By Hung Ou Yang
When almost all the industries all over the world are being impacted by COVID-19, both corporate creditors and debtors shall take a look at the insolvency framework and start to consider the next step to solve the financial distress. In Taiwan, the insolvency procedures available to a debtor when commencing insolvency proceedings are as follows.
1. Settlement: A debtor may apply to the court for a settlement with the creditors before applying for bankruptcy. See Art. 6 of the Bankruptcy Act.
2. Bankruptcy: A debtor may apply to the court for bankruptcy. See Art. 58 of the Bankruptcy Act.
3. Reorganization: A company as a debtor which publicly issues shares or corporate bonds may apply to the court for reorganization. However, to get a grant of reorganization, it requires "a possibility for the company to be constructed or rehabilitated." See Art. 282 of the Taiwanese Company Act. (note that such procedure is not available to all commercial debtors).
Regarding a creditor's measures adopted against a debtor under Taiwanese laws.
First, a creditor may file an applicaton of bankruptcy to the court against the debtor for liquidation. See Art. 58 of the Bankruptcy Act).
Secondly, creditors of the company who have claims equivalent to ten per cent or more of the capital from the total number of issued shares may apply for reorganization. See Art. 282 of the Taiwanese Company Act. Also, two-thirds or more of the company employees, regardless of whether they meet the above standard, may apply for such reorganization after the amendment of the Taiwanese Company Act in 2018. Id. (note that in both situations the law requires that the company debtor must have publicly issued shares or corporate bonds for such reorganization procedure).
Third, a creditor may apply to the court for "special liquidation" when the voluntary winding up of the company process meets circumstances which "apparently impede the execution". Art. 335 of the Taiwanese Company Act. However, when the liquidator fails to reach an agreement of settlement with the creditors committee or such agreement of settlement is not able to be executed, the court shall ex officio announce that the company debtor is bankrupt in accordance with the Bankruptcy Act. See Art. 347 and Art. 355 of the Taiwanese Company Act.
Commencing insolvency proceedings under Taiwan insolvency framework.
1. Settlement: When the company debtor is unable to pay its debt as they mature, such debtor may apply for settlement in accordance with the Bankruptcy Act. See Art. 1 of the Bankruptcy Act (providing that the law assumes that the debtor is unable to pay its debts when the debtor just stops paying its debt).
2. Bankruptcy: When the company debtor is unable to pay its debt as they mature, both the debtor and the creditor may apply for bankruptcy in accordance with the Bankruptcy Act. Id. Moreover, except that Article 282 of the Taiwanese Company Act applies, the board of the company debtor is obligated to file an application for bankruptcy if its assets are apparently insufficient to set off its liabilities. See Art. 89(1) & Art. 211(2) of the Taiwanese Company Act. Although it is not hard to satisfy the standard of commencing insolvency proceedings in terms of bankruptcy in Taiwan, the court would subsequently dismiss the application for many reasons. See 94 Taipei District Court Po (破) No. 97 Ruling (2005) (dismissed the bankruptcy application because the debtor's assets cannot cover the bankruptcy proceedings); 65 Supreme Court Taikang No. 325 Ruling (affirmed the dismissal of the bankruptcy application because there is only one creditor) (precedent).
3. Reorganization: The reorganization proceedings may be commenced when the company suspends its business due to financial difficulty or there is an apprehension of suspension of business thereof, with a possibility of the company to be constructed or rehabilitated. See Art. 282 of the Company Act (note that such reorganization is not available to all commercial debtors).
4. Special Liquidation: A creditor may apply to the court for "special liquidation" when the voluntary winding up of the company process meets circumstances which "apparently impede the execution". Art. 335 of the Taiwanese Company Act. However, when the liquidator fails to reach an agreement of settlement with the creditors committee or such agreement of settlement is not able to be executed, the court shall ex officio announce that the company debtor is bankrupt in accordance with the Bankruptcy Act. See Art. 347 and Art. 355 of the Taiwanese Company Act; See also 104 Shilin District Court Si (司) No. 10 Ruling (2015) (stating that the the special liquidation procedures under the Taiwanese Company Act are in between winding up procedures and bankruptcy procedures for curing the shortcomings of bankruptcy procedures).
Regarding the continuation of existing contracts supplying essential goods and services to the debtor for the survival of his business.
Under the current insolvency framework in Taiwan, there is no explicit provision for the continuation of existing contracts supplying essential goods and services to the debtor. See Section 3 of Art. 287 of the Taiwanese Company Act (reorganization) (providing that the court may render a ruling prior to the ruling for reorganization at the request of the debtor or an interested party, or ex officio, restricting both performance of the company debtor's obligation and exercise of claim against the debtor. In other words, the company debtor may take advantage of this provision to avoid further supplying goods and services to other creditors, OR, to demand the creditor not to exercise their claims against the company debtor. However, please note that it is not a legal basis for requesting the suppliers to continue supplying essential goods and services to the company debtor).
The rejection of overly burdensome contracts where both parties have not fully performed their obligations under Taiwan insolvency framework.
In reorganization, under Section 3 of Article 287 of the Taiwanese Company Act, prior to the ruling of reorganization, the court may render a ruling at the request of the debtor or an interested party, or ex officio, restricting both performance of the company debtor's obligation and exercise of claim against the debtor.
Moreover, during the reorganization procedures, according to Section 6(4) of Article 290 of the Taiwanese Company Act, the reorganizer (trustee) with the prior consent of the reorganization supervisor may conclude or rescind any important or long term contracts.
Preferential transactions before the filing for insolvency/commencement of insolvency proceedings
In bankruptcy, the insolvency representative shall file an application to the court to revoke any acts made by the debtor prior to the ruling of bankruptcy rendered by the court if such acts are prejudicial to the creditor's rights and are revocable in accordance with the Taiwanese Civil Code. See Art. 78 of the Bankruptcy Act. See Art. 78 of the Bankruptcy Act; see also Art. 79 of the Bankruptcy Act (the insolvency representative may revoke the following acts made within 6 months of the ruling of bankruptcy rendered by the court: (1) the granted security interests for existing debts unless the debtor agrees to give such security interests 6 months before such bankruptcy ruling, and (2) the repayment of the debts not outstanding) (note that Art. 79 applies after the filing of insolvency proceedings).
Undervalued transactions before the filing for insolvency/commencement of insolvency proceedings
In bankruptcy, the insolvency representative shall file an application to the court to revoke any acts made by the debtor prior to the ruling of bankruptcy rendered by the court if such acts are prejudicial to the creditor's rights and are revocable in accordance with the Taiwanese Civil Code. See Art. 78 of the Bankruptcy Act.
The possibility of the debtor obtaining credit after commencement of insolvency proceedings to finance its on-going needs during the proceedings
In reorganization, the reorganizers with the prior consent of the reorganization supervisor may enter into contracts of loan. See Section 4(3) of Article 290, of the Taiwanese Company Act. The debts incurred for continued operation of the business during the reorganization shall have preference for repayment over the rights of creditors in reorganization. See Art. 312 of the Taiwanese Company Act.
In bankruptcy, the trustee with the prior consent of the bankruptcy inspector may enter into contracts of loan. See Art. 92(4) of the Bankruptcy Act.
Priority to post-commencement credit
In reorganization, the debts incurred for continued operation of the business during the reorganization of the company and expenses incurred in the process of reorganization (collectively, “reorganization debts”) shall have preference for repayment over the rights of creditors in reorganization. See Art. 312 of the Taiwanse Company Act.
In bankruptcy, the bankruptcy estate expenses and debts arising from the bankruptcy proceedings shall have preference for repayment over the rights of creditors prior to the bankruptcy. See Art. 97 of the Bankruptcy Act. The bankruptcy expensese include the fees with regard to the management and distribution of the bankruptcy estate, the trial fees for the mutual benefits of the creditors, and the compensation of the trustee. See Art. 95 of the Bankruptcy Act.
Creditors voting on the proposed reorganization plan
All the creditors based on a list prepared by the reorganization supervisor may attend the meeting of concerned persons (similar to creditors' committee in other jurisdictions) to vote on the proposed reorganization plan. See Art. 300 of the Bankruptcy Act. The reorganization supervisor would divide the creditors into three groups, that is, the preferred creditors in reorganization, secured creditors, and unsecured creditors. See Art. 298 of the Taiwanese Company Act (the list prepared by the reorganization supervisor includes the shareholders). "Preferred creditors" means creditors who have rights with preference for repayment in accordance with law, such as tax authorities. See Art. 6 of the Tax Collection Act. "Secured creditors" means creditors who have rights secured by mortgages, pledges or rights of retention. "Unsecured creditors" means creditors who have no secured rights. See Art. 296 of the Taiwanese Company Act.
At the meeting of concerned persons, each group of the creditors in reorganization votes separately. Each group can make a resolution with the consent of a majority vote of over one-half of the aggregate votes thereof. Art. 302 of the Taiwanese Company Act (providing that the shareholders group cannot vote if there is no net value of capital of the company).
The insolvency representative
In bankruptcy, generally the trustee will be appointed by the court, however, the creditors' meeting may elect another trustee among the creditors. See Art. 83(2) of the Bankruptcy Act. Also The creditors' meeting may move to reject a trustee during the court proceedings. See Art. 85 of the Bankruptcy Act.
In reorganization, the meeting of concerned persons which includes all creditors may file to the court with a list of reorganizer candidates, requesting the court to appoint a new reorganizer. See Art. 290(3) of the Taiwanese Company Act.
Regarding the sale of substantial assets of the debtor
Taiwan insolvency framework does not require that creditors approve the sale of substantial assets of the debtor. In contrast, there are relevant rules as follows.
In bankruptcy, the trustee's disposal of the debtor's certain assets shall be approved by the bankruptcy supervisor who must be elected by the creditors' meeting. See Art. 92 and 120 of the Bankruptcy Act.
In reorganization, the reorganizer's disposal of the debtor's assets unrelated to business opreation shall be approved by the reorganization supervisor who must be appointed by the court. See Art. 290(6) of the Company Act.
In special liquidation, the liquidator's disposal of any asset of the company shall be approved by the liquidation inspector who must be elected by the creditors' meeting and approved by the court. See Art. 346(1) and 345(1) of the Taiwanese Company Act. If the liquidation inspector does not approve the disposall, the same may be tendered to the creditors' meeting or the court for approval. See Art. 346(1)(2) of the Taiwanese Company Act.
An individual creditor's right to request information from the insolvency representative on the debtor’s business and financial affairs.
In bankruptcy, the trustee shall provide a list of assets and claims open to any interested party so that an individual creditor may obtain information at any time. See Art. 94 of the Bankruptcy Act. Also, an individual creditor may obtain information by attending the creditors' meeting. See Art. 119 of the Bankruptcy Act.
In reorganization, an individual creditor may obtain information by attending the meeting of concerned persons wherein the reorganizer shall provide all information and the reorganization plan. See Art. 301 of the Taiwanese Company Act (but not at any time the individual creditor wants).
In special liquidation, an individual creditor may obtain information by attending the creditors' committee wherein the reorganizer shall provide all information with regard to the debtor's business and financial affairs. See Art. 344 of the Taiwanese Company Act (but not at any time the individual creditor wants).
An individual creditor's right to object to the decision regarding its own claims AND claims of other creditors.
In bankruptcy, an individual creditor may file objection with the court against the acceptance and/or the amount of any claim so that the court will make a decision for this issue. See Art. 125 of the Bankruptcy Act.
In reorganization, any individual creditor shall attend the hearing when the court reviews all the claims and shareholders' rights reported, and shall raise any objection in court so that the court may rule about the objection. If the individual creditor contests the court's ruling, he shall move to a lawsuit for determination of the contested right within twenty days after the service of the ruling and prove to the ruling court that such lawsuit has been raised, to prevent said ruling as well as the contested right from becoming final and binding. See Art. 299 of the Taiwanese Company Act.
In special liquidation, an individual creditor may present his opinion towards any claim in the creditors' meeting, and the creditors' meeting may try to reach a resolution on the project to pay all of the claims against the company; such resolution will become effective after the court's approval. See Art. 350 of the Taiwanese Company Act. If this is not possible, the individual creditor may file a lawsuit for determination of the contested right while the court shall order the company to go bankrupt. See Art. 355 of the Taiwanese Company Act.
(This article is being submitted to World Bank for its Doing Business 2021 Resolving Insolvency project as Brain Trust International Law Firm's contribution. Part of the content in this article is modified from World Bank's questions.)
Authour: Hung Ou Yang
Managing Attorney
Taipei
+886-2-2707-9976
[email protected]
Copyright Brain Trust International Law Firm
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.
撥打電話