By Dah-In Yeh and Li-Chi Yeh (Founding Partner and Senior Associate of FBLawSince the start of the COVID-19 pandemic in early 2020, commercial activities worldwide have been hit hard. It is especially difficult for businesses already affected by changes in the economic environment and consumption pa
2020.07.08 / Formosan Brothers Attorneys-at-Law
By Dah-In Yeh and Li-Chi Yeh (Founding Partner and Senior Associate of FBLaw
Since the start of the COVID-19 pandemic in early 2020, commercial activities worldwide have been hit hard. It is especially difficult for businesses already affected by changes in the economic environment and consumption pattern. While waiting for the pandemic to alleviate and business activities to recover, the number of companies seeking bankruptcy protection or reorganization has increased each month.
According to news reports, up to May of this year, the U.S. has seen a new high in the number of companies seeking bankruptcy protection since the 2009 subprime mortgage crisis. Among which are the well-known hundred-year-old department store chain, JC Penny, fashion apparel specialty retailer J. Crew, and large-scale car rental company Hertz. The renowned lingerie and beauty retailer, The British branch of Victoria’s Secrets, also filed for bankruptcy protection in June.
FC Kaiserslautern, a German sports club with a glorious past, will also apply for bankruptcy protection in June. In Japan, researchers estimated that there might be over ten thousand companies filed for bankruptcy this year. The global pandemic has affected commercial activities across all industries. Even with governments’ active relief measures, businesses that are unable to reduce their debts are left with the only option of going into bankruptcy or reorganization procedures in hope of coming out of their plight through the legal system one day.
From the plight of foreign businesses under the pandemic, we can see that, through the bankruptcy or reorganization procedures, businesses are seeking for “protection” under the system, and which they can deal with their debts with fair and just, and attempt to revive their business. Using the United States as an example, whether it is done through Chapter 7 (Liquidation) or Chapter 11 (Reorganization) of the Bankruptcy Code, pursuant to 11 U.S. Code § 362, once a business file for bankruptcy, the legal effect of “automatic stay” becomes in force, making all acts of collection by the creditors automatically stayed. In Japan’s civil reorganization procedure and corporate reorganization procedure, once a bankruptcy application is filed, the court may issue a temporary restraining order to prohibit creditors from obtaining payment from the debtor. Through protections under the legal system, businesses that are drowning in operational difficulties may deal with their debts openly and fairly. This also prevents dog fights over the remaining assets of the debtor.
Compared to foreign jurisdictions, in Taiwan, when businesses face similar operational difficulties, they seldom seek help from the bankruptcy procedures under the legal system. Based on the judicial statistics of bankruptcy cases in district courts, the highest number of bankruptcy applications go to the 1044 cases in 2007 and the 805 cases in 2008. In the ten years after such time, there are only about 200 cases each year, and in 2019, there were only 205 cases. In terms of the cases of bankruptcy declared by the court, even for the year 2007 with the highest number of applications, there were only 64 cases that were declared bankrupt. In the ten years after that, each year only has around 20 to 30 cases that were declared bankrupt. In 2019, there were only 25 cases declared bankrupt. Judging from the aforesaid statistics, the low number of bankruptcy declared by the court shows that the success rate is low for convincing a judge to allow a business to enter into the bankruptcy procedure. This may be one of the key reasons why few businesses in Taiwan opt for bankruptcy procedures.
Moreover, the investigation procedure before bankruptcy is declared is not as optimistically as Article 63 of the Bankruptcy Act describes: within 7days. In practice, almost all cases need an investigation procedure close to half a year before a ruling could be issued. Although Article 72 of the Bankruptcy Act provides that “prior to bankruptcy is declared, the court may issue a preservation order under its authority,” in practice, almost no court would issue any preservation order prior to the declaration of bankruptcy; neither does the legal system provides an “automatic stay” mechanism similar that in the U.S. Bankruptcy Code. As a result, once a company files for bankruptcy, creditors would swoon down on the company like a vulture to grab whatever remaining assets they could find in the company. Whether through litigation or entering the factories or offices of the company to take away equipment that is still valuable. Under the current system, the debt settlement becomes a competition of “first come first win.” Such a system cannot provide fair protection to all creditors.
In addition to the difficulty in terms of court procedure, psychologically, it is often difficult for business owners to cross over the hurdle of accepting business failure. Moreover, since business owners are often the joint guarantor of the debts, even if the company can declare bankruptcy or be reorganized under the court procedures and be relieved of its obligations, the business owner’s obligation as a joint guarantor cannot be relieved because of it. If the business can be revived, but the business owner is still drowned in debts, it is hardly an incentive for business owners to opt for bankruptcy or reorganization.
Although the current Bankruptcy Act has gone through several amendments, it has not had any major revision. Now it is quite obviously outdated and out of touch with contemporary social demands. It cannot provide procedural protection for businesses mired in operational plight, nor can it provide creditors fair compensation. Through many discussions in the past ten years or so, there was once a close call in 2016 for a “Debt Clearance Act” to resolve issues of the bankruptcy system. However, it was a pity that such a proposal did not reach the stage to be included in a legislative discussion by the Legislative Yuan.
Under this pandemic, the hospitality industry, travel industry, and retail industry in Taiwan are all mired in operational difficulties. An outdated system is the reason business owners are unwilling to opt for bankruptcy or reorganization procedure to help themselves go through their plight. It is truly worth examination from all three perspectives, the executive, legislative, and judicial, to see what kind of a system needs to be in place for a business to end well or to be revived.
(This article was published in the “Expert's Commentary” column of the Commercial Times. https://view.ctee.com.tw/legal/21107.html For more information related to the content of this article, please do not hesitate to contact Formosan Brothers Attorneys-at-Law.)
