AAs part of the State Council’s efforts to reform the overall business environment, six major cities – Beijing, Shanghai, Chongqing, Hangzhou, Guangzhou and Shenzhen – have been participating since the end of October 2021 in a pilot program aimed at creating a more transparent and efficient exit mechanism for market participants. Among the reforms, creditors of bankrupt businesses will be allowed to recommend administrators for court appointment.
Under current corporate bankruptcy law and its interpretations, courts appoint administrators from a local registry through, among other things, random selection, open bidding and recommendations from financial regulators. In practice, however, directors are rarely appointed by recommendation.
Judicial policies are shifting from recommending financial institutions as bankruptcy administrators by regulators to recommending major creditors or debtors of non-financial institutions as administrators. Creditors can make the recommendation in cases applicable to pre-reorganization, or where a financial institutional creditors’ committee has been formed, or for the administration in mainland China of a bankruptcy proceeding recognized by the court of Hong Kong .
The determination of the main creditors varies according to the regions. In Beijing, when the total creditors’ rights of one or more creditors, as evidenced by the accounting report, debt inventory, financial statements and other documents of the debtor, exceeds half of the known total debt , these creditors will be considered as the principal creditors.
They will then have the right to recommend one or two intermediaries as administrators. When aggregating creditor rights, there should be no double counting for joint and several claims, inclusion of debt relationships between affiliated companies or double counting for affiliated companies acting as joint and several debtors towards each other.
The determination of the main creditors does not exclude the claims of objective and real shareholders and the other claims formed by related companies.
APPLICABILITY AND PROCEDURE
In terms of what type of case is suitable for the directors to recommend, policies vary widely from region to region. In Beijing, administrators can be recommended if: the debtor is undergoing an out-of-court reorganization or pre-reorganization; the affiliated companies all go bankrupt; or the case involves a large number of stakeholders and has a significant local impact.
In Chongqing, a recommendation is limited to bankruptcies involving a relatively small amount of capital, a moderate amount of debt, and concentrated creditor rights. In Hangzhou, administrators cannot be recommended in bankruptcies of financial institutions, large state-owned enterprises, listed companies, or debtors whose total asset value exceeds RMB 300 million ($45 million), or in other complex or socially impacting bankruptcy cases.
All regional regulations require creditors and debtors to issue a written consent accepting a certain intermediary as administrator and state the reasons. In Beijing, when a committee of financial institutional creditors makes the recommendation, it does so in accordance with its operating rules and issues a written resolution.
In Chongqing, an announcement should be posted on the local court’s public service network platform for at least five days, and there should be no less than two different types of intermediaries. In Hangzhou, the nominator of an administrator must make a written submission within 15 days from the date of filing for a review of the bankruptcy petition.
In many cities, including Beijing and Chongqing, it is clearly stipulated that the recommended intermediary must, in principle, be an agency listed on the register of administrators of the local court, and which has been reviewed to ensure that it has the staff and the ability to perform his duties and that there is no pre-existing interest likely to affect the proper performance of his duties.
To review a Recommended Intermediary’s potential conflicts of interest, regional policies require the agency to make sufficient declarations and disclosures to allow for a thorough review by the court. Since bankruptcies can affect a significant number of creditors, and large business bankruptcies almost invariably involve financial institutions, requiring that there be absolutely no interest between the competent intermediaries and the creditors or debtors may lead to disqualification. of most ideal candidates.
Therefore, the court often has the final say on whether the pre-existing interests disclosed by the intermediary are significant enough to affect the proper performance of its obligations. Courts tend to focus on the timing and duration of the events disclosed, the size of the interests in question, and the extent of the intermediary service provided.
In Beijing, the provision of out-of-court reorganization, pre-reorganization and other bankruptcy-related services does not necessarily constitute a pre-existing interest, but basic information must nevertheless be disclosed. In Chongqing, if there is a previously unknown creditor-debtor relationship between a registered administrator and the creditor or debtor, or if the administrator has been a regular provider of intermediary services to the debtor within three years prior to acceptance of the bankruptcy filing, the court will form a review committee to make the decision.
If it turns out that the intermediary refused to disclose or deliberately concealed information, he would be disqualified from acting as administrator of the file for which he was recommended and would be liable to a sanction limiting his qualification as an administrator. for a period ranging from six months to almost two years.
OPPOSITION FROM OTHER CREDITORS
If other creditors or debtors oppose the recommendation of the main creditors, the parties must resolve their differences by negotiation. In Beijing, other creditors can recommend a different administrator to the court before it makes a formal appointment, and the court will decide whether or not to accept their application. In Chongqing, if more than two primary creditors recommend different administrators and fail to reach a consensus after negotiation, the court will no longer use the recommendations to appoint the administrator.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
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