The Asian Contagion Understanding Cultural and Legal Differences

The Asian Contagion Understanding Cultural and Legal Differences

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Much has been written about the "Asian Contagion," the economic crisis that has been enveloping many Southeast Asian nations. The current crisis in Asia is often thought to have started last summer with the devaluation of the Thai baht. During the last several months, however, the troubles have spread rapidly throughout Southeast Asia. Countries that have been hit particularly hard include Indonesia, Thailand and the Philippines. Consequences of the crisis have extended to Korea and Japan as well, and the "Asian Contagion" does not appear to have run its course. As this article is written, it is unclear what further implications the Asian crisis will have for China, Australia or even Latin America.

As a consequence of the turmoil, many companies in South-east Asia are expe-riencing tremendous financial difficulty. Devaluations of currency, cut-offs of credit by domestic banks (which are themselves in trouble) and declines in domestic consumption have critically injured many enterprises. These financial difficulties are simul-taneously creating problem credits of many types for North American institutions. North American entities are lenders to, bondholders of and suppliers of goods and services to troubled Southeast Asian companies.

Further, they are equity holders of, and partners with, such companies. It is uncertain whether many of these North American entities also will suffer indirectly from the crisis. Perhaps even more uncertain is what actions such entities, and insolvency professionals on their behalf, should take to alleviate or avoid financial difficulties that may result from connections with troubled Southeast Asian companies.

In addressing Southeast Asian restructuring situations, North American insolvency professionals may find that North American-style "workout" cultures and regimes are either unknown or little developed. Also, actions taken by parties in troubled Southeast Asian financial situations may be quite different from North American practice, and may exclude foreigners. The formal judicial insolvency proceedings of Southeast Asian countries can be quite different from those in North America. Further, such formal judicial insolvency proceedings may be used rarely.

Hence, North American professionals will need to adjust their focus and methodologies to successfully navigate such restructurings. Similarly, they will need to increase their access to and understanding of local Southeast Asian legal, financial and business cultures and practices. This article will address these issues and identify certain major issues that North American insolvency professionals should bear in mind when focusing on Southeast Asian restructurings, insolvencies and even new transactions.

Restructurings and Insolvencies

Effective strategies for recovering troubled credits from debtors in emerging market countries are quite different from the strategies that are best employed in developed countries. In emerging markets, there is often no effective formal or informal process in place. This void creates two problems for creditors. First, there is no certainty that a rational restructuring can be accomplished. Second, the lack of effective processes has the effect of entrenching existing management. Accordingly, the most likely repayment source for the creditors is the continued operation of the debtor’s business under existing management. As a result, the creditors’ first focus should be on the financial health of the debtor’s business under existing management.

In Southeast Asia, creditors generally are best able to play a constructive role in preserving a debtor’s financial health and reaching the most rational restructuring by establishing and growing strong relationships. The key relationships for foreign creditors will be with the debtor’s shareholders and/or management, appro-priate local government officials and local bankers. Through these relationships, creditors can portray themselves as (i) serious investors whose claims have to be addressed in a sensible fashion, as well as (ii) constructive and reasonable par-ticipants in the restructuring process.

It is important to establish these relationships as early as possible. By seeking to establish relationships with a debtor before the debtor formally requests creditor accommodations, a creditor establishes credibility and accelerates the establishment of goodwill. Equally important, a constructive relationship between foreign creditors and their debtors makes it more awkward for a debtor to structure a reorganization without foreign creditor participation. It is quite customary throughout Asia for companies to reach agreements with their domestic bankers, and to present it to others only once the deal is largely done. Accordingly, early positive relationships are of significant value.

In Southeast Asia, there is no substitute for in-person meetings as a means to establish credibility and to convey con-structive motives. In order to commence the process of building relationships, creditors with significant exposures in the region should travel to Southeast Asia. Likewise, professionals who represent such creditors should consider doing the same.


There is no effective or predictable method for restructuring troubled loans in Indonesia. While there is a corporate restructuring law, it is highly ineffective and, consequently, rarely used. Among other things, it is very difficult for creditors to force their debtors into insolvency proceedings. Further, once such proceedings are commenced, creditors ordinarily find themselves stuck in the court system for years before obtaining any remedy. During that time, of course, any value that the troubled company may have had can completely disappear, either because the business deteriorated further or because the assets of the business are secreted out of reach of the creditors.

Hiding of assets is relatively easy and commonplace in Indonesia. There is no effective system for public filing or registration of information about companies such as the identity of a company’s managers, the state of its financial affairs or the identity and claims of creditors with security interests.

In addition to these legal infirmities, presently there is no organized out-of-court workout culture in Indonesia as there is, for example, in the United States, Canada or the United Kingdom. There is no effective body of insolvency practitioners, nor is there an informal set of rules that troubled companies and their creditors have tended to follow. While wide-ranging revisions to the insolvency law and the creation of an organized workout culture are underway, it may be some time before these efforts change the way corporate restructurings are implemented as a practical matter.

As a result of the poor court system and the lack of effective informal processes, troubled Indonesian companies typically accomplish settlements with their creditors on the basis of personal relationships, both with local bankers and with relevant government officials. Settlements are often agreed among this group, and only then presented to foreign creditors as a "done deal," blessed by the authorities.

Given these facts, creditors with exposure to troubled (or potentially troubled) Indonesian companies have two choices. They can wait and see what happens (not necessarily the worst strategy depending on the size of the exposure or the likelihood of a new strategic player who can help turn the company around), or they can decide to participate proactively. Such a decision should include collective creditor organization to the extent applicable, as troubled Indonesian companies are very unlikely to speak to foreign creditors unless there is a critical mass acting together. Further, the participation must include the early establishment and careful maintenance of relationships with key players (often including elements in the government). If foreign creditors are perceived as actively interested and willing to play a constructive role, they can improve their recoveries. North American insolvency professionals can help their clients in this respect by bringing their clients to Southeast Asia for such relationship building, or alternatively, establishing relationships with other firms that already have developed a com-prehensive Southeast Asian access program.


Much like Indonesia, historically, there has been no effective system of in-court remedies for foreign creditors of troubled Thai companies, nor has there been an effective out-of-court workout culture. Further, the Thai government has regularly participated at various levels in private sector workouts.

In recognition that the system has not been very effective, the Thai legislature recently passed a corporate reorganization law, and the law is merely awaiting Royal Assent. This law was drafted in part in an effort to help the Thai private sector recover from the consequences of the deep devaluation of the baht. It is based, to a large extent, on a combination of U.S. and U.K. laws, and it includes a healthy dose of creditor participation. The law appears to be sensible in many respects, but it also contains provisions that are cause for concern. For example, the proposed new law classifies all creditors into one class, whether they are secured or unsecured. Further, the law requires that foreign currency-denominated claims be converted into baht as of the commencement of insolvency proceedings. In a country with a steadily-declining currency, this could have severe consequences for foreign creditors.

With the new law awaiting Royal Assent, Thai companies and their foreign creditors are "holding their breath." The new law is likely to permit more rational debt restructurings than have been previously possible in Thailand. It will take time, however, before the courts, Thai debtors and Thai insolvency practitioners become accustomed to the new law, and it becomes a practically useful tool. When the law becomes effective, foreign creditors with good relationships will be best able to capitalize on its provisions.

The Philippines

As in many Southeast Asian countries, Filipino business people build successful businesses by developing good personal relationships with their business partners. These relationships extend to a business’s bank lenders. As a result, Filipino businesses traditionally have been quite reluctant to use the formal Filipino "suspension of payments law" as a means to restructure the terms of their indebtedness. Such a resort to the courts is ordinarily viewed as signifying that personal relationships have broken down, and this turn of events is perceived as a failure on the part of the business people involved.

However, while Filipino business people consider relationships to be critical to doing business, they recognize that their Western counterparts place less emphasis on relationships and more emphasis on a predictable set of transparent rules. Thus, when doing business in the Philippines, foreigners should be aware that, generally speaking, their Filipino counterparts are not likely to seek to build the same kind of relationship with foreigners as they would with their countrymen.

As a result of the decreased importance of the relationship in Filipino dealings with foreigners, foreign creditors should not assume that a Filipino business will work as hard to avoid a suspension of payments proceeding. It may be that a business has significant relationships with its fellow Filipino lenders, and these relationships will cause the company to seek to avoid suspension of payment procedures. If, on the other hand, such a Filipino business has no significant local creditors, it may be quite willing to commence suspension of payments proceedings in an effort to force its foreign creditors to make concessions.

Because the suspension of payments proceeding can last for a long period (potentially years), and the results can be quite unattractive to creditors, foreign creditors should try to avoid these proceedings if commercially possible. A good way to avoid protracted judicial insolvency proceedings is to seek to ensure that a Filipino debtor has significant borrowings from a Filipino bank or other institution with which the debtor has a long-standing relationship, so that the debtor will prefer a consensual restructuring. Foreign creditors must bear in mind, however, that their Filipino debtors will usually try to negotiate out-of-court settlements with their local bankers (including granting security interests) prior to approaching foreign lenders.

Perhaps the best solution would be to attempt to build a strong relationship with the debtor as early as possible. While no solution will be fool-proof, especially as access to international financial markets becomes easier, it is best for foreign creditors and their professionals to be aware of these aspects of the Filipino business environment, and to design their strategies accordingly.


North American creditors and the professionals representing them must develop an understanding of Southeast Asian legal, business, cultural and financial practices to reduce exposure during the current crisis. Even more importantly, in order best to represent their clients, they must establish a comprehensive network of relationships with key governmental, business and legal players. It is through such a network that professionals can provide their clients with the critical access to the local information and dynamics that is often the difference between a successful restructuring and a write-off.

Journal Date: 
Friday, May 1, 1998