China Special Situations Insight (Volume 4 Issue 7)

Bankruptcy Reorganization for Listed Companies (I): Overview of Bankruptcy Reorganization

As the market is experiencing a downturn, an increasing number of businesses are being forced into distress and bankruptcy. In these circumstances, many investors are looking for opportunities in reorganization procedures for distressed companies. Listed companies undergoing reorganization procedures have to face additional scrutiny and more stringent requirements, but successful investment in such distressed listed companies may bring substantial returns. In this series of articles, we will focus on reorganization of listed companies; and as a start, we will provide an overview of the three types of bankruptcy procedure, then highlight the particularity of the reorganization procedure for listed companies.

1.  Concept and Comparison: Reorganization, Compromise and Bankruptcy Liquidation

The Enterprise Bankruptcy Law of the People’s Republic of China introduces three types of bankruptcy procedure: bankruptcy liquidation, reorganization and compromise.

• Bankruptcy Liquidation: Commonly known as “bankruptcy” in people’s traditional mindset, this refers to the court’s declaration of a company’s bankruptcy for being unable to repay outstanding debts, leading to the legal liquidation of all the company’s assets for distribution to creditors in a statutory order and proportion.
• Reorganization: This refers to the procedures in which, when a company encounters financial distress and is unable to pay its outstanding debts, reorganization investors step in to provide new funding. This capital aims to sustain and develop the company's business, thereby restoring its solvency and allowing it to continue operations.
• Compromise: This occurs when a distressed company and its creditors reach a compromise agreement on the repayment of debts due to the company’s inability to pay outstanding debts. This agreement typically involves debt relief or an extension of the payment timeline.

Bankruptcy liquidation, reorganization and compromise are the three pillars of company bankruptcy procedures in China. Due to their different purposes, the three procedures have distinct differences, which are described in the table below:

Bankruptcy liquidation is the traditional understanding of bankruptcy, whereas bankruptcy reorganization and compromise are alternatives to the traditional bankruptcy procedure, aiming at preventing direct liquidation and preserving the company’s operational capacity.

2.  The Essence of Bankruptcy Reorganization

The essence of bankruptcy reorganization lies in utilizing the mechanisms provided and is permitted under bankruptcy law to renegotiate existing debts with creditors. In most successful cases, this process involves introducing new investors to secure substantial funding. By doing so, it aims to adjust the company's financial structure, restore solvency, and protect the rights and interests of creditors to the best of its ability.

3. Particularity of Bankruptcy Reorganization of Listed Companies

The bankruptcy reorganization of listed companies comes with particularities due to their strong public nature:

• High Public Attention and Wide Impact: In public companies, the reorganization of listed companies will be highly influenced by the capital market and investors, necessitating a more transparent and equitable reorganization.
• Regulatory Oversight: In addition to complying with bankruptcy laws, listed companies must also be supervised by securities regulatory authorities and must adhere to listing rules. Applications for bankruptcy reorganization of listed companies must be reported to these authorities for consultation before the court accepts such applications.
• Shell Value: This refers to the retention of the listed company’s shell resources, or listing qualifications, which hold significant market value.
• Stringent Disclosure Requirement: Listed companies must adhere to a more rigorous information disclosure standard, and the stock exchange’s regulations on the content of information disclosure of listed companies are stipulated throughout the entire reorganization process.
• Complexity of the Reorganization Plan: The business and asset structure of listed companies is usually intricate, involving a broader range of creditors and stakeholders, which makes the formulation and implementation of the reorganization plan more complex.

4. Our Observation

For foreign investors considering investment in the bankruptcy reorganization of listed companies in China, here are some strategic pieces of advice:

• Understand the Legal Framework: Familiarize yourself with the company bankruptcy laws and the evolving regulatory landscape, to figure out the differences and requirements of different types of bankruptcy procedures.
• Engage Legal Experts: Collaborate with legal professionals well-versed in Chinese bankruptcy and restructuring laws, who can provide comprehensive perspectives and strategies for dispute resolution and reorganization.
• Leverage Opportunities: Bankruptcy reorganization can offer access to high-quality assets at lower prices, providing investment opportunities that may not be available under normal market conditions.

For further information, please contact Catherine Miao, Head of Special Situations and Alternative Investment at JunHe LLP: miaoqh@junhe.com or +86-21-22086350.