Introduction This briefing complements our other publications on corporate restructuring and the sale or purchase of distressed assets.
What are the options for companies in financial difficulty in the PRC?
The PRC Enterprise Bankruptcy Law (EBL), which came into effect on 1 June 2007, offers a formal restructuring regime for a company in financial difficulties to work out a reorganisation plan and rehabilitate its business. The reorganisation procedure is court driven and is similar in many ways to the English law administration regime. During the process of reorganisation, any bankruptcy proceedings are suspended and secured creditors are not permitted to enforce their security rights against the debtor’s assets without leave of the people’s court.
The alternative procedures are liquidation or compromise.
How does informal contractual debt restructuring work?
Parties may agree debt restructuring arrangements without going to court. However, such arrangements must not jeopardise the interests of any other creditors else they may subsequently be declared invalid in any court bankruptcy proceedings.
What are the formal procedures if informal contractual arrangements cannot be agreed?
Under the EBL, a company may apply for liquidation or compromise when both a ‘cash flow test’ (i.e. it is unable to pay its debts as they fall due) and a ‘balance sheet test’ (i.e. its liabilities exceed the value of its assets or it is obviously incapable of paying its debts) are satisfied. To be eligible for a voluntary petition for reorganisation, a debtor only needs to establish that it is about to become insolvent.
A creditor is entitled to apply for liquidation or reorganisation proceedings against the company if the ‘cash flow test’ is satisfied.
A shareholder which has contributed more than 10 per cent of the registered capital of the company is also entitled to apply for reorganisation in a creditor-initiated proceeding.
How is a formal restructuring implemented?
The EBL allows for the restructuring of insolvent enterprises at the request of a debtor, creditor or an investor holding at least 10 per cent of the registered capital of the debtor. Once the court agrees to such request, the reorganisation period begins.
During the reorganisation period, an administrator assumes management of the company. However, the EBL allows, upon request, the company’s management team to continue to manage the company under the supervision of the administrator. The company or administrator must submit a draft business restructuring plan aimed at improving the company’s financial performance, including restructuring of debt. Unless the court grants an extension, the reorganisation plan must be submitted to the court and a creditors’ meeting within six months of commencement of the reorganisation period.
Upon receipt of the reorganisation plan, the court must convene a meeting of creditors to vote on the plan. The creditors are divided into four classes: secured creditors, creditors with employment-related debts, tax creditors and other unsecured creditors. The approval of each class is determined by the affirmative vote of a majority of the creditors in that class present and voting, and representing two-thirds in value of the debt held in that class - each class must approve the plan.
If the creditors reject the restructuring plan, the company or the administrator may apply to the people’s court to approve the plan provided that it meets certain criteria. If the plan is also rejected by the people’s court, the restructuring terminates and the debtor will be declared bankrupt.
If the plan is accepted by the creditors and the people’s court, the company will be responsible for implementing it under the supervision of the administrator. If the creditors do not approve the proposed reorganisation plan, the court, after application by the company/administrator, may approve it, provided that certain conditions are satisfied.
How can a company implement a Reorganisation Plan?
As mentioned above, the company is responsible for implementing the reorganisation plan. When the people’s court approves a reorganisation plan, the administrator transfers the assets and management functions back to the company. The administrator supervises the implementation of the reorganisation plan.
During the period of reorganisation, the company must report on the implementation of the reorganisation plan as well as its financial status to the administrator, who must submit the supervision report to the people’s court.
Who is and what are the powers of the Plan Administrator?
The concept of “administrator” was introduced under the EBL and provides that the people’s court is required to appoint an administrator upon acceptance of a bankruptcy petition. The administrator is a person or organisation responsible for managing the debtor’s property and overseeing the reorganisation process. Law firms, accounting firms and bankruptcy liquidation firms, or individuals from relevant departments or agencies, can act as administrators.
Under the EBL, the administrator’s main duty is to take over the management of the debtor’s property and business affairs, including participating in court cases, arbitrations and other legal procedures on behalf of the company, making decisions about the operation of the company and performing other functions and duties that the people’s court deems appropriate. The administrator should report to both the people’s court and the creditors.
If the creditors decide that an administrator has failed to perform its duties properly, they may apply to the court for a replacement administrator.
An administrator may resign, but only for justifiable reasons, and it must obtain prior approval from the people’s court.
What happens once the Reorganisation Plan is binding?
Once the reorganisation plan is approved by the creditors and the people’s court, it must be implemented by the company under the administrator’s supervision within the prescribed supervision period.
A reorganisation plan which has been approved by the people’s court is binding on the company and all its creditors.
The rights of a creditor against any guarantor of the company as well as other obligors who have joint and several liabilities with the company are not affected by a reorganisation plan.
What happens if the restructuring is not successful?
If the company fails to implement a reorganisation plan, the people’s court may, upon request of the administrator or an interested party, terminate the reorganisation and declare the company bankrupt.
If the people’s court terminates the reorganisation plan, the approval (and any debt forgiveness or accommodation) of the creditors is terminated and they are free to enforce their rights.
How does voluntary winding-up work?
A company may undertake a voluntary winding-up procedure if its assets are sufficient to settle all its outstanding liabilities. A liquidation committee of the company is constituted, creditors are notified and an asset distribution plan is developed for approval by the shareholders and creditors. All outstanding debts are repaid, a liquidation report is produced by the liquidation committee and approved by the shareholders, and the company is then wound up and deregistered.
If the company is unable to repay all its outstanding debts the liquidation must be conducted by the people’s court.
How is a compulsory liquidation started?
Under the EBL, a creditor may apply for a court-driven liquidation provided it can prove that the debtor is unable to pay its debts as they fall due. However, such application may not necessarily result in a liquidation of the debtor as the company or a shareholder which contributed more than 10 per cent of the registered capital may apply for a reorganisation at such time.
How is a compulsory liquidation different from a voluntary winding-up?
Both a compulsory liquidation and voluntary winding-up are regulated by the EBL. The major difference between the two is that a voluntary winding-up does not need to be undertaken with court supervision if the company is solvent and able to pay its outstanding debts.
What does the liquidator do?
Under the EBL, a liquidator’s main duties are to take charge of the business, dispose of the assets and pay the outstanding debts of the company.
In a voluntary winding-up, a liquidation committee must be appointed to supervise certain matters including settling claims and disposing of property.
The liquidation committee must apply to the people’s court for a liquidation of the company if the company is found to be insolvent during the voluntary winding-up process and, upon acceptance by the court of such application, it must hand over the liquidation to the court.
Can the PRC Court issue a winding-up order for a foreign company?
The EBL provides that PRC bankruptcy proceedings apply to the assets of a company located outside China. The EBL does not however enable a PRC court to issue a winding-up order against a foreign company.