 Good afternoon. My name is Mark Shklav. I am the host of Think Tech Hawaii's Law Across the Sea. And today my program is titled Asian Insolvency Issues. And my guest is Professor Charles Booth. Professor Booth is a professor of law and the director of the Institute of Asian Pacific Business Law at the William S. Richardson School of Law at the University of Hawaii. Professor Booth is a distinguished and widely published legal scholar whose focus has been business and insolvency law in the Asia Pacific region. Professor Booth advises law firms, banks, financial institutions, and transnational companies and organizations concerning insolvency, restructuring, investment, and financing issues. Today we're going to discuss an interesting area of law that very few ordinary legal practitioners know very much about. But Professor Booth is an expert, maybe the expert. Asian Insolvency Law, its history and breadth causes and effects and strategies to address its repercussions. So let's talk a little bit first. Welcome Professor Booth. Thanks Mark, thanks for having me on the show. Good to have you here. Good to see you. I think our last long time discussion was in Hong Kong. And it's good to have you here and talk a little bit about insolvency law. Now for us ordinary guys, lawyers, what is insolvency law, first of all, before we get into the hard stuff, let's start it simple and then work our way out. What's insolvency law? Basically in any economy, you need a mechanism for dealing with companies that are not able to pay its bills, not able to pay its debts. And you want it for a few reasons. One of them is you'd like an efficient exit of that company from the economy. Secondly, you'd like to pay the creditors as much as you can pay them. And thirdly, you'd like to make sure that you don't leave a gaping hole in a city or municipality when a large company goes under. So insolvency law deals with all of those issues. Okay, so when I became a lawyer here in Honolulu, I've had touches of going into bankruptcy court or dealing with companies that couldn't pay their bills. In fact, I've sued quite a few. That's the normal practice for me. You're a professor of law. How did you ever get involved in this area? How did you get your start? I'm unusual. I've got bankruptcy in the blue. My father and grandfather are both bankruptcy lawyers. So my grandfather actually had a firm going back to the 1930s that he set up during the Great Depression. And then my father joined him out of law school. So I grew up knowing about insolvency law. I always found it interesting. And in law school, of course, I took bankruptcy law at that time with Verne Countryman, who was one of the draftsmen of the 78 Code. And I graduated from law school and practiced a little bit of bankruptcy law. When you say the 78 Code, you mean the Bankruptcy Code? The U.S. Code, the U.S. Bankruptcy Code. Yeah, yeah, wow. You know, it's very interesting that you talk about your grandfather and father and that background as having an influence on you. It is, to me, remarkable how your personal history will move into your professional background and how that has caused you to follow the path or maybe walk the path that you've walked. Absolutely. I was just lucky enough that bankruptcy law took me overseas. And I went from U.S. law. And when I was practicing at Cleary Gottlieb in New York, I had the fortune of working on the first cross-border insolvency, including a turnover order under the new Code. And I wrote the memo in support of the turnover order, and that's how I learned about my Asian insolvency law. Okay, so you started out learning about American U.S. insolvency. Started with U.S. law. And somehow, well, what is Asian insolvency law? It's a completely different animal. All right, so tell us a little bit about that and how you learned about that. Okay, it's been a series of steps over many, many years. I was practicing on Wall Street and I had a case involving Hong Kong. Our case was, of course, involving U.S. law. But in that case, I learned a little bit about Hong Kong law. Before I even went to Wall Street, I always knew I wanted to teach and I didn't practice for very long. And I applied for teaching positions and end up here at the Richardson School of Law in the 1980s. And at that time, they had summer traveling research stipends. And in the summers of 1987 and 1988, I went to Asia. And I was really one of the first people looking at Asian insolvency law. On that summer of 1987, I went to Japan and Hong Kong. And then the next summer also included Singapore and China. And that was my first taste of what was happening on the ground in Asia. Okay, so what are the different tastes between U.S. and Asian insolvency law? Give me, if you can, those countries you mentioned and how they differ. Oh, I can. Well, the first thing is that when we think of U.S. law, U.S. commercial law, U.S. insolvency law, we just take so much for granted. We have a very detailed code and generally in most areas, things work pretty smoothly. When you take a look at Asia, it's a very different animal. And increasingly over the last two decades or so, I've been focusing more on developing insolvency infrastructures that you need for the law to work. In the States, we don't think about it because things do work. But in Asia, you can enact whatever law you want to enact and we can talk about what they've been doing. But most of them don't work very well. Because the supporting factors and conditions are not in place. If you'd like, I actually have two sophisticated charts I can use to show that. Please, please, yeah. Okay, these are copyrighted and quite sophisticated, so be careful out there. This is the first one. Okay. Okay, so generally, of course, when you have a company not paying its debts, if you could anywhere, you'd like to do things out of court. Right. But if you can't work it out of court, then you go into court. That's the court. This is the court. So basically, these are the insolvency companies. If the negotiators haven't worked, generally the creditors will go into court and it covers most of this territory. That's in the United States. That's in the United States. So what happens is, as an American going overseas, since this is the way our system works, you're operating assumption at first is that, well, that must be the way it works. So I'm going to go to these countries and learn all about how their insolvency systems work. Especially in Hong Kong, Singapore, those countries that you think- Hong Kong, Singapore, China, Vietnam, anyone that you mentioned. And when I arrived, I should say after those traveling stipends I had at UH, actually led me to Asia. And I left UH and I was living in Hong Kong for 17 years at the University of Hong Kong. That'll teach them to give you the stipends. Yeah, they asked for the money back though, which was good. But when I was in China in the summer of 1988, I was meeting with one of the- a few professors who was studying Chinese bankruptcy law. And I asked him about Chinese bankruptcy law. And he said that bankruptcy law was the medicine but there was no illness. Okay, this is the medicine but there was no illness. And that was the sense. When I arrived in Hong Kong in 1989, and if I want to talk about insolvency law, that was a pretty lonely place to be because nobody would want to talk about insolvency law. Everything was booming. And even though things were booming, you still had a number of insolvent companies. So it was really when I went to Hong Kong and I was teaching at the University of Hong Kong. First I started learning about Hong Kong bankruptcy law, then Chinese, and then throughout the region. But over the years what I realized is that although this is the way things work in the states. Everything in the courts. Everything sort of in the courts. In Asia, if you're just focusing what's happening in the courts, it's more like this, that little dot. So you think you're learning a lot, but what you're really doing is focusing on that dot. So in China, for example, for every company that goes into the court process, there's probably 200, 250 that disappear a different way. Outside. Outside. So it's a very, very different process. So to see how things work in Asia, you have to take a look at all these administrative efforts that the governments have and just the dissolution of companies. Okay, so we're talking about insolvency and you've defined that law as perhaps a way to help companies go out of business and protect the creditors and the public, perhaps. Although I'm not sure I heard that. You're saying in America, the United States, we kind of have that covered with our laws, at least attempt to. But in Asia. Well, what happens is, I think in the States, we try to. And there's certainly debates about how effectively Chapter 11 is working. And that's sort of a topic for a different day. But overall, I think the system works fairly well. We can tinker with it. We can make improvements. But the practitioners are happy with it. You have very good judges and the system seems to function. When I arrived in Asia, and I took a look around the region, the only jurisdiction that had a modern functioning corporate rescue insolvency law was Singapore. No one else in Asia had it. And the reason they didn't have it at that time, they didn't need it. Asia was booming. And the attitude was, we don't need insolvency law. Because we're making lots of money and we're going to keep on making lots of money. So why do we have to worry about all these depressing things like insolvency? And they didn't have a background. They didn't have the depression like your grandfather did to learn through that. They didn't have the economic history that your father did with various companies going out of business. So they didn't need it. They thought they didn't need it. Of course, we all need it. We all need it. One prayer or another, we all need it. But they didn't realize that at the time. And I'm starting to hear that you're saying that bankruptcy is kind of a, it's a catcher in the rye, if you will. It's the way to help people and catch problems. You have to have it and you have to catch them early. So ideally, you want to start drafting and working on these laws when things are good. So you can prepare for when things are bad. But what happened in Asia was that nobody was functioning on the downside because everybody was making lots and lots of money. Funds plowing a lot of capital into Asia, the rates of return were very good. And you mentioned you were talking to a lawyer. Was this a Chinese lawyer? That was the professor, the one about the medicine and the need for, there's no disease at that time. Was it a Chinese professor? Correct. And were there many lawyers in Asia that were dealing with this? Certainly not in China. In Hong Kong, Singapore, Japan, there were. And those countries do have the infrastructure that I mentioned earlier that is necessary. But at that time into this day, and this is one thing we can talk about, is that Hong Kong still does not have the formal corporate rescue law. Japan certainly does Singapore. Does most countries in Asia do? Although most of them actually don't work as effectively as they could. Okay. So there was this concept or feeling within the community of attorneys or the business, we don't really have to deal with insolvency and bankruptcy, that type of thing. What changed or did something change? Oh, it changed big time in 1997 when the Asian financial crisis hit. And then. So what is that? Well, the Asian financial crisis was really quite different what we just went through in the States. Because in the states and in the financial crisis that we had, it was really in the banking sector and the auto industry as well, Chrysler and GM. But most of corporate America did not go into insolvency procedures, proceedings at that time, where the 97 crisis was very, very different. In Asia? Yes. Because what happened was all this money was coming into Asia. And then in the 1990s interest rates started coming up in the States. And a lot of those, the money men started moving funds elsewhere to make other returns. So the money came into Asia and it left a lot of these countries very, very quickly. So you have the money flow issue. Secondly, because it was so easy to make a lot of money, the banks actually had very, very poor risk assessment procedures. And I learned afterwards, the banks, even in Hong Kong, they would give a company a short-term line of credit, not knowing that that company was using that line of credit to invest in real estate. And when things were going well, they made lots of money. But when the music ended, all of a sudden you have a short-term obligation. And you're stuck with a property that could be far underwater. So at that time, what happened within months? The stock markets crashed, the real property markets crashed. Unlike the states where the markets often are on different cycles, in Asia, they're really on the, in most countries, they're on the same cycle. All the countries? Well, most of them, where the markets are functioning. And a lot of the countries know the stock markets are very small market cap and you don't have a representation of the whole economy. But in Hong Kong, for example, the many of the largest companies in the stock market were property companies. So when the stock market crashed, the property companies crashed as well. So things got ugly very, very quickly. Plus in countries like Thailand and Indonesia, and Thailand is really where it started, because of everything going on, their currency had to be devalued. So then you had a major mismatch of paying back your foreign debt obligations because the currency was depreciating. And you just had a major, major mess, big time. And in many countries, not all the countries, but in many countries then, it then infected the banks. And once the banking system is in trouble, you've got to move really quickly, as we saw, because your level runs on the banks. So they had the financial crisis in the banking sector like we had. But on top of that, in many sectors of their economy, in many countries, it was just pure bedlam with companies. So we had this crisis. And after the crisis, something happened. And I want to talk about that after a break, short break. Thank you very much. Hi, and thanks for watching Think Tech Hawaii. My name is Justine Espiritu, and I host the Hawaii Food and Farmer series with my co-host, Matthew Johnson of Awaku Fresh. Every week, we bring on farmers, as well as all the other individuals and organizations that help support a thriving, sustainable food system. In fact, it's interesting to learn what others are doing, so you don't have to be a Hawaii resident or producing food on Hawaii to be featured on the show, like today's guest, Wyatt Bryson of Jewels of the Forest and Michaelab Solutions. Aloha, thank you. It's been a pleasure being on the show. I love seeing what you guys do, and I really support your mission. And it's really nice being back in Hawaii. And thank you again. It's an honor. So you can see guests like Wyatt every Thursday at 4 p.m. on Think Tech Hawaii. Thank you. We are back with Professor Charles Booth, and we are talking about Asian Insolvency Law. And it is very complex. And we're learning the background, the history of it, and we've just been talking about the 1997 crisis, financial crisis in Asia. Things were going well. They didn't think they needed insolvency law, or that wasn't the top of their agenda. Things went bad. What countries did it affect? What happened after that? And has there been a change? All very good questions. Well, initially, you had a lot of countries that were in horrible shape. And the IMF came in with the other multilaterals, and basically they took a look around and they basically said, if you want more money from the West, then we need changes in your infrastructure. We need an insolvency law. We need certain changes. So overnight, all these countries, I shouldn't say all these countries, Indonesia, Thailand, Japan, they start working on drafting or updating their insolvency laws. So you saw that when you arrived there. When you were just coming over and viewing these things, you knew before. I was very lucky. I had eight years to prepare. I moved there in 89. So I had eight years to start learning about this. But what happened was, one of the problems was, and a lot of it's just the colonial history, is you have the laws that you have. So the beauty of the British Empire is they basically enacted the same laws everywhere. But they didn't update them was the problem. So Hong Kong, when I arrived on the personal bankruptcy side, they had the law from 1914, a law that actually was very close to what Charles Dickens knew about when he was his father was sent to debtors prison. He grew up in debtors prison. So the bankruptcy law in Hong Kong in the 1980s was very similar to what you had a century earlier. So the International Monetary Fund and other creditor banks, I suppose international banks, said we got to have some changes. We got to have some changes. The problem is everyone's focusing on the legal change. But the legal changes do not help you for the crisis that you're in. They help you for the next crisis. Because the things that have happened have already happened. So initially, each creditor has to decide for itself whether the entity that owes it money should be liquidated or whether it's possible to save it. Maybe benefit from the ongoing concern value. Maybe there's a new product coming on the line. Maybe the problem was this currency devaluation the company was still working. So they had to make that individual decision. So it's more of an ad hoc. That was ad hoc. And that's the way the bank started. That's the way Asia functioned initially. But then one of the major changes that actually was probably the most effective reform that occurred is that many countries enacted versions of workout guidelines that were enacted initially in London. So you had the Hong Kong approach, the Jakarta initiative, et cetera, where you had a structure, an informal workout structure, just for the financial creditors. Which worked very effectively in Asia because a lot of the bankers knew each other. They controlled most of the debt and some countries almost 100%. And they could then make their own agreements without having to resort to this very ineffective and inefficient insolvency system. And then the last part of the puzzle was for those countries where the banks were in trouble, then you had to save the banks first. Because you always have to stop the hemorrhaging of cash in the banks. And there they had asset management companies that were set up. So your question, part of it asked on what countries were affected. So for instance, Japan was already in recession when the financial crisis hit. And they had the misfortune of also having the largest exposure to Indonesia. So Japan was getting hit everywhere in the region. Malaysia, Thailand, countries like that were hit very, very hard. Interestingly, China is looking out. And China was in a very, very different position because one of the things about China is that it's very easy to get your money in but it's very hard to get your money out. In these other Asian countries, we saw the same thing during our own financial crisis. Every day before the market closes, basically there's a massive sell-down. That didn't happen in China. And in China, as I said, it's very hard to get your money out. So the irony is at that time, China was actually moving on major reforms to its insolvency law. And my view is that when they looked around at what was happening outside their borders, that actually led them to slow down the insolvency law reform as legal process and function much more on administrative reforms because they saw what was happening to its neighbors. Because unlike these, a lot of the countries with these old colonial laws, of course, China just had this very new insolvency law that was only in operation for only a decade or so. And so in the other countries, the capitalist countries, if you will, around there, money was flowing out freely and it wasn't there to protect the economy. No, what happened there? And then every country tried various initiatives. Basically, some countries tried currency controls. Hong Kong came up with a mandatory provident fund where a lot of money had to be invested in the Hong Kong stock market. So every jurisdiction took steps to try to preserve capital in their country, to either prevent people from taking it out or finding ways for it to come in and just trying to work out stopping the runs on the banks. Because if you have the runs on the banks, of course, are just completely just devastating. And as we've seen from our own crisis at a certain point, you've got to get liquidity into the banks. In countries like Indonesia, it was just devastating. You had a generation that had taken decades to get into the middle class and many of those people within months or a year were now back out. They pretty much lost everything because, of course, in most people in most countries, they're investing in the currency of that country. So if that currency then is depreciated very badly, that will, of course, hurt all the individuals. So the countries are the capitals of capitalism like Hong Kong and Singapore. What happened to them? What was the result of them? They actually pulled through much better because in Hong Kong and Singapore, the banks weren't affected. Lending in Hong Kong was very conservative. So at the time when we moved there, a real estate was getting quite frothy, but the banks would require, let's say, 40% deposit on a lower valuation than market. So they had a bit of a cushion. The property prices fell quite a bit before the banks got worried in Hong Kong. One of the ironies was that Hong Kong had actually started its corporate insolvency low reform process before the financial crisis. But for other reasons, and I guess a topic for a different day, they were unable to complete it. They still haven't completed it. So they're certainly the only major commercial center and one of the few jurisdictions in the world without a corporate insolvency law. For a long time, I thought that Hong Kong would emerge as the center for Asian insolvency. Of course, and we thought for sure that it would because Hong Kong, I think it's fair to say, had at that time the best judges, the best practitioners, creative minds, and even with this old British law, they were actually able to work things out pretty well. So even though you don't have a formal corporate rescue law, they took this old British law from the 1920s and they sort of made it work. I often say it's like the American cars in Cuba. There's old Chevy's. They don't go too fast, but you tink with them a little bit. You can make them run for a long time. So we all thought that Hong Kong was going to be the center. But quite interestingly, over the last couple of years, Singapore is emerging as the center for Asia. And their government is very, very focused on putting a whole legal infrastructure in place to make that happen. Where Hong Kong right now has a lot of problems with mainland China and the result has been that a lot of laws are not getting enacted. So even though the differences of opinion are primarily not in the commercial area, the commercial laws are hostage to the problem. So Singapore has taken advantage of that. And eventually I think what will happen is you'll have one or two centers in Asia. I think Singapore will be the main center. Hong Kong will be secondary. Dubai in the Middle East. Of course you have, you know, for most international companies, you know, you have New York and Delaware where they have some presence. You've got London. And increasingly I think that's where the major corporate insolvencies are going to be handled. All right. I am a major company located in Asia, many offices. Things are not looking good. I'm looking down the road now. I may not have enough money, okay? My, I'm set up in Hong Kong, but I have offices everywhere. What do I do? Well, first of all, it's going to be a mess because most Asian companies have a very, very complicated corporate structure with a holding company in the Cayman Islands or the BVI in the Caribbean. So what complicates everything is you often have the holding company there and that's often where the money has been lent by foreign bond investors. Then you have a subsidiary in Hong Kong, maybe a banking subsidiary in Singapore, other subsidiaries in Asia. So with your company, we've got to work out where the problems are. Is it just the Hong Kong presence? Is it throughout Asia? So eventually we look at all these different operations that you have and we've got to decide, first of all, whether we should does liquidate. Secondly, whether they're going to reorganize and then the participants have very different opinions, of course. You might prefer if you're in Hong Kong, you want to file in Hong Kong where you are, but if you are a foreign company and basically the majority of companies on the Hong Kong Stock Exchange were incorporated elsewhere, you're definitely going to need a proceeding overseas in the Cayman or BVI where your company actually is from. And that can be done. That can be done. And meanwhile, your American creditors are going to be very unhappy and they might file in New York either a full plenary proceeding or chapter 15. There might be a proceeding filed in the U.S. So there's going to be a lot of fighting. So there's going to be multiple bankruptcies in various countries. How does that get handled? I mean, which one takes priority? Well, it's case by case. And that's one reason why Singapore wants to emerge as the hub. What Singapore has been doing is they've been sending delegations to New York, to Delaware. They want to work with courts worldwide. The difficulty we have is that businesses are always far ahead of the legal infrastructure. So the laws that we have in most of these places still does not function too well. And yet with a push of a button, companies can move hundreds of million dollars from Singapore to China to the U.S. like that. So the difficulty that you have is you have all these proceedings. Ultimately, you've got to get your hands on the assets in the respective country. So if we're dealing with a company with most of its assets in mainland China or in Indonesia, no matter how effective our insolvency proceedings are in Singapore or Hong Kong, for example, if we can't get our hands on the assets, we're going to have a real problem. So you've got to get everyone to cooperate. And I think with the development of the ASEAN initiative in Asia, I think Singapore will benefit from that and try to work with its neighbors to cooperate in some of these insolvency cases. So what I think I'm learning is that in the United States, we're this big country and we just have bankruptcy within our borders. In Asia, you have this widespread economic activity over many countries which means that we've got all types of problems, different countries depending on where you're at and no one law to govern. Correct. A lot of Americans can just learn American law. And since 1898, we've had an insolvency law in the books. For Asian countries, it's very recent. And if you're a businessman in Asia, you're always thinking what's happening outside your jurisdiction. So almost every major insolvency and most smaller ones will have many countries involved. So it's much more complicated than we would have if we just have a filing here in Hawaii. So we've got to open our eyes beyond the seashore if we're dealing with Asia, beyond our own shores and look at all the different multitudes of countries and ideas and philosophies and mindsets that are out there. Well, you have to because in those countries it's not just a matter of filing a petition. You have to navigate many different avenues. In many countries, you have to decide is this company getting a lot of government support? Are we going to be able to get our money out? Basically, is everyone honest? Is there corruption? Basically, if we have the money in the bank, is it going to be there? So there's just a lot of issues that you have to deal with that you actually don't have to focus on when you're in the States. And with the few minutes we have left here, is Singapore's goal then to bring it all together? We are going to be the one place for Asia. They want to be the Asian hub. To bring it all together, to bring everybody. We all got to agree though and we're going to do it in Singapore. Is that? You've actually made a very important point. It will work if people agree. If the participants do not want to be in Singapore, they can fight and fight and fight. But this is all quite recent until just a few years ago. I certainly thought that Hong Kong was going to be the main center. And I don't think that Hong Kong is going to disappear as an insolvency jurisdiction for these cases because the lawyers and judges are first rate. But I do think that until they get their laws in place, right now the advantage is to Singapore because they have better laws. And I think a broader view of where they're heading with these issues. Okay, my last question to you. I'm that company looking down the road. What is the best country in Asia for me to file bankruptcy, Professor Booth? Well, it depends of course on your connection. You have to have a connection with these countries. You just can't file. Relationships you're talking about. You know what you would have, I think in any case, depending on where your country, where your company's incorporated, you will most likely have a proceeding in a place like Singapore if there's jurisdiction in the country where you have your operation. So there's not just going to be one, it's going to have to work with each other. So you just can't say I'm just going to file here because if the assets aren't there, you're not going to be able to make any payments to your creditors. All right, and the law is developing. Laws are developing. Professor Booth, I want to thank you so much for being with us today and opening our eyes beyond our shores and across the sea. Thank you so much. Oh, thank you very much. Thanks for having me on the show. I enjoyed it. Good.