This brief article considers the currently active restructuring markets in Asia and provides examples of where insolvency procedures from outside of Asia come to the rescue or, depending on your side of the table, torment, those trying to implement an orderly restructuring.
Introduction
It is still too early to tell how many restructurings, insolvencies and other financial casualties there will be around Asia as a result of the current market turmoil stirred up by COVID 19 and the near collapse of some of the resource and commodity markets and related consequences. But it seems increasingly likely that more restructurings will need to take place in Asia, in particular for corporates and funds. Indeed, many of us are fielding tell-tale calls from market participants on a daily basis where the topics range from short-term queries around waivers, reservation of rights and potential forgiveness of liability, to early stage strategic discussions which may culminate in consensual or, occasionally, full-blown non-consensual restructurings.
Non-consensual restructurings are sometimes referred to by the restructuring community as “Plan B” and basically entail creditors letting go of consensual options and, instead, attempting to use a variety of statutory and contractual insolvency remedies and procedures to realise value from debtors and assets in distress, including (depending on the jurisdiction) such things as enforcement of security, liquidation and schemes of arrangement. Those practitioners with experience of previous market turmoil and restructurings will appreciate the importance of being able to visualise non-consensual situations in advance: even though the majority of solutions will turn out to be consensual whereby debtors and creditors renegotiate everything from overall deal structures to troublesome individual covenants. But one thing is for sure - creditors find consensual discussions much more difficult where there is no real belief that, if all else fails, a non-consensual restructuring by way of Plan B will ever really provide them with adequate recompense.
When it comes to the important task of analysing non-consensual scenarios, there are many moving parts. Two of the most important matters to establish will include:
(i) how vulnerable to attack is the creditor’s collateral package – what, if any, challenges may be raised against such things as sales of assets and making demands under guarantees ?; and
(ii) will the debtor have the benefit of any rescue procedure or moratorium whereby senior creditors’ rights are, at best, suspended or potentially their value is entirely compromised ?
This article briefly summarises how these two important aspects of restructurings will typically play out in the Asian markets but it will then go on to describe the impact of some of the surprising infiltrations of foreign and extra-territorial laws in these scenarios.
1. Remedies which may be challenged upon insolvency
The usual position
Where a corporate obligor in an Asian financing finds itself approaching a formal insolvency process, many jurisdictions will apply the concept of pari passu distribution of assets but in doing so, most types of credit support will be reviewable to ensure there is fair distribution of assets between those creditors with beneficial, prior ranking rights and those merely with general unsecured claims. It is common for transactions to be cross-border and therefore the insolvency analysis to determine which senior claims are robust and which should properly be overridden may involve several governing laws. The jurisdiction of the debtor will almost always be relevant. The governing law of any security, guarantee or other finance document will also be relevant - and so too will be the jurisdiction of any other participants or assets involved in the insolvency.
Jurisdictions such as Hong Kong and Singapore have insolvency legislation which, whilst different in several important details, broadly follows the architecture of the UK’s Insolvency Act 1986. Hence, courts or insolvency practitioners in sophisticated Asian jurisdictions will generally have powers to set aside certain classes of transaction upon application by an insolvent entity’s liquidator or other manager/administrator. They generally retain wide discretion to grant orders and decisions restoring the parties to the position they would have been in had such transactions not occurred. Depending on the applicable laws and detailed circumstances, ‘reviewable transactions’ commonly include:
- Transactions at an Undervalue – transactions for which the obligor received no consideration or where the value of the consideration received is significantly less than that provided by the obligor;
- Preferences – if the obligor does anything which at the relevant time puts one of its creditors in a better position in an insolvent liquidation than it would otherwise have been;
- Certain Dispositions – any disposition of an obligor’s assets (including the grant of security) made after the presentation of a winding up petition against the obligor (unless the court otherwise orders);
- Floating Charges – a floating charge created in exchange for past consideration – such as to secure loans previously advanced – and made within a specified period before the onset of the obligor’s insolvency; and
- Extortionate Credit Transactions – a transaction which, having regard to the credit risk accepted by the creditor, would be considered extortionate – whether by requiring grossly exorbitant payments for the provision of credit...
