Supreme People’s Court’s new bankruptcy information platform

Screen Shot 2016-08-06 at 12.12.56 PMOn 1 August, President Zhou Qiang of the Supreme People’s Court (SPC) inaugurated the SPC’s new enterprise bankruptcy and reorganization electronic information platform, linked here and accessible through the Supreme People’s Court’s website (www.court.gov.cn).  The English title and slogans could have benefited from a 5-minute consultation with a native speaker, but more importantly, some of the functions still appear to be in Beta mode.  The platform has three parts.

It provides information for the public on:

  • Debtors (债务人信息). :

 This function seems to be in Beta mode because when you click further for more details,Screen Shot 2016-08-07 at 9.03.31 AMno further information is available.  This section is intended to provide the most recent annual report, related litigation, and information on assets of the company from the industrial and commercial authorities’ database and enable “one-stop shopping” for distressed assets.

Bankruptcy notices, such as this one with a plan on the distribution of the assets of a Xinjiang tomato processing company;

  • Bankruptcy rulings made by the local courts, such as this one by the Qidong (Jiangsu) court on accepting the bankruptcy case of a Nantong marine engineering company;
  • Laws and regulations (primarily SPC regulations related to bankruptcy);
  • Bankruptcy related news, primarily reports on new regulations issued and bankruptcy-related initiatives or conferences, such as this one in Zhejiang, on the crisis in Zhejiang’s ship-building industry);
  • Typical (model) bankruptcy and liquidation cases (see an explanation of typical/mode cases here), so far just a re-publication of the typical cases that the SPC issued in June.

Second, bankruptcy administrators are required by these regulations to upload information to issue to parties to the bankruptcy.

Third, judges are required to upload their bankruptcy/liquidation rulings to this platform.

For parties, the platform enables them to have current information on the status of their cases and upload documents to submit to the court or bankruptcy administrator.

The SPC issued regulations on the operation of the platform in late July, available here. It seems likely that the SPC considered the bankruptcy platform of other major jurisdictions in the process.  This platform is part of the SPC’s Internet Plus/smart courts policy to provide greater transparency, easier access to information, and “greater informatization,” for some of the reasons described in this short article–particularly having tangible results and promoting the use of information technology.

For anyone seeking to drill down into the details of how bankruptcy and liquidation law is being implemented in China’s political and economic environment, and particularly for lawyers and others doing due diligence and distressed asset investors (domestic or foreign), the platform is unquestionably very useful.

 

 

 

 

First quarter 2015 bankruptcy cases in the Chinese courts

Continuing my series on bankruptcy law, this blogpost gives a quick report on 2015 first quarter bankruptcy cases in the Chinese courts, drawn from this report (including the charts used).

Bankruptcy cases accepted, by province

Bankruptcy cases accepted, by province

During that period, the Chinese courts accepted 264 bankruptcy cases.  Jiangsu, Zhejiang, and Guangdong had the top number of cases, followed by Shanxi, Anhui, and Hunan.  The top bar is cases is the rest of the country. d5015987-bb7f-4ee4-812a-e711a3264557

The piechart sets out the percentage distribution of cases by province (the largest percentage is from the rest of the country).

A listing of the courts that have accepted the most bankruptcy cases bears out earlier analysis on this blog about the Shenzhen courts (Shenzhen is the court that has accepted the most bankruptcy cases in the country, with Zhangjiagang (Jiangsu Province) in second place.

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As for the types of cases, the piechart below shows that most cases (about 2/3s) were bankruptcy liquidation cases, followed by reorganization (about 1/3), with very few settlement cases.  This article explains the three different types of cases.

d5015987-bb7f-4ee4-812a-e711a3264557On the geographical distribution of the liquidation cases.the piechat above shows that most arose in Jiangsu Province (about 23%), with Guangdong, Zhejiang, Shanxi, and Anhui Provinces following in descending order.  The 40% is from the rest of the country. Several cases involve multi-tiered, overlapping layers of complex entities (as elsewhere in the world), leading Chinese courts to consolidate the bankruptcy cases of several related companies (this Harvard Law School article gives a US bankruptcy perspective on consolidation).3be5b38d-70a0-4ebd-bdae-3472f9de09ae

On the geographical distribution of the reorganization cases, the piechart above shows that greatest proportion of reorganization cases were in Zhejiang (25%) (the site of at least one pilot court for bankruptcy cases), followed by Anhui, Jiangsu, Shandong/Shanxi) (the 30% is for the rest of the country).

As mentioned previously, the Supreme People’s Court expects to see an upturn in bankruptcy cases, and I would expect to see initiatives in transferring cases from enforcement to bankruptcy (an outstanding issue for the courts) and proposed solutions to achieve more reorganization and settlement cases. These are likely to happen because (as mentioned previously) the Chinese government has committed to reducing the number of zombie enterprises.  Early this spring, a conference will be held in China on the trial of bankruptcy cases, where these issues are likely to be discussed. If the organizers (and funding) permit, I will attend.

 

Shenzhen leads the way in bankruptcy law reforms

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Shenzhen’s bankruptcy information platform

This very brief blogpost is reporting on bankruptcy law developments in Shenzhen.  The Shenzhen courts are often used as a venue for piloting reforms, and bankruptcy law is no different.  It is likely that the Supreme People’s Court (SPC) is aware of this.

The Shenzhen Intermediate Court held a press conference on 21 January  to announce that they had established a bankruptcy information platform (linked here) with information case guidance, filing guidance, guidance on procedures, bankruptcy case announcements, bankruptcy judgements, etc.  The Shenzhen court also released some recent statistics on their caseload.  In 2015, the Shenzhen intermediate court accepted 131 cases, up 105% from the year before, tried 283 cases, and resolved 82 cases (up 26% from the year before). On the timing for cases to be resolved, as mentioned in a previous blogpost, bankruptcy cases tend to take a long time to be closed in the Chinese courts.

The bankruptcy platform is likely to be a model for other courts around China and fits nicely with the other “informatization” initiatives of the SPC.  Having a single platform should make it easier for bankruptcy practitioners (as well as buyers of distressed assets).  For those of outside of the Chinese court system seeking to understand what is happening, it will provide more information for us to consider.
The cases in Shenzhen accounted for 40% of the total bankruptcy caseload in Guangdong.  Although national statistics for bankruptcy cases in 2015 have not yet been released, when compared with 2014 (and presuming China had more cases bankruptcy in 2015), Shenzhen accounts for a significant proportion of bankruptcy cases. That is likely not a sign of weaker companies in Shenzhen, but that the Shenzhen government is more willing to see companies go through bankruptcy procedure.

 

Brief report on bankruptcy litigation in the Chinese courts

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Declaration of bankruptcy meeting of Guangdong company

The soft Chinese economy means that an increasing number of Chinese companies are in financial difficulties.  But, according to the Supreme People’s Court, the number of bankruptcy cases have been decreasing rather than increasing, with over a thousand cases accepted nationally in 2014.  Earlier this fall, the All China Lawyers Association held a conference for its bankruptcy practitioners, to which were invited the head of  #2 Civil Division of the Supreme People’s Court, Judge Liu Min (principal author of the bankruptcy law judicial interpretation),  KPMG partner, Cao Chunye, SASAC officials, and others.  What more can be said about the decrease in cases, why the decrease in cases and what is the Court doing about it?

Some Statistics

According to a 2014 Court study by Ma Jian of the Court’s Research Office, from 2003-2012, the Chinese courts accepted about 40,500 bankruptcy cases, decreasing an average of 12.23% a year, only increasing in Henan and Tianjin, which Ningxia, Hunan, Hebei, and Qinghai decreasing at a rate of 20% a year or more. In almost 70% of cases, the debtor company applied for bankruptcy, with only 30% creditor initiated.  The Court analysis was that creditors didn’t have a clear picture of the business operations of their creditors, or still believed that the debtor would be able to repay, or believed that because asset recovery in bankruptcy was so little, they did not want to bother initiating bankruptcy. Practically all the companies in bankruptcy proceedings were domestic companies, with 55% state owned companies, 26% collectively owned. Almost half of the cases took a year or more to resolve.

Why?

Ma Jian set out the following factors:

  • In a Chinese bankruptcy, the judge has more of a societal function than legal.
  • Most companies misunderstand bankruptcy law;
  • Local government interference in the acceptance, and trial of bankruptcy cases, with local governments closing down companies through administrative means, leaving unresolved debts and workers who have not been resettled;
  • Many obstacles stand in the way of realizing assets: 1) many companies in financial trouble have old equipment that is not worth much on the market or no one appears at the auction; 2) many SOEs occupy allocated land (land given by the government for free), and when the government takes possession of the land, it is impossible to sell the buildings on the site; 3) some companies use collective land, so that only other collectively owned entities can purchase the buildings built on the land.
  • It is very difficult to recover bankruptcy assets.  The debts are generally very old, and often times the statute of limitations has expired; additionally it is often difficult to find company debtors;
  • Resettlement of workers, is the primary issue to be considered in a bankruptcy case, particularly with the social safety net in such a fragile situation (according to Ma Jian).
  • Additionally, reorganization is very difficult to do, with multiple government approvals, difficulties in obtaining creditor agreement, difficulties in changing a company’s line of business, etc.
  • KPMG partner Cao Chunye highlighted the unfavorable tax treatment of companies in bankruptcy restructuring;
  • As to why courts do not want to accept cases, Ren Yimin of the All China Lawyers Association Bankruptcy and Restructuring committee mentioned that a bankruptcy of private company may cause a chain of other companies to fail, and it is difficult to resolve a chain of linked cases.

Measures

Some of the many measures under consideration or being explored include:

  • Moving bankruptcy cases out of the local courts where the company is located, to centralize jurisdiction in certain courts;
  • Making it easier for creditors to switch from enforcement proceedings to bankruptcy;
  • Improving the system for bankruptcy administrators.;
  • Looking to have a fast track system for small cases;
  • Exploring better restructuring systems.
  • Looking to foreign law, particular US bankruptcy law, for concepts that could be used to improve the bankruptcy system.

(Those with a greater interest in this topic can review this law review article–in the current situation, this area of law deserves closer attention by concerned professionals than it is currently receiving.)