SECOND PACIFIC-RIM COLLOQUIUM ON ECONOMIC DEVELOPMENT AND THE HARMONIZATION OF COMMERCIAL LAW SHANGHAI, CHINA – JANUARY 8-10, 2015: SUMMARY OF DISCUSSIONS, CONCLUSIONS AND NEXT STEPS

Summary and Comments Prepared for NatLaw by: Boris Kozolchyk with the Assistance of Adalberto Elias © NatLaw, 2015

I. BACKGROUND

On October 2013, the National Law Center for Inter-American Free Trade (NatLaw) and the Universidad Mayor organized the first Trans-Pacific Colloquium on the Harmonization of Commercial Law and Economic Development in Santiago, Chile. It was attended by distinguished commercial law scholars and public sector representatives from Chile, China, Colombia, Costa Rica, Japan, Mexico, the U.S. and Vietnam. Its purpose was to agree on an agenda of harmonization of commercial laws and practices that could help the economic development of Pacific Rim countries. The laws and practices discussed pertained to: simplified stock corporations, personal (moveable) property secured transactions, electronic warehouse receipts, and debtor rehabilitation and insolvency.

The Shanghai University of International Business and Economics, School of Law (SUIBE), a participant in the Chile Colloquium, offered to co-host with NatLaw and the Universidad Mayor a Second Colloquium in Shanghai, China on January 8-10, 2015 (Second Pacific Rim Colloquium: Economic Development and Harmonization of Commercial Law). During the preparation of this Second Colloquium, the co-hosts decided to add the topic of Electronic Commerce (EC) to the Shanghai agenda. The Shanghai Colloquium gathered forty participants including commercial law scholars, law practitioners, and government and multi-national institution officials from Chile, China, Colombia, Costa Rica, Japan, Korea, Mexico, U.S. and Vietnam. This document summarizes their presentations and discussions and identifies the steps that could pave the way for regional commercial legal harmonization on selected topics.

II. SIMPLIFIED COMPANIES

A. The Colloquium and the Work of UNCITRAL Working Group I on Simplified Companies

A Model law of Simplified Companies is being drafted by Working Group I of the United Commission of International Trade Law (UNCITRAL). Its text is inspired, at least in part, by Colombia’s Simplified Companies Law 1258 (Ley de Sociedades Anonimas Simplificadas) (SAS) enacted in Colombia in 2008 and drafted by Professor Francisco Reyes de Villamizar. The SAS is applicable to all types and sizes of corporations and has proven to be highly successful in attracting the largest percentage of filings in the history of Latin America. The

1 scope of Working Group I’s work is to draft a narrower law, i.e. one that would eliminate obstacles faced by MSME’s when attempting to regularize their legal status and become creditworthy. Hence, it became necessary to narrow the scope and rewrite segments of the SAS as the inspiring text.

During an April 2014 UNCITRAL Working Group I meeting, Japan, Colombia, El Salvador, the United Kingdom, Croatia, Finland, and the U.S. formed an ad hoc drafting group led by Lic. Jose Manuel Pliego, Deputy General Director of Business Regulation for the Mexican Ministry of the Economy (Secretaría de Economía). This group prepared a Working Paper that listed international best practices for the registration and incorporation of MSME’s. Many of these practices were part of the Colombian SAS and included: (i) the ability to incorporate by one or more incorporators and with a liability limited to their capital and in kind contribution(s); (ii) the acquisition of legal capacity to do business by simple and inexpensive registration procedures, many of which had been pioneered by Chile; (iii) a fully-fledged limitation of liability; (iv) a pervasive freedom of contract that includes agreements on company governance; (v) an optional minimum capital; (vi) a supple organizational structure; (vii) an optional specification of the company’s purpose(s); (viii) an optional use of agents and intermediaries whose apparent authority (as contrasted with a formally expressed authority) binds their principals; and (ix) fiscal transparency and reliance on simplified and standardized accounting statements and reports designed to improve the creditworthiness of the MSME’s. Lic. Pliego, joined by Michael Dennis Esq. of the Office of the Legal Advisor of the U.S. Department of State, authored a document entitled “Framework for a Simplified Company Model Law for MSME’s” that explained the main features and goals of the new proposed model. This document is available from NatLaw upon request.

B. Panel Discussion

At the Shanghai Colloquium, the panel on simplified companies was moderated by Lic. Pliego and included representatives from Chile, Colombia, Japan, Mexico and the World Bank. Most panelists discussed the status of simplified companies in their countries and the way forward for a possible UNCITRAL Model Law and Trans-Pacific law. Lic. Pliego described how the Pliego/Dennis proposed framework adopted the core elements and functionality of the earlier Colombian draft and showed how the proposed rules also reflected the best MSME practices. Panel and Colloquium participants expressed agreement with the balanced approach of the proposed framework.

Mr. Dobromir Christow, Senior Private Sector Development Specialist for the World Bank and one of the world’s experts on the formation and viability of MSME’s, discussed the best practices of formation and registration as summarized by the World Bank’s “Doing Business Report.” Among these were many in the Pliego/Dennis Framework, such as: i) a flexible approach to minimum capital, (ii) the standardization of simple forms and procedures, (iii) an optional specific purpose (objects) clause in the Articles of Incorporation, and (iv) optional

2 middlemen such as lawyers, notaries, and registered agents. Others in the World Bank report included: the use of electronic One-Stop Shops and flat and minimal fees for creation and or incorporation.

Professor Dr. Xiaoshan Li of SUIBE discussed features of the 2013 Chinese Corporation law which were consistent with the Pliego/Dennis Framework and with the World Bank’s ease of “Doing Business” recommendations. Two of these were the simplification of the creation and registration procedures and the elimination of the requirement for a minimum capital. China’s elimination of the minimum capital requirement illustrated the role played by the Chile Colloquium and NatLaw’s part as a clearing house for the possible harmonization of commercial law. In preparation for China’s participation in the Chile Colloquium, SUIBE’s then Dean Lisa Chen asked NatLaw to provide her with Professor Reyes’ writings and the reasons for his decision to eliminate the fixed capitalization requirement from Colombia’s SAS. Consistent with China’s elimination of this requirement, Professor Xiaoshan Li expressed his support for the Pliego/Dennis Framework.

Professor Tomotaka Fujita of the University of Japan, School of Law noted that the majority of Japanese businesses are micro and small businesses and are organized as joint stock companies. In addition, he confirmed that current Japanese law on MSMEs is mostly consistent with the core elements of the Pliego/Dennis Framework. As had been done by Professor Xiaoshan, Professor Fujita expressed support for this Framework.

C. The MSME’s Need of Suitable Accounting Reports and Statements

Morrison, Brown, Argiz and Farra (MBAF), is Florida’s leading independent international accounting firm. Mr. Boris Rosen (one its principals) was a consultant to NatLaw’s Honduran secured transactions law project designed to facilitate the access of Honduran MSME’s to secured loans at reasonable rates of interest. Based on that experience, Mr. Rosen prepared a set of simplified standard accounting statements and reports for small companies with annual sales in excess of $300,000. These statements and reports are designed to help monitor the borrower’s inventory, cash flow, assets and liabilities, and profits and losses. He emphasized the importance of starting out with realistic business plans and completing periodic budgets that would act to check the consistency between the budgeted income and expenditures and the business plan.

Micro enterprises (whose sales were below the $300,000 threshold) would require simpler business plans and single entry book-keeping. Gradually, as their business grew they would be introduced to more sophisticated book-keeping and accounting practices and to the reports and statements used by small businesses.

Colloquium participants inquired as to how inexperienced MSME’s could facilitate the book- keeping entries. Dr. Kozolchyk recalled that during the field research (“roadmap”) phase of drafting the Honduran Secured Transactions law, some of the Honduran potential lending banks

3 who interviewed MSME’s as potential borrowers filled out the book-keeping and accounting forms themselves. Mr. Rosen suggested that MSME’s that should consider hiring the present day counterparts of the traditional (“Green Eye Shades”) as their permanent or seasonal bookkeepers, hopefully at an affordable cost. These book-keepers should undergo a basic training provided by certified public accountants to qualify them as book-keepers and preparers of the forms and statements that would attest to the creditworthiness of their MSME’s. At a given point, the MSME’s would be able to use accounting software themselves, such as QuickBooks. Finally, Mr. Rosen suggested that the term used when creating and registering the simplified limited liability MSME’s should be “simplified companies” instead of “corporations.” In his experience, the latter designation enables MSME’s to obtain a more favorable tax treatment in more than one tax jurisdiction than if labeled a “simplified corporation.” Some participants suggested including the MBAF standard forms as part of an Appendix to the Proposed Model Law on Simplified Companies so that nations that adopted their versions of the UNCITRAL Model Law could make these standard forms available to interested MSME’s.

D. National Treatment and Suggestion to UNCITRAL Working Group 1.

Another possible feature of the Trans-Pacific Model Simplified Company is that each participating nation would agree to give national treatment to simplified companies registered in other trans-Pacific nations. This would enable these MSME’s to engage in the largest number of business activities possible, excluding only those forbidden by national law or public policy. Generally, these exclusions apply to larger enterprises, especially those involved in activities such as mining, public construction and transportation.

Professor Clara Szczaranski, Dean of the Faculty of Law at the Universidad Mayor in Chile, prepared a report on the selection of those business activities that the Trans-Pacific nations may wish to include in their lists of national treatment. She pointed to national treatment provisions in bilateral investment treaties (BIT’s) and noted that Chilean court decisions had already granted to them the legal status of mandatory law and thus conferred national treatment to the businesses listed as acceptable by the BIT signatories. As a rule, BIT treaties grant not only national but also most favored nation and fair and equitable treatment to foreign investors. Many of them also grant free convertibility of currency and protection against expropriation. Of these principles, that of national treatment was regarded by the panelists and other participants as of greatest significance for MSME’s.

Given the fact that during the February 2014 UNCITRAL meeting, Working Group I delegations expressed an interest in a possible national treatment feature of a model simplified company, various panelists and participants at the Shanghai Colloquium suggested to Working Group I participants to bring up the advisability of adopting the same BIT criteria on national treatment in the UNCITRAL Model Law during UNCITRAL’s Working Group I’s next session that will take place April 13-17, 2105.

4 III. A HARMONIZED SECURED TRANSACTIONS LAW (STL)

The secured transactions panel discussed the current status of secured transactions reform in the Colloquium countries and suggested significant steps toward the harmonization of their laws. This panel was moderated by Lic. Rodrigo Novoa, a NatLaw board member, Executive Director of NatLaw Chile and a partner at the distinguished Chilean law form of Saldivia, Contreras, Inalaf, Würth & Verdugo Abogados. Dr. Marek Dubovec, a NatLaw Senior Research Attorney who has coordinated the enactment of numerous STL’s in Africa and Asia as well as of registry regulations in those regions and in Latin America, explained the basic elements of a secured transaction collateralized by business assets. He also discussed legal principles that inform the most successful STL’s, such as the NatLaw 12 Principles of Secured Transactions Law that inspired the OAS Model Law of Secured Transactions of 2002, as well as its statutory progeny in Latin America and other developing regions. Subsequently, panelists provided updates on the state of STL’s in Chile, China, Costa Rica, Colombia, Japan and Mexico.

A. Chile

Lic. Rodrigo Novoa used a McKinsey & Co. study on global financial inclusion to compare the access to commercial credit by MSME’s in different regions of the world. The statistics on access to such credit in countries with effective secured transactions laws and registries stood in sharp contrast with countries, like his own, which still lack such a law and registry system despite having more than one million MSME’s in a position to profit from such a law and registry. He also reported that Chile has just started a drafting process of a STL and of its registry regulations based on the OAS Model Inter-American Law on Secured Transactions and the UNCITRAL Legislative Guide on Secured Transactions.

B. China

Dean and Professor, Dr. Shoubin Ni of the SUIBE School of Law and Emily Yu, Executive Director and Head of China TSS Legal Department of JPMorgan Chase Bank discussed the state of Chinese law and practice. Dean Shoubin Ni addressed some of China’s problems with a fragmented STL and overlapping registry filings. His analysis was particularly significant because it was based not on “desk” research but on his six year experience with China’s STL as a practicing commercial and banking lawyer. Accordingly, security interests that stem from retentions of ownership or reservations of title, financial leases, and transfers of mobile goods in guarantee to creditors, pledges of accounts receivable and guaranty trusts, as well as generic “pledges” and mortgages” are subject to different legal regimes, including overlapping and conflicting filings and priorities. He agreed with the need for a unitary STL, including registry regulations. The Dean’s observations were echoed by Emily Yu (also a SUIBE graduate) who, as legal counsel for J.P. Morgan Chase, experienced the same difficulties and uncertainties described by Dean Shoubin Ni. In her experience, banks would able to lend larger amounts, at

5 lower interest rates and to a larger number of borrowers (including MSME’s) if the uncertainties noted by Dean Shoubin Ni were removed.

C. A Pilot Project of Secured Lending to MSME’s in Shanghai’s Free Trade Zone

Dr. Kozolchyk and Dean Shoubin Ni met on January 6, 2015 to discuss a possible joint research project for the newly inaugurated NatLaw-Shanghai Center. It involved a pilot project that would try to enact a state of the art STL and registry regulations in the Free Trade of Shanghai. Such an enactment would enable MSME’s located in the Free Trade Zone to obtain secured loans at reasonable rates of interest from local and international banks.

In a visit to China in 2008, Professor Kozolchyk was asked by academic, judicial and banking authorities about the likely effectiveness of China’s 2007 Property Rights law in facilitating secured credit at reasonable rates of interest. He expressed the same doubts expressed above by Dean Shoubin Ni. Kozolchyk suggested that a state of the art, unitary substantive law and registry system, such as that of Colombia or Mexico, would increase China’s MSME’s access to secured credit at reasonable rates of interest. In his January discussion with Dean Shoubin Ni, Dr. Kozolchyk proposed that NatLaw Shanghai and SUIBE participate in a pilot project whose first phase would be to determine the legal feasibility of Shanghai’s Free Trade Zone’s enactment of a STL and registry regulation. If the Shanghai Free Trade zone had the autonomy to enact such a regime, Shanghai’s MSME’s would be able to access secured credit at reasonable rates of interest and employ many more employees than they presently do.

During the second or legislative phase of the proposed pilot project, a drafting committee would be appointed by SUIBE and appropriate municipal authorities. It would involve SUIBE and NatLaw scholars, local bankers, MSME’s, and judges (including directly or indirectly the Supreme Court of China). During the third or trial phase, a dozen Free Trade zone MSMEs would be selected by lending institutions to be the recipients of revolving lines of credit. The amounts of these credits would be determined by the lending banks with the assistance of international banks and accountants specialized in secured or asset-based lending. The revolving and/or cumulative amounts would be reviewed periodically by the specialized banks and accountants on the basis of the MSME-borrowers’ performance. This selection of borrowers would be based on factors such as their track record as businessmen and women, their experience with record keeping and accounting, their reputation for honesty and veracity, and the state of their finances. Based on the fact that highly reputed international bankers’ association such as the Commercial Financial Association (CFA), banks such as J.P. Morgan Chase and an accounting firm such as MBAF were sponsors of the Shanghai Colloquium, it is likely that they would be willing to serve as advisors of the drafting committee or subcommittees and of future secured lenders. Finally, the necessary legal steps involved in the creation and registration of MSME’s, in the filing of security interests and handling collection proceedings would be done by SUIBE law students under the supervision of SUIBE professors and students and with the assistance of NatLaw Shanghai. The Pilot Project would last two years. Dean Shoubin Ni

6 expressed an interest in this project, as did SUIBE’s Professor Jun Feng who, as an Associate President of the Shanghai WTO Consulting Office, could help determine the legal feasibility of the proposed enactments.

During the discussion of this proposal, Saibo Jin, Esq., a leading Chinese and international commercial and banking law litigator and an advisor to the People’s Republic Supreme Court program on letter of credit directives to lower courts (and also a sponsor of the Colloquium) stated that the Supreme Court was either engaged or would be engaged shortly in preparing directives to lower courts on STL decision-making. He offered to act as a liaison with the Court in the event that the proposed project was deemed legally feasible and subsequent phases were initiated.

D. Colombia

Lic. Santiago Renjifo, Manager of Colombia’s Registry of Security Interests (RSI) at the Conference of Chambers of Commerce in Colombia, presented on Colombia’s STL. Where MSME’s were concerned, secured credit at reasonable rates was mostly unavailable in Colombia prior to the enactment of its ST Law 1676 of 2013 and the operation of its registry of security interests. Lic. Renjifo estimated that only 12 of 100 MSME’s had access to credit in 2013. In Lic. Renjifo’s words, Colombia started to “break this paradigm” when it enacted and created a centralized registry lodged with the Confederation of Colombia’s Chambers of Commerce. As noted by Dr. Kozolchyk, an adviser to Colombia’s drafting Commission, this law was inspired by the OAS Model law, the NatLaw 12 principles and the UNCITRAL Legislative Guide. Hence it adopted a unitary system of security interests whose conceptual common denominator was not the debtor’s title to the collateral but his preferential possessory right to it. The 2013 law also fully implemented the NatLaw principle that the number and types of preferential possessory rights were open ended, as were the mobile goods that could be used as collateral. The law also made possible a more reliable judicial and extra judicial collection process, including an extra-judicial means of repossession and foreclosure of collateral.

As inspired, among others, by the Mexican RUG (which will be discussed shortly) the Colombian RSI is centralized and electronic, and is supported by a Cloud based platform that stores the data submitted to the RSI online by means of summary financing statements. On December 1 of 2014, this registry had 1,083,000 registrations on file. Even if one deducts from this number the approximately two hundred thousand filings in existence under the old regime which were allowed to migrate to the new system, this figure is quite impressive, considering that Colombia’s population in 2014 was approximately 48 million. Equally significant was that even though 78% of the filings involved personal and business (commercial, agricultural and industrial) motor vehicles, 22% of the filings including previously scarcely used collateral such as: accounts receivable, contract rights, crops (especially in loans where the borrower was not the owner of the land) mining and industrial equipment, sewing machines, livestock and fisheries. Accordingly, of his 22%, a significant percent of the collateral was beginning to secure loans to

7 Colombia’s MSME’s. An informal survey conducted by Kozolchyk’s among Colombia’s bankers in early 2015 indicated that the percentage of loans to MSME’s had conservatively grown to more than twice at the time of the enactment of the 2013 STL.

E. Costa Rica and the Dominican Republic Contrasted

Lic. and LLM. Joaquin Picado, is a founding partner of the Picado León Abogados of Costa Rica and of the “Signature Regional Law Firm” of Costa Rica and Central America. He is also a Professor of Law at the Universidad Escuela Libre of Costa Rica and assisted Dr. Kozolchyk in drafting the first draft submitted to the Costa Rican Ministry of the Economy, part of which became Costa Rica’s STL No. 924 on May 15, 2014. Professor Picado, a NatLaw member and consultant is also an advisor to the drafting commission of a new Dominican Republic STL.

Professor Picado noted that part of the Costa Rican STL became a victim of a harmful political compromise. Even though it was modeled after the same NatLaw 12 Principles of a STL which inspired the OAS Model Law of Secured Transactions as well as the Guatemalan, Honduran, Colombian and Mexican STL versions, Costa Rica’s Congress opted for a fragmented legal regime that accorded security interests in motor vehicles a different legal regime than the one that governs other business assets/collateral. Thus, security interests in motor vehicles, including those used as collateral by businesses, are governed by different rules on attachment, perfection and registration than those that apply to other assets of the same business, such as inventory, equipment, contract rights, intellectual property rights, accounts receivable and proceeds, among others.

Professor Picado contrasted the Costa Rican law with the present draft of a Dominican Republic STL, which is unitary and thus consistent with the NatLaw 12 Principles and the OAS Model Law as well as with the laws of Colombia, Guatemala, Honduras and Mexico. He expressed the hope that once the Costa Rican lenders and borrowers start experiencing the uncertainties and costliness of fragmentation and become familiar with the successful operation of the unitary system, the present text will be revised. He also emphasized the importance of preparing sound STL text books for law students, lawyers and bankers as well training manuals for lenders and borrowers.

F. Japan

Professor Hiroo Sono of the Hokkaido University in Japan spoke on Japan’s STL through a video presentation to Colloquium participants. Despite the increasing awareness of the importance of commercial secured lending in Japan and despite Professor Sono’s learned advocacy and support for a unitary ST system, Japan’s fragmented law of security interests still prevails. Unfortunately, Professor Sono remains skeptical about Japan’s near term modernization of its STL.

8 G. The Mexican STL and its Unified Registry (RUG)

Starting with the May 23, 2000 amendments to Mexico’s Commercial Code and General Law on Negotiable Instruments and Credit Transactions and culminating with the June 13, 2014 amendments to the same code and law, Mexico’s STL became, for the most part, a unitary law. While the STL still retained all of the security interests that pre-existed the current version of the law and some still have different methods of creation, all interests now have to be registered. Lic. Ms. Elsa Ayala is the General Director for Business Regulation of Mexico’s Secretariat of the Economy and was also a participant in the Chile Colloquium. She pointed to the 2009 amendments of the Commercial Code as those that created the national Property Collateral Registry (RUG) at the Secretariat of the Economy, the agency charged with its management. The RUG started operations in 2010 as Mexico’s single electronic registry and is the registry in charge of filing of security interests, including potential interests, such as “preventive notices,” and also judicial and statutory liens. The filing is a summary electronic message which contains selected data derived from the terms and conditions of a security agreement or from a judicial or statutory lien. A RUG filing perfects the security interest and provides notice to third party creditors and purchasers of the described collateral. It has proven to be an easy to use, fast and economically productive secured system of filing: secured creditors or holders of liens on personal property collateral can file, amend, and terminate the registration of their security interests and obtain immediately upon filing from the RUG a time stamped certificate. To make this possible, the RUG issues electronic signatures to the secured/filing creditor and their filings can be searched and certified almost immediately upon their input into the system. The filing is free, thereby meeting one of the STL and RUG’s principal goals: to provide easier access to secured credit at reasonable rates of interest to Mexico’s MSME’s, which, as pointed out by Lic. Ayala, amount to 99% of all Mexican business establishments. After explaining the daily operations of the RUG, Lic. Diana Muñoz, Director of Coordination of the RUG, provided comparative statistics on the yearly increases in volume in the number of filings. For example, during October 2009 (prior to the inauguration of the RUG), the number of filed security interests was 13,719, while from October 2010 to 2011 the volume of filings multiplied almost fourfold to 41,190 and by November 30, 2014 the number of filings was 400,383. By this time it was easy to establish patterns with respect to the types of business assets used as collateral and the average loan amount. These patterns revealed that 44% of these assets were motor vehicles (for personal or business use), 26% were agricultural products, 3% were livestock, 17% were machinery and equipment and only 2% were accounts receivable and 1% were equity securities, bonds, options and futures. Thus, from a secured credit vantage point, while Mexico has continued to make strides in its industrial sector, agriculture and cattle raising continue to be among Mexico’s most important trades and the financial market still has a long way to go. Meanwhile 97% of secured loans were for amounts lower than one million U.S.D and only 3% were for higher amounts. This statistic indicates the increasing use of secured lending by Mexican MSME’s. 9 IV. A STANDARD ELECTRONIC WAREHOUSE RECEIPT (EWR)

The poorer Trans-Pacific economies are especially in need of financing to enable a more productive cultivation and trade of agricultural commodities. A missing link in the supply chain of these commodities is a cost effective, reliable and trustworthy electronic warehouse receipt (EWR) that could facilitate spot and future sales as well as financing in national or regional financial centers and commodity exchanges. This is especially true for “dry” agricultural commodities such as sugar, cotton, grains, coffee and peanuts, among others.

Following the choice of the EWR as a topic for harmonization during Shanghai Colloquium, NatLaw researchers, as well as University of Arizona LLMs and SJD students, completed comparative legal and field studies on the utilization of EWR’s in the U.S. and on paper based and EWRs in Latin America and Africa. Meanwhile major fraudulent transactions that took place in Asia and Latin America highlighted the need for fraud-proof electronic warehouse receipts (EWR). Additionally Mexico’s Ministry of the Economy, the Colombian Association of Bankers (Asobancaria), and the Corporación Andina de Fomento (CAF)—a development bank located in Latin America and a major sponsor of the Shanghai Colloquium, expressed interest in NatLaw’s proposal of a standardized Trans Pacific EWR.

A. Regional Field Studies on EWRs

Dr. Vassil Zhivkov recently received his SJD from the University of Arizona, James E. College of Law. In his thesis, he identified key features of paper-based and electronic warehouse receipts in different legal systems and economies. In theory, WRs and EWRs not only acknowledge the warehouseman’s receipt and storage of goods and commodities, but also grant “preferential possessory rights” to their holders. This term was coined by the NatLaw 12 Principles for Secured Transactions and it is part of the text of the OAS Model Law of Secured Transactions and of its progeny in Latin America and Africa. The possessory rights it refers to are similar to those Roman jurists referred to as “rights in the goods of others” (iura in re aliena) and thus fall short of conveying absolute and permanent title to the goods or commodities stored; nonetheless, they allow their holders to claim the possession of the goods stored with preference over the claims of “historical” owners and depositors of the stored goods.

In the case of paper-based WRs, a large number of civil law countries continue to rely on a two documents: (i) a certificate of deposit or of title which allows its holder to claim the goods stored from the warehouseman; and (ii) a certificate of pledge, “warrant” or “pledge bond,” which allows the holder to pledge the goods stored as collateral with a secured lender who will be paid prior to the release of the goods to the holder of the certificate of deposit or any other party. The fact that there are two different documents that they are not filed in a public registry, and if labelled as negotiable that can each create a different set of holders and endorsees, is the reason for fraudulent practices that de facto render these documents non-negotiable. As a result, many lending institutions refuse to lend against these WRs.

10 In contrast, Dr. Zhivkov documented the successful use of EWRs in sales and secured loans in commodity exchanges in India, South Africa and Ethiopia, as well as in the U.S. His conclusion was that the future of WRs, especially when used in international transactions, will be electronic and, that given its commercial and economic complementarities, the Trans-Pacific region should enact a harmonized law that would cover paper-based and electronic WRs.

B. The United States Law on WRs and EWRs

Professor Drew Kershen is a Professor of Law Emeritus at the University of Oklahoma College of Law was the co-reporter for the redraft of Article 7 of the Uniform Commercial Code (UCC) of the U.S. from 2000-2003. He prepared an introductory Colloquium video that described the basic features of the WR and EWR in U.S. law. Article 7 contains the uniform statutory law for “documents of title” i.e. warehouse receipts and ocean bills of lading. Warehouse receipts cover storage and ocean bills of lading cover ocean, and on some occasions, multi-modal transportation. Parenthetically, Dr. Kozolchyk added during the discussion of Professor Kershen’s presentation that the term “documents of title” was misleading because these documents do not convey ownership or absolute title to the goods but preferential possessory rights. Still, Article 7 provides the statutory framework for electronic commerce in paper based WRs and to a lesser extent EWR’s and, unlike the dual documents that characterize the issuance of WRs in most civil law countries, Article 7 provides for only one paper based document and for its electronic counterpart or one EWR with both being negotiable, although the right acquired by the holder of the latter is one referred to by Article 7 as “control.” As explained by Professor Kershen, Article 7 envisions that electronic commerce could take place in either a “closed” or an “open” system. The U.S. Warehouse Receipts Act, that authorized EWRs beginning in 1992, uses a “closed” system of issuance, i.e., one in which only the regular participants in the commodity trade in question act as contractual signatories to a multi-party agreement that includes as participants: i) the electronic system provider; ii) the warehouseman, issuer of the EWR; iii) the producer of the goods (depositor); iv) the buyer of the goods; and v) the lender who lends on the strength of the collateral value of the EWRs. The U.S. Warehouse Receipts Act closed system of EWRs has been widely adopted in agricultural sector for three commodities: cotton, grains, and peanuts.

C. The United States Cotton Warehouse Receipt Practices

As is customary with NatLaw legislative and “living law,” prior to engaging in textual comparisons and drafting, contextual/field research is undertaken to provide answers to questions such as: What are the standard and best practices for each of the aspects of the transaction in question? Who are the standard practitioners? What does each do? Are their functions or roles interchangeable? Or, are issuers of promises, communications or documents only issuers and nothing else or, are they at times buyers and at times sellers or brokers? What does each party

11 give to the other and what does he reasonably expect to receive in return? How are third parties affected by the transaction protected, thereby possibly qualifying as a best practice?

Mr. Ari Pozez is a NatLaw Legal Research Assistant and a second year law student at Tulane University Law School. For a number of months in 2014 he conducted field research in cotton warehouses on the East Coast of the U.S. His research also included interviews with officers of EWR Inc., the U.S. based provider of the software that manages the systems for the storage and issuance of EWRs in the U.S. His research contributed a detailed business and legal roadmap of cotton warehouse receipt law and practice, especially in his description of the “closed system” of issuance pioneered by EWR Inc. Thus, Mr. Pozez tracked the cotton from its harvest to its transportation to a cotton gin where the raw cotton was then ginned and baled, graded and classed and in so doing acquired a verifiable market value. With Mr. Pozez’s description, it is now possible to identify practices reflected in the text of a future Trans-Pacific EWR cotton prototype, including the practices of the private and public sectors.

D. Warehouse Receipts in Latin America

NatLaw Research Attorney Lic. Adalberto Elias holds both Mexican and U.S. law degrees and is also an LLM from the James E. Rogers College of Law of the University of Arizona. At NatLaw, Lic. Elias conducted field research on the prevailing warehouse receipt system of issuance and transfer in Latin America (the so called “double warehouse receipt system”) that is comprised by the above described certificate of deposit and certificate of pledge, pledge bond or warrant. He documented the practice of Latin American secured lenders, including warehousemen, of keeping the original certificates of deposit and pledge under lock and key until they were fully paid by the depositors of the goods or their buyers or creditors.

Another Mexican practice revealed the susceptibility of abuse in overreaching credits as a result of the absence of a reliable system of public notice. Frequently, after a lender/holder of the certificates of deposit and pledge receives a partial payment of his secured loan, he sends an email to the warehouse authorizing the release of part of the stored goods to their depositor (loan borrower). Yet, despite this release, some secured creditors continue to hold the certificates of deposit and pledge, including those that are negotiable. Obviously, this practice enables the fraudulent secured creditor to endorse his negotiable pledge bond or certificate to an innocent third party who will find out from the warehouseman that the same goods had been released to the depositor. This practice illustrates the need for a safe and efficient system of handling the transfers of WRs warehouse receipt system in Mexico, including their public notice.

According to Lic. Elias, Colombia was the first Latin American country to establish an EWR system in a double warehouse receipt system jurisdiction. As opposed to the closed EWR system available in the U.S.—in which independent and licensed service providers (private entities), in coordination with warehouses, issue EWR and maintain electronic records on the transfer of the right to control the goods—the Colombian system relies on the Colombian

12 Commodities Exchange acting as the key entity and regulator of the EWR system. Apparently this system is being re-examined and may undergo a substantial revision.

E. Present Warehouse Receipt Laws and Practices in China

SUIBE’s Associate Professor Xu Den’s presentation addressed the frequent fraudulent issuances and transfers of WRs in China. He identified China’s “general” contract law (as contrasted with a specialized WR or EWR law) as the law that governs the issuance and transfers of Chinese WRs. This is an important point because while the WRs do contain contractual stipulations and allocate in personam rights and duties to its parties, the most important function of the WR is to confer, what the NatLaw 12 Principles of Secured Transactions refer to as preferential possessory rights, to their holders. As noted earlier by Dr. Zhivkov and Professor Kershen, a purely contractual obligation is insufficient to confer or negotiate these possessory rights and a secure and reliable public notice system is needed. Professor Xu Den concluded by endorsing the NatLaw suggestion of drafting of a “progressive instrument that would help the unification of the WR law in China” as the first step in the road to a unified registry system.

F. WRs and Commodity Exchanges in Vietnam

Professor Tien Vinh Nguyen is the Head of the International Law Department of the School of Law of Vietnam National University in Hanoi. Despite the major significance of the agricultural sector in Vietnam’s economy, Professor Nguyen concluded that Vietnam’s WR law suffers from an incomplete and ineffective legal framework. This explains the lack of circulation of negotiable WRs in Vietnam. Without such a legal framework, there is no incentive in Vietnam for the development of either a local or foreign public warehousing industry. Professor Nguyen suggested to undertake Trans-Pacific legal and business research and to provide adequate technical legal and economic assistance to governments desirous of developing their agricultural sectors.

G. Conclusions: A Prototype Trans-Pacific EWR and an Electronic Registry.

The Trans-Pacific region presently lacks an appropriate EWR that could help finance the growth of agri-business, including MSME’s, access to credit at reasonable rates of interest. Paper based WRs only convey in personam rights. Consequently, their holders can only claim the goods stored at the warehouse, which could be fewer than those the WR states were deposited. Further, in some Trans-Pacific countries, unless these receipts are negotiable documents, they will not be immune from a warehouseman’s defense that the employee who issued the WR lacked the power to do so. Accordingly, these receipts could hardly be marketable or collateralized nationally or internationally. In addition, the issuance of duplicate negotiable WRs has already caused hundreds of millions of losses due to fraud in the Trans-Pacific region and beyond.

13 In contrast, the U.S. EWRs issued singly enjoy an enviable record of safety and reliability when conveying the right to “control” (a preferential possessory right to the stored goods) to bona fide buyers and secured creditors. Because the system of issuance and circulation of these EWRs is closed to those who are not regular participants in the trade in question and who are signatories of the an issuance and record maintenance contract (be they growers, manufacturers, warehousemen, sellers, buyers, lenders, borrowers or brokers) it has prevented fraud and has encouraged the sale and financing of stored goods. However, a closed system of issuance and transfer of EWRs is ill suited for cross-border transactions in which the above parties are often unknown to each other.

In the absence of an unrealistic and impractical multi-sector, multi-trade Master Agreement, a standardized EWR text for a given trade within a given sector, such as for cotton, grains or coffee, offers a more realistic and practical path not only toward a Trans-Pacific EWR but also towards uniform national registries or a multi-national registry of EWRs. It would contain the terms and conditions of issuance, transfer, negotiation and pledge of the EWR as agreed upon by regular participants in that trade across national borders. At the same time, and depending upon the goods or commodities stored or stored and shipped, it would also contain the necessary certifications by governmental agencies or their designees of the type, quantity, quality, weight, safety, wholesomeness etc. of the goods or commodities involved.

This proposed standardized EWR would render unnecessary the drafting of a uniform or model substantive law for EWRs. The focus would be on a uniform or harmonized registry law or regulations, which could be greatly assisted by the presence of STR registries such as those in Colombia and Mexico.

V. ELECTRONIC COMMERCE (EC)

The electronic commerce panel included the most participants hailing from Chile, Colombia, China, Korea, Japan and the U.S. The first presentation highlighted the organic connection between the continuing development of information technology (IT) and EC. The following presentations will be summarized in alphabetical order and not in the order the presentations were given.

A. An Empirical Study of Institutional (Technical and Legal) Environments Favorable to the Growth of EC

Long Island University’s Professor Ling Zhu is the NatLaw Liaison and coordinator of research for SUIBE in conjunction with the creation of a NatLaw-Shanghai Center at the SUIBE campus. His presentation summarized his five year empirical study of the relationship between the adoption of EC practices and an adequate, supportive legal environment. First, he identified the presence of a seemingly organic connection between the growth and diversification of IT and the development of EC practices. Consider, for example, the relationship between technology and

14 the proliferation of the inbound logistics practices of large enterprises. Since 2003, Walmart, the largest retail corporation in American, requires that all of its world-wide suppliers attach RFID (Radio Frequency Identification) chips on the products they ship to Walmart’s warehouses. Its goal is to achieve “just in time” or “zero inventory.” The RFID technology allows Walmart to track its inventories in real time and reduce its warehousing costs. The same is true with Chinese companies such as Lenovo, the largest manufacturer of personal computers in the world. Lenovo has created a “China-based global supply chain network” that uses Internet technology. It is also true for Apple and Google’s recently launched mobile payment systems and for an unknown digital entrepreneur who created an Internet form of private (non-banking) digital currency known as Bitcoin, managed by computer operators around the trading world. Bitcoin makes possible online payments between individual buyers and sellers in P2P (Peer to Peer) or C2C (Consumer to Consumer) transactions.

Similarly, “big data,” the creation, collection, and analysis of a huge amount of commercial transaction data (at the Terabyte level), makes descriptive, predictive and prescriptive analytics of consumer behavior unprecedentedly accurate, spawning many unexpected EC marketing practices. For example, after conducting a sophisticated analysis of its sales data, Walmart found “a hidden trend” in the relationship between inventory items as seemingly distant from each other such as diapers and beer. Big data made it possible to find out that quite often these items were part of the same sale. This finding made Walmart decide to place these products in close proximity to each other in store to promote their sales.

Given the seemingly unstoppable growth in the use of the Internet as well as in the volume of Internet related laws and regulations, Professor Zhu tried to answer two related questions frequently asked by academics (especially social and management scientists), government officials, and businessmen: Does the presence of a favorable legal environment encourage the above described EC growth? And is there any scientific evidence that demonstrates the positive impact of a favorable legal environment?

During a period of five years, Professor Zhu conducted rigorous empirical research at multi- levels and using multi-methods such as secondary data, surveys and interviews with firms in the U.S., China, Taiwan and Hong Kong. Among his conclusions was that the presence of an adequate legal system, i.e. one that recognizes and protects EC practices, is a precondition of widespread e-commerce usage. Certainty and security are two of the biggest concerns before businesses in the adoption of EC practices. He found that, however, legal adequacy is not the direct determinant of the levels of EC usage after businesses adopted EC. His data suggested that sophistication and extensiveness of business usage of EC are primarily driven by business needs (e.g., customer or supplier requests, competitive pressure, and common or best practices in the industry), and government encouragement (e.g., financial incentives, supporting policies, and role models).

15 B. Chile

Mr. Prieto is an attorney at the law firm Saldivia, Contreras, Inalaf, Wurth & Verdugo, one of Chile’s most prestigious. Mr. Prieto provided statistics to underscore the growing importance of EC in Chile and in Latin America. He noted that in 2015, EC will reach a volume of US$1500 billion worldwide, of which US$60 to US$70 billion will take place in Latin America. Chile shows a similar growth rate for its EC trade. In the past three years, the number of online companies or shops in Chile has doubled, so much so that the Santiago Chamber of Commerce estimates the annual EC sales in 2015 could exceed US$2 billion with annual growth rate of 20- 30%.

According to Mr. Prieto, EC used to be characterized as any form of transaction or exchange of goods and services or commercial information that was transmitted and consummated through the Internet. EC transactions touch many areas of the law, such as commercial and consumer law, pre-contractual liability, consumer protection, personal data protection and liability for defective products. In addition, they are subject to the laws of taxation, customs and others. Mr. Prieto stated that in Chile there is no specific act or law on electronic commerce. In the absence of such a unifying act, Chile has been inserting specific EC rules in different broader scoped statutes, such as the insertion of criminal rules on matters of privacy in Law 19.423 Act of 1995. Relationships between customers and suppliers are governed by an Act 19.496 of 1997. Issues related to personal data protection are governed by Act 19628 Act of 1988 which, incidentally, has already several modifications and matters related to electronic commerce and signatures are regulated by Act 19799 of 2002.

Faced with this diversity, Chile’s legislative system of scattered acts and statutes relies heavily on “self-regulation.” This is consistent with the dynamic nature of EC which requires governance by efficient best practices: suppliers want to be paid as soon as possible and buyers want to receive goods as quickly and reliably as possible. How has Chilean law responded to the pressures of transactional efficiency? According to Mr. Prieto, when it comes to quick and reliable payments, Chile has developed an interesting framework for electronic payments by fostering a major inter-bank agreement that has generated a safe and efficient system designed to protect the interests of those involved in each transaction and the fiduciary duties of the banking system. This major agreement has the approval of the governmental authorities that issue mandatory regulations for financial institutions.

According to this major electronic payments agreement, a fund transfer is understood as an operation performed by electronic means. Some examples are: a) a money payment made directly from one banking account to another; b) an automatic transfer of funds made by one client from one account to another; and c) a payment order to pay third parties. Besides having to comply with the major agreement, financial institutions must also comply with other best payment practice requirements. It is safe to say that Chilean banks have generated the necessary conditions for the expansion of EC by establishing an electronic payment system for transfers.

16 As noted earlier, there is no EC act in Chile that applies to consumers. However, EC traders aware of the importance and the fragility of trust in EC have created a private standard agreement sponsored by the Chambers of Commerce of Santiago. It is a code of good practices for EC whose objective is to serve as an ethical guide for suppliers for the benefit of consumers who make purchases from suppliers through electronic systems. To achieve this objective, this private code sets forth principles and standards that must be adjusted to the peculiarities of the various businesses thereby creating a system of trust between suppliers and consumers. Suppliers must accept the code as a regulatory system in two ways: i) by the single fact of being part of the Chamber; or ii) by the unconditional and unqualified consent given by the representative of the supplying enterprise. Sanctions include the ban of enterprises found guilty of a breach of the code. Mr. Prieto concluded by suggesting that the focus of future uniformity or harmonization should be on the adoption of generally accepted standards and agreed upon best international practices.

C. Colombia

Mr. Santiago Renjifo, head of the Colombian secured transactions registry, focused on the security aspects of e-communications within the Colombian Secured Transactions Registry. When the platform for the secured transactions registry was first established, Colombia’s biggest concern was the likelihood that the information coming in or exiting the registry could be stolen by spyware. Thus, the main EC question was how to make the best possible use of Colombia’s EC laws. The drafters of the Colombian Secured Transactions Law took into consideration the EC laws (enacted in 1999 and 2008) and used them to draft rules that applied to the registry e- communications.

According to Mr. Renjifo, when it comes to the Colombian registry, a lender who is also the filer assumes responsibility with regards to the information that he inputs into the system since the registry does not verify or assume legal responsibility for the factual or legal validity of that information. In addition, because the information inputted just identifies the lender, debtor, amount and description of collateral, there is no need for any other financial information to be governed by EC laws. Thus the responsibility for what is filed is not the Registry’s but the lenders. In effect, the registry only acts as a webmaster. The only information that is validated by the registry is that regarding the lender. The registry makes sure that the lender is an entity or an individual registered in Colombia. This validation is performed by the registry prior to the lender being able to make a registration and the registry’s platform is “cloud” based. Finally Mr. Renjifo expressed that the Colombian Superintendence of Finance requested that the Colombian registry adopt some security protocols. This means that when banks do filings for large numbers of secured loans, the same security protocols of banks are used by the registry, therefore assuring that the information being passed on cannot be breached.

17 D. China

Dr. Kevin Luo is the General Manager of Microsoft’s Asia Research and Development Group and, given his dual Chinese and U.S. legal and engineering background, was an ideal moderator for the EC panel discussion.

i. Salient Features of Chinese National and International EC.

According to Dr. Luo, EC is growing exponentially in China. Overall, EC transactions (Jan– June 2014) were close to US$1 trillion (this number refers to EC in general including B2B and B2C) and growing at 35% when compared to 2013. The growth of retail sales alone B2C is even more significant. During the first six months of 2014, EC transactions amounted to US$175 billion with a growth rate of 44%, and retail sales have grown 12% when compared to 2013. Finally online retail transactions represent 8.7% of total retail sales of consumption goods in China.

Chinese companies have also implemented an extremely efficient delivery system for online purchases: the moment a buyer places an order, s/he receives an email or text message that includes not only the time and place of delivery, but also the cellphone number of the delivery person so that the purchaser can speak directly to him and modify the terms of the delivery if needed. Important developments have taken place in domestic EC transactions in China. Alibaba—China’s largest EC company that provides C2C, B2C and B2B sales services via web portals— has established in China a business date to encourage sales similar those that occur on Black Friday in the U.S. The day selected by Alibaba is November 11 and it has been nicknamed “Single’s Day.” When comparing the domestic sales on these two dates in both countries, U.S. sales amount to US$4.5 billion and Chinese sales amount to US$9.1 billion.

Cross-border online retail sales (inbound and outbound sales into and out of China) have also increased dramatically. In February 2014, Alibaba created an online market place called Tmall that serves Chinese customers who buy from overseas suppliers. During Chinese Single’s Day, online retail sales amounted to US$80 million including Chinese purchases of US$80 million worth of goods from countries such as Korea, Japan, and Europe. Sales made online by Chinese people to other parts of the world encouraged by AliExpress—also a branch of Alibaba— received US$6.8 million orders during Single’s Day from 217 countries. Besides attesting to the extraordinary level of globalization, this data evidences that foreigners are now taking advantage of Singles’ Day to purchase cheaper Chinese goods.

ii. Principal Sources of Chinese National and International EC laws

The New York Convention on the Use of Electronic Communications in International Contracts (2005) (“New York Convention”) was signed by only 20 nations, mostly developing countries in Asia and Africa. In contrast, the Model Law on Electronic Commerce (“Model Law on EC”)

18 promulgated in 1996 by UNCITRAL has been adopted by at least 130 countries, including China, France, Hong Kong, and the U.K. and U.S. As noted by Dr. Luo, the countries that have adopted this Model Law do not need to adopt the New York Convention. The UNCITRAL Model Law was the first international legislation to adopt the three fundamental principles of international electronic commerce law: i) non-discrimination, ii) technological neutrality and iii) functional equivalence between paper based and electronic communications. The other important piece of international EC legislation is the UNCITRAL Model Law on Electronic Signatures.

China has adopted: a) UNCITRAL Model Law on Electronic Signatures (PRC’s 2004 Electronic Signature Law); and b) the Model Law on EC, now a part of the People’s Republic of China Contract Law of 1999. Article 11 of the Chinese Contract Law validates electronic contracts. Article 16, in turn, provides that an offer transmitted through electronic means is effective when it reaches the offeree. Further, if the offeree-recipient of an electronic message designated a specific system to receive it, the time when the electronic message enters that system is deemed its time of arrival. Meanwhile, Article 34 provides an important conflicts of law rule by designating the law of the place of formation of the electronic contract as the applicable law.

The PRC also adopted a Consumer Rights Protection Law (amended in 2013). Article 27 provides for a seven day “no reason” return period for EC purchases (with limited exceptions). Article 44 grants to consumers a cause of action against the third-party platform (“platform”) service providers if their platform fails to provide identity and contact information of the actual seller. After compensating the consumer, the platform may seek indemnification from the actual seller.

China’s State Administration of Industry and Commerce (SAIC) regulates consumer transactions. Its regulations on online transactions cover, among other aspects, mandatory disclosures to consumers and unfair competition practices. In 2013, nine Chinese important ministries, including SAIC, jointly issued “Opinions on Policies Supporting Cross-Border Retail Exports.”

iii. A Proposed Topic for Legal Uniformity: A Uniform Choice of law for Cross- border EC

According to Dr. Luo, legal uncertainties hinder cross-border Chinese EC. Among these are the application of the laws of taxation, foreign exchange control, restrictions on third party payment platforms and import/export controls. In addition, cross-border logistics and warehousing practices also hinder China’s EC as does the generalized lack of contractual and regulatory transparency. For instance, confusion prevails when customs duties must be paid for goods imported into bonded free trade zones especially when the sales are to individual consumers. There is also uncertainty as to whether the duties should be based on what is owed for goods imported in batch versus what is paid for articles for personal use imported separately.

19 There are also uncertainties regarding double taxation. For example, should the earnings on the sale of certain software be characterized as sales income or royalty income or both? On import/export controls—an obstacle for EC not exclusive to China—should they apply not only to certain goods used for national security but also those that can threaten the viability of domestic industries? Finally on the topic of lack of transparency, the Chinese government has yet to establish a database or platform that shows the consumers’ credit rating or the exporter’s transactional history.

Dr. Luo suggested the topic of a “uniform choice of law rule applicable to EC disputes” as ripe for uniformity since it is not a politically sensitive topic and could be a helpful contributor to legal certainty. Disputes involving Alibaba’s Tmall division illustrate the need for a uniform choice of law rule. Tmall is registered to do business in Hong Kong, where it also services the goods sold by foreign sellers to Chinese consumers. The alternative dispute resolutions law applicable to claims against foreign sellers is usually that of Hong Kong and the Hong Kong Arbitration Center is the forum for such disputes. The only pre-condition for this to take place is that the seller must be a Non-Chinese foreigner. Yet, what is the law applicable to claims against Chinese importers? Is it the PRC law or also the Hong Kong Law? And if so, would the PRC’s Contract Law of 1999 be the sole source applicable to a claim against a Chinese consumer, or should it be applied in conjunction with China 2013 Consumer Right Protection Law?

iv. Chinese Free Trade Agreements and EC.

Professor Jun Feng teaches EC Law at SUIBE and is also the Associate President of the WTO Consulting Center. These two positions give Professor Feng a unique perspective on the connection of trade agreements and EC law. Professor Feng examined the interaction between Free Trade agreements (hereinafter “FTA’s”) and EC laws and concluded that it provides a fruitful perspective for the future harmonization of EC in particular and commercial law in general. He pointed out that while the U.S. has signed a total of 14 FTA’s with 20 countries, 11 of them have EC chapters or articles devoted to EC. Yet, different trading partnerships involve different negotiation strategies that reflect the difference in volumes and types of trade. Thus, while the U.S.’s trade agreements with the NAFTA countries and with Israel have no EC chapters, the U.S.’s FTA with Korea has an entire chapter (Chapter 15) devoted to EC. He anticipates similar chapters in the FTAs being negotiated by China with Australia and Korea and welcomes the presence of these EC chapters as “a useful drafting invention.”

Professor Feng regards the FTA chapter in the Korea-U.S. (hereinafter “KORUS”) as an important model. Its broad scope is highlighted by its Articles 15.2. and 15.9. The former deals with the Electronic and Cross Border Supply of Services, such as for Investments and other Financial Services. The latter defines “Digital Products” as “….Computer programs, text, video, images, sound recordings, and other products that are digitally encoded and produced for commercial sale or distribution, regardless of whether they are fixed on a carrier medium or

20 transmitted electronically.” And in connection with these products: a) neither Party may impose customs duties, fees, or other charges on or in connection with the importation or exportation, and b) neither Party may accord less favorable treatment to some digital products than it accords to other like digital products.

v. A Possible Topic of Uniformity

Professor Feng noted that despite the comprehensiveness of the definition of a digital product, the determination of whether an imported good is exempt can be uncertain. He gave the example of a cell phone: is it a digital product and thus exempt from custom duties only if it contains software? Another example was medical equipment. Consider the case of an import of medical equipment by a Chinese company as part of a set. Assume that one part of the equipment has no software in it and thus is deemed subject to customs duties. However, what if a second equipment part of the same set did have software in it? Should this second part of the equipment qualify the entire set as digital and thus exempt equipment? Professor Feng concluded that China must use its FTAs to clarify the tax status of digital imports, among other products and services.

vi. Other Challenges Faced by China’s Cross-Border EC

Along the same lines of thought of Professor Feng, Professor Fuping Gao (who is the Director of the EC Law Institute at East China University of Political Science & Law) focused on the challenges posed to cross-border EC by China’s international trade regime, especially its customs rules. Relevant statistics of China’s cross-border EC are: a) Chinese consumers spending $345 billion during 2014 shopping online, surpassing all other countries including the world’s current largest online retail market, the U.S; b) in 2013, more than 315 million Chinese consumers shopped on the internet and 7% of all digital shoppers made cross-border purchases (this represents $12.3 billion in 2013).

Should products shipped electronically (instead of physically as was the case with Professor Feng’s medical equipment) be classified as goods, services, intellectual property or something else? If digital transmissions or products are regarded as goods, they will be subject to General Agreement on Tariffs and Trade (GATT) rules, which would make electronically, shipped products dutiable. If, on the other hand, they are classified as services, under the General Agreement on Trade in Services (GATS), they will be probably be classified as not dutiable.

Another challenge presented by cross-border EC involves coping with national or domestic regulatory issues. B2C international trade means marketing products to different consumers in different cultures. This requires compliance with regulations issued by each country. Finally, cross-border EC also represents a challenge to international trade supervision. Each state has international trade regulation or policy governing import and exports (i.e. import/export control) that prohibit or limit the goods or technologies can be imported and exported. There is also an

21 international trade competition order with which cross-border EC must comply with that oversees unfair-competition, anti-monopoly and anti-dumping investigations as well as intellectual property rights protection. In addition, regulations on foreign exchange and international payment systems often respond to major national security concerns.

vii. A Suggestion for Uniformity: Should Trans-Pacific Nations adopt a Uniform Cross-Border EC Customs Duty or Tax?

Purchasing tax-free foreign goods via the internet has become so common in China that a new term has been coined by Chinese consumers: “Haiwai daigou” (purchasing consumer goods from foreign countries). As a result of the popularity of these goods, Chinese policy has recently changed. On August 1, 2014, the Chinese General Administration of Customs issued Announcement No.56 which provides that all enterprises and individuals engaged in cross- border EC have to provide a list of imported and exported items to the customs authorities. It also provides that when the value of the imported items reaches a certain amount, the authorities will impose duty. Those who do not abide by the rules are dealt with as lawbreakers or even smugglers. Hence, Professor Gao questions whether a special uniform tariff should be imposed on Trans-Pacific foreign consumer goods much as the uniform global EC tax proposed by Professor Rifat Azam of the Herzliya Radzyner School of Law of Israel.

E. Japan

Professor Naoshi Takasugi teaches Private International Law at Doshisha University’s College of Law in Kyoto, Japan. In addition to being a distinguished commercial law scholar, he was an ardent supporter and organizer of the Colloquiums. As did his predecessors in the EC panel, Professor Takasugi also stressed the economic significance of EC for Asia and the U.S. During 2013, the value of Japanese consumer online purchases from businesses located in China and the U.S. was US$1.6 billion. In return, the value of U.S. consumers’ online purchases from businesses located in China and Japan was US$6 billion and the value of Chinese consumers’ online purchases from businesses located in Japan and the U.S. was US$6.7 billion. Clearly, China has the largest EC market among these three states. It is estimated that cross-border EC among these three states will soon amount to US$34 billion, although economic downturns may lower that estimate.

In Professor Takasugi’s opinion, the steady growth of cross-border EC requires: i) transparency and predictability of the applicable law, and ii) effective and inexpensive dispute resolution systems to build consumer confidence in EC particularly in B2C transactions. He observed with respect to B2B transactions these goals are gradually being attained. In addition to the national laws that govern international EC contracts, some international instruments also address them. One such a law is UNCITRAL’s Model Law of Electronic Commerce. In addition to these national and international laws, the parties can usually select the law they wish to be applicable to the transaction and the court in which a dispute must be decided.

22 As states attempt to build consumer confidence for B2C transactions not governed by the above laws, their legislative, administrative and judicial bodies have sought to: a) limit unfair commercial conduct; and b) protect the privacy and security of consumer cyberspace communications. The solutions vary from state to state and they are not always adequate to address the problems of cross-border EC. To start out, these two topics deserve comparative legal research in order to find the best solutions.

To illustrate the types of Japanese EC practices that affect privacy and security of communications, Professor Takasugi focused on the Interpretative Guidelines on EC published by Japan’s Ministry of Economy, Trade and Industry (METI) with respect to the practice of acquiring unauthorized personal information via the Internet. It is not uncommon that internet businesses (whether involved in internet trading themselves or in managing information retrieval sites) obtain personal information and compile databases that they subsequently use and sell to marketers of goods or services. As often as not, the consumers are unaware of the fact that their personal information was obtained by these businesses, mostly through software known as “spyware.”

What are the legal problems caused by this practice? In Japan, the Personal Information Protection Act prescribes the duties to be observed by business entities handling personal information: a) the business entity shall specify to the consumer, the purpose of the information requested or otherwise obtained (Art. 15); b) the business entity has the obligation to notify the person of the purpose of utilization of the information (Art. 18). Additionally, if the business entity checks personal information by using cookies against the user who subscribed to the service, the business must notify the purpose of the utilization to the user. If the business entity collects information for marketing purposes without notifying them, it may be held liable for non-compliance with Article 18 of the Act. Article 17 of the Act prohibits business entities from obtaining personal information by deceptive or “wrongful means” and “wrongful” is defined as: i) the acquisition of personal information by falsifying the intention or purpose of such acquisition; ii) acquisition of personal information from the object person while concealing the fact of such acquisition; iii) acquisition of personal information via the information retrieval site; iv) acquisition of personal information via online shopping sites; and v) acquisition of personal information via spyware programs. Yet, under the Act, certain information acquired through the internet and collected in a form in which particular individuals cannot be identified (for example an individual’s website browsing history) by the business entity do not require the business to notify the individual user about the purpose for which the personal information will be used.

As is apparent from this detailed set of duties (and just for one EC practice) a comparative study of Trans-Pacific practices, including the harmfulness or the effectiveness of regulations including fines and other remedies, would be helpful for future legislative and adjudicatory efforts.

23 F. South Korea

Dr. Kyung Han Sohn is regarded as South Korea’s foremost EC law scholar and he drafted some of his country’s most important EC statutes. After noting the large volume of EC transactions in his country (worth US$1.2 trillion in 2013) he briefly reviewed the key EC statutes of South Korea.

i. The Most Important South Korean EC Statutes

Among these statutes are: i) the E-Documents & E-Transaction Framework Act of 1999 (hereafter “EFA”); ii) the Digital Signature Act of 1999, iii); the EC Consumer Protection Act of 2002; and iv) the Electronic Financial Transactions Act. These laws were influenced, among other sources, by the UNCITRAL 1996 Model Law on Electronic Commerce and by UNCITRAL’s 2001 Model Law on E-Signatures.

The EFA’s goals are: i) to achieve a reliable, predictable and safe EC environment; ii) to protect consumers as inexperienced participants and thereby promote the use of EC and; iii) to facilitate the quick and inexpensive resolution of disputes. Thus, it validated among others: a) the use of electronic records as legally enforceable documents; b) the reliance on certified digital signatures; c) the time and place of transmission or receipt of electronic documents; and d) the privacy of EC and the security of electronic transaction, establishing the Accredited Certification Authorities.

Prominent among the recent amendments to the EFA are: improved consumer protection measures, including a Certified E-Merchant System, and the requirement that all government contracts must be executed electronically. Meanwhile, during 2007 and 2008, other amendments replaced the storage of governmental paper documents with electronic documents and provided a stronger protection for consumers by granting them the right to withdraw offers by electronic means and to cancel/terminate contracts or return purchased goods. An additional protective measure introduced in 2012 was the establishment of a registration system for consumers who do not want to receive commercial emails. On the other hand, the EC Consumer Protection Act of 2002 (“Consumer Protection Act”) was prompted by disputes involving the payment and delivery of the goods. The Consumer Protection Act introduced an Escrow System for Payment for EC, in which a trusted third party holds the contract money on behalf of the EC buyer and releases the money to the seller when the ordered goods are delivered to the buyer.

ii. The Costs of Excessive Regulation

Some of formalistic requirements associated with the listed statutes or regulations are costly enough to hinder cross-border sales of items as innocuous as replicas of the coat worn by a South Korean television soap opera star who became highly popular with female Chinese television viewers. South Korea’s Digital Signature Act of 1999 required the authentication of the

24 signatures of the online purchasers of products such as these coats by means of an official signature certificate. Once enacted, this requirement caused a sharp drop in the volume of sold coats and caused the enactment of yet another amendment to the Digital Signature law.

iii. Recommendations of Possible Topics for Uniformity

South Korean voluminous legislation illustrates the need for a balanced normative approach. Some of the concerns about violations of privacy may be eliminated or significantly reduced by the “soon to be” E-traders’ adoption of protective technology on hacking or appropriation of private and personal data. Another effective response to the same concern may be to persuade the insurance industry to insure against the loss of privacy risks. Governments may wish to consider implementing more reasonable enforcement policies than those presently in force.

G. Conclusions and Recommendations

Following the panel discussions, Dr. Kozolchyk polled members of the panel and audience on the most appealing topics of EC uniformity. Most agreed with Professor Sohn’s warning not to get entangled with sensitive political issues, such as governmental security and traders’ privacy concerns. Dr. Luo’s suggestion of a uniform choice of law rule for cross-border EC was viewed favorably by most, as was Professor Takasugi’s suggestion of a comparative study of Trans- Pacific EC rules and practices, especially on unfair commercial conduct. This view was encouraged by Mr. Prieto’s persuasive description of Chile’s experience with a private (chamber of commerce enforced) code of best EC practices. Strong support also existed for Professor Feng’s suggested inclusion of cross-border EC rules as part of free trade agreements.

VI. INSOLVENCY AND REHABILITATION

A. The Napoleonic Fraudulent-Criminal View of Insolvency vs. the United States’ “Second Chance” Regime

The Latin American (and many other civil law countries) treatment of insolvent debtors was initiated by the Napoleonic Commercial Code of France of 1807. It dealt harshly with insolvency and often treated failed merchants as fraudsters. Chile abandoned this attitude recently as Lic. Hector Novoa, the moderator of the panel discussed in his presentation. The U.S.’ Bankruptcy Act of 1841 pioneered a more humane and optimistic view of bankruptcy and rehabilitation by adopting debtor protection provisions such as: voluntary bankruptcy filings by insolvent debtors and the lifting of the restriction on non-merchants as debtors who could avail themselves of bankruptcy proceedings, including the discharge of their liability after turning over their assets to their creditors. The effects of this approach on insolvency and rehabilitation are finally being widely recognized, not only for what it has done for honest insolvent debtors but also for society at large: many of the U.S.’ largest employers have been the beneficiaries of not only a second but also a third and a four chance in bankruptcy courts.

25 The debtor rehabilitation and insolvency panel was comprised by recognized scholars and practitioners from Chile, China, and U.S. As mentioned earlier, Lic. Hector Novoa acted as the panel moderator. Since 1976, he has been a partner at the highly reputed Chilean law firm Eluchans & Cia. He is also known for his contributions in strengthening Chile-China legal, commercial and cultural relationships. China was represented by professors Changyin Han of the Shanghai Jiao Tong University, KoGuan College of Law and Zhengshan Xie of SUIBE. Finally, the U.S. was represented through a video recording by Professor Jay Westbrook, a leading U.S. Bankruptcy scholar.

i. A Flexible Federal Substantive and Procedural Law: Liquidation and Rehabilitation

Professor Westbrook pointed out that as a federal law the law of bankruptcy in the U.S. is applied by federal courts. In contrast, the law of commercial transactions is a state law which must be consulted in bankruptcy proceedings on issues such as the perfection of a security interest. Thus, bankruptcy courts in the U.S. have to apply both federal law and state law.

Flexibility is one of the principal features of U.S. Bankruptcy law. Thus, a bankruptcy procedure is initiated voluntarily by debtors and involuntarily by creditors, although the latter procedure is rare, and U.S. law does not require that a debtor be insolvent in order to open the bankruptcy procedure. In some cases, this flexible bankruptcy procedure leads to the liquidation of the assets of an insolvent debtor, which is the mission of Chapter 7 of the Bankruptcy Act. In this procedure, a trustee is appointed to manage the assets of the debtor and ultimately sell them and distribute the proceeds to creditors

The alternative procedure to that of Chapter 7 is that of Chapter 11. Chapter 11 has two goals: i) to rescue; or ii) to sell the business as an economic unit rather than to liquidate it piece by piece as Chapter 7 does. In this procedure, existing Management (known as the “Debtor in Possession or DIP) remains in control of the company. From a legal perspective the DIP stands in the place of a trustee in bankruptcy with the same obligations to creditors. The purpose of reorganizations, then, is for the DIP to propose a plan to the creditors, obtain its approval by the court and enable the reorganized company to go back to the market place with a better chance of prospering.

The policy underlying reorganization has three goals: a) to preserve jobs by keeping the business operating as a going concern; b) to enable creditors to receive more in a reorganization than they would in a liquidation—and to maximize the value of the debtor’s assets under the principle that companies are worth more alive than dead; and c) to allow the insolvent entity to retain its management on the assumption that even though management may have weaknesses and flaws, as a rule they know more about their business than an outside party brought in as a trustee.

26 ii. Recent Trends and Procedures

The sale of assets under Section 363 of the Bankruptcy Act is a recent trend under American reorganization law. Increasingly creditors are impatient about the time it takes to go through the plan process and therefore in some cases they try to get the court to agree to a quick sale of the business without having a reorganization plan. This would happen, for example when the assets of the business are subject to loss because of market conditions. If the sale is not performed quickly the assets will be rapidly worth less. In this situation the judge may approve an immediate sale. The sale will be free and clear of all interests other than those of the purchaser which will likely produce a higher price for the asset. The second trend is to allow secured creditors gain more control over their secured assets. Third, there are more out-of-court workouts (settlements) than in the past because debtors and creditor know from experience what will happen under Chapter 11. Accordingly, they are often able to avoid the expenses and delays of litigation and obtain pretty much the same deal that probably would have resulted had they gone to court.

Another recent variant is that of debtors seeking an expedited “pre-pack” procedure that involves major creditors who have already agreed to a procedure that will flow faster through the court. Creditors in international bankruptcies are now also beneficiaries of a more efficient and fair procedure for the finding and distribution of the debtor’s assets. When a financially distressed company has assets and operations in several nations a need often arises for trans-national cooperation in locating and adjudicating the fate of assets. For this reason, the U.S. adopted the United Nations Model Law on Cross Border Insolvency as Chapter 15 of the Bankruptcy Code. This Chapter allows a trustee or administrator in a foreign bankruptcy procedure, particularly one that is taking place in the home country of the debtor company, to come to the U.S. to open and file a petition under Chapter 15. This opens up an “ancillary” or supporting procedure to the main procedure that is taking place in the debtor’s home country of origin. This procedure enables U.S. courts to help foreign trustees to find and repossess assets in the U.S. for distribution to creditors, often through the foreign proceeding. As a rule, U.S. courts are anxious and willing to assist foreign proceedings and have done so since the Model Law was adopted nine years ago.

B. The New Chilean Insolvency and Rehabilitation Law

Considering the short time that has elapsed since its enactment, Lic. Hector Novoa has been able to develop a considerable command of Chile’s new Insolvency and Rehabilitation Law (Ley No. 20.720) (New Chilean law) in force since only October 9, 2014. He noted that his presentation, in significant measure, reflected the views of the Chilean Ministry of Insolvency (Superintendencia de Insolvencia y Re-emprendimiento) on the “New Chilean Law”). Under this law, the Ministry of Insolvency has the obligation to exercise its new administrative powers which means that Chilean Tribunals on insolvency and rehabilitation matters are not as involved with these procedures as would have been required by a tradition of almost exclusive judicial

27 adjudication of civil and commercial disputes. This may cause some consternation among “strict law” judges and their admirers because the spirit of this law is to enable administrative authorities to be flexible and equitable when applying the new law.

i. The Old Regime

Some of the main problems with Chile’s preceding Bankruptcy Law were that moderate and low income parties could not afford its procedures. In addition these procedures were also slow and inefficient and did not include reliable and clear terms and time limits for creditors and debtors to develop their business restructuring plans. Consequently, no adequate incentives existed for debtors and creditors to promptly initiate insolvency proceedings. In addition, unlike U.S. law, this law did not provide an insolvency procedure for non-merchants and consumers or for “personal” as contrasted with commercial insolvencies. Neither did it clarify the status of special highly paid employees as claimants. As a result, only 7% of financially troubled enterprises in Chile used the official bankruptcy and reorganization system. The vast majority preferred to go out of business informally; thereby they often operated for a considerable time as de facto bankrupt companies.

ii. The Main Principles of the New Chilean Insolvency Law

The main principles of the New Chilean Law are: a) the setting of time limits for the proceedings; b) the reliance on specialized bankruptcy courts; c) the creation of effective reorganization procedures; and d) the protection of the assets of secured creditors and the improvements of the transparency of proceedings, including the ability to follow them online.

The purpose of the reorganization procedure is to create the conditions and incentives to reach a workable agreement for the benefit of viable businesses and their creditors. Accordingly, the agreement cannot be dilatory and should: i) be concluded in less than four months; ii) allow an automatic 30 days’ stay for the protection of debtors subject to foreclosures or attachments; iii) allow the intervention of a neutral party-observer; iv) allow the reorganization proposal to be divided into classes or categories of creditors; v) allow secured real and personal property creditors who participate in the reorganization agreement proposal to keep their priorities; vi) provide tax benefits equivalent to those provided for liquidation procedures; and vii) allow out- of-court reorganization agreements. The purpose of the liquidation procedure is to enable a quick and efficient liquidation of non-viable businesses. Accordingly, it should take place in less than 12 months in the case of formally established businesses and less than seven months in case of individual debtors.

iii. Consumers Renegotiation Procedure

This procedure is designed to enable consumer-debtors to renegotiate their debts with all their creditors in a single forum. It can be a voluntary and out-of-court procedure, with the following

28 requirements: a) the liability involved will need to be at least two or more debts from different obligations that exceed US$3,000 (approximately), are due for more than 90 days; b) and the consumers had not been defendants in a Consumers’ Liquidation Proceedings or any other enforcement proceeding, excluding labor lawsuits. This procedure also grants an automatic 30 days’ stay of executions, attachments and foreclosures and enables the Superintendence of Rehabilitation and Insolvency to act as a facilitator. The end results should be: i) that the credits of the renegotiation agreement will be renegotiated, cancelled or novated according the reached agreement; ii) that unpaid debts will be discharged; and iii) that relief and rehabilitation will be given to the responsible consumer. It also sets up a statute of limitations of five years for the filing of a new application for renegotiation of claims.

iv. Cross-Border Insolvency

Inspired by the same UNCITRAL Model Law on Cross Border Insolvency adopted by the U.S., Chile’s version contributes to the legal certainty of international trade and investment. The New Chilean Law provides for the cooperation with the foreign courts’ adjudication of bankruptcy proceedings, especially when the insolvent debtor resides in the courts’ jurisdictions.

C. Introduction to Debtor Rehabilitation in China: A Statistical and Conceptual Analysis of Values and Attitudes

Professor Han Changyin teaches and writes on Bankruptcy Law at Shanghai Jiao Tong University (SJTU). Unlike Chilean law, Chinese bankruptcy law does not have rules on consumer bankruptcy and does not apply to banks and other financial institutions. In addition, it has developed autochthonous features which Professor Han’s statistical and cultural analysis has helped to discern.

i. Statistical Information

Professor Han detected geographical trends and changes in the frequencies of bankruptcies. Most bankruptcy cases seem litigated in the Yangtze River Delta, the Pearl River Delta, or in the developed regions of the southeast coastal area, especially in Zhejiang, Guangdong and Jiangsu provinces. He also detected a rise in the number of bankruptcies among state-owned and private enterprises in some regions. In these more economically developed areas, the bankruptcy claims against state-owned enterprises appear to have been settled in a manner satisfactory to creditors; however, in the northeast and northwest regions of China, the bankruptcy of state-owned enterprises is still a major concern for secured and unsecured creditors. Meanwhile, the number of reorganization cases is still quite small. Chinese company law includes two kinds of companies, a Limited Liability Company and a joint stock limited company. The joint stock limited company can also be divided into listed and non-listed. He defines a listed company as a joint stock limited company whose issued shares have been approved by the State Council or the securities regulatory authority to be listed and traded on a securities exchange. According to the

29 statistics he compiled, during 2013 only 43 listed companies had filed for reorganization while during the first ten months of 2009, only 80 non-listed companies filed for reorganization in the entire PRC.

ii. “Run Away” and “No asset” Cases

“Run-away” and “No asset” cases in which insolvent business owners and executives run away from their former places of business are growing in China. For example, from 2003 to 2008, 206 insolvent business owners from the Qingdao city Shandong province abandoned their assets. The number of workers affected by their departures was approximately 26,000. Similarly, by the end of October 2011, 228 business owners of the Zhejiang province fled their businesses and nine of them committed suicide.

These failures are connected with the low ratio of assets to liabilities in Chinese bankruptcies. According to the official statistics, of the 11 listed companies, five companies’ liabilities exceeded assets by 200%, in another five companies the excess of liabilities over assets ranged between 100%-200%; only one company had less than a 100% ratio of liabilities to assets. For those listed companies whose liability to assets ratio was that high, the reason they survived was that China’s stock market adopted an approval system in which the “shell resource” of listed companies had a special value.

These above statistics appear to support the Chinese debtors’ skepticism on the likelihood of “second” chances under the prevailing Chinese Bankruptcy law and practice. In the case of suicidal debtors, the statistics could also indicate how seriously embarrassing commercial failure is to debtors and their families. Professor Han’s research on the absence of investors willing to risk their investments in reorganizing companies by purchasing all of the companies’ significant assets (“Crisis” investors) would seem to confirm that the skepticism of reorganizing debtors is well founded. He found the same reluctance among financial institutions that could have provided restructuring loans.

One of the most serious problems he found with sale-of-assets reorganizations was their lack of transparency. This problem was manifest in the reorganization of the Jianghu Ecology Company. In this case, the trustee chose Guangdong Nianhua instead of Zhejiang Nanxi River Company as reorganization investors, though the former’s price was much higher. This also raises the question: What are the selection criteria for selecting the reorganization investors? Who has the authority to choose investors? So far, the Enterprise Bankruptcy Law has not answered these questions.

Similarly, reorganization lenders are not easy to find in China. Banks are reluctant to lend to insolvent borrowers because they are not certain about the loan applicant’s ability to repay his debts. A relevant question would be the extent to which Chinese secured transactions laws allows for these lenders to acquire a “super priority” security interest in the assets that these

30 lenders enabled to purchase or borrow. Further, while investors could provide operating capital for the restructured debtor during the implementation of the reorganization plan, the operating capital during the time is being negotiated is equally important and helps to maintain or improve the management of the insolvent enterprise. He contrasts the dearth of reorganizing capital in China with the many incentives, such as priorities for creditors who finance the cost of management as well as “super priorities” and “golden” priorities that the U.S. Bankruptcy Code provides. Professor Han adds that even though Paragraph 75 of Article 2 of China’s “Enterprise Bankruptcy law” provides that “during the period of reorganization, if the debtor or the trustee borrows to continue their business’s operations, they can “set the security for the loan,” this provision is too vague to be helpful. Simply put, there are no provisions clarifying the reorganizing loan procedure and its priority vis-a-vis other creditors under present Chinese law.

An additional disincentive is the high tax burden imposed on reorganizing financial enterprises such as banks. In practice, the tax authorities often require the debtor to repay in full the tax credits they may have received if they do not agree with the reorganization plan. In order to solve this problem, many trial or superior courts consult the tax authorities on the need for the refund on a case by case basis. So far, this practice has not satisfied the expectations of litigators. The result of these disincentives is that few financial institutions file for bankruptcy in the PRC. Insolvent financial institutions often withdraw from the market through administrative procedures other than bankruptcy. In fact, aside from regulatory agencies, local governments often will be involved in the bailout of problem banks. Similarly, only a few bankruptcies of securities companies including the Guangdong International Trust and Investment Company are resolved through judicial bankruptcy procedures. Suffice to say, so far, no bank bankruptcy case has been decided under the Enterprise Bankruptcy Act.

iii. Conclusions and Suggestions

Among the most important factors that affect the reorganization practice in China is the parties’ lack of motivation to file for bankruptcy. Creditors seldom wait for the judicial procedures and seek their recovery of assets on their own and outside of bankruptcy. Debtors fear that nothing will be left with which to operate their business after a liquidation procedure and are also skeptical of renegotiation procedures. Thus, the vast majority of China’s companies’ reorganization cases are launched by creditors. To these factors, Professor Han added the negative attitude of local governments towards bankruptcies as well as the passive attitudes of the courts. He encouraged the local and national governments to change their attitude to bankruptcy and start regarding as a tool to strengthen the viability of the many deserving companies and assured them that this would strengthen the national and local economies. Thus, not only should the local governments adopt a neutral attitude between creditors and debtors but also stimulate the participation of investors and lenders in reorganization procedures. Similarly, there needs to be an improvement of the judicial role and performance. As long as the judge's performance evaluation system does not take into consideration the number of court cases, the court’s attitude toward bankruptcy cases will tend to be negative. Finally, the improvement of

31 the performance of China’s Enterprise Bankruptcy law will require the legislative, administrative and judicial buttressing of the principle the Debtors’ self-management. Debtors should be allowed to manage their own assets and affairs as debtors in possession as done under the U.S. Bankruptcy Law.

iv. Corporate Group Insolvency in China

Associate Professor Zhengshan Xie teaches commercial and bankruptcy law at SUIBE and has maintained in his writings that a corporation that enjoys a separate legal personality under Chinese law should be liquidated or rehabilitated individually not as part of a group of insolvent debtors. This is not the case when an enterprise group (i.e. group consisting of two or more separate legal corporate entities) goes bankrupt in China.

China's Enterprise Bankruptcy Law of 1986 held a similar view. None of these sources provided for group insolvency. This followed China’s Supreme Court Judicial Directives on the Trial of cases involving bankrupt enterprises issued by China’s Supreme People’s Court (Judicial Interpretation N.23 (2002). It stated: where a wholly owned enterprise set up by the debtor or an enterprise in which the debtor invests shares or the shares of which are held by the debtor is unable to repay the debts that are due and needs to repay the debts upon bankruptcy, it shall file an application for bankruptcy separately.——Art. 79 of Judicial Directives.

Many Higher People’s Courts have objected to the application of consolidated bankruptcy procedures. For example, the Guangdong Higher People’s Court stated that the court should order related enterprises with their assets combined to make a clear distinction among their assets when they file for bankruptcy and that the liquidator should be assigned to make a clear distinction among related enterprises whose assets are combined when the creditors of such enterprises file for bankruptcy and that debt consolidated liquidation is not permitted (Art. 7 of Guidelines on the Trial of the Enterprise Bankruptcy Cases, Judicial Document, No.[2003]200, Issued by Guangdong Higher People’s Court).

Similarly, a decision by Qinghai Higher People’s Court (Opinions on Regulating the Trail of Enterprise Bankruptcy Cases, Judicial Document, No. [2003]181) stated that the consolidated bankruptcy of related enterprises enjoying the independent status of a legal person is not permitted and that the case of bankruptcy must be dealt “one by one” rather than “multiple cases dealt at one time.” Nevertheless, the New Enterprise Bankruptcy Law that came into force on June 1, 2007 seemed to embody a contrary trend. Thus, despite these decisions, a dramatic change of the courts’ attitudes toward enterprise group insolvencies is now apparent: consolidation of the assets of the consolidated company is now allowed.

Yet, many of Higher People's courts have enacted new judicial guidelines that on the one hand require trial courts to adhere to the principles of separated insolvency, and on the other hand allow the courts to consolidate the assets of the companies that belong to a group in exceptional

32 circumstances. For example, Guangdong Higher People’s Court stated that “the courts can treat the affiliated enterprises in bankruptcy by means of consolidated bankruptcy according to the application of the receivers and creditors of the debtor under the conditions that legal personality or property of members of affiliated enterprise is highly commingled, or one or more members of affiliated enterprise take advantage of connected relationship to damage interests of creditors.”— — Notice on the Summary of Minutes of the Symposium on Bankruptcy Trial Practice in Certain Courts of the Whole Province, Judicial Document, No. [2012] 255.

Finally, the Supreme Peoples’ Court issued an advisory opinion on the “provisions on Several Issues concerning the Application of the Enterprise bankruptcy Law (VI) (Consultation Paper),” promulgated in 2013. Art. 1 of these Supreme Court Provisions provides that the court may allow substantive consolidation of assets when the legal personality and the assets of members of enterprise group are highly commingled and the interests of creditors are injured because of the misuse of the “connection relationship” by affiliated enterprises.

These decisions illustrate an ineffective and uncertain method of judicial decision-making. It is ineffective because it is not only self-contradictory and contributes to what is described by Professor Kozolchyk as an “invertebrate” method of rulemaking in which a normative hierarchy is ignored or rendered vague an inconclusive but this method of rulemaking affects not only the certainty of normative hierarchies, but it also encourages contradictory fact findings, issue identification, and ultimately contradictory policies. For example, how could there be a uniform or harmonious law against predatory raids by holding companies of assets that belong to their subsidiaries if it is unclear what is precisely and factually unacceptable in the raiding practices of the holding company consolidators’ of assets? Is it the intent to maximize the profits of the holding or consolidated company at the expense of the subsidiaries or separate legal entities? And if so, how was this done and what were the specific violations of commercial good faith and best accounting practices?

D. Next Steps

As it can be seen, there are major differences with respect to debtor rehabilitation and insolvency procedures between the U.S. and Chilean laws compared to the Chinese law. Thus panel participants, as well as polled members of the audience, agreed that the time was ripe for an in- depth comparative contextual study of not only statutory, administrative and judicial law but also of the related commercial and financial practices and that only after such a study is concluded, would it be possible to discuss cogently the path toward uniformity or harmonization.

33 VII. FINAL REMARKS

This document summarizes the discussions, conclusions and possible next steps agreed by the panelists in each topic area discussed at the Second Colloquium. The agreements reached vary substantially per topic when it comes to next steps. For instance, on the topic of simplified companies, most of the panelists agreed to support or communicate their support (i.e. China and Japan) to their respective delegations to UNCITRAL Working Group I with respect to the “Framework for a Simplified Company Model Law for MSME’s” proposed by Mr. Pliego. On the topic of secured transactions, it was agreed that the moderator of the panel, Mr. Rodrigo Novoa, will draft and circulate to the panelists a plan for future work in this topic area. However, outside panel discussions, both NatLaw and SUIBE agreed to collaborate in a joint pilot project for a secured transactions law and registry that will enable MSME’s in the Free Trade Zone of Shanghai to apply for lines of credit and other types of secured loans from local or international banks.

On the topic of warehouse receipts, it was agreed that additional research had to be completed in order to set in motion the drafting of a prototype electronic warehouse receipt for selected agricultural goods that could be used among the participating nations. On the topic of electronic commerce, it was agreed that Dr. Kevin Luo, the moderator of the panel, will take into consideration the suggestions made by the panelists and will make some recommendations on viable harmonization projects for the near future. Finally, on the topic of debtor rehabilitation and insolvency, it was also agreed that the moderator of the panel, Lic. Hector Novoa, will circulate a report identifying areas in which additional research could be done within the topic with the ultimate goal of achieving some degree of harmonization among the participating nations.

More information on the panelists and the events that took place at the Colloquium are available on NatLaw’s website at http://www.natlaw.com/event/second-pacific-rim-colloquium-economic- development-and-harmonization-commercial-law. Finally, NatLaw would like to thank all Colloquium sponsors, panelists and attendees for their participation in this monumental event, especially co-organizers CAF, SUIBE and the Universidad Mayor.

34