Lately, the global economic market has beentumultuous. Major changes such as inflation and interest rate hikes may causeindividuals or legal entities to fall into the abyss of insolvency. Accordingto the Consumer Debt Clearance Statute and the Bankruptcy Act, if a debtor isunable to repay his/her debts, he/she may clear his/her debts according to therehabilitation or liquidation process set out by the Consumer Debt ClearanceStatute, or file an application for bankruptcy in accordance with theBankruptcy Act. Both are procedures to help debtors clear their debts. However,statistics of judicial cases show that there are considerable differencesbetween the two in terms of approval rate.

According to the Judicial Yuan’s annualreport on the “State of Filings and Dispositions of Debt Discharge Civil Casesin the District Courts,” from 2012 to 2021, there are a total of 33,997applications for rehabilitation, and the number of applications approved was24,699 (approval rate of 72.7%). The total number of applications forliquidation was 9,995, and the total number of approved liquidationapplications was 7,984 (approval rate of 79.9%).

Yet, in the statistics of the “State of CivilBankruptcy Cases Terminated by the District Courts” for the same period, thetotal number of bankruptcy filings was only 2,013 cases and the number ofbankruptcy declarations was only 287 cases (approval rate of 14.3%). The twoare both procedures for debt clearance; both are expected to help debtors get anew life through the debt clearance procedure. Why are bankruptcy cases, be itthe number of cases or the approval rate, much less than rehabilitation orliquidation cases?

In the bankruptcy procedure, what made thecourt dismiss these bankruptcy-filing by individuals or legal entities? Perhapsone can find out why the bankruptcy procedure in Taiwan is so very difficultfrom the grounds the court used to dismiss the applications.

The requirement for declaring bankruptcy isprovided in the Bankruptcy Act at Article 57, “the debtor is unable to repayhis/her debt.” However, an interpretation by the Judicial Yuan years ago addeda new requirement. According to the Judicial Yuan 25-Yuan-Zi No. 1505Interpretation, “With respect to a bankruptcy application, if the courtconfirms from its own investigation that there is no asset, then no bankruptcy estatecan be established and debts cannot be cleared through a bankruptcy procedure.”Hence, if a debtor wishes to clear his/her debts through a bankruptcyprocedure, he/she needs to remember not to be “no asset” or “zero asset.”

Taiwan Supreme Court 86-Tai-Kang-Zi No. 479Civil Ruling further indicates, “A bankruptcy application may be dismissed onthe ground of no substantive benefit arising from declaring bankruptcy onlywhen the debtor indeed has no asset to form a bankruptcy estate or the assetsof the debtor is not sufficient to settle the expenses of the bankruptcy estateand the debts of the estate, and thereby cannot clear its debts through abankruptcy procedure.” Since then, in addition to the ground of having zeroasset, a debtor’s application may also be dismissed by the court on the groundof “no substantive benefit arising from declaring bankruptcy” because that thedebtor’s asset is not sufficient to settle the expenses of the bankruptcyestate.

From then on, when a court adjudicatesbankruptcy cases, in addition to considering whether the debtor is unable torepay the debts, it shall also consider “if there exists substantive benefitarising from the declaration of bankruptcy.” The amount of debtor’s assetsremaining at the time of bankruptcy filing is also an important basis for acourt’s consideration with respect to whether there exists substantive benefitfrom the declaration of bankruptcy.

The resolution for proposal No. 7 of TaiwanSupreme Court’s Civil Court Meeting of 2009 added more bricks tothe wall already built by stating, “If a debtor’s asset is insufficient tosettle debts with preferential rights such as taxes, it is even more unlikelythat debts owed to other creditors can be paid. If bankruptcy is declared forsuch a case, the bankruptcy estate’s expenses need to be paid off first, whichwill further reduce the assets of the bankruptcy estate. Then the debts owed tocreditors with preferential rights, i.e., tax authorities, will receive lessdistribution or no distribution. And other creditors have even less of a chanceof receiving distribution. This does not conform to the purpose of thebankruptcy system.”

Lately, there is also a court ruling(Taipei District Court 107-Po-Zi No. 10) that states, “Applying for bankruptcydeclaration requires that, after deducting debts with exemption rights andexpenses of the bankruptcy estate from the assets of the applicant, a balancestill exists to be distributed to the creditors. Only then does substantivebenefit exist in the declaration of bankruptcy.” That means, when a debtorencounters financial difficulties and wishes to clear his/her debts through abankruptcy procedure, the requirements have evolved from “not allowed to haveno assets” to “having enough to pay for the expenses of the bankruptcy estate”to “having enough to pay for the expenses of the bankruptcy estate and the debtswith preferential rights such as taxes” to the late “having a balance to bedistributed to common creditors after deducting debts with exemption rights,”to be determined that there exists substantive benefit from the declaration ofbankruptcy.

However, if the debtor’s asset is greaterthan its debts with exemption rights, the debtor probably does not need todeclare bankruptcy in the first place. Does the fact that the court continuesto raise the bar for bankruptcy declaration mean that Taiwan needs to reviewand amend its bankruptcy laws as soon as possible?

In fact, Taiwan Supreme Court 96-Tai-Kang-ZiNo. 442 Civil Ruling stated, “A bankruptcy system can ensure both equalcompensation to creditors and financial rebirth for debtors. Pursuant toArticle 112 of the Bankruptcy Act, the debt with preferential rights are only repaidin priority to other debts, the court cannot take Paragraph 1 of Article 6 ofthe Tax Collection Act, which provides that collection of taxes shall havepriority over general claims by creditors, as a reason to claim that taxes owedby the debtor affect the repayment of debts owed to other creditors, and thatthere exists no substantive benefit from the declaration of bankruptcy.”

When a court hears a bankruptcy case, itoften neglects the Bankruptcy Act’s function of facilitating financial rebirthfor debtors. In its interpretation of the law, the court added requirements notprovided in the Bankruptcy Act and continues to expand its interpretations. Theso-called “no substantive benefit from the declaration of bankruptcy” is only thetip of an iceberg. Debtors who are unable to apply the Consumer Debt ClearanceStatute to rehabilitate and liquidate need to face the high wall for bankruptcyerected by the court. This may be one of the reasons why these individuals andcompanies are not able to clear their debts and have a financial rebirth. As aresult, individuals have nowhere to go, and companies become zombie companies.In addition to re-examining the legal system, courts should also pay moreattention to the difficulties faced by debtors when hearing bankruptcy cases.

‍

This article was published in the Expert’s Commentary Column of the Commercial Times：https://view.ctee.com.tw/tax/45254.html