Insufficient Information Summary

Taiwan's insolvency regime has been called "archaic," but Lawrence Liu, writing for the Forum on Asian Insolvency Reform has reported that the need to remain globally competitive has inspired the authorities to revamp the system. The law is fragmented, with reorganization covered under the Company Act and liquidation and composition covered under the Bankruptcy Act. Insolvency of failed banks and insurance companies are regulated by the Banking Act and Insurance Act, respectively. Amendments to the laws in 2000 and 2001 have not yet addressed all the weaknesses in the regime. The Bankruptcy Act does not adequately address cross-border issues, but there were draft amendments, proposed in 2004, that deal with some cross-border rules. A 2009 report by KPMG notes that a new law consolidating reorganization and bankruptcy proceedings was, at the time of the publication, under review. In 2009, the U.S. Department of Commerce stated that Taiwan’s insolvency regime guaranteed creditors the right to proportional share in a debtor's assets. The DoC report, along with several others, also makes note of the slow legal proceedings in Taiwan Nonetheless, there is no publicly available information regarding Taiwan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank.

General Overview

There is insufficient publicly available information regarding Taiwan's compliance with the Principles and Guidelines for Effective Insolvency and Creditor Rights Systems developed by the World Bank. The 2009 U.S. Department of Commerce (DoC) "Doing Business in Taiwan" Country Commercial Guide states that Taiwan's Bankruptcy Act guarantees all creditors "the right to share the assets of a bankrupt debtor on a proportional basis” (p..67). According to Lawrence Lui, writing in 2002 for the Second Forum for Asian Insolvency Reform, Taiwan's insolvency regime is "archaic" (p. 2), but he noted that the pressures of globalization have led to a determination to reform the system. According to Lui, Taiwan's system was originally based on the assumption that insolvency was a non-litigious matter, according to the terms of the Civil Law. Adding to the problem is the fragmentation of the system, with the Company Act covering corporate reorganizations, whereas settlement and bankruptcy proceedings for companies and individuals are the province of the Bankruptcy Act, and banking and insurance firm insolvencies are covered under the Banking Act and Insurance Act respectively, as explained in the 2004 report by George Lin.

According to Lui, the Company Act is administered by the Ministry of Economic Affairs, whereas the Bankruptcy Act is administered by the Taiwanese judiciary (the Judicial Yuan). The government's strong involvement in the banking sector through the early 1990s "led to asset-based lending without much emphasis on understanding the firms' value and risks (including insolvency risks and costs)" (p. 2). The lack of any special bankruptcy court contributes to the system's deficiencies, because judges lack the training needed to render appropriate rulings. In addition, the court system is overburdened, leading to excessively long proceedings. While the 2009 U.S. DoC report does note that “simplified courts have been set up to deal with minor cases that can be resolved quickly” (p. 67), it is unclear as to whether or not this pertains to cases of insolvency. Liu also noted that Taiwan is institutionally weak in the credit-industry area, enabling fraud and making it difficult for creditors to gain access to credit information on debtor firms. The Lui 2002 report notes that globalization pressures have led Taiwan to reconsider its situation beginning in the late 1990s, giving rise to amendments to the Banking Act and related legislation. Liu noted that a draft amendment to the Bankruptcy Act does not fully address the problem of fragmented legislation, however.

According to George Lin's 2004 paper, both the Banking and Company Acts were significantly amended in 2000 and 2001, respectively. Nonetheless, Lin found the changes in the Company Act to be insufficient to ensure the creditors or reorganization administrators with adequate protection against fraudulent efforts by the debtor to transfer assets to a third party during reorganizations. This sort of protection is provided in the Bankruptcy Act (Articles 78 and 79). According to Lin, the Ministry of Finance (MoF) has attempted to introduce changes that would extend this sort of protection within the Company Act, but there is no information available as to whether or not this attempt has been successful. A 2009 report by KPMG however, does note that a “new code of law consolidating reorganization and bankruptcy is under final review” (p. 5).

The Banking Act provides for merger, winding-up, and receivership as the three mechanisms with which to handle financial institution failure. In addition, the Resolution Trust Corporation (RTC) Act of 2001 offers assistance to failed financial institutions. In situations where a conflict arises between the provisions of the RTC Act and other banking-related laws, the RTC Act takes precedence. According to Lin, bankruptcy statistics for the years 2001 to 2003 are as follows: "more than one hundred companies in Taiwan filed reorganization applications to the courts; nevertheless, some of the applications are still pending, forty-six of which have been dismissed, and only sixteen applications have been approved by the court" (p. 2). There have been no amendments to the Bankruptcy Act since 1993, according to Lin. However, Lin reported that there was an amendment under consideration that could enhance professionalism by holding the public accountant "jointly and severally liable with a debtor if the accountant includes false information or fail to include the material information in the debtor's financial statement" (p. 5).

Finally, Lin reported that, institutionally, Taiwan created its first asset management company, called the Taiwan Asset Management Corporation (TAMCO) in 2000, and mentions that others have been formed since then. The aim of such institutions is to help reduce the nonperforming loan ratios carried by Taiwanese banks and financial institutions. In this, Lin found TAMCO to be somewhat successful, and a significant number of nonperforming loans have been bought by TAMCO and other asset management companies in the years since they began operation. In addition, Lin reported that there has been a financial information unit within the MoF since 1960 that now permits a creditor who has received either a judgment from the courts or an "entitlement of enforcement" to gain access to a debtor firm's financial records.

Lui's 2002 paper directly addressed Taiwan's cross-border insolvency regime. According to Liu, there was no recognition of foreign judgments as binding on a bankrupt's assets. Because the Taiwanese Bankruptcy Act did not deal with anything except liquidation and dissolution, it would not recognize a foreign judgment calling for reorganization. In Lui's words, "the current state of cross-border insolvency law is a case of straightforward irrelevance" (p. 4). Reviewing the draft amendments proposed for the Bankruptcy Act, Lui notes that it provides a means by which to recognize the judgment of a foreign court, whereby "the representative of the foreign composition or liquidation proceedings will have power over the assets of the foreign debtor located in Chinese Taipei" (p. 4). Lui found provisions dealing with parallel proceedings "very confusing" (p. 5). He also reported that the draft bill does not recognize foreign reorganization proceedings. Nonetheless, Lui found Taiwan to be sincere in its commitment to insolvency reform, due to its need to remain globally competitive. In his 2004 report, George Lin also noted that the proposed amendments to the Bankruptcy Act deal with cross-border insolvencies. According to Lin, "the amended Bankruptcy Act would allow bankruptcy settlement and judgment made by foreign courts to be enforced against the bankrupt's assets in Taiwan if such foreign settlement or judgment has been recognized by Taiwanese Court" (p. 4). The 2009 U.S. DoC report notes that “judgments of foreign courts with jurisdictional authority are enforced in Taiwan by local courts on a reciprocal basis” (p. 67), but makes no further elaboration on this point.

According to the official website of Taiwan’s Financial Supervisory Commission, the Executive Yuan, the Consumer Debt Clearance Act came into effect on April 11, 2008. The Taiwan New Economy Newsletter states that the Act “adopts a twin-track approach that offers a rehabilitation procedure and a liquidation procedure” in the event of inconclusive negotiations between a bank and a debtor. However in terms of corporate insolvency, the KPMG report states that Taiwan still “does not have an up to date insolvency legal framework” (p. 5). The report highlights the lack of swiftness in the execution of legal proceedings due to the lack of laws comprehensive enough to allow “stakeholders to maximize recovery in a timely manner” (p. 5). It also highlights the need for greater coordination between reorganization and bankruptcy laws in order to enable more timely legal proceedings. The issue of slow judicial proceedings seems to persist, despite the measures adopted by the authorities to monitor case processing times in 2002, which was mentioned in the 2009 U.S. DoC report.

The International Bank for Reconstruction and Development and World Bank's "Doing Business Guide 2010" for Taiwan looks at three business-closing indicators to identify "weaknesses in existing bankruptcy law and the main procedural and administrative bottlenecks in the bankruptcy process." These are the time, in years, taken to conclude such proceedings; the cost, expressed as a percentage of the debtor estate; and the recovery rate, expressed as cents on the dollar. These indicators are presented alongside similar indicator averages for the East Asia & Pacific region and for the member countries of the Organization for Economic Cooperation and Development (OECD) for purposes of comparison. For Taiwan, it takes an average of 1.9 years to close a business, compared to 2.7 years for the region and 1.7 years for the OECD. It costs 4 percent of the estate in Taiwan, compared to 23.2 percent in the region and 8.4 percent in the OECD. In Taiwan, recovery averages 80.9 cents on the dollar, compared to 28.4 cents in the region and an OECD average of 68.6 cents.