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During business operations, companies may undertake intra-group restructuring to enhance efficiency and optimise resources, often driven by financial or tax considerations. When facing financial distress, formal procedures such as bankruptcy or reorganisation may become necessary to protect creditor interests and seek a path to recovery. Whether through internal restructuring or court-supervised processes, these mechanisms help businesses to adapt to changing circumstances. In Taiwan, there are established and viable legal frameworks available to facilitate restructuring and insolvency processes.

Key considerations for group restructuring

Restructuring is common within group companies, often involving integration or adjustment of group resources or business operations to streamline operations and enhance efficiency. When undertaking group restructuring, it is essential to consider multiple facets such as operational impact, regulatory compliance, financial arrangements and tax implications to maximise benefits for the entire group.

Group restructuring can take various forms depending on the business objectives and group goals, including share transfers, asset transfers, spin-offs, share exchanges, and share swaps. When the goal is to integrate group resources by consolidating two companies into one, two primary options are typically considered.

In the event of a merger, the acquiring company assumes all the assets/liabilities of the acquired company on the merger record date. Accordingly, a merger is more straightforward as assets, agreements and employees are transferred by operation of law. However, it may entail additional procedures and costs to change registered ownership of assets from the acquired entity to the acquiring entity.

As for an asset transfer, if assets cannot be transferred immediately, the parties may enter into transitional service agreements before liquidating the transferor, allowing business continuity without disruption. Nonetheless, the liquidation process may require additional time and costs.

Before deciding on a restructuring option, it is crucial to conduct due diligence to verify whether there are any registered assets under the transferor (such as factory registrations, or intellectual property rights) or supplier qualifications (such as green marks or special licences) that cannot be immediately transferred. Additionally, the overall timeframe and costs should be carefully evaluated to determine the most suitable restructuring approach.

Reorganisation and insolvency triggers

Every business faces significant challenges that necessitate reorganisation or, in more severe cases, insolvency. In Taiwan, if a company incurs losses amounting to half of its paid-in capital, the board of directors must report them at the next shareholders’ meeting. If the company’s assets are insufficient to satisfy its debt, the board shall, in principle, declare bankruptcy.

Timeline of bankruptcy procedures

Under the Taiwan Bankruptcy Act, a bankruptcy petition may be filed by one or more creditors. After receiving the petition, the court must decide within seven days, extendable by an additional seven days. In practice, the process is often prolonged due to the complexity of insolvency cases. The court typically requires the petitioner to prove that the prerequisites for bankruptcy proceedings are met. However, the court may investigate the debtor, creditor(s) and other interested parties.

Bankruptcy estate control and trustee

Once bankrupt, the debtor loses the right to manage and dispose of property classified as the bankruptcy estate. Meanwhile, all creditors’ efforts to enforce their claims against the debtor must stop, except for claims secured by pledge, mortgage, or lien before the adjudication of bankruptcy.

Additionally, the court will appoint a trustee, usually an impartial professional, such as a CPA, lawyer, or reputable person in the debtor’s field of business. The trustee is entrusted with a wide range of powers, including the ability to revoke gratuitous or non-gratuitous acts conducted by the debtor, review and verify the debtor’s asset statement and creditor list, and distribute the bankruptcy estate. With this authority, the trustee must act with a duty of care and will be subject to scrutiny by the court.

Creditor claims and meeting deadlines

When a bankruptcy is adjudicated, the court will set a 15-day to three-month period for creditors to register claims and schedule the first creditors’ meeting, which must take place within one month of the adjudication date. Failure to file a claim within the specified period precludes the creditor from receiving repayment from the bankruptcy estate, unless the debt is secured.

The first creditors’ meeting shall determine matters such as management of the bankruptcy estate and whether to continue the debtor’s business. Unless otherwise provided by the Bankruptcy Act, these resolutions shall be adopted by most creditors who account for more than half of the creditors present at the meeting and whose aggregate claims amount to more than half of the total claims. Any objection to the inclusion of a claim must be raised before the first creditors’ meeting concludes.

After receiving claims from creditors, the trustee will prepare a distribution plan for court approval and publication for creditors to review. Objections must be raised within 15 days. If no objections are received, the bankruptcy estate is liquidated and distributed to the creditors according to their priority,

Debtor misconduct civil and criminal

Even though the debtor’s ability to operate the company will be delegated to the trustee, the debtor remains responsible for its conduct. Engaging in dishonest conduct, such as hiding assets, falsifying financial records, or making preferential payments, may lead to civil liability for damages under the Civil Code and criminal liability under the Bankruptcy Act or the Criminal Code. These offences apply mutatis mutandis to responsible persons such as de facto and de jure directors, officers and liquidators.

Taiwan reorganisation as alternative relief

Like other jurisdictions, Taiwan provides a “Plan B” for companies in distress. Specifically, if a public company has a viable opportunity for rehabilitation, the company or qualified interested parties, such as qualified shareholders, employees, or labour unions, may petition the court for reorganisation. The court will conduct a preliminary review to assess whether the company has viable prospects for reorganisation. In recent approved cases, the court has granted reorganisation on the basis that the company retained certain valuable technologies, had not entirely lost its operational capacity, and with the support of major creditors.

However, it is not uncommon for the court to reject such petitions, particularly where the company has a severe asset shortfall or has ceased operations, failed to propose a feasible reorganisation plan, and/or faced clear opposition from its creditors.

Conclusion

This article provides an overview of restructuring and insolvency in Taiwan. Foreign investors are strongly advised to seek in-depth consultation with experts in the legal, financial, and tax fields to make informed decisions tailored to their specific circumstances.

Lee and Li Attorneys-at-Law
8F, No. 555, Sec. 4
Zhongxiao E. Rd.
Taipei 110055 Taiwan
Tel: +886 2 2763 8000
Email: attorneys@leeandli.com