enhancing china’s nascent corporate rescue regime — a case study of zhejiang province zinian...

Enhancing China’s Nascent Corporate Rescue Regime

— A Case Study of Zhejiang Province

Zinian Zhang (张子年 )

under supervision of Prof. Roman Tomasic

Durham University Law School

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1. History of China’s bankruptcy Law

1906 bankruptcy law by Qing Dynasty. 1935 Bankruptcy law by Nationalist Govt.

1986 Bankruptcy Law by Communist Govt.

2006 China Enterprise Bankruptcy Law

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1. History of China’s bankruptcy Law

China Enterprise Bankruptcy Law 1986 - applying to state-owned enterprises (SOEs) - served as a government tool to reform SOEs - a chapter in Civil Procedure Law for non-SOEs

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1. History of China’s bankruptcy Law

Radically changed economy in recent

decades

- accession to WTO

- growing private sectors

- foreign investment

- global trade

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1. History of China’s bankruptcy Law

China Enterprise Bankruptcy Law 2006

- embracing international insolvency principles

- applying to all enterprises

- rescue-oriented

- insolvency practitioner, moratorium, cram-down,

etc.

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2. Implementation of rescue in China

105 rescues reported from 2007 to 2010

Payment to unsecured creditors at 21%

175 days on average to complete a rescue

Big-firm-first rescue approach

Nearly a quarter of rescues conducted in

Zhejiang

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3. Corporate rescues in Zhejiang

Zhejiang Province

Shanghai

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3. Corporate rescues in Zhejiang

Zhejiang Economy in China

- the 4th in GDP among 31 provinces

- 94% of GDP contributed by manufacture and

service

- 82% of industrial-added value from private

sectors

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3. Corporate rescues in Zhejiang

20 reorganizations dealing with 35 debtor

companies

91% of debtors are totally private

Big-firm-first approach

£130,538,690 debt per debtor

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3. Corporate rescues in Zhejiang

260 days on average to complete a rescue

Absolute priority principle largely complied with

Special protection to general public shareholders

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3. Corporate rescues in Zhejiang

All secured and preferential creditors fully paid

Unsecured claims 36% satisfied on average

- national figure at 21%

- liquidation at less than 10%

75% of rescues are company sales

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3. Corporate rescues in Zhejiang

Cram-down against shareholders in 44% of rescues

No cram-down against creditors in Zhejiang

Cancellation of old shares under consent of

shareholders

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4. Courts’ acceptance of rescue

Court’s hesitation in hearing corporate bankruptcy

Corporate bankruptcy – controlled by Govt, in

history,

Inaction of court leads to few company bankruptcies

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4. Courts’ acceptance of rescue

Difficulties of court in dealing with corporate

rescues

- courts inferior to other government bodies

- lack of cooperation from government

institutions

- in fear of collective protest

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4. Courts’ acceptance of rescue

The usual route to formal rescue

- company collapse

- social crisis by unpaid employees or

creditors

- protest

- government intervention

- court ordered to commence a rescue

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5. Administrators in Zhejiang

Zhejiang Bankruptcy Administrator List 2007

- made in September 2007

- by Zhejiang High Court

- 34 law firms and 14 accountant firms

included

- no training and examination before and

after16

5. Administrators in Zhejiang

Law firms appointed in 45% of reorganizations

Accountant firms: 20%

Government-organized liquidation committee:

35%

Lawyers included in most of above committees

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5. Administrators in Zhejiang

The roles of administrator in rescue

- taking control

- verifying debts

- instigating agreement between investors and

creditors

- initiating a reorganization plan

Debtor-in-possession vs. practitioner-in-possession

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6. Challenges of early rescue

The debtor: in fear of losing control

- especially disclosure of tax evasion

No wrongful trading mechanism in China

Punishment from market:

- 50% chief executives absconding

Social attitude hostile to a second chance

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Conclusions

Optimism:

- rescue aligned with local government’s interests

- fast growing private sectors

- prospective economic recession

- lowered economic growth target less than 8%

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Conclusions

Pessimism:

- a lack of rule of law

- poor record in enforcing commercial law

- corrupted judges and courts

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Thanks you

谢谢

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