Vol 9 (2012) - Issue 3

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Debt Restructuring by Out-of-Court Workouts in East Asia

Insolvency law reforms in East Asian countries
South-east Asian countries including Thailand, Malaysia, Indonesia, Korea and the Philippines reformed insolvency laws and created out-of-court debt restructuring schemes after the Asian currency crisis that happened between 1997 and 1998, assisted by the World Bank, IMF and other international organisations. Chinese Bankruptcy Law was enacted in 2006. My comments here will focus on Japan and Korea.
Introducing modern, sophisticated laws and schemes are not sufficient in themselves. Judicial independence from political influence that does not involve any corruption is crucial. Speedy, transparent and effective practice by experienced professionals is essential.
Effective insolvency laws and workout schemes are indispensable in wiping out non-profitable business entities and in enabling reorganisation of viable but debt-heavy business corporations and effectively allocating limited resources such as human power, goods and money into viable businesses.

Establishing rules for out-of-court workouts in East Asia
In addition to insolvency laws, Thailand, Malaysia, Indonesia, Hong Kong, Korea and Japan created rules regarding out-of-court workout restructuring (OOCR) for multi-financial creditors referencing INSOL 8 Principles and London Approach to wipe out poor and non-performing loans (NPLs) between the late 1990s and early 2000s. The Agreement among Financial Institutions for Corporate Restructuring was made in 1998 in Korea. The Guideline for Out-of-Court Multi- Financial Creditors Workout ('Guideline') was created in Japan in 2001 by the Bankers’ Association and other relevant associations to clean up NPLs that ballooned after the burst of the bubble in the early 1990s.
Without reducing NPLs, financial institutions had not been able to finance new money in corporations, provide working capital and make new investments to create and innovate businesses. OOCR is a useful scheme to restructure ailing business corporations at an earlier stage than courtsupervised statutory reorganisation proceedings. Even today, a court-involved reorganisation procedure may be deemed as a stigma in some countries, deteriorating the company’s business reputation and its enterprise value. OOCR is an excellent tool to reduce debt burdens of financial institutions by means of debt forgiveness or haircuts and debt-for-equity swaps (DES) without impairing any trade creditors’ debts. Upon completion of debt restructuring, a healthy company may, through M&A, purchase the debtor company whose debt was reduced to normal level.

Assets management companies in East Asia to dispose of non-performing loans
The rules for OOCR are no more than gentlemen’s agreements among financial institutions, and not sufficient to wipe out NPLs by themselves. To speed up disposition of NPLs, Korea, Thailand, Malaysia and Japan created assets management companies (AMC) specialising in buying bad loan assets from banks. Malaysian DANAHARTA, Korean KAMCO and Industrial Revitalisation Corporation of Japan (IRCJ) were all quasi-governmental AMCs established for that purpose and were regarded as successful examples.