In Asia, there has traditionally been a strong stigma associated with corporate insolvencies. The taint of insolvency can be hugely value-destructive, for it might destroy the goodwill of the business, and brand the managers and controllers as failures and social outcasts. Culturally, the problem is exacerbated by the dominance of family-controlled businesses, whose controllers are held in high esteem by the business community – for whom the negative stigma associated with insolvency can often be unpalatable.
While there has been a gradual global shift from viewing insolvency as strictly a terminal procedure leading to inevitable liquidation, to recognising insolvency proceedings as a gateway to potential business rescue, this mindset change is largely limited to the leading Western financial centres, such as the United States and the United Kingdom. In most of Asia, the negative cultural perception of insolvency remains.
The time is ripe to change this cultural mindset. The economic devastation wrought by the COVID-19 pandemic will force many companies to confront squarely, the need for effective corporate debt restructuring and turnarounds. We discuss three areas that may lead to a mindset shift.
CREATING A TRACK RECORD OF SUCCESS
Historically, the insolvency laws and ecosystems in many Asian jurisdictions have been woefully underdeveloped. There has also been little uniformity of approach across different countries, as the laws across Asia are a patchwork of different civil and common law systems. Given that most modern businesses are cross-border in nature, this has made effective restructurings a challenge. Given the high failure rates and inefficiencies associated with previous cases of companies going through formal restructuring processes, it is unsurprising that this has created a negative impression.
Given that the economic slowdown caused by the COVID-19 pandemic has impacted many businesses, this is an opportune time to showcase the ability of Singapore’s modern restructuring laws and framework to rescue and rehabilitate companies.
Singapore’s concerted drive in recent years to position itself as the leading Asia debt restructuring hub has been widely publicised. Singapore’s restructuring framework has been enhanced to make it relatively easy for foreign companies to commence formal restructuring proceedings in Singapore. Additionally, features such as the statutory moratorium (against legal actions and enforcement of securities etc) with extra-territorial impact, the ability to extend the moratorium to certain related companies in the same group, the ability to cram-down on dissenting creditors via a scheme of arrangement, as well as the rescue financing provisions – are all but examples of the useful toolkit that distressed companies can avail themselves of if they restructure in Singapore.
Singapore is not the only country in the region that has sought to modernise its restructuring laws. A notable example is neighbouring Malaysia, which has also taken concrete steps to introduce corporate rescue mechanisms, including corporate voluntary arrangements and judicial management, via recent amendments to their Companies Act. India is another example with recent amendments to its Insolvency & Bankruptcy Code
Separately, the slow but steady adoption by more countries in Asia of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross Border Insolvency, as well as judiciaryled innovations such as the Judicial Insolvency Network (JIN) guidelines also means that we can expect to see increasing cooperation and coordination across different jurisdictions on cross border insolvency matters.
As a matter of necessity, it is likely that more Asian companies will avail themselves of these formal restructuring mechanisms. The efficacy of these mechanisms will be tested. If successful, the positive experience of companies that restructure and re-emerge as reinvigorated businesses in these challenging times, will go a long way towards removing the stigma of corporate stigma associated with insolvency processes.
Whether a restructuring is ultimately perceived to be successful is inextricably tied to the ability of service providers and the court system to bring real value to the stakeholders. Among other things, this will include moderating divergent needs of different creditors, preserving enterprise value, and the ability to raise new monies.
At a minimum, legal and financial professionals who service the stakeholders involved will have to adeptly perform the following functions: (i) Educate the stakeholders on the informal and formal restructuring options available to them in a commercially sensitive manner; (ii) Manage delicate negotiations and balance varied stakeholders’ interests; (iii) Commence and utilise the available court processes in an effective manner.
Where recourse from the Courts is sought, there must be confidence that the matter will be dealt with by a specialised insolvency judge who is efficient but commercially attuned.
As the experience of more mature restructuring jurisdictions (such as the United States) have shown, the availability of able professionals and an effective court system are the sine qua non of an effective restructuring.
At the same time, it is also important to be mindful of criticisms that have emerged of the US Chapter 11 regime, in particular, of the high costs associated with it. In order that there is value, the costs involved must be commensurate with the level of service provided. Ultimately, each restructuring is different and the costs involved will depend on the complexity, scale, and length of the restructuring. However, restructuring professionals should always be conscious of the need to provide real value – all the more so given that they are dealing with a distressed situation.
It is only when the wider business community recognises the value brought by the restructuring process that perceptions will also change.
As credit markets and capital structures in Asia become more complex, we can expect to see increased use of restructuring processes. In particular, given that companies across the region have raised a significant amount of debt capital through the international bond markets in the past few years, the involvement of more sophisticated institutional bondholders may push distressed borrowers to restructure in established legal markets such as Singapore and Hong Kong.
We also anticipate distressed players to become more active in Asia, as asset prices in the region start to become depressed. Many of these distressed players have experience with more sophisticated regimes and may demand that borrower companies undergo formal restructuring as a condition for injecting new monies.
The need to maintain continued access to credit markets in these challenging conditions will likely compel many companies to engage in formal restructuring. As this practice becomes more widespread, there will hopefully be a mindset shift to recognising restructuring as performing a necessary and critical function in a properly functioning credit market.
The next couple of years are likely to be interesting times in the development of restructuring practice in the region. The authors are optimistic that the existing laws and ecosystems in place across Asia will be more than up to the task, and that there will be a sea of change in the cultural perception of restructuring and insolvency in the region.