Lawyers and accountants believe sanctions against directors in restructurings should be increased. Distressed M&A deals will fail if they are not.
“Until countries in the region get more serious about sanctions for company directors in the twilight of insolvency, it is going to be very hard to run a truly international style M&A,” said Scott Bache, Clifford Chance partner, speaking at IFLR’s Asia Restructuring Forum in Hong Kong on June 17.
One speaker went as far as calling for debtors’ prisons to be reinstated. “Something like a prison sentence would certainly give them [directors] something to think about,” said the speaker.
In Hong Kong, notorious for its sparse codes on restructuring, the government is looking to improve bankruptcy legislation. The treatment of directors in the process is being considered now. “I have been calling on the government, perhaps too vocally, for proper sanctions,” he added.
At the moment directors in Hong Kong can only be charged for fraudulent activity. Creditors and shareholders cannot bring directors to account for wrongful trading while insolvent.
Middleton said that some receivers in Hong Kong were bringing cases against directors but the courts were failing to back them up. “Directors are literally being handed out HK$10 fines,” said Eddie Middleton, partner at KPMG in Hong Kong.
In China, debtors can be held under house arrest as in the case of Lan Shili, president of East Star Airlines, who has detained in March this year for debts that he owed under the company.
The treatment of directors led panellists to bemoan the lack of opportunities for distressed M&A deals in Asia, which compares less favourably to the US and Europe. They also believed that the unstable restructuring process more common in Asia (highlighted in the still unresolved Asia Aluminum case) was deterring investors.
“The majority of family-owned companies are reluctant to face up to due diligence process, especially in China. Until they do so, it will deter foreign capital,” said one speaker.