California Bar Journal
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Self-Assessment Test
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Answer the following questions after reading the MCLE article on bankruptcy in a global company. Use the answer form provided to send the test, along with a $20 processing fee, to the State Bar. Please allow at least eight weeks for MCLE certificates to reach you in the mail.

1. The pending or actual insolvency or filing of a petition for bankruptcy by a parent company in its home jurisdiction (e.g. in the U.S. under Chapter 11 of the U.S. Bankruptcy Code) has no possible legal effect on the operations of its foreign subsidiaries.

2. Australia is one important jurisdiction that prohibits an insolvent Australian company from trading and incurring debts.

3. The standards for determining insolvency of foreign subsidiaries are always the same as that for the parent company.

4. Insolvency or bankruptcy of the parent company will not automatically cause its subsidiaries to become insolvent.

5. Individuals who are appointed by the parent company to act as directors and officers of an Australian subsidiary have no potential criminal or civil liability if they allow the Australian subsidiary to continue to trade or incur debts while it is insolvent.

6. Directors of a Taiwan company do not face any potential civil or criminal liability when their company becomes insolvent.

7. Since directors and officers face little risk of potential liability, indemnity or liability insurance coverage for directors and officers of foreign subsidiaries is unnecessary in the Asia-Pacific region and legal counsel often waste time examining this issue prior to a restructuring or bankruptcy petition of the parent company.

8. If any of the foreign subsidiaries of an insolvent parent company also become insolvent, the in- house legal counsel of the parent company should examine whether the parent company may have possible shareholder liability. As a first step, legal counsel should check in which countries the foreign subsidiaries are incorporated.

9. When an insolvent parent company considers restructuring or filing a petition for bankruptcy (e.g. under Chapter 11 of the U.S. Bankruptcy Code), one of the issues that legal counsel should look into is the repayment of inter-company loans granted to subsidiaries and the remittance of dividends due to the parent company as part of the restructuring or bankruptcy plan for satisfying creditors' debts.

10. Legal counsel for the parent company will only need to apply one standard for determining declaration of dividends of foreign subsidiaries in Asia-Pacific since all Asia-Pacific countries apply the same rules.

11. The CEO of a parent company informs its in-house legal counsel that the parent company is requesting the foreign subsidiaries to pay dividends to the parent company in order to repay debts of the parent company. Legal counsel should advise the CEO that dividends may be remitted by the subsidiaries to the parent company subject to relevant local regulations related to declaration of dividends, the solvency of the subsidiaries under local law and further subject to any rules on unfair preference of payments in the relevant jurisdiction.

12. Auditors of Asia-Pacific subsidiary companies are required by local law to include going concern qualifications in the audited financial statements when the parent company faces financial difficulty.

13. If an insolvent parent company has a going concern qualification in its financial statements, its Asia-Pacific subsidiaries will therefore be deemed insolvent and their operations should immediately be discontinued.

14. Before the parent company files a petition for bankruptcy, it is prudent for legal counsel to review any loan agreements of the subsidiaries and security documents provided by the parent company on behalf of its foreign subsidiaries.

15. As there are cross-default issues that may arise due to the insolvency or bankruptcy of a parent company, it is advisable for legal counsel to check for any cross-default provisions in the parent company's or in the foreign subsidiaries' agreements as soon as possible prior to incurring a default or filing a petition for bankruptcy.

16. When a parent company prepares its restructuring plan or its petition for bankruptcy, its directors, officers, in-house legal counsel and advisors do not need to consider the operations of its foreign subsidiaries.

17. Prior to restructuring or filing a petition for bankruptcy by a parent company with subsidiaries in the Asia-Pacific region, in-house and bankruptcy counsel should consult with counsel based in the Asia-Pacific region to assist regarding local issues.

18. When a parent company faces financial difficulties and considers filing for bankruptcy, it is usually unnecessary for in-house and bankruptcy counsel to be familiar with legal issues affecting the operations of the parent company's foreign subsidiaries.

19. Prior to the filing of a petition for bankruptcy by the parent company, it is often helpful for in-house legal counsel and bankruptcy counsel to gather as much relevant information as possible about the foreign subsidiaries and their operations.

20. A useful tool for counsel to use to collect information about a parent company's foreign subsidiaries is to prepare a general type of form or outline of questions and issues affecting subsidiary operations that may be filled in with all necessary relevant information about each subsidiary.