||China's Enterprise Bankruptcy Law
||U.S. Title 11 Federal Bankruptcy Law
|Forms of Relief
||Three forms: restructuring, liquidation, and conciliation.
||Two forms: restructuring and liquidation. China’s conciliation relief might be analogous to informal compositions (workouts) and out-of-court wind-downs in the U.S.
||Applies to state-owned and private corporate entities, but not to partnerships or individuals.
||Applies to all forms of companies, as well as individuals.
|Insolvency Requirements - Voluntary Bankruptcy
||Debtor may file for any form of relief if it meets two requirements: (1) it is unable to pay its debts when due; and (2) its total liabilities exceed the value of its assets.
||There is no insolvency requirement for a business to file a voluntary bankruptcy petition.
|Involuntary Bankruptcy Requirements
||Creditors may force a debtor into bankruptcy if the debtor is unable to pay its debts when due. No requirements re liabilities vs. assets.
||An involuntary bankruptcy petition can be filed by creditors if the creditor or creditors (depending on total number of creditors):
- Have undisputed accounts totaling more than $10,000; and
- Can prove the debtor is not paying the majority of his non-disputed accounts as they become due; and
- Makes the involuntary petition “in good faith”.
|Administration of Estate
||People’s Court appoints an Administrator when the bankruptcy is accepted by the Court. Debtor may request court’s permission to manage the estate under supervision of the Administrator.
||Bankruptcy Court appoints a Trustee when the bankruptcy is filed. In most reorganizations, however, the debtor automatically assumes the identity of “debtor in possession” and continues to operate the business and maintain control of its assets.
||Takes effect upon the Court’s acceptance of the bankruptcy application. There is a potential 15-day gap between filing and acceptance during which creditors can continue to pursue collection efforts.
||Stay of creditor actions against the debtor automatically goes into effect when the bankruptcy petition is filed.
||Administrator can recover assets transferred during a specific time period prior to the acceptance of the bankruptcy application. These fall into three categories:
- Debt payments made during six months prior to bankruptcy acceptance and while debtor was insolvent (as defined in the law).
- Transfers indicative of fraud made during one year prior to acceptance of bankruptcy case (for instance, a transaction at an unreasonably low price).
- Transfers involving actual fraud (for instance fabricating debtors or hiding property to avoid obligation of debt).
|Trustee or debtor-in-possession can undo a transfer of assets made during a specific time period prior to the filing of the bankruptcy petition (called preferences). There are three types of preference:
- Insider transfers made within, usually, one year prior to bankruptcy filing.
- Fraudulent transfers made within one year (or up to seven years in some states) prior to bankruptcy filing.
- Non-insider transfers – the most common – made within 90 days prior to bankruptcy filing.
||Administrator (or debtor) is allowed to assume or reject executory contracts.
||The Trustee (or debtor) is allowed to assume or reject executory contracts.
||Suppliers of goods dispatched for delivery before the bankruptcy may take back those goods if the full price has not yet been paid.
||Suppliers may reclaim goods sold to the debtor “in the ordinary course of business” where the debtor was insolvent and received the goods within 45 days prior to commencement of the bankruptcy case.
||A creditor owing debts to the debtor may request the ability to offset them against what the debtor owes them. Setoff is not allowed in some circumstances.
||Setoff of mutual pre-petition obligations is under the jurisdiction of state law.
||The Administrator or debtor (if provided rights to oversee the business) may obtain loans (grant liens) in order to continue operations. The law does not specify that such liens can only be granted on unencumbered assets.
||If the debtor can demonstrate that financing could not be procured on any other basis, the Court can, subject to certain limitations, authorize the debtor to grant the debtor-in-possession lender a lien that has priority over pre-bankruptcy secured creditors and a claim with super-priority over administrative expenses (including vendor and employee claims).
Collateral rights of secured creditors are suspended during reorganization. In cases where collateral value may be decreased in such a way that it hurts the rights of the secured creditor, the creditor can request the People’s Court allow resumption of its collateral rights.
Law does not, however, elaborate on how such protection will be provided.
Secured creditors may seek adequate protection or seek relief from stay where collateral value may decrease.
Adequate protection is spelled out and includes such methods as periodic cash payments, additional or replacement liens, or other relief that supplies the "indubitable equivalent" of the creditor's interest.
|Determining Debts Owed
||All creditors must declare any debts owed (with the exception of employee-related debts) within a time frame provided by the People’s Court. Creditors must provide a written explanation of the claim as well as evidence supporting it.
||The debtor provides a schedule of debts to the Bankruptcy Court. Only those creditors whose debts are not listed, or that are listed as disputed, contingent or unliquidated, are required to file a proof of claim prior to a bar date set by the Court.
||Makes a distinction between two types of administrative costs: expenses directly related to the bankruptcy filing and requirements, and “debts of common benefit”, which include costs to continue the company during the adjudication of the bankruptcy. Both costs are to be paid “when they occur”, with bankruptcy costs taking precedence where assets are insufficient to pay both.
||Gives priority for payment of reasonable and necessary administrative expenses, which are to be paid in full from the estate’s unencumbered assets.
||All creditors with lawfully declared credits are members of the Creditors’ Meeting, which has duties similar to those of the U.S. Creditor’s Committee. The Creditor’s Meeting has the ability to establish a Creditors’ Committee of no more than nine members, one of whom must represent the debtor’s employees.
||The Trustee appoints unsecured creditors (usually selected from the 20 largest) to an Unsecured Creditor’s Committee, which is purely voluntary. There is no limit to the number of members, although the Committee generally consists of three to nine creditors.
|Submission of Reorganization Plan
Draft reorganization plan to be submitted within six months after the Court has accepted the case. The court may extend the period for three months upon showing good cause. If the plan is not submitted in a timely fashion, then reorganization is terminated and the debtor is declared bankrupt – to be liquidated.
There is no provision for submission of competing plans by creditors and/or shareholders.
|Debtor has exclusive right to submit reorganization plan for 120 days post bankruptcy filing. Once this period has expired, a creditor or the Trustee may file a “competing” plan for consideration by the creditors and Court.
(Paid 1st to Last)
Four classes of creditors:
- secured creditors
- tax creditors
- ordinary creditors
|Basically five classes of claims:
- secured creditor claims
- administrative expenses (costs of the bankruptcy)
- pre-petition priority claims (includes wages)
- general unsecured creditors claims
- shareholder claims
|Approval of Reorganization Plan
||Plan must receive approval of more than half the number of creditors in each class present at the meeting and more than two-thirds of the total amount of claims in each class.
||Debtor has 180 days after filing of petition to obtain acceptances to reorganization plan. (Court must first approve Disclosure Statement.) All creditors have the right to vote. Court holds Confirmation Hearing and if no timely objections by any creditors, determines whether to confirm the Plan.
||Permits the Court to approve the reorganization plan over a dissenting class of creditors where:
- Secured creditors, employees and tax creditors are either unimpaired or have voted in favor of the plan; and
- Ordinary creditors receive at least as much as they would under a liquidation; and
- Equity holders have been treated fairly or voted to approve the plan; and
- Members of the same voting class are treated fairly and equally; and
- The debtor’s business plan is feasible.
|If all requirements for confirmation are met, except that not all classes of claims have accepted the plan, the Court may still approve the plan provided that certain requirements are met. The basic requirement is that the plan is fair and equitable with respect to each class of claims or interests that has not accepted the plan. Fair and equitable is further defined to ensure that each member of the class will receive a value that is not less than the amount that such holder would receive or retain if the debtor were liquidated under Chapter 7.
||Recognizes foreign proceedings and provides that parties may apply to the People’s Court for recognition and enforcement of a bankruptcy judgment made in a foreign court that involves debtor property located in the PRC.
||Incorporates the Model Law on Cross Border Insolvency drafted by the United Nations Commission on International Trade and Law.