The guide, which can be downloaded here, identifies nine high-level principles that create the underpinning philosophical framework for a successful out of court workout in Asia, as well as 11 practice tips that guide readers along the journey of an out of court workout in a granular and hands-on manner. This unique approach aims to strike the right balance between espousing general best practices and providing practical guidance, in particular consideration of the lack of sufficient knowledge, or even awareness, of out of court workouts in Asia.

Workouts

One way of dealing with insolvency is a private agreement between creditors — often just banks and bondholders — and the debtor to effect a restructuring.

Such a restructuring might entail, for example, a rescheduling of the debts of the debtor, the conversion of such debts into shares, a disposal of the debtor’s assets and a trimming of the debtor’s business. Reaching a private agreement is by far the most common solution to dealing with insolvency and does not involve the courts.

This is referred to in industry jargon as an “out-of-court workout”, a “consensual workout”, an “informal workout” or simply a “workout”.[1]

Asian principles of business restructuring

The guide is produced under the auspices of the Asian Principles of Business Restructuring project (Project) jointly undertaken by the Asian Business Law Institute (ABLI) and the International Insolvency Institute (III). The Project was conceived with the ultimate vision of producing a set of Asian Principles of Business Restructuring (Asian Principles).

The Asian Principles are not intended to be legally binding. Rather, they are intended to promote convergence in the philosophy and approach that the region takes to business restructuring in an insolvency context. The guide is one component of the Asian Principles.

The guide sets out a model of best practices, in the form of both principles and practice tips, for workouts of corporate debtors in Asia. Although focussed on workouts that are entirely consensual and out of court, the guide inevitably makes some reference to the court process since such process is the next step if consensus cannot be reached in a workout. The potential involvement of the courts also looms large in all workout discussions, not always as a menace to compel concordance, but sometimes as an agreed appropriate enforcement layer to the planned restructuring. That further aspect is beyond the scope of the guide.

Progenitors

The guide has lineage and pedigree with earlier iterations of workout philosophy in other jurisdictions, such as the London Approach developed by English banks in the late 1970’s,[2] which has influenced the INSOL Statement of Principles for a Global Approach to Multi-Creditor Workouts (INSOL Principles), the Bangkok Rules,[3] the Jakarta Initiative,[4] the Hong Kong Approach to Corporate Difficulties,[5] the guidelines for facilitating workouts issued by the Association of Banks in Singapore[6] and A Toolkit for Out-of-Court Workouts of the World Bank (which adopts the INSOL Principles).

Necessity

With such distinguished forebears, the question might be fairly asked as to why the guide is necessary in the first place. The answer is simple to those working in Asia.

First, anyone seriously involved in multinational insolvency policy-making knows that reform can never be achieved solely by top-down normative processes. The real driver for effective reform is inevitably grass-roots, or in modern parlance, local geographies “taking ownership” in the project to reform. This applies to both the nature and the geographical location of the institutions driving policy changes.

Second, although many of the principles in the guide are well traversed in its forebears, the emphasis and accentuation of the guide is markedly different.

For example, there is significant emphasis in the guide on the duty of the debtor to be transparent and on seeking reform to debtor behaviour. In the Asian context, the debtor is very often headquartered in a developing Asian jurisdiction, having perhaps raised its finance in a developed regional international financial centre (such as Hong Kong SAR or Singapore). As such, less effort is spent on creditor behaviour in the guide than in other literature.

Another example is the approach to standstills. In Asia, early standstills are not plausible without a debtor first showing good faith by providing disclosure. The guide therefore proposes a de facto standstill early on with a contractual standstill to follow — slightly later in the staging than other international models such as the INSOL Principles.

Third, although other regions of the world, especially developing jurisdictions, may fairly be said to have similar characteristics to Asia, increasing financial interconnectedness, the growing importance of Asia in global financial arrangements, and Asia’s projected economic dominance warrant a guide specifically on conducting workouts in Asia.

Fourth, there are certain characteristics in Asia that are, if not unique, certainly unusually potent which deserve special attention. For example, there is the presence of two international financial centres in Asia, Hong Kong SAR and Singapore, which both service variegated regional capital allocation needs (often from less developed jurisdictions). Neither of these international financial centres has an agrarian economy, nor any material manufacturing sector, which means that their specialism (in this context) is inevitably finance — to be “exported” regionally. This often creates an asymmetry of sophistication and experience between creditor and debtor.

With no inherent conflict between the guide and other literature on workouts despite different focusses, the hope is that the guide will be an added tool that stakeholders can refer to along with other highly distinguished work.

Asia’s distinctive characteristics and challenges

The guide considers the diverse cultures, heterogeneous economic development, and different legal systems in Asia by being respectfully restrained. It does not seek to overly prescribe. It leaves room for difference. It is worth acknowledging that the variegated legal and commercial landscape spread across a huge geography means that certain identified characteristics or concerns in the guide will be more or less relevant in certain parts of Asia. For example, it is axiomatic that concerns about tax treatment in Japan are irrelevant in Singapore, and that concerns about the level of expertise of the judiciary are applicable in some places but not others. The guide includes references to Asia’s near-neighbours such as Australia by reason of the intellectual contribution from the insolvency community there, and from its professional financier, accountancy and legal diaspora situated in the region. Moreover, there is significant commerce between the two areas.

Putting variegated systems to one side, the guide confronts head-on the challenges of workouts in Asia, with especial challenges in developing jurisdictions. In particular, the guide accentuates issues which are not necessarily identified, or accentuated, in the approaches of other jurisdictions and which may apply in some parts of Asia (but again, not all), as will be detailed later. In addition, the guide takes a much more granular, practice-oriented approach out of consideration that workout as a concept is arguably still in its infancy in not a small number of Asian jurisdictions.

Exclusions

The guide does not specifically address workouts between debtors who are micro and small enterprises (MSEs) and their creditors. Given the different realities in which MSEs operate and the important role played by MSEs in a country’s economy, especially Asian economies, ABLI and III have earlier released the guide on the Treatment of Insolvent Micro and Small Enterprises in Asia, another component of the Asian Principles, which details policy recommendations for dealing with the insolvency of MSEs, including concrete suggestions for workouts by MSEs.

Further, in its current, the guide does not specifically address workouts in “newer” scenarios, such as workouts involving digital markets and digital market operators and treatment in workouts of environmental aspects.

Opportunity

Workouts can be challenging. In particular when the debtor is large, it can be difficult to balance the competing interests of creditors, and unravel and restructure a labyrinth credit structure, all the while trying to ensure the debtor is capable of continuing as a going concern. Nonetheless, the rewards of a workout can be great, particularly where the alternative is for a potentially viable debtor to be placed into liquidation. Workouts are, moreover, especially effective “in those countries with a vulnerable corporate sector and an inefficient insolvency system”.[7] The workout process itself can be effectively managed with the support of experienced professionals who act with an eye towards complying with industry best practice.

As readers of the guide will find out, Asian jurisdictions have taken diverse approaches to workouts. However, this is a significant opportunity. Particularly in jurisdictions which do not presently have formalised rules and structures for workouts, there is clearly considerable scope for common and consistent standards to take root in Asia in the years to come. It is hoped that the guide will serve as a useful foundation for that road to convergence.

Download the full guide here.

[1] For the purpose of this guide, the term “workout” is used throughout for consistency. This guide does not discuss hybrid workouts.

[2] The “London Approach” was intended only to bind banks but not other creditors such as bondholders, employees or trade creditors. See Pen Kent, “The London Approach” (1993) Q1 Bank of England Quarterly Bulletin 110. The broad features of the London Approach are: (a) supportive approach by creditors; (b) a role for the Bank of England as peacemaker; (c) a standstill to allow situation analysis; (d) provision of full information; and (e) a role for the lead creditor in particular to ensure that other creditors are kept informed.

[3] The Bank of Thailand Policy on Out-of-Court Workouts (3 August BE 2551 (2008), as amended by the Policy dated 31 October BE 2561 (2018)). As result of the 1997 Asian Financial Crisis that hit Thailand, the Bank of Thailand set up out-of-court processes for the restructuring of distressed enterprises. In 1998, the Corporate Debt Restructuring Advisory Committee (CDRAC) was established, followed by the establishment of the Thai Asset Management Corporation which is entrusted with the facilitation of restructurings and the monitoring of restructuring processes. In this context, the CDRAC developed a framework of voluntary principles and timelines for voluntary workouts, known as the Bangkok rules, which aimed at resolving the limitations of the applicable legal framework.

[4] The Jakarta Initiative was established as a set of principles based on the London Approach to facilitate voluntary corporate workouts in Indonesia. It was terminated in 2003 without being replaced.

[5] Hong Kong Monetary Authority and Hong Kong Association of Banks, Hong Kong Approach to Corporate Difficulties, November 1999.

[6] The Association of Banks in Singapore, Principles & Guidelines for Restructuring of Corporate Debt: The Singapore Approach, undated.

[7] World Bank Group, “COVID-19 Outbreak: Corporate Insolvency – How Can Out-of-Court Workouts Help?”, COVID-19 Notes: Finance Series, 15 May 2020 at p2.