If things go wrong | Taiwan | Asia Pacific Guide to Lending and Taking Security

If things go wrong

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1. Please provide a brief description of the insolvency regime. In particular what rights and duties do unsecured and secured lenders have on the insolvency of a debtor? Are there any other matters of concern?

There are three distinct statutory corporate insolvency regimes:

Liquidation/winding up
Bankruptcy
In the case of a public company, reorganization

Secured lenders rank above unsecured lenders

If an event of default occurs, a lender usually first applies to the court with jurisdiction for a provisional seizure order in respect of the debtor's assets and then initiates enforcement proceedings.

Liquidation/Winding Up

A creditor may not institute liquidation proceedings against an insolvent Taiwanese company. Those proceedings may only be instituted by the company itself through a shareholder's resolution or by a Taiwan governmental agency. On the appointment of liquidator(s) to the company, the liquidator(s) issue public notices requesting the creditors to declare their claims unless a creditor is known to the liquidator. The liquidator must notify individually creditors that are known to the liquidator. The liquidator will then repay all creditors on behalf of the company after liquidating the assets of the company.

Bankruptcy

Where the value of the assets of a company is less than the value of its debts, then (unless reorganization proceedings are in progress) the board of directors of the company must file for bankruptcy, or the creditors of the company may petition for a declaration of bankruptcy against the company. Each secured creditor that had a security interest over the company's assets prior to the declaration of bankruptcy is entitled to a right of exclusion. In that case, it is not required to participate in the bankruptcy proceedings and may enforce its claims outside those proceedings. The secured creditor may file a claim in accordance with the bankruptcy proceeding for any portion of the debts due to it that remain unsettled after the exercise of the right of exclusion. A moratorium on the enforcement of the claims of all unsecured creditors comes into effect during bankruptcy, and unsecured creditors may only seek satisfaction of their claims, on a pro-rata basis, by participating in the bankruptcy proceedings.

Reorganization

When a company that publicly issues shares or corporate bonds suspends its business due to financial difficulties or when there is a concern that it may do so but there remains a possibility of the company being rehabilitated or restructured, the company or its interested parties (which/who are shareholders who have continuously held shares representing 10% or more of the total number of issued shares for a period of six months or longer or creditors of the company who have claims equivalent to 10% or more of the capital from the total number of issued shares) may apply to the court for reorganization. In these circumstances, the enforcement of security and the realization of collateral are suspended after the grant of a reorganization order by the court and during a period of emergency stay, and are subject to a reorganization plan approved by the creditors and the court. Subject to the preferential claims set out in the answer to question 1 of the "If taking security" section, secured creditors enjoy priority in the order of repayment. However, the claims of all creditors must be exercised in accordance with the reorganization plan and the reorganization procedures.

2. Is it possible to obtain a moratorium before insolvency?

It is only possible to obtain a moratorium before insolvency in the case of reorganization proceedings of a public company. In that case, and as mentioned above, the enforcement of security and the realization of collateral are suspended after the grant of a reorganization order by the court and during a period of emergency stay and are subject to a reorganization plan approved by the creditors and the court. However, the debtor, the creditor and/or any interested third party may seek modification of the plan.

If a petition for a bankruptcy order is filed with the court against a debtor, the court may, at the request of a creditor or ex officio, issue a preservation order to restrict the right of creditors to take enforcement action against the debtor.

3. When a company is the subject of a formal insolvency procedure, can the company’s pre-insolvency transactions be set aside?

Certain pre-insolvency transactions can be set aside in relation to a bankruptcy procedure. In a bankruptcy procedure, the bankruptcy administrator may revoke the following pre-insolvency transactions if made by a bankrupt person or entity within six months before the declaration of bankruptcy:

The creation of a security interest to secure any existing indebtedness
The prepayment of any indebtedness that has not yet matured

The setting aside of pre-insolvency transactions does not apply to a liquidation/winding-up.

4. When can a lender enforce its security? Can security be enforced out of court following an event of default (or other contractual trigger event), or is a court order required? Are there any restrictions that apply before a lender may enforce its security?

A lender may enforce its security when there is an event of default by the borrower or the security provider, as the case may be. An enforcement clause may be included in the finance documents (i.e., a clause about the consequences of an event of default), giving the lender the right to enforce its rights against the borrower or the mortgaged/pledged assets once an event of default occurs. At the time a security interest is created, the parties may agree to enforce the security interest out of court and choose an agreed method of enforcement. However, in the case of reorganization proceedings (see the answer to question 1 of this section), the enforcement of collateral is suspended during an emergency stay and after the grant of the reorganization order as the collateral is subject to the reorganization plan. If there are liquidation/winding-up or bankruptcy proceedings, the enforcement of security may be excluded from them and the lender may continue with enforcement.

5. Do any limitation periods apply in relation to bringing an action to enforce security?

Yes. The limitation period (also known as the prescription period) for the claim of a loan repayment is 15 years. For a claim secured by a mortgage, however, if the claim for the repayment of a loan is extinguished due to the lapse of the prescription period, the mortgagee has an additional five-year period, which commences on the last date of the prescription period, during which the mortgage must be claimed and enforced.

6. Is there any particular way in which secured assets must be liquidated on enforcement (e.g., by auction or court sale)?

A sale of a secured asset can occur through a public or private auction, and the manner of that auction may be agreed upon in the mortgage or pledge agreement. A mortgagee or pledgee that has not received payment by the maturity of a claim may enter into a contract to acquire the ownership of the mortgaged/pledged property or dispose of it by any means other than an auction unless doing so would be prejudicial to the interests of the other mortgagees/pledgees.

7. Are there any particular legal or practical difficulties or delays in enforcing security?

The enforcement of security may be delayed when a debtor, or any third party or interested party, files for bankruptcy or reorganization against the debtor.

8. In relation to enforcement, are there any specific requirements to be borne in mind if the lender is a foreign entity?

A foreign entity that does not have a local presence but that has a representative in Taiwan may file a petition with a court in Taiwan or initiate legal proceedings in Taiwan. A foreign company without a local presence cannot be registered as a secured party for chattel mortgages and real estate mortgages. Under Taiwanese law, a real estate mortgagee agreement has to be registered to be valid. For chattel mortgages, registration is not required for a chattel mortgage to be valid, but it is necessary for the chattel mortgage to be enforceable against a bona fide third party.

Given the above, specific legal advice should be taken regarding the enforceability of security interests in Taiwan in favor of a foreign lender or security agent.

9. Is there any reason why you think that arbitration rather than litigation might be advantageous in resolving disputes under the finance documents, and if so, why? Please outline the relative merits of arbitration and litigation, including the ease of enforcement of foreign judgments and foreign awards from different jurisdictions. Is it possible to rely on a hybrid enforcement provision that allows the lenders to opt for either arbitration or litigation as they see fit?

Cause of action and costs

Litigation may be more advantageous when the cause of action is clear and the documentary evidence is sufficient. In some cases, arbitration may be more time-consuming than litigation and the cost may be higher.

Application for recognition

After the court has granted an application for recognition, foreign court judgments and foreign arbitral awards are binding on the parties and have the same force as a final judgment of a Taiwanese court. The criteria for a court to review an application for recognition are set out below.

Foreign court judgments

In the case of an application to a Taiwanese court for recognition and enforcement of a foreign judgment, the judgment will be enforced by the Taiwanese court if:

In the case of a default judgment, the relevant process was served on the defendant in the foreign court's jurisdiction or on the defendant with Taiwanese judicial assistance.
The judgment is not contrary to the public order or good morals of Taiwan.
According to Taiwanese laws, the foreign court had jurisdiction over the case.
Judgments of Taiwanese courts are reciprocally recognized by the foreign courts.

Foreign arbitral awards

The court will dismiss an application for recognition of a foreign arbitral award in one or both of the following cases:

Where the recognition or enforcement of the arbitral award is contrary to the public order or good morals of Taiwan
Where the dispute cannot be resolved by arbitration under the laws of Taiwan

The court may (but is not bound to) also dismiss an application for recognition of a foreign arbitral award if the country where the arbitral award is made or whose laws govern arbitral awards does not recognize the arbitral awards of Taiwan.

“Reciprocal recognition” principle

In light of the criteria in the Civil Procedural Laws and the Arbitration Law respectively, the main difference between the requirements for recognition of foreign judgments and foreign arbitral awards is the "reciprocal recognition" principle. The "reciprocal recognition" principle is a "must" for the recognition of foreign court judgments but a "may" for the recognition of foreign arbitral awards. Therefore, it is relatively easier to obtain a court order that recognizes a foreign arbitral award than a foreign judgment.

Hybrid enforcement provision

There are court precedents where the Supreme Court held that a provision in the contract giving the parties the right to opt for either arbitration or litigation as they see fit is valid. Therefore, it is possible to rely on a hybrid enforcement provision that allows lenders to opt for either arbitration or litigation as they see fit.

10. Are asymmetrical jurisdiction clauses enforceable? (By this we mean clauses that allow the lenders, but not the borrowers, to make certain choices in relation to choice of jurisdiction and how to litigate. These types of clauses allow the lenders, but not the borrowers, to commence proceedings in any court they choose, but restrict the borrowers to commencing proceedings in one jurisdiction only. This may also allow the lenders, but not the borrowers, to choose whether to litigate the finance documents before a court or to submit to arbitration in relation to them, but restrict the borrowers to either litigation or arbitration, as specified in the agreement).

No. The choice of court or arbitration forum must be fair to both parties. The court that has jurisdiction must be specified or ascertainable by reference to information available to the parties (e.g., the jurisdiction would be the court where the lender's registered office is located).

Asia Pacific Guide to Lending and Taking Security