overview of session

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ADB - RETA 5975 Regional Insolvency Cooperation

FAIR Session III

Managing Major Asian Collapses:

The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk Management in Asia

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Overview of Session

Ron Harmer, International Consultant to the ADB

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Overview of Session

Insolvency laws part of systemic risk management infrastructure of region and countries

Only one country - Japan - has a “modern” cross border insolvency regime in Asia

Proposals developed in Korea and the Philippines No viable formal means of dealing with a pan-Asian

collapse in spite of increasing interdependence

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Overview of Session

Complete inability for dealing with major corporate collapses in Asia adversely impacts on systemic risk management

Asian Pulp and Paper exemplifies the need to reform of cross border insolvency regimes

Michael Sloan to present APP case study

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Overview of Session

Regional treaty for cross border insolvency law reform is an option

Lessons can be learned from initial difficulties with EEC cross-border insolvency regulation

Ron Harmer to review the EEC experience

Economic arguments in favour of insolvency law reform

Michael Sloan

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Overview of Session

Insolvency law reform will aid attraction of foreign investment

Stanley Tai of the New York Life International LLC and Mr. Nagarajan Srinivasan of the Indian Commonwealth Development Corporation.

Possible regional solutions Ron Harmer

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APP Case Study

Michael Sloan, Blake Dawson Waldron

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APP Case Study

AP&P incorporated in Singapore Operations throughout Asia $US 13.9 billion “collapse” Lenders, shareholders and bondholders

affected worldwide

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ADB - RETA 5975 Regional Insolvency CooperationSubsidiaries

Australia BelgiumBritish Virgin IslandsChinaFrance Hong Kong India IndonesiaItaly JapanMalaysiaSpainSingaporeTaiwanUK USA

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ADB - RETA 5975 Regional Insolvency CooperationLenders

AustriaBahrainBelgiumCanadaChinaDenmarkFinlandFranceGermanyHong KongIndonesia

ItalyJapan NetherlandsNorwaySingaporeSouth AfricaSpainSwedenTaiwanThailand UKUSA

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ADB - RETA 5975 Regional Insolvency CooperationShareholders

ChinaFranceGermanyIndonesiaJapanNetherlandsSingaporeSwitzerlandUKUSA

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APP Case Study

12 March 2001 unilateral debt standstill announced by AP&P

Application in Singapore for appointment of judicial managers

Basis for application: Unilateral declaration of Standstill Lack of progress with Standstill Need for independent control

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APP Case Study

APP successfully resisted application due to: Lack of creditor support Inability of judicial mangers to take effective control of

group

No reorganisation plan agreed yet

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ADB - RETA 5975 Regional Insolvency CooperationDealing with multi-national administrations

Ron Harmer, International Consultant to ADB

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ADB - RETA 5975 Regional Insolvency CooperationEuropean Insolvency Regulation An ambition of the Treaty of Rome (1960) Attempt at a convention failed (2001) Commenced life as a regulation (31 May 2002) Now applies to 25 member states (Denmark is

the only exception; binds all accession states) Deals solely with cases of insolvency in which

the debtor has its centre of main interests or an establishment in at least one of the member states

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Member countries of the EURecent accession countries

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EUR: Jurisdiction

Article 3.1: “The courts of a Member State within the territory of which the ‘centre of a debtor’s main interests is situated’ shall have jurisdiction to open insolvency proceedings. In the case of a company or legal person, the ‘place of the registered office’ shall be presumed to be the ‘centre of main interests’ in the absence of proof to the contrary.”

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EUR: Jurisdiction (continued)

Recital 13 to the preamble of the EUR states: “The centre of main interests should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties.”

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ADB - RETA 5975 Regional Insolvency CooperationEUR: Applicable Law and Effect of Opening Article 4 states that the “law applicable to an

insolvency proceeding shall be the law of the member state in which the proceedings are opened.”

Article 16 states that “any judgment opening proceedings that is handed down in a Member State shall be recognised in all other Member States.”

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EUR: Public Policy Provision

Article 26 states that a Member State may refuse to recognise insolvency proceedings opened in another state…if the effects of such recognition…would be manifestly “contrary to the state’s public policy and….its fundamental principles or the constitutional rights and liberties of the individual.”

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EUR: COMI Use and Practice

Statistical and other information is not provided

Many decisions are unreported UK/Irish decisions suggest problems with

issues of jurisdiction Consider cases of Enron Directo SA (2002),

Brac Rent-a Car (2003), Daisytek (2003) and Parmalat (2004)

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Brac Rent-a-Car case

Brac was incorporated in Delaware, USA It never traded in USA Its operations were conducted in England The English court held that insolvency

proceedings could be opened in England because its COMI was in England

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Enron Directo case

Enron Directo was incorporated in Spain It conducted its daily operations there English court held that insolvency proceedings

could be commenced against Enron Directo in England on the basis that the ‘head office’ functions of Enron Directo were run from the European headquarters of Enron Directo which was situated in London

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Daisytek case

Holding (or parent company) incorporated in England

Three, wholly owned by the parent, subsidiaries were incorporated in Germany and one in France

English court opened insolvency proceedings in respect of all four subsidiaries on the basis that their respective COMI was in England because most of the trade creditors considered that the important functions of the subsidiaries were carried out in England, in the office of the parent

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Daisytek case (continued)

Insolvency proceedings were brought in France in respect of the French subsidiary and in Germany in respect of one of the three German subsidiaries

In France, court of first instance determined that the COMI of the French subsidiary was in France and purported to open main proceedings accordingly. That was overturned on appeal.

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Daisytek case (continued)

In Germany, court of first instance opened main proceedings in respect of the subsidiary. On appeal the German proceedings were closed, following a finding that the manager of the German subsidiary had authorised the English proceedings.

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Parmalat case

Parmalat SpA was incorporated in Italy in [] It commenced life in Collecchio, Italy as a

producer of dairy products Although itself controlled by a family group,

Parmalat spread throughout Europe, South America, Asia and Australia

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Parmalat (continued)

It performed this growth through a 20 year long acquisitions policy

That policy was financed through offshore financing vehicles, including Eurofood IFSC Limited (‘Eurofood’)

Eurofood was incorporated in Ireland It was a single purpose vehicle formed for the

purpose of raising USD150 million through a bond issue

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Insolvency of Parmalat

A massive hole of some USD7 billion in the assets of Parmalat SpA was discovered in December 2003

The Italian government, acting under a decree passed on 23 December 2003, placed Parmalat under extraordinary administration on 24 December and appointed a special commissioner

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Insolvency of Eurofood

Eurofood is incorporated in Ireland It is a wholly owned subsidiary of Parmalat SpA On 27 January 2004, Bank of America filed a

winding up petition against Eurofood in the High Court of Ireland

On the same day the Irish court appointed a provisional liquidator to Eurofood

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ADB - RETA 5975 Regional Insolvency CooperationInsolvency of Eurofood (continued) On 9 February 2004 the Italian government

purported to place Eurofood under extraordinary administration and appointed Bondi as special commissioner (subsequently confirmed by an Italian court on 20 February)

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ADB - RETA 5975 Regional Insolvency CooperationInsolvency of Eurofood (continued)

On 23 March 2004, the Irish court determined that:

The Italian court lacked jurisdiction (because it could not ignore the Irish decision of January 2004)

The COMI of Eurofood was in Ireland (because it was incorporated there and because that was where its creditors believed its COMI to be)

The decision of the Italian court was against public policy (because no notice and no opportunity was given to the Irish creditors to be heard in the Italian proceedings)

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ADB - RETA 5975 Regional Insolvency CooperationInsolvency of Eurofood (continued) An appeal was made to the decision of the

Irish court The appeal court, although it upheld the

judgment of the Irish court, referred two matters to the European Court of Justice:

Whether the Irish or Italian courts had ‘opened main proceedings

Whether the Irish court was entitled to invoke Article 26 of the EUR (the ‘public policy’ issue)

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ADB - RETA 5975 Regional Insolvency CooperationComparisons with the Uncitral X Border Model Law No experience of it Adopts similar jurisdiction criteria to that of the

EUR

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ADB - RETA 5975 Regional Insolvency CooperationHow big is the ‘problem’ of COMI under the EUR? It may be argued that the problem should be

confined and should not be regarded as a general issue concerning COMI (and consequent ‘forum shopping’) but rather in the failure of the EUR to deal with that issue in the context of groups of companies and associated companies (note that the Uncitral X Border Model Law is also silent on this issue)

There is an absence of a provision in the EUR that requires co-operation between courts, judges and administrators (cf. UNCITRAL Model Law)

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Relevance for Asia

Any bi or multi-lateral cross-border arrangements should address more particularly the issue of COMI (or similar)

Particular provisions concerning the approach to be taken in respect of groups/ related/or associated companies may be desirable and necessary

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ADB - RETA 5975 Regional Insolvency CooperationEconomic Rationale for Reform Asian economies linked to global economy:

Degree of dependence on international trade Level of foreign investment Degree of foreign ownership of share market Overseas debt

Insolvency laws: Don’t yet recognise globalisation Weak protection of domestic and international interests

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ADB - RETA 5975 Regional Insolvency CooperationEconomic Rationale for Reform

Michael Sloan, BDW

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ADB - RETA 5975 Regional Insolvency CooperationSizes of economy

Source of data: The World Bank Group

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ADB - RETA 5975 Regional Insolvency CooperationTrade in goods as a share of GDP

Source of data: The World Bank Group

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ADB - RETA 5975 Regional Insolvency CooperationPresent value of debt in 2002

Source of data: The World Bank Group and the Korean Ministry of Finance and Economy

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ADB - RETA 5975 Regional Insolvency CooperationEconomic Rationale for Reform Investment flows linked to quality insolvency

laws Weak insolvency systems result in longer and

deeper recessions

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ADB - RETA 5975 Regional Insolvency CooperationEconomic Rationale for Reform Weak governance systems:

Discourage investment Increase price of capital

Weak insolvency systems could: Undermine effectiveness of bond markets Discourage investment in bond markets

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ADB - RETA 5975 Regional Insolvency CooperationAdequacy of Liquidation Laws and their application

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ADB - RETA 5975 Regional Insolvency CooperationAdequacy of Rescue Laws and their application

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ADB - RETA 5975 Regional Insolvency CooperationAttitude of International Investors to Inadequate Insolvency laws Stanley Tai, New York Life International LLC Nagarajan Srinivasan of the Indian

Commonwealth Development Corporation.

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Solutions

Ron Harmer, Consultant BDW

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Major Corporate Collapses

No ability to deal with a major Asian corporate collapse

Need to implement law reform Options include regional treaty and model law Not mutually exclusive Treaty preferred option at present Also require informal workout protocols to

operate across borders

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Institutional Capacity

Quality laws not sufficient, need institutional capacity

Problems include: Lack of fairness in trials Corruption Lack of expert judges Lack of qualified professionals

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Institutional Capacity

No quick fix but measures to improve include: Develop rules for communications between courts Employment of Interpreters Development mutual understanding by judicial

conferences and exchange of information between courts

Development of court protocols

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Out of Court Proceedings

Courts do not have to be involved in all areas of an insolvency administration

Out of court processes possible United Kingdom, Singapore, Hong Kong, China and

Australia all have out of court processes

Introduction of such frameworks in Asia may circumvent some issues around institutional capacity

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Cross Border Treaty A regional cross border treaty would assist in dealing with major

corporate collapses That treaty must address:

Issues surrounding the definition of the location of the centre of main interest for a group of companies

Cooperation between courts Formalities required for commencement of an application for recognition Recognition for both 'in-bound' and 'out-bound' insolvency administrations the effect of recognition; cooperation between courts; the possible approaches to accommodating different types of insolvency

administrations; evidence required of commencement of insolvency administrations the formalities required for commencement of an application for recognition.

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ADB - RETA 5975 Regional Insolvency CooperationSolutions – Informal Workout Principles Adoption of Informal Workout Protocols by

Banking Associations

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Facilitation Agreement

Administrative Committee

Financial Institution Creditors

>10% Initiate Workout

First Meeting of Financial Institution Creditors

No Workou

t

Workout Committee

Negotiate Workout

Agreement

No Workout

FIC Meeting to Consider Workout

Initial Standstill Period

Standstill Ends

Extended Standstill

Standstill Ends

No Cooperation by Creditor

No Workout

Workout Agreemen

tFailure Success

Exte

nded S

tandstill

Standstill Ends

overview of session

Documents