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Chapter 7
Enterprise bankruptcy law
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Overview
Bankruptcy causes and application
Bankruptcy liquidation
Reconciliation
Reorganization
1 Overview
1.1 Concept
Bankruptcy liquidation, reconciliation and reorganization
Primary goal
Application
scope
Liquidation
Reconciliation
Reorganization
Equally distributing property
Reconstruction
Reconstruction
Large & SMEs
SMEs
Large firms
Insolvent firms
Insolvent firms
Insolvent &
firms in distress
Creditor
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Debtor
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Debtor’s investor
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Applicant
Executor
Liquidation group
Debtor
Reorganization
executor
High expenses
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Rigid procedure
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Termination
Completion of distribution
Agreement
Completion of
reorganization
1.2 Sources of bankruptcy law
Sources of bankruptcy law
Issuance time
Number of articles
Scope of application
EBL
EBL Measures
Company
Law (Ch.8)
CPL (Ch.19)
1986
2002
1993
1991
43
106
2
8
SOEs
Enterprise legal
person
LLC & CLS
Enterprise legal
person
2 Bankruptcy causes and
application
2.1 Bankruptcy causes
Bankruptcy causes
EBL
CPL
Serious losses
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Poor operations and management
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Failure to discharge due debts
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Company Law
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• SOE’s bankruptcy:
(1) It is incurred major losses
(2) Such losses are due to improper operation and management
(3) It is unable to discharge matured debts.
• Obviously the EBL is to save the SOEs rather than get rid of
them.
• Failure of repaying matured debts:
(1) The period for performing the debts has expired
(2) The debtor is evidently unable to repay such debts
• Unless there is evidence to the contrary if the debtor ceases
to matured debts continuously, it is presumed that such
debtor is unable to discharge matured debts.
• SOEs’ exemption:
(1) public utility enterprises and enterprises having important
relationship to national economy and people's livelihood, for
which relevant government departments grant subsidies or
adopt other measures to assist the repayment of debts
(2) enterprises having obtained guarantees for the repayment
of debt within 6 months from the date of the application for
bankruptcy
2.2 Bankruptcy application
2.2.1 Eligible applicant
• Both creditor and debtor may apply for bankruptcy
• Before SOE as debtor dong so, he shall seek approval
from his competent government departments.
2.2.2 Submission of application
Debtor’s application:
(1) written bankruptcy application
(2) evidence the enterprise itself
(3) legal representative and major responsible persons
(4) situation of the workers and staff and plans for their settlement
(5) written statement on the enterprise’s losses attached with audit report
(6) balance sheet including tangibles, intangibles and investments up to the
bankruptcy submission
(7) detailed situation of the accounts in the financial institutions including
account approval document, account number and funds
(8) situation of the enterprise claims including the name and domicile of the
debtors, amount and time of debts as well as their information of
collection
(9) situation of the debts including the name and domicile of the creditors,
amount and time of claims
(10) guarantees involving the enterprise
(11) litigations occurred
(12) other materials deemed necessary by the court.
Creditor’s application:
(1) facts and evidences of the claims
(2) nature and amount of the claims, and their security status attached
with evidences
(3) evidences showing the debtor’s failure of repaying matured debts
2.3 Acceptance
• Within seven (7) days.
• Causes for rejection:
(1) debtor conceals or transfers property so as to escape the debts
(2) creditor intends to defame the goodwill of the debtor and disrupt
fair competition through bankruptcy application
• Appeal against rejection ruling is allowed
2.4 Declaration of claims
• Within 10 days after receiving detailed list of debts submitted by
debtor, court notify known creditors
• Creditors having received notice: 1 month from receipt to declare
• Remaining creditors: 3 months after the public announcement to
declare
• Else, regarded as automatic waiver
3 Bankruptcy liquidation
3.1 Creditor’s meeting
• Non-permanent organization consisting of all
creditors having declared claims
• Chairman: court’s appointment
•
Powers and functions:
(1) examine materials of proof relating to the claims, and to
confirm the amount of such claims and whether or not
the claims are secured
(2) discuss and adopt the draft reconciliation agreement
(3) discuss and adopt the plan for the disposition and
distribution of bankruptcy property
• First creditor’s meeting: convene by court within 15
days after the expiration of the claims declaration
period
• Subsequent meetings convene by:
(1) court or the chairman of the creditor’s meeting when
deeming necessary
(2) liquidation commission or creditors whose claims
comprise more than one fourth of the total unsecured
claims
• Ordinary resolutions: 1/2 affirmative votes of creditors
with voting right + 1/2 of total unsecured claims Draft
reconciliation agreement: 2/3 total amount of
unsecured claims
3.2 Bankruptcy declaration
• Once declared bankrupt, it is irreversible
• Causes for declaring bankruptcy:
(1) debtor unable to repay the matured debts & fails to perform
the reconciliation agreement;
(2) in course of reorganization: creditor’s meeting has applied
for the termination due to continued worsening in the
debtor’s its financial condition
(3) in the course of reorganization: debtor engages in fraudulent
bankruptcy acts seriously harming the creditor’s interests
(4) upon expiration of reorganization: debtor unable to repay its
debts in accordance with the reorganization plan
• Appeal against bankruptcy ruling is allowed
3.3 Liquidation group
• Permanent body to administer the bankruptcy
affairs
• Creation by court within 15 days from
bankruptcy declaration
• Members:
competent government departments
liquidation intermediary organizations
accountants and lawyers
• Responsibility:
(1) take over the assets sheets and accounts of the tangible property, and all
the property, accounts, documents and files, seals, licenses and relevant
materials from the bankruptcy debtor’s legal representative and other
personnel
(2) put bankruptcy property in order, prepare balance sheet and claims and
debts statement, and organize the their appraisal, auction and converting
into cash
(3) recover the property of the bankruptcy debtor and exercise property
rights against the debtors and property holders
(4) manage and dispose of the bankruptcy property, and decide whether to
perform contracts and carry out operations within the scope of liquidation,
and confirm the right of repossession
(5) entrust eligible organizations to appraise and auction the property and
other works so as to convert them into cash
(6) draft and the execute the property disposition and distribution plans
(7) submit liquidation reports
(8) take part in the litigation and arbitration on behalf of the bankruptcy
debtor
(9) handle cancellation registration
(10) other matters as designated by the court
3.4 Bankruptcy and non- bankruptcy property
3.4.1 Scope of bankruptcy property
(1) all property the bankrupt debtor operated and managed
at the time bankruptcy was declared
(2) property obtained by the bankrupt debtor from the
bankruptcy declaration to the termination of the
bankruptcy proceedings
(3) other property rights that bankrupt debtor should
exercise
3.4.2 Scope of non-bankruptcy property
(1) property possessed or utilized by the bankruptcy debtor based on such legal
relationships as storage, custody, processing, lease, consignation, borrowing,
commissioned sale and entrusted sale; (2) mortgaged or pledged property
except for the waiver of such preferential repayment or part in excess of the
secured debts
(3) substitutes for the extinguished collaterals
(4) the property on which preemptive rights exist according to the law except for
the waiver of such preferential repayment or part in excess of the preferred
debts
(5) the sale of specific things where the payment has been made in full but the
possession has been transferred
(6) the property title or property rights transfer have been completed but the
property has been delivered to the buyer
(7) in the conditional sale where the bankruptcy debtor has not obtained the
title yet
(8) exclusive State-owned property whose circulation is prohibited
(9) property owned by the trade union
(10) welfare facilities such as the kindergarten, schools and hospitals of the
bankruptcy debtor
3.5 Bankruptcy claims
3.5.1 Scope of bankruptcy claims
Only confirmed as bankruptcy claims can the creditors obtain
repayment from the debtor.
(1) unsecured claims occurred before the bankruptcy declaration
(2) secured claims occurred before the bankruptcy declaration
whose preferential repayment have been abandoned
(3) secured claims occurred before the bankruptcy declaration,
the claims in excess of the value of the collaterals
(4) upon bankruptcy of the drawer of the negotiable instruments,
the claims occurred due to the drawee or acceptor make
payment to the bearer without the knowledge of the facts
(5) upon discharge of contract by the liquidation group, the claims
of the counterpart according to the law or contractual
provision which can be measured in cash
(6) claims occurred when the debtor’s agents handled
entrusted matters in the interests of the debtor
(7) claims arising from the guarantor’s recourse rights against
the debtor after discharge the debts on the debtor’s behalf
(8) claims arising from issuing bonds
(9) claims of the debtor’s guarantor declared for the advance
exercise of recourse rights according to Art.32 of the STL
(10) in the case of debtor as guarantor, the guarantee liability
confirmed by judicial documents effective prior to the
bankruptcy declaration
(11) compensation liability of the debtor for tort or breach of
contract causing losses to others
(12) other claims recognized by the court
3.5.2 Scope of non-bankruptcy claims
(1) fines and other fees imposed on the debtor by the
administrative or judicial organs
(2) late fee for the payable items after the court’s acceptance
of the bankruptcy case
(3) interests on the claims after the bankruptcy declaration
(4) the expenses of creditors for participating in the
bankruptcy proceeding
(5) shareholder’s rights on the debtor’s stocks and capital
contribution including that of the employees as
shareholders
(6) claims declared to the liquidation group after the
commencement of property distribution
(7) claims whose limitation of action has lapsed
(8) the management fees and contracting operation fees
charged by the debtor’s sponsors
(9) the funds allocated to the debtor without compensation by
the government
3.6 Bankruptcy fraudulent acts
6 months prior to bankruptcy acceptance until bankruptcy
declaration date
(1) concealment, secret distributions or transfers of property
without compensation
(2) sale of property at abnormally depressed prices
(3) securing claims originally unsecured
(4) early repayment of immature claims
(5) abandonment of the enterprise's own claims
3.7 Property distribution and sequence of
payment
Disposition of assets held by bankruptcy debtor
Category of assets
Disposition
Repossession by their property owners
Non-bankruptcy property
Realization of the secured claims by secured creditors
Bankruptcy expenses (three types of expenses)
Bankruptcy property
Employee’s wages and labor insurance expenses owed
by bankrupt debtor
Taxes owed by bankrupt debtor
Bankruptcy claims (twelve categories)
3.7.1 Property distribution
3.7.2 Payment of bankruptcy expenses
(1) expenses needed for management, sale and distribution of
bankruptcy property, including expenses of hiring work
personnel
(2) litigation expenses of bankruptcy proceedings
(3) other expenses paid in the course of bankruptcy proceedings
for common interest of creditors
3.7.3 Sequence of payment
(1) wages of staff and workers and labor insurance expenses
owed by the bankrupt debtor
(2) taxes owed by the bankrupt debtor
(3) bankruptcy claims
Illustration : GITIC’s bankruptcy property distribution
GITIC was created in the 1983 and once one of China's most prominent financial
institutions. As the investment arm of Guangdong province, the fast-growing
province bordering HK, GITIC obtained loans and issued bonds overseas to finance
local projects. It also invested in stock and property deals that went bad. It was shut
down by the central PBOC in October 1998 for failing to repay debts and declared
bankrupt on 15 January 1999 by the GDHPC as the trial court, which became the
first non-bank financial institution bankruptcy. There are 131 overseas creditors
with a claim of RMB 15.9 billion. It involves more than 80000 shareholders and the
resettlement of 629 employees, which are closely connected with social and political
stability. GITIC’s property was very complicate. It had nine securities offices, among
which three in Guangzhou, two in Shanghai, and one each in Shenzhen, Xian,
Tianjin and Puning, which should be sold as a whole. Creditor claims accepted by
liquidation group totaled RMB 26.14 billion, and the claims against GITIC totaled
RMB 38.8 billion.
The liquidation group was composed of personnel from the provincial government,
provincial audit bureau, personnel bureau and judicial administration. After putting
GITIC’s property in order, there were enormous works involving the conversion of
them into cash. The nine securities trading offices were sold as a whole. The sixtythree (63) floors building was auctioned for three times and eventually sold for RMB
1.13 billion on 11 November 2002. The Jiangwan New City was sold for RMB 350
million on 31 January 2002 and the Guangdong Trading Center was sold for RMB
389 million on 23 May 2001. The liquidation group adopted staged property
distribution, which were three times until the conclusion of the proceedings. In the
first distribution in October 2000 liquidators recovered RMB 755 million in cash and
realized RMB 476 million by selling recovered assets, the creditors obtained an
initial RMB 1.0027 billion, i.e. 3.84 percent of total approved claims. In the second
distribution on 28 June 2002 the creditors obtained RMB 820 million, and
repayment rate raised to 7.38 percent of the total approved bankruptcy claims. In
the third distribution on 28 February 2003 the creditors obtained the final RMB 700
million. Putting the three distributions together the creditors obtained RMB 2.536
billion, and the repayment rate was 12.52 percent. That means if the GITIC owed
you RMB100, you may get back RMB 12.52. After the third distribution the GDHPC
ruled the termination of the bankruptcy proceedings lasting for four years, i.e. from
January 1999 to February 2003. It is reported that the liquidation group would
survive the termination so as to collect the un-recovered property and distribute it to
the creditors in the future.
3.8 Termination of bankruptcy proceedings
4 Reconciliation
4.1 Comparison between reconciliation and
reorganization
4.2 Reconciliation proceedings
• EBL links reconciliation with reorganization
• Reorganization is proposed and organized by the competent
government departments
• Reconciliation is treated as the prerequisite of re-organization,
reorganization is natural outcome of reconciliation
• Debtor may simultaneously apply for reconciliation when
filing for bankruptcy
• After court’s bankruptcy acceptance, both debtor and
creditors may do so
• Reconciliation agreement: submission to court for confirmation
• If confirmed, termination of bankruptcy proceedings
• Secured creditors may exercise their respective real rights over
the secured things after agreement
• Agreement: binding upon debtor and all creditors
• Undeclared claims may be repaid
• If debtor fails to repay the debts, creditors may apply to court
for enforcement and for bankruptcy declaration.
5 Reorganization
• Since late 1990’s there are a number of informal restructuring activities
mainly involving the SOEs
• Debt restructuring plans usually comprise government injections of
assets into the enterprise, asset sales, or one-off cash payments.
(1) Asset injections: common component of debt restructuring plans
(2) Asset sales: virtually all enterprises in distress undergoing the
restructuring process have surplus assets not fundamental to the
operations of the business
(3) One-off payments
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Reorganization plan: 2/3 affirmative votes of the ascertained claims
If approved, it shall be submitted to court for approval
If ratified by court, administrator is responsible for its execution
Upon complete execution of the reorganization plan the court rules
the termination of the bankruptcy proceedings at the administrator’s
request
• If reorganized enterprise fails to perform the reorganization plan
without due causes, court may rules the termination of such plan at
request of interested parties. If reorganized enterprise meets the
bankruptcy cause, the court shall declare its bankruptcy
Illustration: GDE’s restructure
GDE was Guangdong province's main investment arm based in HK. It was created in
the early 1980’s to raise funds in the international markets for the development of
hundreds of companies in Guangdong province. By late 1998, GDE faced an immediate
need to restructure more than $5 billion in debt for international lenders and
bondholders. Goldman Sachs was retained to advise the Guangdong provincial
government on the restructuring under the supervision of the former deputy governor
Wang Qishan. The GDE restructuring was no less monumental a task. The
restructuring also involvd GDE's Hong Kong-listed units, i.e. Guangnan (Holdings)
Ltd and Guangdong Investment Ltd (GDI). According to the restructure plan
Guangnan creditors would receive HK$775 million cash from a rights issue, HK$650
million of new Guangnan debt and all the non-core assets of Guangnan. GDI would get
an 81 percent stake in the Dongshen Water Supply business and HK$155 million cash
from the Guangdong government in exchange for 2.3 billion new GDI shares and other
assets. GDI's debt of HK$ 4.5 billion would be rescheduled with more than 40 percent
to be repaid in five years and the remaining debt to be refinanced, and sell HK$1.6
billion assets over five years for debt repayment. Such restructuring would involve the
creditor’s loss of at least 21 percent, i.e. around $ 2 billion and the Guangdong
government as the debtor’s asset injection valued around $ 2 billion. That is to say,
such restructuring involved equivalent compromise from both the debtor and the
creditor. It turned out to be a very successful restructuring highly commended by the
international financial community.
Illustration: Zhengbaiwen’s restructure
Zhengbaiwen is the listing code of the Zhengzhou Baiwen Co. Ltd. in the
Shanghai Securities Exchange. Its predecessor was founded on the bases
of Zhengzhou Department Store and Zhengzhou Timepieces &
Stationeries Company under the name of Zhengzhou Commodities &
Stationeries Company. In December 1988, its predecessor was
reorganized to CLS and adopted the name of Zhengzhou Commodities &
Stationeries Company Limited and in December 1992 its name was
changed to Zhengzhou Baiwen Co., Ltd. (Group). It operated the
department store, retails and whole-sales commodities and stationeries
and variety of other goods. It was once one of the 500 largest enterprises
in service trades. In September 1994, it was granted the right of
operation of import & export by the former MOFTEC. It also engaged in
printing, transportation and tertiary industry.
It was listed on the Shanghai A share stock market in 1996. It has lost
RMB 1.5 billion and owed RMB 2.5 billion in bank loans. It has just
RMB 600 million worth of in assets. In order to avoid an embarrassing
bankruptcy and also relieve small investors who would otherwise get
nothing from the bankruptcy, the debt-ridden State-owned department
store in the capital of Henan province, Zhengbaiwen tried to restructure
its business and assets. Restructuring began when the Construction
Bank of China, Zhengbaiwen's biggest creditor ordered its assets
management subsidiary Cinda to negotiate the debts with the
Zhengzhou municipal government, the store's biggest shareholder.
Cinda also appealed twice to the CSRC to let Zhengbaiwen go bankrupt,
but met with strong resistance from local authorities. The Zhengzhou
based court also rejected Cinda's application requesting for
Zhengbaiwen’s bankruptcy.
After lengthy negotiation it reached reorganization agreement with the
Sanlian Group, a Jinan-based company with diverse interests. Sanlian
would take over the store and up to 50 per cent of stake in the listed
branch of the company. The local government's holdings would be
phased out from the store, and loan liabilities would be divided three
ways: the parent company of Zhengzhou Baiwen, Sanlian Group and
Cinda. In return Sanlian would pump RMB 300 million into the
Zhengbaiwen, and Cinda would waive part of the loan liabilities. On the
2001 Zhengbaiwen shareholder’s meeting such reorganization was
passed by an overwhelming majority. Over 90% shareholders attending
the meeting voted for the plan. Thus Zhengbaiwen’s shareholders
including the shareholders of legal person shares and negotiable shares
should transfer 1/2 of the shares they held to Sanlian. Over 90%
shareholders attending the meeting voted for the plan. 111862 shares
held by 39 dissident shareholders would be bought back at a fair price
and written off later. Other shareholders did not show any objection to
the restructuring would transfer 1/2 of their shares to Sanlian for
nothing.