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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

WHEN THE LAW IS AN ASSET

Bankruptcy can work for creditors and investors

By Jonathan Sprague


Finding Gold Amongst the Ruins

Who Are These Guys?: Some of the Big Players in the Asian Assets Game

How To Buy Asia, And Win

No Accidental Tourists: Foreign bosses bring many advantages

THAILAND'S SENATE WAS UP in arms. Speaker Meechai Ruchuphan warned that bills to toughen up bankruptcy laws, after the sale of assets of shuttered finance firms to foreign investors, would mean an economic death sentence to thousands of debt-burdened Thais. "Not only have we given [foreigners] knives, but also machine guns," he told the Nation newspaper. The government countered that absent tougher laws, debtors could thumb their noses at creditors. That meant death not only to Thai banks, but to foreign investment and credit, as lenders and investors balk at putting money into an country where delinquent borrowers go scot free.

Those mortal metaphors got all to real recently, with the fatal shooting of Michael Wansley, an Australian insolvency expert with the global firm Deloitte Touche Tohmatsu, who was working on a cash-strapped sugar mill in central Thailand. Though it was not immediately clear whether the killing had anything to do with the victim's work, it was further evidence that the bankruptcy process has become a contentious one across a Crisis-hit region strewn with delinquent loans and beleaguered borrowers.

Last week, with minor compromises, Thailand's bankruptcy bills passed. They give creditors the option to sue for possession and disposal of assets held or pledged by defaulting debtors. That, lenders hope, will bring debtors to the negotiating table and payment window. Besides bankruptcy laws, officials and lawyers in Crisis-hit countries are scrambling to establish rules on restructuring corporate debt, disentangling good and bad assets, packaging and trading loans - and, of course, to actually implement all these regulations.

Investor sentiment hinged on turning back the attempt by a few senators to gut Thailand's bankruptcy bill, probably reflecting the sentiment of heavily indebted tycoons, many of whom are close to MPs or are MPs themselves. "The law was a big stumbling block [to foreign investment]," says Wirot Poonsuwan of law firm Clifford Chance Wirot in Bangkok. The new legislation, yet to be affirmed by the lower house, is a big step forward, he adds. It is not perfect: for example, rigid rules allow a small minority of creditors to push a company into bankruptcy even if it wins majority support for a debt restructuring, thus discouraging companies from negotiating with lenders. Foreclosure proceedings also need speeding up. Other legal issues, including limits on foreign investment in most Thai industries and in property, have yet to be battled out.

Indonesia revamped its bankruptcy code last year, refreshing statutes dating back to 1905, but the improved law has proved not much more helpful in clearing up the mountain of bad debt. "The position of the creditor has been very much improved by the new law," says a Hong Kong-based lawyer who works on Indonesian debt. "The problem is whether the judiciary is willing and able to grasp the nettle and use the new law to create more balance between debtor and creditor."

A recent cause of concern among investors and creditors in Jakarta is the dismissal of a suit in the bankruptcy court to wind up an agribusiness venture unable to repay debts of over $50 million. The power of entrenched interests is only part of the problem. Just as important is the lack of training, experience and precedent among executives and legal personnel in working out the debt overhang.

Legal systems in Northeast Asia are more developed. Bankruptcy law is well established in South Korea and was made more efficient last year. But the process remains in flux, says Eric Yoon, head of the Korea practice at White & Case. The country has yet to adopt concepts that help speed the process in Western jurisdictions, like prepackaged bankruptcy, in which all parties agree to the liquidation terms before going to court.

Workout procedures to restructure debt or foreclose on a firm are too rigid in Korea, and more modern guidelines are now being hammered out. But there were enough laws to forge major deals like the sale of nationalized Korea First Bank and Seoulbank to foreign investors. What the bank sales really needed was political will, says Yoon, who advised the government on both transactions.

In Japan, laws and procedures too often seem to be set in stone. "There aren't significant barriers to foreign investments in assets anymore, but there are systemic and procedural barriers that remain quite significant," says Robert Grondine of White & Case in Tokyo. Bankruptcies and foreclosures are excruciatingly slow. The process of evicting tenants from a building used as collateral can take years.

Officials are moving to simplify procedures, but the bureaucracy has a way of putting up new hoops to jump through. A further huge constraint is the sheer lack of lawyers; there are only 16,000 (the New York Bar alone lists 60,000), and most do not practice business law. Besides the legal chores of dealmaking, Japanese lawyers monopolize many non-legal activities like collecting debt and running companies under reorganization.

Regulations may also have to be devised for novel (in Asia) debt management methods like securitization, equity swaps and restructuring. Plainly, just as Asia's business, political and social institutions have had to adjust to the new realities of the Crisis, so have its legal systems, to deal with bankruptcies at a scale unimaginable in the boom decades. The region can only hope that by helping clear its burden of bad loans, insolvency laws will pave the way for recovery.


This edition's table of contents | Asiaweek home

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