Property Rights, Collateral, Creditor Rights, and Insolvency in East Asia 1

Abstract

I. INTRODUCTION A number of common preconditions must prevail if a market-orientated financial system or national economy is to develop and function effectively.2 Those relating to financial sector development rest on three principles: the first, institutional and legal; the second, largely legal; and the third, related mainly to policy. First, a market economy and a market-based financial system cannot exist if certain institutional and legal supports are not in place, namely, a governance mechanism that establishes property rights and provides for the consistent enforcement of contracts and resolution of commercial disputes. It is also important that the setting provides for the development of human capital.3 With these institutional foundations in place, a number of legal underpinnings must then be available for a market-based financial system to function effectively. These include the availability of collateral to support secured transactions, a system of law for the establishment and dissolution of corporate bodies, and a transparent system of government funding, including taxation. To maintain such effectiveness, national and sub-national governance should also provide more widely for the rule of law, which is taken to be transparent and non-discriminatory, in addition to establishing specific property rights, enforcing contracts and supporting commercial dispute resolution. Third, a financial sector functions most effectively in the context of appropriate macroeconomic policies. These policies, while largely outside legal and institutional concerns, operate best in the context of an appropriately designed and transparent institutional framework. No sophisticated market economy or market-based financial system can exist without these prerequisites, regardless of indigenous or acquired national characteristics or the form manifested by that system. In this context, this article examines the relationships within East Asia between economic development, governance, property rights, provisions for the deployment of collateral and the creation of secured financial transactions, and creditor rights and their relationship with insolvency. The eleven subject jurisdictions appear in two groups, shown in Table 1. First is a core group of nine, which have undergone, or intend to enact, reforms in the subject areas. second are two common law jurisdictions that are perceived as being among the most sophisticated in the region in terms of the issues examined, and which may represent benchmarks for reform elsewhere. It is not suggested that either jurisdiction represents an institutional or practical optimum.4 Neither law nor practice is advanced in relevant areas in most of the remaining jurisdictions within the region, but the issues addressed in this article have begun to receive attention from policymakers and commercial interests. The issues of policy and principle raised in this article have been regularly debated in official and legal circles since the economic and social shocks associated with the 1997-98 Asian financial crisis. In no national case can the legal, regulatory, or policy background be described as either complete or fully integrated, even in the two examples of benchmarks, or elsewhere in countries where specific reforms have been recently instigated or completed, for example, China or the Philippines. Later sections include tables that give appraisals of the legal framework for creditor rights, especially in relation to secured claims; the effectiveness of national insolvency systems; specific or general provisions for private securitized transactions; and the mutual compatibility of systems for enforcement. Thus in Tables 2, 5, 7 and 8, a scale rising from 1 to 5 is used to indicate the quality or effectiveness of specific factors that are self-explanatory, with NA used to signify where the law makes no provision in a specified matter, based primarily upon qualitative analysis. …