Overview of Session

FAIR Session IIIManaging Major Asian Collapses:The Importance of Insolvency Frameworks for Foreign Direct Investment and Risk Management in Asia

Overview of Session • Ron Harmer, International Consultant to the ADB

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

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

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

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

APP Case Study • Michael Sloan, Blake Dawson Waldron

APP Case Study • AP&P incorporated in Singapore • Operations throughout Asia • $US 13.9 billion “collapse” • Lenders, shareholders and bondholders affected worldwide

Subsidiaries Australia Belgium British Virgin Islands China France Hong Kong India Indonesia Italy Japan Malaysia Spain Singapore Taiwan UK USA

Lenders Austria Bahrain Belgium Canada China Denmark Finland France Germany Hong Kong Indonesia Italy Japan Netherlands Norway Singapore South Africa Spain Sweden Taiwan Thailand UK USA

Shareholders China France Germany Indonesia Japan Netherlands Singapore Switzerland UK USA

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

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

Dealing with multi-national administrations • Ron Harmer, International Consultant to ADB

European 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

Member countries of the EU Recent accession countries

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.”

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.”

EUR: 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.”

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.”

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)

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

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

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

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.

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.

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

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

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

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

Insolvency 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)

Insolvency 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)

Insolvency 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)

Comparisons with the Uncitral X Border Model Law • No experience of it • Adopts similar jurisdiction criteria to that of the EUR

How 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)

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

Economic 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

Economic Rationale for Reform • Michael Sloan, BDW

Sizes of economy Source of data: The World Bank Group

Trade in goods as a share of GDP Source of data: The World Bank Group

Present value of debt in 2002 Source of data: The World Bank Group and the Korean Ministry of Finance and Economy

Economic Rationale for Reform • Investment flows linked to quality insolvency laws • Weak insolvency systems result in longer and deeper recessions

Economic 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

Overview of Session