THE NEW PRC BANKRUPTCY REGIME

Transcription

1 THE NEW PRC BANKRUPTCY REGIME CHIA Kim Huat Partner, Rajah & Tann 11 June Overview 1

2 Overview 1. Scope of Application 2. Insolvency Test / Proceedings 3. Appointment and Role of Judicial Administrator 4. Creditors' Rights and Priority of Claims 5. Bankruptcy Options Restructuring & Compromise 3 Overview 6. Fraudulent and Preferential Transactions 7. Moratorium Restrictions 8. Contractual Obligations during Bankruptcy 9. Strategy to Maximise Recovery and Mitigate Enforcement Risks 4 2

3 Scope of Application Scope of Application 1. Unified Insolvency Regime applicable to all enterprises with legal person status state-owned enterprises foreign-invested enterprises financial institutions such as commercial banks, insurance and securities companies (but authorities may intervene) 6 3

4 Scope of Application 1. Unified Insolvency Regime (Cont'd) not applicable to non-legal person entity individuals partnership representative offices 7 Scope of Application 2. Cross-Border Insolvency outbound extend to PRC debtor's assets outside PRC UNCITRAL Model Law on Cross-Border Insolvency countries adopting UNCITRAL Model Law to establish that PRC is the "center of interest" not conditional on any reciprocity treatment 8 4

5 Scope of Application 2. Cross-Border Insolvency (Cont'd) inbound recognition of a foreign bankruptcy court ruling in China pre-conditions existence of treaties and reciprocal relations with PRC not to violate PRC state sovereign, national security and public interests not to harm the lawful rights and interests of the PRC creditors 9 Insolvency Test / Proceedings 5

6 Insolvency Test / Proceedings 1. Insolvency Test debtor is unable to pay off its due debts (cashflow test) AND its assets are insufficient to discharge all its liabilities (balance-sheet test); OR debtor is unable to pay off its due debts AND it is obvious that the debtor lacks the ability to discharge its liabilities 11 Insolvency Test / Proceedings 2. Insolvency-related Proceedings initiated by debtor: bankruptcy, restructuring and compromise initiated by creditor: bankruptcy, restructuring but not compromise 12 6

7 Insolvency Test / Proceedings 2. Insolvency-related Proceedings (Cont'd) application initiated by debtor: court to decide whether to accept application within 15 days initiated by creditor: court to notify the debtor within 5 days upon its receipt of application debtor entitled to oppose the application within 7 days upon its receipt of notice 13 Insolvency Test / Proceedings 2. Insolvency-related Proceedings (Cont'd) court to decide whether to accept application within 10 days bankruptcy commences from court's acceptance (not filing) 14 7

8 Insolvency Test / Proceedings 2. Insolvency-related Proceedings (Cont'd) commencement court to appoint judicial administrator upon acceptance court to notify known creditors and make public announcement within 25 days upon acceptance creditors to register claims within period specified by court (not less than 30 days and not more than 3 months) 15 Appointment and Role of Judicial Administrator 8

9 Appointment and Role of Judicial Administrator appointment to be nominated and appointed by court creditors may request the court to replace a new one on legitimate grounds duty and power to take custody of the debtor's property to administer the business and assets of the debtor to attend to litigation, arbitration and other legal proceedings on behalf of the debtor to play supervision role during the restructuring process 17 Appointment and Role of Judicial Administrator delegation & remuneration subject to court approval standard of care due diligence good faith resignation with good and appropriate reasons to be approved by court 18 9

10 Creditors' Rights and Priority of Claims Creditors' Rights and Priority of Claims 1. Creditors' Rights creditors' meeting matters deliberated at creditors' meeting representative from debtor's employees limit of secured creditors' voting rights 20 10

11 Creditors' Rights and Priority of Claims 1. Creditors' Rights (Cont'd) resolution to be approved by creditors (i) (ii) comprising at least 1 / 2 of the total numbers of creditors with voting rights present at the meeting; and holding not less than 1 / 2 of the total value of unsecured debts 21 Creditors' Rights and Priority of Claims 1. Creditors' Rights (Cont'd) creditors' committee maximum 9 persons representative from the debtor's employees to be appointed by creditors' meeting and approved by court supervise assets distribution 22 11

12 Creditors' Rights and Priority of Claims 2. Priority of Claims bankruptcy costs and expenses and "joint interest debts" secured creditors preferred creditors employment-related claims, including unpaid employees' wages, pension payments and medical benefits other social benefits and outstanding taxes 23 Bankruptcy Options Restructuring 12

13 Bankruptcy Options Restructuring 1. Commencement application for restructuring by creditor cash flow test by debtor or 10% shareholder of debtor insolvency test commencement upon approval by court (not filing) 25 Bankruptcy Options Restructuring 2. Formulation of Restructuring Plan statutory timeline debtor or judicial administrator to submit restructuring plan within 6 months 3-month extension available on legitimate grounds court to convene a creditors' meeting to vote on the plan within 30 days after receipt of restructuring plan 26 13

14 Bankruptcy Options Restructuring 2. Formulation of Restructuring Plan (Cont'd) content of restructuring plan debtor's business plan classification of debts, debt adjustment scheme, and debt repayment scheme time limit for execution of the plan time limit for monitoring and supervising the execution of the plan other schemes beneficial to the debtor's restructuring 27 Bankruptcy Options Restructuring 3. Approval of Restructuring Plan division of creditors into different classes secured debtors employment-related debtors tax normal debtors an option for the court to establish a sub-class of small claims within the unsecured creditors 28 14

15 Bankruptcy Options Restructuring 3. Approval of Restructuring Plan (Cont'd) required approval from creditors approval from each class to be obtained from:- (i) affirmative vote of a majority of the creditors in each class present at the meeting; and (ii) 2 / 3 of the total value of debts in that class 29 Bankruptcy Options Restructuring 4. Approval of Restructuring Plan (Cont d) approval from shareholder(s) of debtor only required where the restructuring plan involves adjustment of shareholders' equity interests same approval requirement as class of creditor 30 15

16 Bankruptcy Options Restructuring 4. Approval of Restructuring Plan (Cont'd) authority of court ultimate approving authority to approve the restructuring plan even if some classes of creditors object, provided that secured creditors, employees, and tax authorities are fully paid unsecured creditors are no worse off than if the debtor went into liquidation the plan is feasible 31 Bankruptcy Options Restructuring 5. Implementation debtor to implement the restructuring plan judicial administrator to supervise the implementation debtor to report to judicial administrator on implementation judicial administrator to submit a supervision report to the court 32 16

17 Bankruptcy Options Restructuring 6. Termination of Restructuring no restructuring plan submitted within the statutory timeline restructuring plan not approved by court and/or creditors/shareholders upon application by judicial administrator or a significant interested party 33 Bankruptcy Options Compromise 17

18 Bankruptcy Options Compromise only debtor can apply before a declaration of bankruptcy upon approval, court to make a public announcement and convene a creditor's meeting to discuss the draft compromise proposal no statutory time limit to prepare or agree on the compromise proposal 35 Bankruptcy Options Compromise compromise proposal to be approved by (i) (ii) (iii) a simple majority of the creditors with voting rights attending the meeting; and such creditors holding no less than 2 / 3 in total value of the unsecured debt, and the court secured creditors not entitled to vote on compromise proposal 36 18

19 Fraudulent and Preferential Transactions Fraudulent and Preferential Transactions 1. Claw-back claw-back situations sale or transfer of assets at no value sale or transfer of assets at an obviously unreasonable value early repayment of debts prior to maturity waiver of creditor's rights provide security for unsecured debts 38 19

20 Fraudulent and Preferential Transactions 1. Claw-back (Cont'd) risk period within 1 year prior to the acceptance by court of the bankruptcy application sanction judicial administrator is entitled to request the court to invalidate such transactions 39 Fraudulent and Preferential Transactions 2. Preferential and voidable Transactions preferential transaction judicial administrator is entitled to apply to declare payments invalid if (i) (ii) a debtor has made preferential payment to creditors whilst insolvent, and such payment occurs within 6 months prior to the acceptance by the court of the bankruptcy application 40 20

21 Treatment of Fraudulent and Preferential Transactions 2. Preferential and voidable Transactions (Cont'd) any preferential payment is invalid after the acceptance by court of bankruptcy application other voidable transactions concealing or diverting the bankrupted company's assets to avoid liabilities acknowledgment of 'untrue debts' or the fabrication of liabilities 41 Moratorium Restrictions 21

22 Moratorium Restrictions liquidation suspension of all ongoing civil proceedings and arbitrations relating to the debtor judicial administrator to commence/defend proceedings restructuring moratorium against all proceedings secured creditor is expressly precluded from exercising its security rights during restructuring process 43 Moratorium Restrictions restructuring (cont'd) secured creditor is entitled to seek the court's permission to enforce its security rights compromise no moratorium against proceedings 44 22

23 Contractual Obligations during Bankruptcy Contractual Obligations during Bankruptcy judicial administrator to elect between performing and rescinding a contract if judicial administrator fails to respond to the counterparty within 2 months upon the acceptance by the court of the bankruptcy application, the contract is deemed to be rescinded if judicial administrator elects to continue with a contract, the counter-party is entitled to ask for security insolvency set-off 46 23

24 Strategy to Maximise Recover and Mitigate Enforcement Risks Strategy to Maximise Recovery and Mitigate Enforcement Risks promptly claim & register creditor's rights with court commercial strategy restructuring and compromise claw-back, fraudulent and preferential transactions security and enforcement cross-border enforcement call on shareholders to pay up unpaid registered capital liabilities of directors and officers 48 24

25 Singapore Office CHIA Kim Huat 4 Battery Road #26-01 Bank of China Building Singapore Direct Dial : (65) Direct Fax : (65) kim.huat.chia@rajahtann.com Thank You Shanghai Office Unit ShuiOn Plaza 333 Huai Hai Middle Road Shanghai , P. R. China General Line: (86) General Fax : (86)