I INSOLVENCY LAW, POLICY AND PROCEDURE

i Statutory framework and substantive law

After over a decade of consideration and consultation drafts, China introduced a new corporate bankruptcy regime, reflecting its transition to a market economy and greater accountability towards creditors. On 27 August 2006, a new Law of the People’s Republic of China (PRC) on Enterprise Bankruptcy (the Bankruptcy Law) was adopted by the Standing Committee of the National People’s Congress, which came into effect on 1 June 2007.2

The Bankruptcy Law applies to enterprises with PRC legal person status3 including domestic limited liability companies, enterprises with foreign investment, joint stock limited companies and state-owned4 enterprises. It does not apply to partnerships and sole proprietorships.

ii Policy

The court has discretion on whether to accept an application under the Bankruptcy Law. In general, many courts are reluctant to accept bankruptcy cases for two reasons: the potential for government intervention (see Section I.vi, infra) and negative publicity; and the fact that bankruptcy cases are generally complex and time consuming with the potential to impinge on the judges’ performance evaluation.5

While there is no consolidated public search system of bankruptcy cases, from the cases that have reached the press it appears that reorganisation is preferred over liquidation. Guidelines issued by the Supreme People’s Court (SPC) have reinforced this view. In its opinion dated 12 June 2009, it stated that companies in financial difficulty should be treated differently according to their circumstances.6 If a company is seeking to evade its creditors by way of applying for bankruptcy, the court should unwind any illegitimate disposal of assets and hold the shareholders liable for any such acts, both to frustrate the company’s purpose of evading its debts and to protect the interests of creditors. If a company still has realistic business prospects, the court should assist in salvaging the company by initiating reorganisation or compromise procedures.7

iii Insolvency procedures

The Bankruptcy Law contemplates three different insolvency procedures: liquidation, reorganisation and compromise, and it places emphasis on salvaging and turning around the business. The Bankruptcy Law encourages insolvent businesses to first consider choosing one of the restructuring methods, with liquidation a last resort.8

Reorganisation

The introduction of a reorganisation procedure under the Bankruptcy Law (modelled upon the Chapter 11 process under US bankruptcy law) provides a framework for a company to work out its financial difficulties with its creditors. Secured creditors are subject to a moratorium during the reorganisation period, but may apply to the court for leave to enforce a security interest if the interests of the secured creditor may be prejudiced as a result of a potential impairment or devaluation of the secured asset.9

The company subject to a reorganisation procedure can be managed by the debtor in-possession under the supervision of a court-appointed administrator or directly by such administrator.10 The administrator can be a ‘liquidating group’,11 which may consist of government officials or other market intermediaries such as lawyers, accountants and bankruptcy experts (or both).12 A reorganisation plan must be prepared by the administrator or the debtor-in-possession within six months of the commencement of the reorganisation,13 and upon receipt of such plan the court convenes a meeting of the creditors. The creditors are divided into different classes or ‘voting groups’,14 and each voting group must approve the reorganisation plan in order for it to take effect. Each voting group is considered to have approved the plan if a simple majority of the creditors present and voting at the meeting endorses the plan and the aggregate value of these creditors’ claims exceeds two-thirds of the total value of claims of that group.15

Compromise

Under the Bankruptcy Law, the debtor may apply for a court order for the commencement of a compromise, whereby the debtor has the opportunity to propose a settlement of its debts with its creditors.16 A settlement agreement must be accepted by a simple majority of the creditors who attend the meeting and are entitled to vote and who together hold no less than two-thirds in value of the unsecured debt.17 If the creditors’ meeting fails to approve a settlement agreement or the court refuses to accept the approved settlement agreement, the court should declare the debtor bankrupt.18

Liquidation

Finally, the liquidation route is the process under which the legal entity undergoing liquidation is dissolved and the creditors then share the debtor’s assets according to the order of priorities of their claims (see below).

Insolvency test

The insolvency test under the Bankruptcy Law is based on establishing that: (1) the debtor has failed to pay its debts when due, and its assets are insufficient to meet its liabilities; or (2) the debtor has failed to pay its debts when due and it is obvious that the debtor lacks the ability to discharge its liabilities.19 It should be noted therefore that both insolvency tests are predicated on the debtor being cash flow insolvent, while test (1) further requires balance sheet insolvency.20

Priorities

Under the Bankruptcy Law, secured creditors have priority in respect of the assets secured in their favour, but employment-related claims rank ahead of the claims of ordinary unsecured creditors.21 This alters the order of priority under the old bankruptcy regime, where employees enjoyed preferential treatment over all other creditors including secured creditors. The Bankruptcy Law aims to find a compromise between the competing rights of employees and the need to ensure that security rights are respected.22

Voidable transactions

The Bankruptcy Law also sets out certain circumstances under which a transaction entered into by a debtor before bankruptcy will be voidable upon the insistence of the administrator, who may apply to the court to recover any relevant assets.23 Guidelines issued by the SPC dated 16 September 2013 provide that the court should support such an application by the administrator provided the conditions set out in the Bankruptcy Law have been met.24 A creditor or group of creditors can also apply to the court if the administrator fails to make such an application.25

iv Starting proceedings

Each of the three insolvency procedures commences upon the acceptance by the court of an applicant’s application,26 but not the mere filing of the application with the court.

A debtor may file an application with a people’s court for any of the three insolvency procedures referred to in Section I.iii, supra, but a creditor can only apply for liquidation or reorganisation.27 Note that the reorganisation or compromise application can be made at any time prior to the court’s declaration of a debtor’s bankruptcy.28

In addition, a shareholder or shareholders of a debtor may file an application to commence one of the insolvency procedures. Where any creditor applies for bankruptcy liquidation against a debtor, a shareholder who holds one-tenth or more of the debtor’s registered capital may apply to the court to convert liquidation proceedings into a reorganisation.29

v Control of insolvency proceedings
Role of the court

A bankruptcy case is decided by the court of the location in which the relevant debtor resides,30 and as there are no specialist bankruptcy courts in China, cases are heard by the civil and commercial tribunals of PRC courts. The court is considered to be at the heart of the bankruptcy process, and has extensive supervisory and management powers in dealing with bankruptcy cases.

Procedural powers of the court are used to direct proceedings under the Bankruptcy Law. These include the discretion on whether to accept a case,31 the appointment of an administrator32 and the fixing of the administrator’s remuneration,33 the convening of the first creditors’ meeting,34 the approval of the reorganisation plan and its implementation,35 as well as the ability to declare the debtor bankrupt36 and to terminate the reorganisation and compromise procedures.37 In particular, note that under certain conditions the court may sanction a reorganisation plan that has been rejected by certain dissenting voting groups.38

Substantive powers exercised by a court are key to determining the parameters of a case and the rights and responsibilities of the different interest groups. A court is able to adjudicate on the amount and value of the bankruptcy estate, including revocation of preferences and fraudulent transactions,39 determine the claims of the parties in relation to the ownership of assets in the bankruptcy estate40 and approve the application of set-off rights.41 The Judicial Interpretation II also specifies circumstances in which the court should support claims for set-off.42

Role of local government

The active support of the local government is crucial to the success of any PRC restructuring or reorganisation process. Bankruptcy cases, especially those that involve large corporations that are major employers and taxpayers, can have significant local political, economic and social implications. The liquidation of such an enterprise and the consequent loss of jobs would not only affect local government income but could also undermine social stability. In practice, such local considerations are likely to influence the outcome of a case, providing local government with strong incentives to intervene. Government officials have been known to facilitate proceedings in a variety of ways, including coordinating with various stakeholders, convincing creditors (particularly local state-owned banks) to defer payments, and identifying potential white knight investors.43 For example, in the case of FerroChina44 the local government swiftly paid employees to stay at home and temporarily shut down operations, while in the case of Asia Aluminum45 the local government negotiated a stay of local creditors and convinced local banks to allow the company to continue to draw on its working capital facilities allowing operations to continue, in both instances to allow a restructuring solution to be found. The eventual outcomes of these two cases were also decisively shaped by the relationships between the local governments and the existing management.46

vi Special regimes

The Bankruptcy Law provides a carve-out for financial institutions such as banks and insurance companies given the potential systemic risk posed by the prospect of the insolvency of such institutions. In the event of a financial institution insolvency, the State Council may apply to a court for the reorganisation or liquidation of such financial institution. When the State Council takes control or custody of the management of financial institutions, it may apply to a court for a stay of any ongoing civil proceedings where the financial institution is the defendant or the party subject to enforcement.47

vii Cross-border issues

The Bankruptcy Law extends the effect of PRC bankruptcy proceedings to a debtor’s assets located overseas,48 although this relies on the cooperation of foreign courts. Whether or not foreign bankruptcy proceedings are binding in China with respect to the China-based assets of a debtor is subject to the review of PRC courts, in accordance with relevant treaties or the principle of reciprocity on enforcement of foreign court judgments. Consequently, a foreign court judgment may be recognised and enforced in China if the Chinese court finds that:

a there is a bilateral treaty of recognition and enforcement of civil judgments between China and the foreign jurisdiction or that, based on precedents of recognition or enforcement of PRC judgments in a foreign jurisdiction, a PRC court may apply the principle of reciprocity to enforce or recognise the judgment of that foreign jurisdiction;

b the foreign insolvency judgment or court order does not contravene the basic principles of Chinese law and Chinese sovereignty, security and public interest; and

c the foreign bankruptcy judgment or order does not prejudice the legal interests of a Chinese creditor.49

Despite the existence of bilateral treaties on enforcement of civil judgments, in practice enforcement of a foreign judgment based on the principle of reciprocity is rare.50 Recognition of judgments has been refused on grounds of ‘public interest’ and ‘impairment’ of the legal interests of Chinese creditors.

II INSOLVENCY METRICS

Statistics indicate that the number of bankruptcy cases heard by the PRC courts has, ironically, been on a steady decline since the implementation of the Bankruptcy Law.51

One reason for this decline is that ‘Chinese culture does not accommodate bankruptcy’52 and the concept of bankruptcy is seen as taboo in Chinese society. A well-known bankruptcy specialist cited local government bailouts and creditor reluctance as the two main reasons why insolvent Chinese companies avoid bankruptcy.53 Many companies simply choose to ‘wind up’ outside court proceedings, rather than making a bankruptcy filing, when they exit the market because of insolvency.54

China’s economic growth continues to slow against the backdrop of the eurozone’s financial crisis, decreasing exports as a result of general global slowdown, and its own cooling real estate market.55 The Organisation for Economic Co-operation and Development estimates that China’s economic growth is set to edge down further, from 6.5 per cent in 2016 to 6.2 per cent by 2017.56

Before the global financial crisis, China’s economy relied remarkably little on debt, but Beijing turned to debt as a stimulus for growth in light of the global economic downturn in late 2008. As a result, China’s total debt by individuals, companies and government soared to 282 per cent of GDP in 2014, up from 158 per cent in 2007.57

The banking sector in China is now feeling the strain of the debt burden created by years of rapid credit growth, including the swift expansion of the shadow banking sector. Credit expanded at the rate of approximately 20 per cent year on year in the first half of 2013, while GDP increased by just 7.6 per cent – one possible reason being that new debt is being used to repay interest on loans rather than making productive investments.58 In order to deleverage the economy, China has made efforts to temper the pace of total credit growth.59 However, owing to the government’s boost of provincial finances and the central bank’s accelerated monetary easing, China’s new credit in June 2015 increased the most since January 2015.60 According to the People’s Bank of China, the aggregate amount of outstanding bank loans was 99.35 trillion renminbi at the end of 2015. 61

Most of the credit stimulus in late 2008 went towards politically directed lending channelled to state-owned enterprises and local governments, resulting in overcapacity in certain sectors. A large portion was also used to fund infrastructure projects sponsored by local governments. With many of these projects generating little or no revenue, and slumping revenue from land sales (a main source of income for local governments), local governments also face growing difficulties in repaying their loans.

As the Chinese economy slows, many of the industries previously championed by the state, which were recipients of government subsidies, such as shipbuilding, solar power, wind turbines and metal smelting, are now facing shutdowns and the threat of bankruptcy.

The chairman of the China Banking Regulatory Commission in 2013 acknowledged that Chinese banks face a large quantity of maturing local government debt. In March 2015, China’s heavily indebted local governments were allowed to issue US$160 billion of bonds to pay off 53.8 per cent of provincial and municipal government debt maturing in the same year.62

So far, many Chinese banks have resorted to extending maturing loans to avoid default.63 In August 2013, several senior executives of Chinese banks signalled growing concern at the risk of rising bad debts.64 As of April 2015, industry watchers observed accelerating credit risk exposure in China, with a continuous increase in the average overdue loan period and subsequent pressure on such overdue loans to be downgraded to the non-performing loans category.65 While banks’ combined loan balance grew by 11.49 per cent in 2014, non-performing or bad loans rose at a much higher rate of 38.23 per cent.66

In general, Chinese banks’ non-performing loan levels are still very low. The China Banking Regulatory Commission announced that the bad loan ratio of the total number of loans increased to 1.75 per cent at the end of March 2016. The CBRC said the commercial banks’ credit risk is ‘generally controllable’ and the lenders’ overall capability to offset risks remains stable.67

III PLENARY INSOLVENCY PROCEEDINGS

A central theme of many cases that have been administered under the Bankruptcy Law is the issue of foreign debt (i.e., debt owed by onshore PRC entities to offshore entities).68

Unless special approvals are obtained from the State Administration of Foreign Exchange, there are limited types of PRC companies that can incur foreign debt, mainly banks and foreign-invested enterprises. The level of foreign debt that a foreign-invested enterprise can hold in relation to its equity is restricted by China’s capital controls and, unless otherwise approved, is limited to the gap between the approved total investment and the registered capital of the foreign-invested enterprise. Before 1 June 2014, assets owned by onshore subsidiaries could not be used as security for their offshore parent’s debt.69 The implications of this were twofold: offshore creditors to the offshore parent companies were not only structurally subordinated to the claims of onshore creditors of the onshore subsidiary, but they also had no direct recourse to the onshore subsidiary and hence were unable to participate as a stakeholder in respect of any onshore bankruptcy proceedings of the onshore subsidiary. Without a direct recourse to onshore assets, they were excluded from any recovery if onshore assets were insufficient to repay the onshore creditors.

Pursuant to the Administrative Provision on Exchange Control over Cross-border Security, which was promulgated by the State Administration of Foreign Exchange on 12 May 2014 and took effect on 1 June 2014,70 assets owned by onshore subsidiaries can now be used as security for their offshore parent’s debt owed to offshore creditors under certain conditions, but the proceeds from such offshore debt may not be remitted into China directly or indirectly through the usual channels of equity or debt. While this is a significant conceptual shift, the ability to use onshore assets as security will not apply if the security is to secure a bond issuance by the offshore parent company or if the offshore parent company raises offshore debt with the intention of injecting the proceeds into their operating subsidiaries in China. In these cases, the new regime does not apply and so the foreign creditors should consider other forms of credit support as they will have no recourse to Chinese onshore assets unless they lend directly to onshore operating subsidiaries.

The various cases set out below serve to highlight the implications of the Bankruptcy Law for offshore creditors of a bankrupt PRC entity and the potential courses of action open to offshore creditors to mitigate the risks involved in lending to PRC entities and to maximise their recoveries in a bankruptcy scenario.

i Wuxi Suntech

The 18 March 2013 bankruptcy filing in respect of Wuxi Suntech Power Co Ltd (Wuxi Suntech) brought into focus whether the Bankruptcy Law can, in a fair and just manner, protect and reconcile the competing interests of the various classes of creditors involved, both onshore and offshore.

Wuxi Suntech was the principal operating subsidiary of New York Stock Exchange-listed Suntech Power Holdings Co Ltd (Suntech), at one time the world’s biggest maker of solar photovoltaic products, with a market capitalisation of US$16 billion. A victim of overcapacity in the global solar industry, as well as anti-dumping investigations and tariffs implemented by the US and the European Union, Suntech defaulted on its US$541 million convertible bonds (CBs) due in March 2013, creating a cross-default with its other loans, including a US$50 million loan from the International Finance Corporation, an arm of the World Bank.71 Neither Suntech Power nor any of its subsidiaries other than Wuxi Suntech have been the subject of formal insolvency proceedings in other jurisdictions.

Interestingly, eight Chinese banks, including policy lender China Development Bank and Bank of China, filed a petition against Wuxi Suntech to commence reorganisation proceedings, which was accepted by the Wuxi City Intermediate People’s Court. Chinese banks were owed about US$2.3 billion by Wuxi Suntech. Local commentators expressed surprise that it was the Chinese banks that ceased supporting Suntech, given the potential for large write-downs for them. This was a significant move, suggesting an awareness that the usual government-sponsored bailout may not have been forthcoming to make way for a much-needed streamlining of the solar industry, as Beijing tried to move away from its previous growth model, which relied on allocating cheap capital to selected sectors. It should, however, be noted that local interests would have differed from those in Beijing given the number of jobs provided by Wuxi Suntech directly, as well as its 400 suppliers, in the Jiangsu province.

The involvement of local government surfaced early in the restructuring process in the form of Wuxi Guolian Development Group, a state-backed investment company, which took a lead role in the restructuring negotiations on behalf of Wuxi Suntech.72 This was accompanied by the appointment of Zhou Weiping, who previously worked for Wuxi Guolian, as the new president of Wuxi Suntech, replacing Suntech’s founder, Shi Zhengrong, who was forced out of his role as chairman of the board. In October 2013, Cayman-incorporated Shunfeng Photovoltaic International won a bidding process to acquire Wuxi Suntech for 3 billion renminbi.

In November 2013, more than 95 per cent of Wuxi Suntech’s onshore creditors voted in favour of a court-approved restructuring plan, mostly to be funded from the 3 billion renminbi sale proceeds, where unsecured claims of up to 100,000 renminbi would be paid in full. For all onshore debts above 100,000 renminbi, the unsecured creditors could choose between a 31.55 per cent recovery in cash payments, or a 30.85 per cent recovery in cash in addition to approximately 0.94 per cent recovery in receivables. The creditors of the US$541 million CBs were not covered by this because they were structurally subordinated to Wuxi Suntech’s unsecured onshore debt.73

Suntech’s Cayman Islands court-appointed liquidators objected to the acquisition, which amounted to a transfer of assets belonging to Wuxi Suntech’s British Virgin Islands-incorporated parent (which is a subsidiary of Suntech). In particular they challenged transfers of Suntech’s Singaporean and Japanese units to Wuxi Suntech in May 2013, which were approved by Wuxi Suntech’s court-appointed administrators and executed following the default on the CBs in exchange for the cancellation of alleged intercompany debt owed to Wuxi Suntech. The liquidators argued that these were invalid under Cayman Islands law since they were done for improper value and the group was insolvent at the time.

Despite the liquidators winning a Singaporean court judgment for almost US$264 million in respect of claims relating to the Singaporean unit acquired by Wuxi Suntech, and the commencement of further Chapter 15 proceedings under the United States Bankruptcy Court in February 2014, Shunfeng and Wuxi Suntech continued to progress the acquisition on the basis that the Wuxi court had sanctioned the onshore restructuring process. The acquisition completed on 8 April 2014.

On 4 September 2014 the Singapore High Court ordered a freeze of all of the assets of Suntech’s Singaporean unit up to a value of US$197.5 million on application from the Cayman liquidators, superceding an earlier default judgment made in March 2014. An asset disclosure was also ordered. On appeal from the initial judgment the liquidators had further contested that Suntech Singapore had a significant overlap of management with Wuxi Suntech. Moreover, the liquidators contended that the legal representative of the Chinese company (who held effective control over the movement of the Singaporean and Japanese units to Wuxi Suntech) was subsequently appointed as chairman and legal representative of one of Suntech Singapore’s key remaining subsidiaries. The Singaporean claim sat alongside two related cases brought in Shanghai for US$11 million of intercompany claims on behalf of Suntech’s international creditors, in an effort to stop Chinese recognition of asset transfers. However, there have been no further developments in these claims.

A year-and-a-half later, on 18 March 2016, the Wuxi Municipal Intermediate People’s Court in Jiangsu officially accepted a petition for the insolvency and restructuring of Wuxi Suntech. The petition was submitted by eight Chinese banks and the Court has now appointed an administration committee to manage the restructuring process.

ii FerroChina

FerroChina Limited was a Bermuda-incorporated company listed on the Singapore Stock Exchange and one of Asia’s leading galvanised steel makers. It had five operating subsidiaries in the PRC and had taken on onshore and offshore debts. On 9 October 2008, FerroChina announced that it was unable to repay 706 million renminbi in working capital loans and suspended operations at its manufacturing plant in China. On 18 November 2008, the Changshu People’s Court announced that FerroChina had entered into reorganisation proceedings, with outstanding debt of 5.2 billion renminbi. The offshore creditors encompassed holders of US$130 million notes issued by FerroChina and guaranteed by two other offshore holding companies and participants in a Citibank-arranged US$160 million loan.

In many ways FerroChina was the first landmark test case for the Bankruptcy Law and established the equality of treatment of foreign and local creditors who had lent onshore. Under the court-sanctioned restructuring plan, through the eventual sale of the five operating subsidiaries to a China Minmetal Corp-led consortium, 3 billion renminbi of proceeds were used to pay off approximately 8 billion renminbi in onshore claims. Secured onshore creditors (whether Chinese banks or PRC branches of foreign banks) would make a full recovery over four years, while unsecured onshore creditors would receive about 20 per cent of principal. Notably, the Citibank-led syndicate was expected to recover 60 per cent of its principal in respect of a US$85 million onshore registered portion of the US$160 million loan.74 Offshore holders of the US$130 million notes were, however, completely left out of the restructuring and received nothing as there was no surplus available after settlement of onshore debts.75

The principle derived from FerroChina was that the level of recovery for creditors under the Bankruptcy Law was not determined by whether a creditor was Chinese or foreign, but whether the creditor had lent to the onshore or offshore entity, and whether such lending was secured or unsecured. In this case, the offshore bondholders were effectively taking equity risk when lending to an offshore entity. Potential lenders should aim to lend where the assets are located, and against fixed assets where possible.

iii Asia Aluminum

Asia Aluminum Holdings Ltd (Asia Aluminum), a Hong Kong-incorporated holding company with three onshore subsidiaries in the PRC, once ranked as one of the top three aluminium-processing companies in the world. While the case is somewhat similar in profile to FerroChina, its offshore creditors ultimately achieved a more successful outcome.

On 16 March 2009, Asia Aluminum filed a petition for provisional liquidation in the Hong Kong High Court following a failed tender offer for its offshore debt. Asia Aluminum had net debts of about HK$2.2 billion and its offshore creditors included US$727.5 million payment-in-kind (PIK) noteholders and US$450 million senior noteholders. On 3 August 2009, proceeds from the sale of the three PRC operating entities to Golden Concord Pacific led to the estimated recovery for bondholders being 18 per cent (although recovery to PIK noteholders was below 1 per cent).76

Crucially, apart from security over shares of subsidiary companies, the bondholders in Asia Aluminum had security over certain offshore intercompany loan accounts,77 which ensured that any value that flowed offshore would flow directly to the noteholders rather than as dividends through the group structure, where cash leakage to other creditors may have occurred. The security granted over the aforementioned intercompany loans is said to have at least doubled the recoveries for the senior noteholders in this case.78

By having the relevant shareholder loans in the corporate structure assigned to them, on the occurrence of an event of default offshore creditors may have a direct claim against the onshore entities79 and would not necessarily need to resort to appointing a receiver or provisional liquidator of the offshore holding company. Alternative forms of credit support or transaction structures may also be considered by foreign creditors to boost their recovery rates: offshore financing can be granted on the condition that it is backed by standby letters of credit or guarantee facilities from Chinese or foreign banks. Some lenders might elect to lend part of the loan amount to the onshore subsidiary in addition to the primary loan to its offshore parent to enable it to take security over some onshore assets of the PRC subsidiary and to enable them to participate in any bankruptcy process as creditors of the onshore entity.

iv China Sun and Skyfame

Several courses of actions are open to offshore creditors in a bankruptcy scenario, the key being the need to take prompt – almost pre-emptive – action before formal insolvency proceedings are filed in respect of any PRC onshore subsidiaries from which offshore creditors may be excluded. The cases below serve to highlight several potential routes of action.

China Sun Bio-Chem Technology Group Co Ltd (China Sun) is a processor and manufacturer of starch products in the PRC that is listed in Singapore. In July 2009, China Sun defaulted on around US$100 million of offshore bond debt. Unsuccessful negotiations led to the enforcement by bondholders of the security over shares of the offshore holding companies and the commencement of provisional liquidation proceedings in the Cayman Islands. All the directors and management offshore were replaced first, then the offshore companies were utilised to assert management control over the onshore operating entities. Bondholders eventually received, through agreeing to a buyback of the notes by China Sun, a 36 per cent recovery – a significant improvement from the outset of negotiations where China Sun’s best offer had been 10 per cent up front and 10 per cent 18 months later.80

One of the most effective ways of exerting control over an onshore subsidiary is to replace its legal representatives. A company’s legal representative, registered with the State Administration for Industry and Commerce (SAIC), is the main contact person in a company and generally has full authorisation to act on behalf of the company (including the right to execute disposals of assets).81 Changing the legal representatives of the PRC entities can apply substantial pressure on the main controlling shareholders as well as prevent dealings with onshore assets. The removal of an existing legal representative is not, however, a straightforward process, even when offshore creditors have enforced their security over shares in an offshore entity and own the equity in the onshore company, as some local AICs may require an application for such change, signed by the former legal representative, to be submitted.82 Foreign creditors can technically apply to a PRC court to implement such a change but will have to combat political influence held by the controlling shareholders of any such onshore companies.

In China Sun, following a rejection of their application for a change in legal representative by the Wuzhong District Court, foreign creditors mitigated the influence of the controlling shareholder Sun Guiji by appealing to a court in a different jurisdiction where the controlling shareholder was deemed less influential. This led to a settlement offer by China Sun on the improved terms set out above even before a ruling was made. Another method used by the offshore creditors of Skyfame Realty (Holdings) Limited (Skyfame) was to engage the advisory services of a Guangzhou state-owned enterprise to counter the influence of the controlling shareholder and chairman of Skyfame,83 giving the creditors the ability to implement the change of legal representative. Following three years of belligerent negotiations and the commencement by the noteholders of provisional liquidation proceedings in Hong Kong, Skyfame agreed to settle both the HK$220 million bridge loan and US$192 million corporate bonds in two instalments, resulting in an 80 per cent recovery rate for offshore creditors.

v Sino-Environment

In the dispute concerning Sino-Environment Technology Group (Sino-Environment) the SPC issued what commentators have described as a game-changing ruling, recognising a foreign-appointed liquidator’s authority (in particular its authority to change a legal representative of a Chinese company). Sino-Environment was a water treatment company listed on the Singapore Stock Exchange, and its onshore subsidiary Thumb Env-Tech (Thumb) was based in Fujian. In 2008, Sino-Environment issued S$149 million of convertible bonds. By March 2009 its controlling shareholder Sun Jiangrong had defaulted on separate debt obligations to a Hong Kong investment firm, Stark Investments, to which he had pledged his shares in Sino-Environment, leading to the loss of Sun’s control of Sino-Environment.84 Investigation of financial irregularities during Sun’s tenure was initiated by Sino-Environment’s independent directors, at the behest of convertible bondholders, and identified fraudulent transfers of money, upon which Borrelli Walsh was appointed by a Singapore court as judicial manager of Sino-Environment in March 2012 and liquidator in January 2013.

In August 2010, the legal representative for Thumb, Tian Yuan, whom Sun had previously appointed, was still using his position to try to get a local court to transfer 49 million renminbi from the parent company’s onshore bank accounts to Thumb to settle debts he claimed were owed by the parent company in respect of additional registered capital.85 In April 2012, Borrelli Walsh applied to the Fujian Administration for Industry and Commerce (AIC) to become Thumb’s legal representative; however, it was unsuccessful on the basis that it could not present the company’s chops, which were in the possession of Tian. In May 2012, Tian won a counter-suit in a lower Fujian court for Sino-Environment to remit 45 million renminbi allegedly owed to Thumb in respect of registered capital, and the court refused to recognise the foreign liquidator’s authority on the technical grounds that it was not listed as the legal representative in the relevant AIC filings.86

In June 2014, the SPC overturned the Fujian court’s ruling and found in favour of Sino-Environment, following a first-of-its-kind hearing, where foreign diplomats, scholars and journalists were invited. The court recognised Borrelli Walsh as the representative of Sino-Environment as well as Thumb’s rightful legal representative, on the basis that pursuant to Section 227G of the Singapore Companies Act, Borrelli Walsh as judicial manager exercised control and management of the parent company, and Chinese company law recognises a parent company’s right to appoint its subsidiary’s representatives.87 The court acknowledged that the question of who represents a foreign shareholder (of a PRC company) should be governed by the laws of the jurisdiction in which that foreign shareholder is incorporated, in this case, Singapore law. However, note that the court avoided commenting expressly on the recognition of a Singapore court’s appointment of the judicial manager in bankruptcy proceedings commenced in Singapore, basing its decision solely on the Companies Act of Singapore. While not resolving the issue of recognition of a foreign court’s decisions made in foreign bankruptcy proceedings with regard to allocation of the bankrupt company’s assets in China, the court’s ruling is potentially significant as it effectively recognised a foreign court’s decision on the legal capacity of a receiver or judicial manager as the representative of a foreign company. This would appear to provide guidance to overseas insolvency practitioners obtaining and maintaining control of onshore subsidiaries and their assets in China through the control of the foreign shareholder’s legal representative. In particular, the deliberately public nature of the hearings showed that the court recognised the importance of this case, and sought to reassure foreign investors and lenders of a conducive investment and legal environment.

IV ANCILLARY INSOLVENCY PROCEEDINGS

There have been no significant ancillary insolvency proceedings in China in the past year and, as far as we are aware, none are pending.

V TRENDS

With the Chinese corporate sector being highly leveraged amid current economic conditions, defaults are likely to rise in the coming years. This may not, however translate into more cases being tried under the Bankruptcy Law for reasons discussed in Section III.iv, supra. Suntech was a major test for Beijing’s commitment to reforms that aimed to reduce government subsidies and investments in certain sectors suffering overcapacity and losses.88 The aggressive stance taken by the local banks in Suntech in initiating bankruptcy proceedings also signalled a shift from the prevailing corporate expectations of government-sponsored bailouts, especially in respect of large strategic enterprises. This precedent was followed by the onshore creditors in the case of LDK Solar (as discussed below). However, in the case of Shanghai Chaori Solar Energy Science & Technology, although the company was allowed to default on its bonds (involving mostly retail investors) in March 2014, this was followed by a bail-out by a state-owned bad-loan bank in October 2014, a move indicating that the government continues to prize social stability over reform. The bail-out was expected to have the effect of increasing the appetite for high-risk bonds.89

There is general acknowledgement that any bankruptcy process in the PRC, especially if involving a major enterprise, will be influenced in some way by the interests of the local government. In respect of the outcomes of any future bankruptcy cases, whether the advent of economic restructuring will prompt genuine and sustainable debt restructurings (as opposed to mere buyouts from white knight state-owned investors), will depend on how competing priorities between Beijing and each local government play out in each context.

The frequent presence of local government officials in the liquidating group implies that local government considerations will be taken into account in bankruptcy cases. As the court has significant powers under the Bankruptcy Law, it is also important that such powers be exercised by the courts with certainty and consistency, and further judicial interpretations by the SPC will be welcome in this respect.

The way the Suntech case played out originally appeared encouraging for foreign creditors, with offshore creditors maintaining future prospects of recovery through a proposed debt-for-equity swap. The administrator and the company in this case initially showed a willingness to engage with the offshore creditors from the outset to achieve a consensual restructuring. However, the debt-for-equity swap never materialised, and offshore creditors have so far been unable to obtain any recovery from Suntech’s assets in China (which constitute the majority of its assets). An offshore recovery in excess of US$263 million was made by the provisional liquidators of Suntech’s subsidiary through petitions in the Singaporean courts; however, creditors have so far been unable to recover direct value from the assets that were transferred onshore to Wuxi Suntech following the convertible bond default.

In line with previous cases under the Bankruptcy Law, there is no standard approach to bankruptcy cases, and the rate of recovery for foreign creditors will often depend on the context, in particular, contractual protections built into the relevant financing structures and any prompt pre-emptive actions taken by them at the outset, such as maintaining close communications with the administrator or exerting management control on the onshore entities by enforcement action.

Recent developments in the case involving LDK Solar (LDK), a solar company also in financial distress, has shown a markedly different approach taken by creditors and local government, which ultimately has revealed the difficulty in balancing onshore and offshore credit pressures. Despite multiple defaults, LDK had not been forced into a PRC court-administered restructuring process. Instead onshore creditors such as China Development Bank, Agricultural Bank of China, Bank of China, Bank of Communications and China Construction Bank have largely cooperated with the company, with certain creditors even supporting it with new onshore financing in an attempt to avoid local bankruptcy court proceedings.90 This in turn gave LDK time to commence, through the filing of provisional liquidation proceedings in the Cayman Islands, a restructuring with its offshore noteholders and preference shareholders.91 In September 2014 the joint provisional liquidators announced that restructuring proceedings had also been commenced in the Hong Kong courts with a view to complete a Hong Kong scheme of arrangement. Both the Hong Kong and Cayman schemes of arrangement were blessed with super majority creditor approval across three classes of creditors the following month. By April 2015, LDK had successfully restructured US$700 million of offshore liabilities and had started to attract new investors.92 The approach taken in the LDK case was heralded as a welcome contrast to the approach taken in Suntech – by addressing the restructuring of its overseas obligations without declaring bankruptcy in China, LDK was able to push for a rapid resolution and gave creditors their best chance of recovery.93 This move meant that creditors retained control of the restructuring process, as opposed to local courts, and could provide a template for the restructuring of other distressed PRC companies with both onshore and offshore debts.94 However, the restructuring of LDK’s offshore debt ultimately was in vain given the reluctance of onshore creditors to follow suit and offer credit support and haircuts to the US$2.9 billion onshore debt pile. In November 2015 LDK announced that the Xinyu Intermediate Court had accepted applications against four onshore subsidiaries for bankruptcy with over 280 million renminbi of debts due. In light of this, the New York Stock Exchange ultimately rejected LDK’s application to retain its listing, and on 11 February 2016 holders of the restructured offshore LDK convertible unsecured notes filed a winding up petition in the Cayman courts.95 On 8 April 2016, LDK announced that the Cayman courts had ordered a winding up.

Offshore creditors will need to remain vigilant to the risks of having lent to PRC companies, which become distressed and should continue to monitor closely the performance of the onshore entities, while also considering at the outset alternative financing structures that might provide them with leverage in subsequent restructurings. Pre-emptive moves early in the restructuring process by offshore creditors to maintain management control over onshore assets of the distressed company can also serve to preserve the value of such assets for the benefit of offshore creditors, as demonstrated by Sino-Environment.

Recent attention has focused on Shenzhen-based Kaisa Group Holdings Ltd (Kaisa), which defaulted on its US dollar notes in early 2015. The bondholders in this case recognised that reaching a deal with offshore creditors would be preferable to the uncertainty inherent in an onshore liquidation.96 The home-building company won support from creditors holding about 99.9 per cent of its debt through restructuring efforts in Hong Kong and Cayman culminating in schemes of arrangement being approved in both jurisdictions in June 2016. However, because the offshore bonds were governed by New York law Kaisa sought recognition from the US courts of the restructuring schemes under Chapter 15 of the US Bankruptcy Code, which was granted on 14 July 2016.97 The restructuring, which took effect on 21 July 2016, enabled Kaisa to swap its existing US$2.6 billion of offshore loans and notes into a combination of straight bonds, mandatorily exchangeable bonds and contingent value rights. It appears that Kaisa may avoid an onshore insolvency process after all.

While commentators have observed that the ruling in Sino-Environment marks a greater willingness to protect interests of foreign creditors and has the potential to facilitate future cross-border restructurings, one should note that it expressly sidestepped the issue of recognition of rulings in foreign insolvency proceedings. There remains uncertainty whether insolvency proceedings commenced by foreign creditors in an offshore jurisdiction will be recognised by a PRC bankruptcy court, especially in cases where the liquidation of a large PRC enterprise could have adverse economic and social effects in China. Meanwhile, the fight for control of the Chinese cement manufacturers China Shanshui Cement Group will continue to be watched closely as China’s Supreme People’s Court is expected to make a ruling on the temporary restraining order currently preventing former management from using the original chops of a lynchpin company. The contest before the Chinese courts has resulted in credit defaults and the company unable to legitimately open new credit lines without the chops; onshore creditors are reported to be waiting in the wings ready to seize onshore assets if necessary and offshore bondholders are waiting for the planned redemption of US$485 million offshore notes due in 2020.98 Shanshui Cement provides an example of the potential instability caused by dynastic power struggles played out across onshore-offshore company structures as Chinese family owned companies continue to grow internationally.

Footnotes

1 Ni Jiahua is a partner and Liu Tiecheng is a senior associate at Clifford Chance LLP. Ni Jiahua and Liu Tiecheng reviewed and updated the chapter, and would like to acknowledge the original authors Chen Chin Chuan and Virginia Tan.

2 Reference made to an article is to an article of the Bankruptcy Law, except where otherwise specified.

3 Article 2.

4 Except for special matters relating to the bankruptcy of state-owned enterprises within the term and scope specified by the State Council, which shall be governed by relevant State Council regulations; see Article 133.

5 Li Shuguang and Wang Zuofa, ‘The Function of China’s Court in Enterprise Bankruptcy and the Future Trend – Observations from the Background of the Four Year Implementation of China’s Existing Bankruptcy Law’, Quarterly Journal of INSOL International, Fourth Quarter 2012, p. 13.

6 Articles 2 and 3 of Opinions of the Supreme People’s Court on Several Issues Concerning Correctly Hearing Enterprise Bankruptcy Cases to Provide Judicial Guarantee for the Protection of Market Economic Order dated 12 June 2009.

7 Li Shuguang and Wang Zuofa, ‘Review of the PRC Bankruptcy Law in 2009’, INSOL International, Technical Series Issue No. 11, March 2010, p. 3.

8 Ibid.

9 Article 75.

10 Articles 73 and 74.

11 Article 24. ‘Liquidating group’ is a concept unique to China’s bankruptcy law and practice, originating from the 1986 Bankruptcy Law. The Bankruptcy Law originally retained this term to facilitate a smooth transition from the old bankruptcy law to the current law, but in practice the liquidating group acts as the administrator of large bankruptcy cases and is often controlled by representatives from local government; see Li Shuguang and Wang Zuofa, ‘The Function of China’s Court in Enterprise Bankruptcy and the Future Trend – Observations from the Background of the Four Year Implementation of China’s Existing Bankruptcy Law, Quarterly Journal of INSOL International, Fourth Quarter 2012, p. 13.

12 Article 24.

13 Article 79. Note that if a restructuring plan is not tabled to creditors within six months of the commencement of proceedings, upon application of the debtor and the administrator the court may extend the reorganisation period for a further three months, if it is satisfied that there are proper reasons to do so. If a reorganisation plan is still not submitted within the stipulated time, the court will have to terminate the reorganisation process and declare the debtor bankrupt.

14 Article 82. Note that creditors attending the creditors’ meeting to discuss the reorganisation plan shall be divided into the following groups (for the purpose of voting on the reorganisation plan): secured creditors, creditors with employment-related claims, creditors with tax claims and unsecured creditors.

15 Article 84.

16 Article 95.

17 Article 97.

18 Article 99.

19 Article 2.

20 In respect of test (1), pursuant to Article 3 of the Provisions of the Supreme People’s Court on Certain Issues Relating to the Application of the Enterprise Bankruptcy Law of the People’s Republic of China (I) dated 26 September 2011 (Judicial Interpretation I), a court can determine whether the debtor’s assets are insufficient to cover its liabilities based on the debtor’s balance sheet, audit report or asset appraisal report. In respect of test (2), Article 4 of the Judicial Interpretation I sets out a list of circumstances under which a debtor shall be deemed as lacking repayment capacity (even when its assets may be more than its liabilities). Note that this list is not exhaustive, and therefore the court is vested with certain discretion to determine whether the debtor lacks repayment capacity.

21 Articles 109 and 113.

22 Under the Bankruptcy Law, employment-related claims that accrue prior to the date of promulgation of the Bankruptcy Law (i.e., 27 August 2006) will rank above secured creditors (Article 132). This means that where unsecured assets are insufficient to repay employment-related claims that accrued prior to 27 August 2006, employment-related claims can be repaid from secured assets prior to satisfying the claims of secured creditors.

23 Voidable transfers refer to certain transactions relating to the debtor’s assets entered into during the period of one year before the court accepts the bankruptcy application, while voidable payments refer to preferential payments made to any particular creditor or creditors during the period of six months before the court accepts the bankruptcy application (Articles 31 and 32). Article 31 provides the circumstances under which a transaction may be deemed a voidable transfer of assets: (1) transferring assets for no consideration; (2) entering into transactions at a manifestly unreasonable price; (3) granting security over assets for pre-existing unsecured debts; (4) prepaying debts that are not yet due; and (5) releasing debt claims. Concealing or transferring assets for the purpose of evading liabilities and falsifying debts are also deemed voidable acts or transfers.

24 Article 9 of the Provisions of the Supreme People’s Court on Certain Issues Relating to the Application of the Enterprise Bankruptcy Law of the People’s Republic of China (II) taking effect as of 16 September 2013 (Judicial Interpretation II).

25 Article 13 of the Judicial Interpretation II.

26 Article 19.

27 Article 7.

28 Articles 70 and 95.

29 Article 70.

30 Article 3.

31 Article 10 to 12.

32 Articles 13, 22, 28 and 29. Please also refer to the Provisions of the Supreme People’s Court on the Appointment of Administrators in Hearing Enterprise Bankruptcy Cases dated 12 April 2007. Note that a court should generally appoint an administrator from a register of administrators compiled by the court.

33 Article 28. Please also refer to the Provisions of the Supreme People’s Court on Fixing the Remuneration of Administrators in Hearing Enterprise Bankruptcy Cases dated 12 April 2007.

34 Article 62.

35 Article 86.

36 Articles 31 and 107.

37 Articles 88, 93, 98, 99 and 120.

38 Article 87.

39 Articles 31, 32 and 17 of the Judicial Interpretation II.

40 Article 38.

41 Article 40.

42 Articles 43, 44, 45 and 46 of the Judicial Interpretation II. For instance, Article 43 provides that a creditor’s claim to set-off shall still be supported by the court even if the debt is not yet due at the time of the acceptance of the bankruptcy petition or if the subject matter of the debts owed by the debtor and creditor to each other are not of the same kind and quality.

43 Kathleen Wong, ‘Going Bust’, BusinessForumChina, March 2010.

44 See Section V.ii, supra.

45 See Section V.iii, supra.

46 The resulting difference in outcomes in the FerroChina and Asia Aluminum cases can be attributed to the relationships between management and the local government. Asia Aluminum’s founder, being born in the area and with an extensive family network operating other related businesses in the region, had strong ties with his local government. His local government ultimately preferred a buyout led by the current management, and its opposition meant that potential bids by alternative investors such as Norsk Hydro were untenable. On the other hand, local government ties with the FerroChina management were not strong. The controlling shareholder group was from Taiwan and fled home while the remaining management proved unhelpful to the local government in the initial stages of restructuring, thereby leading to the appointment of administrators who were able to introduce an external investor; see Louise Gray, ‘Asia Aluminum vs FerroChina – a Tale of 2 PRC Restructurings’, December 2009.

47 Article 134.

48 Article 5.

49 Article 5.

50 In 2001, Foshan Intermediate Court recognised a bankruptcy decision made by a Milan court against a Italian company’s assets in China based on the bilateral treaty between the PRC and Italy; however, enforcement was not carried out because of the transfer of the assets from the defendant to a third party.

51 Prior to the Bankruptcy Law, the number of cases in 2001 was greater than 10,000. The number of cases in 2007, 2008 and 2009 were 3,817, 3,139 and 3,128 respectively. In 2012, the number of cases on record was only around 2,100; see John M Marsden and Phoebe Lo, ‘Experiencing the Great Wall – Reorganisations under the PRC Enterprise Bankruptcy Law’, The Quarterly Journal of INSOL International, Fourth Quarter 2012, p. 14.

52 Li Shugang and Wang Zuofa, ‘Review of the PRC Bankruptcy Law in 2009’, INSOL International, Technical Series Issue No. 11, March 2010, p. 12.

53 Leslie Hook, ‘Suntech unit declared bankrupt’, Financial Times, 20 March 2013.

54 Note that an enterprise in the PRC may exit the market in two ways: either by liquidation sanctioned by the court or by winding up under the company law provisions without involving the courts. Please refer to Article 181 of the Company Law of the People’s Republic of China. Some enterprises choose to wind-up voluntarily in accordance with its charter; some liquidate involuntarily because of the cancellation of a business licence by the State Administration for Industry & Commerce. An enterprise still retains legal status if its business licence is cancelled but it has yet to complete the winding-up process. An enterprise must be deregistered before it loses its legal status and in order to be deregistered it will need to complete the winding-up process. Note that in practice some enterprises exit the market without completing the appropriate winding-up process in order to evade debts. In 2008, 780,000 enterprises exited the market, with 380,000 through deregistration and 400,000 through licence cancellation; see Li Shugang and Wang Zuofa, ‘Review of the PRC Bankruptcy Law in 2009’, INSOL International, Technical Series Issue No. 11, March 2010, p. 2.

55 Leonard P Goldberger, ‘Focus: A Five-Year Retrospective on China’s New Bankruptcy Law’, The Quarterly Journal of INSOL International, Fourth Quarter 2012, p. 8.

56 ‘China - Economic forecast summary (June 2016)’, Organisation for Economic Co-operation and Development, June 2016.

57 ‘China’s Debt Bomb’, The Wall Street Journal, 28 June 2015.

58 Ray Bartkus, ‘China’s rising risks’, The Wall Street Journal, 27 August 2013.

59 ‘China Economic Update – June 2015’, The World Bank, June 2015, www.worldbank.org/content/dam/Worldbank/document/EAP/China/ceu_06_15_en.pdf.

60 ‘China’s Credit Expands in June as Stimulus Efforts Kick In’, Bloomberg, 14 July 2015, www.bloomberg.com/news/articles/2015-07-14/china-s-credit-growth-beats-projections-after-monetary-easing.

61 ‘Financial Statics Report of 2015’, the People’s Bank of China, 15 January 2016.

62 Dinny McMahon, ‘China Allows Local Governments to Issue $160 Billion of Bonds’, The Wall Street Journal, 13 March 2015, www.wsj.com/articles/chinese-local-governments-
to-issue-160-billion-of-bonds-to-repay-debt-1426226789.

63 Lingling Wei and Daniel Inman, ‘Chinese Banks Feel Strains After Long Credit Binge’, The Wall Street Journal, 15 August 2013.

64 Yi Huiman, president of Industrial & Commercial Bank of China (ICBC), said the bank would remain cautious against a potential pickup in bad loans after its non-performing loan ratio increased over the first half of the year. Overdue loans at ICBC not yet designated as non-performing loans rose to 69.2 billion renminbi or 0.73 per cent of all lending, from 0.71 per cent at the end of the previous year. Bank of China’s 14.1 billion renminbi of provisions were 276 per cent greater than those made a year earlier. At the end of June 2013, China Construction Bank announced that the bank had witnessed a rapid rise in non-performing loans compared to the year before. The bank held 90.4 billion renminbi in overdue loans, accounting for 1.12 per cent of the lender’s outstanding loans, which was 13.4 billion renminbi higher than at the beginning of the year; see Jane Cai and Jeanny Yu, ‘China’s big banks wave red flag over rising bad debts’, South China Morning Post, 30 August 2013.

65 ‘China bad debt spikes by more than a third’, CNBC News, 23 April 2015, www.cnbc.com/2015/04/23/china-bad-debt-spikes-by-more-than-a-third.html.

66 Ibid.

67 ‘The main regulatory indicators data of first quarter of 2016’, The China Banking Regulatory Commission, 12 May 2016, www.cbrc.gov.cn/chinese/home/docView/1F0C0499AC004998B9BF9E5922E643DD.html.

68 ‘Foreign debt’ is normally denominated in a foreign currency, but may be denominated in renminbi given the recent trend of renminbi internationalisation. It includes foreign government loans, loans from supranational financial organisations and international commercial loans. International commercial loans are the most common form of foreign debt. However, loans provided by foreign-invested banks in China (despite the foreign element) are not deemed as foreign debt. Eligible lenders of foreign debt include offshore institutions and offshore individuals. Loan agreements that document the foreign debt are required to be registered with the State Administration of Foreign Exchange (SAFE).

69 Taking security over the equity interests held by a foreign company of operating subsidiaries in China is allowed.

70 The purpose of the new regulations is to facilitate lending to firms with offshore funding needs, in particular to encourage PRC companies to make outbound investments.

71 Both the CBs and the IFC loan are not backed by security; see Leslie Hook and Paul J Davies, ‘Suntech a test for China’s bankruptcy law’, Financial Times, 21 March 2013.

72 Note that the committee of administrators (or liquidating group) for Wuxi Suntech also included representatives of the Wuxi local government and was headed by Yang Erguan, an official who oversees the district in which Wuxi Suntech is based; see Henry Sender, ‘Spotlight on solar panel maker in test for China’, Financial Times, 6 August 2013.

73 ‘Wuxi Suntech creditors approve restructuring plan’, Debtwire, 12 November 2013.

74 Chaim Estulin, ‘FerroChina PRC restructuring to be approved by court tomorrow; Citi lender group to get near 60 per cent for onshore facility’, Debtwire, 31 August 2009.

75 Laura Santini, ‘FerroChina Deal Stuck’, The Wall Street Journal, 3 September 2009.

76 ‘Asia Aluminum senior-bond trustee receives USD 81.25m dividend, representing 18.06 per cent recovery for holders’, Debtwire, 15 October 2010.

77 Asia Aluminum had agreed to pledge to noteholders up to US$100 million of intercompany loans lent to two offshore subsidiaries and all net proceeds from the US$450 million senior notes lent to a third offshore subsidiary.

78 Nevie Nie, ‘International Creditors Do Stand a Chance in China’, Debtwire, 22 July 2011.

79 Note that shareholder loans between an offshore parent and onshore subsidiary will also be classified as foreign debt and will need to be registered with SAFE. In practice, enforcement of any assignment of such shareholder loans by an offshore creditor will require an amendment of the aforementioned SAFE registration and this amendment would generally require the cooperation of the onshore entity. Nevertheless, such a security structure (even in a non-enforcement scenario) could still have a significant impact on the recovery by an offshore creditor as under PRC law, shareholder loans between an offshore parent to an onshore subsidiary and loans from external third parties are ranked pari passu. Note that loans from an onshore company to another onshore company are prohibited under PRC law and can only take the form of an entrustment loan (whereby the loan is directed via a financial institution).

80 David Kidd and Kathleen Wong, ‘Equality or Disparity between Foreign Creditors and Chinese Creditors’, The Quarterly Journal of INSOL International, Fourth Quarter 2012,
p. 21.

81 The legal representative’s powers to act on behalf of a company may be restricted by its constitutional documents; however, such restrictions are effective internally only and will not bind the relevant counterparty unless it is fully aware of such restrictions.

82 Article 7 of the Administration Regulations of Registration of Enterprise Legal Persons promulgated by the State Council on 7 April 1998.

83 Nevie Nie, ‘International Creditors Do Stand a Chance in China’, Debtwire, 22 July 2011.

84 ‘Sino-Environment Technology announces Stark Investment acquires additional 25% stake; company chairman now owns over 6%’, Debtwire, 27 April 2009.

85 ‘Sino-Environment Technology announces freezing bank account in PRC by subsidiary’, Debtwire, 21 September 2010.

86 Zhou Ping, ‘China Supreme Court’s deft Sino-Environment ruling cuts barriers to cross-border restructurings’, Debtwire, 3 July 2014.

87 Id.

88 In July 2013, the Ministry of Industry and Information Technology stated that it would push for mergers and restructuring of companies in industries such as steel, cement, aluminium, and shipbuilding as it looks to resolve overcapacity problems in those sectors; see Jenny Su and Jonathan Standing, ‘China to push mergers, restructuring in sectors with overcapacity’, Reuters, 23 July 2013. Premier Li Keqiang also emphasised at a meeting of the State Council held on 19 June 2013 that it was seeking to restrain serious overcapacity and blind expansion in certain industries. For example, banks would be prohibited from giving loans to steel companies launching new projects; see Zhang Xiangdong, ‘China’s Steel Problem’, Economic Observer, 2 August 2013.

89 ‘China Puts Stability Ahead of Reform With Shanghai Chaori Bailout’, The Wall Street Journal, 16 October 2014; ‘China landmark bond default heads towards bailout’, Financial Times, 8 October 2014.

90 ‘LDK Solar receives $321 million state-backed loan’, PV Magazine, 27 May 2014.

91 ‘LDK Solar key restructuring hurdle remains USD 50m exit financing’, Debtwire, 13 May 2014.

92 ‘LDK Solar emerges from bankruptcy’, PV Magazine, 20 February 2015.

93 ‘LDK nears debt agreement’, IFR Asia, 29 March 2014.

94 In this case the preference shareholders, who were party to the offshore restructuring, were directly or indirectly affiliated with LDK Solar’s onshore lenders, and this implied that the best restructuring option for onshore creditors was also in the interests of offshore creditors, removing one potential point of contention.

95 ‘LDK bondholders file Cayman winding-up petition, nominate FTI’, Debtwire 15 February 2016.

96 ‘When a Chinese developer defaults, debt restructuring may be preferable to bankruptcy – S&P’, Debtwire, 25 June 2015.

97 ‘Kaisa Group’s HK restructuring scheme granted recognition by US court; to be effective by 21 July’. Debtwire 16 July 2016.

98 ‘Shanshui Cement former management loses appeal over chops; Supreme Court hears recovery suit test’ Debtwire, 12 July 2016.