In Taiwan, statutory regimes governing reorganization, insolvency, and liquidation of companies are under different laws. Reorganization is primarily regulated by the Company Act; bankruptcy is governed by the Bankruptcy Act; and liquidation is stipulated in both the Company Act and the Civil Code.
Reorganization is a reconstructive debt-clearing procedure aimed at enabling a company to recover through the reconciliation of stakeholder conflicts and adjustments to its capital structure and operations. However, not all corporate entities can apply for reorganization. According to Article 282 of the Company Act, only companies that “publicly issue shares or corporate bonds” can file for reorganization with the court. In determining whether a company can undergo reorganization procedures, the court uses “the possibility of reconstruction and rehabilitation” as a condition. The court believes that the determination should be based on the company’s business and financial status, requiring evidence showing that the company can break even after the reorganization and generate surplus revenue to repay debts before it is considered to be of operating value and is permitted to reorganize.
Insolvency is a liquidation-type debt-clearing procedure applied when a company’s assets are evidently insufficient to repay its debts. In an insolvency procedure, a court declares the company bankrupt and appoints a receiver in bankruptcy to liquidate and distribute the company’s remaining assets in accordance with the Bankruptcy Act. The objective of insolvency is to ensure fair compensation for creditors while considering the financial rehabilitation of the debtor. When a court evaluates whether a company can proceed with insolvency proceedings, in addition to determining whether the company’s assets are insufficient to repay debts, it also needs to determine “whether there is practical benefit to declaring bankruptcy.” If the court believes that the company’s assets are at least sufficient to pay the costs of insolvency proceedings, the company can declare bankruptcy.
Liquidation occurs when a company’s assets are sufficient to settle its debts and is aimed at resolving claims and distributing remaining assets to shareholders. In a typical liquidation process, the company’s directors act as liquidators to inspect company assets and prepare financial statements and property catalog for the purpose of settling current affairs, collecting receivables, paying off debts, and distributing residual assets. While the court has supervisory authority over liquidation, it generally does not actively intervene in the process.
In summary, companies can choose between reorganization, insolvency, or liquidation to resolve their debts depending on their financial conditions and asset status.
Using Contractual Agreements as a Mechanism for Out-of-Court Restructurings and Workouts.
When a company faces operational difficulties and debt issues, if it can negotiate and reach an agreement with all stakeholders, including creditors, debtors, and shareholders, regarding the company’s financial problems through mutual concessions, the parties can achieve debt resolution by signing a contract under the principle of freedom of contract. This process avoids the need for formal reorganization, insolvency, or liquidation proceedings. However, given that companies often have a large number of creditors or significant amount of debts, the communication costs for reaching contractual agreements are extremely high. As a result, it is generally unrealistic to expect corporate debt issues to be resolved through unanimous contractual consent.
Using the Chamber of Commerce Settlement Procedure under the Bankruptcy Act as a Mechanism for Out-of-Court Restructurings and Workouts.
Taiwan’s Bankruptcy Act provides a “Chamber of Commerce Settlement” procedure. According to Article 41 of the Bankruptcy Act, merchants who are unable to repay their debts may request settlement through their local chamber of commerce, allowing for out-of-court restructuring and negotiation.
Once a settlement request is made to a chamber of commerce in accordance with the Bankruptcy Act, the chamber of commerce must promptly convene a creditors’ meeting. If a settlement is approved by the meeting of creditors, with the parties entering into a written agreement which also signed by the chairman of the chamber of commerce and affixed with the seal of the chamber of commerce, the settlement is established, and it is not necessary to submit the settlement to a court for approval or disapproval.
In principle, as long as a majority of creditors agree to the settlement plan at the creditors’ meeting, the chamber of commerce settlement procedure can bind dissenting minority creditors. However, pursuant to Article 50 of the Bankruptcy Act, creditors who did not agree to the settlement terms at the meeting or did not attend or appoint a proxy to the meeting may, within ten days of the chamber chairman signing the settlement agreement, petition the court to revoke the settlement if they can demonstrate that the agreement unfairly favors other creditors to the detriment of their rights.
The provisions of the Bankruptcy Act regarding chamber of commerce settlement stem from earlier societal customs. However, due to the declining number of cases requesting settlement through chambers of commerce, representatives of these chambers have become less familiar with the procedure. Consequently, it is now rare for companies or debtors to choose to settle through chambers of commerce.
Overview of Insolvency Proceedings
According to Article 58 of the Bankruptcy Act: “Bankruptcy, unless otherwise provided, may be declared upon the petition of creditors or the debtor.” Accordingly, both creditors and debtors may file a petition for bankruptcy declaration with the court. However, aside from differences in the petitioning party, there is no procedural distinction between the two procedures. Taiwan’s legal system does not clearly differentiate between voluntary and involuntary bankruptcy procedures.
After filing for a bankruptcy declaration with the court, the court must determine whether the conditions for bankruptcy are met, including whether the debtor’s liabilities exceed assets, whether sufficient assets exist to cover the costs of bankruptcy proceeding and be distributed to creditors, and whether there are multiple creditors. Only when these conditions are met will the court find that a bankruptcy declaration serves the purpose of practical benefit. If the conditions for bankruptcy are satisfied, the court will issue a bankruptcy declaration and appoint a receiver in bankruptcy (Article 64 of the Bankruptcy Act). The receiver is required to fulfill their duties in managing the bankruptcy estate with the duty of care and distributing the estate’s assets. During the proceedings, creditors form a creditors’ meeting, which exercises its rights through majority decisions. A creditors’ meeting may decide on important matters such as appointing supervisors, how the bankruptcy estate is to be managed, and whether the bankrupt entity can continue its operations.
Once the receiver in bankruptcy completes the final distribution of the estate’s assets, they shall submit a report on the distribution to the court (Article 145 of the Bankruptcy Act). Upon receiving this report, the court shall render a ruling to terminate the bankruptcy (Article 64 of the Bankruptcy Act), thereby concluding the bankruptcy proceedings
Exercise of Bankruptcy Claims
Claims against the bankrupt that were established before the bankruptcy declaration are classified as bankruptcy claims. When a court declares bankruptcy, it will also announce the period for filing claims. Creditors of the bankrupt must file their claims with the receiver within this period. Failure to file within the specified time frame precludes the creditor from receiving repayment from the bankruptcy estate (Article 65 of the Bankruptcy Act).
The Bankruptcy Act further specifies certain claims that are excluded from being treated as bankruptcy claims (Article 103 of the Bankruptcy Act):
In principle, creditors in bankruptcy proceedings exercise their rights through resolutions made at creditors’ meetings and are repaid fairly in proportion to the amount of their claims. However, according to Article 112 of the Bankruptcy Act, “claims with priority rights to the assets of the bankruptcy estate shall be repaid before other claims.” Thus, the order of repayment for creditors varies depending on legal provisions. However, the Bankruptcy Act does not explicitly define which claims have priority or their rankings. Priority claims are instead dispersed across various laws. For instance, Labor Standards Act, Article 28, Paragraph 1 provides that wages from the six months preceding the bankruptcy declaration have the same priority as secured claims, such as those backed by a first-rank mortgage. Any unpaid portion also enjoys top priority. Tax Collection Act, Article 6, Paragraphs 1 and 2 provide that tax collection takes precedence over ordinary claims; taxes such as land value increment tax, land value tax, house tax, and sales tax on goods sold or auctioned by the Administrative Enforcement Agency take precedence over all claims, including secured claims.
According to Article 99 of the Bankruptcy Act, bankruptcy claims must be exercised through bankruptcy proceedings. However, Article 108, Paragraph 1 stipulates: “For property of the debtor that is subject to a pledge, mortgage, or lien established before the bankruptcy declaration, the creditor has a right of exclusion.” Paragraph 2 further states: “Creditors with rights of exclusion may exercise their rights without adhering to bankruptcy procedures.” This means creditors with rights of exclusion can directly petition the court to enforce and claim repayment from the debtor’s secured property without being subject to bankruptcy proceedings.
Creditors may also exercise the right of set-off in a bankruptcy procedure. According to Article 113 of the Bankruptcy Act: “Bankruptcy creditors who owe obligations to the bankrupt entity at the time of the bankruptcy declaration may offset their obligations regardless of whether the types of payments are the same. Claims subject to a time limit or discharge conditions may also be offset.”
The company reorganization procedure applies only to companies that publicly issue shares or corporate bonds with the potential for reconstruction or rehabilitation. According to Article 282, Paragraph 1 of the Company Act, the following entities may petition the court for company reorganization: shareholders who have continuously held at least 10% of the total issued shares for more than six months; corporate bond-holders whose holdings amount to at least 10% of the total value of issued shares; labor unions; or at least two-thirds of the company’s employees.
The process for company reorganization is as follows:
As previously stated, the prerequisites for company reorganization, aside from being a company which publicly issues shares or corporate bonds, it also need to be suspended its business due to financial difficulties or there is an apprehension of suspension of business thereof, as well as the possibility of reconstruction and rehabilitation. Regarding the possibility of reconstruction and rehabilitation, the court must assess the company’s operational and financial conditions to determine if the company can break even and generate surplus to repay debts after reorganization. Only if the company is deemed to have operational value will reorganization be permitted. According to Article 294 of the Company Act, “After a ruling for reorganization is rendered, all procedures of bankruptcy, composition, compulsory execution and other litigation involving property shall be suspended in due course.”
After the court renders a reorganization ruling, creditors must submit documents proving their claims to the reorganization supervisor. Only claims submitted as reorganization claims can be repaid through the reorganization process (Article 297 of the Company Act). Reorganization claims must be property-related claims established before the reorganization ruling and can be categorized into: priority reorganization claims (e.g., tax claims with priority), secured reorganization claims (reorganization claims secured by collateral), and unsecured reorganization claims. After creditors submit their claims, the reorganization supervisor conducts an initial review (Article 298, Paragraph 1 of the Company Act), followed by court review (Article 299, Paragraph 1 of the same).
The reorganizers shall draw up a plan of reorganization and submit it together with reports and statements of business and finance of the company to the meeting of concerned persons for examination (Article 303, Paragraph 1 of the Company Act). In the case where the reorganization plan is adopted at the meeting of concerned persons, the reorganizers shall apply to the court for a ruling of approval and thereupon execute it (Article 305, Paragraph 1 of the same). Reorganizers of a company shall complete the reorganization plan within the implementation schedule specified therein; and upon completion of the reorganization plan, shall apply to the court for a court ruling of recognition of the completion of the reorganization, and shall, after such court ruling became final, convene a meeting of shareholders for election of directors and supervisors (Article 310, Paragraph 1 of the same).
In a reorganization procedure, reorganization creditors and shareholders form a meeting of concerned persons. The purpose of this meeting is to provide creditors and shareholders with the opportunity to participate in the reorganization and to adjust their rights and interests through a majority vote mechanism, facilitating the smooth progress of the reorganization. The duties of the meeting of concerned persons include: to hear reports on business and financial conditions of the company and opinions on reorganizers of the company; to deliberate and vote on the reorganization plan; and to resolve other matters relating to reorganization (Article 301 of the Company Act). Yet, a decision by the meeting of concerned persons requires approval by more than half of the total voting rights. Even if a creditor opposes the reorganization plan or other matters during the meeting of concerned persons, once the reorganization plan is approved by the meeting, it becomes binding on the company and all concerned persons.
In cases where there is a substantive dispute over a claim, the court shall rule on the disputed claim. Disputing concerned persons may file a confirmation lawsuit under Article 299, Paragraph 3 of the Company Act to resolve the conflict. However, until a judgment is finalized, they shall exercise their rights in accordance with the content and amount specified in the court’s ruling.
Article 24 of the Company Act provides, “A dissolved company shall be liquidated, unless such dissolution is caused by consolidation or merger, split-up, or bankruptcy.” In principle, the directors of a company are the liquidators in a liquidation procedure, but interested parties may also petition the court to appoint a liquidator (Article 322 of the Company Act)
The liquidator shall, after having assumed office, examine the financial condition of the company, prepare the financial statements and inventory of property, send them to the supervisors for examination, and shall, after such reports, financial statements and inventory of property have been ratified by the meeting of shareholders, submit the same to the court (Article 326 of the Company Act). After that, the liquidator shall perform his duties, which include: wind up the business or affairs of the company (Article 40, Paragraph 1, Subparagraph 1 of the Civil Code); claim obligatory rights and discharge debts (Article 40, Paragraph 1, Subparagraph 2 of the Civil Code); urge creditors to declare their rights of claims (Article 327 of the Company Act); allocate the residual assets (Article 84 of the Company Act applying mutatis mutandis to Article 334 of the same). Upon completion of liquidation, the liquidator shall prepare an income and expenditure statement, and a statement of profit and loss, and shall forward the same together with all statements and records of accounts to the supervisors for examination and subsequently submit them to the meeting of shareholders for its ratification. After the ratification by the shareholders’ meeting, the completion of liquidation shall be reported to the court (Articles 331, Paragraphs 1 and 3 of the Company Act). After the completion of liquidation, the company shall keep all statements, records of account and documents (e.g., minutes of shareholders’ meetings, balance sheets, and other financial-related statements) for ten years (Article 332 of the Company Act). If there are assets to be distributed after the completion of liquidation, the court may, upon application of interested persons, appoint a liquidator to redistribute such assets. (Article 333 of the Company Act).
The liquidators shall complete the liquidation within a period of six months; and if liquidation cannot be completed within six months, an application, with good cause shown therein, for extension of the deadline date may be filed with the competent court by the liquidators (Article 87, Paragraph 3 of the Company Act applying mutatis mutandis to Article 334). However, even if liquidation is not completed within six months and no extension is requested by the liquidator, this does not imply that the liquidation process has concluded. The process is only considered completed when the liquidator has in fact finished all liquidation duties.
In a liquidation process, if creditors fail to file claims within the specified claim declaration period, their claims will not be included in the liquidation. These creditors may only seek repayment from any undistributed residual assets of the company (Article 329 of the Company Act). Except for secured claims, the liquidator is prohibited from making payments to creditors during the claim declaration period. If the liquidator proceeds with repayment before the declaration period ends, the company remains liable for damages caused by the delay in payment to creditors whose claims have not yet been settled (Article 328, Paragraphs 1 and 2 of the Company Act).
Taiwan’s Bankruptcy Act, enacted nearly 90 years ago, has never been amended to keep pace with contemporary developments, rendering certain provisions outdated or incomplete. According to Article 4 of the Bankruptcy Act, the principle of territoriality is still adopted, meaning that foreign settlement and bankruptcy declarations have no effect on the debtor’s or bankrupt party’s assets in Taiwan. On this, Supreme Court Civil Judgment 102-Tai-Shang-Zi No. 193 holds, “As international commerce and trade develop, adhering strictly to territoriality could hinder commercial development among nations. To meet the demands of economic globalization, territoriality is outdated and requires revision to uphold the principle of equality.” The court further ruled that the application of Article 4 of the Bankruptcy Act should be narrowly interpreted. It should only apply when “foreign debt resolution procedures are equivalent to Taiwan’s bankruptcy or settlement procedures.” That is, if the nature of the foreign debt resolution procedure in question does not align with Taiwan’s laws, Article 4 may not apply, thereby addressing disputes regarding the recognition of foreign debt resolution procedures in Taiwan.
As clarified in Supreme Court Civil Judgment 102-Tai-Shang-Zi No. 193, Taiwan does not currently have a procedure for recognizing foreign bankruptcy declarations, and is restricted by the territorial principle established under Article 4 of the Bankruptcy Act, as previously mentioned. If the conditions of a foreign debt resolution procedure align with Taiwan’s bankruptcy or settlement provisions, such procedures will not be effective concerning the debtor’s or bankrupt party’s assets located in Taiwan.
Formosan Brothers
No. 384, Section 4, Ren’ai Rd, Da’an District, Taipei City,
Taiwan 106
Call: +886 2 2705 8086
Li-Pu Lee
CEO / Managing Partner
Email: lipolee@mail.fblaw.com.tw
Call: +886 2 2705 8086
Li-Chi Yeh
Associate Partner
Email: yrich@mail.fblaw.com.tw
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