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Companies may undertake intra-group restructurings to enhance efficiency and optimise resources, often driven by financial or tax considerations. When facing more serious financial distress, formal procedures such as bankruptcy or reorganisation may become necessary to protect creditors¡¯ interests and seek a path to recovery.

Whether through internal restructuring or court-supervised processes, these mechanisms are important tools for businesses to adapt to changing circumstances. In Taiwan, there are established legal frameworks to facilitate restructuring and insolvency processes.

Restructuring options

Restructuring is common within group companies, often involving the integration or adjustment of group resources or business operations to streamline processes and improve 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 business objectives and group goals. These may include 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, there are typically two primary options:

In case of implementing a merger, no individual consent from third parties (such as counterparties to the contracts) is required. Instead, the acquiring company will assume all the assets and liabilities of the acquired company on the merger record date. Hence, a merger is more straightforward as assets, agreements and employees are transferred to the merged entity by operation of law. However, it may entail additional procedures and costs to change the assets¡¯ registered owner from the acquired entity to the acquiring entity.

As for asset transfer, if the transferor transfers all or major parts of its business or assets to the transferee (rendering the M&A Act applicable), no individual consent from third parties is required. If certain assets of the transferor cannot be immediately transferred, the parties may enter into transitional service agreements before liquidating the transferor, allowing the business to continue operating without disruption. Nonetheless, the liquidation process may require additional time and costs.

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

Insolvency

Businesses may face challenges that necessitate reorganisation or, in more severe cases, lead to insolvency.

In Taiwan, if a company incurs losses amounting to half of its paid-in capital, the board of directors must report such losses at the next shareholders¡¯ meeting. If the company¡¯s assets are insufficient to satisfy its debt, the board shall declare bankruptcy. However, if the company is a public company and there remains a viable opportunity for rehabilitation, qualified interested parties may petition the court for reorganisation under the Taiwan Company Act.

Bankruptcy procedure. Under the Taiwan Bankruptcy Act, a petition for bankruptcy may also be filed with the court by one or more creditors of the company. After receiving the petition, the court will decide within seven days, which can be extended by an additional seven days (although in practice, the process is likely to be prolonged due to the complexity of insolvency cases).

The court typically requires the petitioner to prove that their application meets the prerequisites for bankruptcy proceedings. However, it may still conduct a necessary investigation by questioning the debtor, creditors and other interested parties, if needed.

Effects of adjudication of bankruptcy. 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 means of pledge, mortgage or lien before the adjudication of bankruptcy.

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.

Rights of creditors. When a bankruptcy is adjudicated, the court will set a period of between 15 days to three months after adjudication 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 the claim within the specified period precludes the creditor from receiving repayment from the bankruptcy estate, unless the subject debt is secured.

The first creditors¡¯ meeting shall determine matters such as the methods to manage the bankruptcy estate, and whether to continue the debtor¡¯s business. Unless otherwise provided by the Bankruptcy Act, these resolutions shall be adopted by a majority of 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.

Distribution of bankruptcy estates. After receiving claims from creditors, the trustee will prepare a distribution plan to be approved by the court and published for creditors to review. Objections must be raised within 15 days. If no objections are received, the bankruptcy estates will be converted into cash and distributed to the creditors according to their priority of rights.

Reorganisation as an opportunity for rehabilitation. As previously mentioned, if the company is a public company and there remains 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 cases, the court granted reorganisation as the company retained valuable technologies and operational capacity, with support from 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 creditors.

Foreign investors are strongly advised to seek in-depth consultation with legal, financial and tax experts based on their specific circumstances.

Lee and Li
8F, No.555, Sec. 4, Zhongxiao E. Rd.,
Taipei 11072, Taiwan, R.O.C.
Tel: +8862 2763 8000
Email: attorneys@leeandli.com