Enterprises serve as the driving force behind national economic and social development, anchoring a critical foundation of China’s economic growth. But amid an overall downturn of the global economy, operational risks faced by enterprises are increasing daily, and bankruptcy has become a common phenomenon.
Recalling first-hand experience of handling a bankruptcy case transitioning from liquidation to reconciliation, the author explores the legal basis of the bankruptcy reconciliation procedure, key issues during implementation, and how administrators can guide possibility of revival for debtor enterprises while protecting the interests of creditors.
Case study
An art photography business (company X) was established in Shanghai in 2011 as a Sino-foreign joint venture limited liability company with two South Korean shareholders and one Chinese corporate shareholder (company Y).
In 2024, upon application of creditor A, the Shanghai Third Intermediate People’s Court ruled that company X enter bankruptcy liquidation proceedings.
Senior Partner
Joint-Win Partners
Tel: +86 180 1978 7906
E-mail:
qianxin@joint-win.com
After taking over, the administrator immediately retrieved business archives, bank accounts and other information from relevant departments, finding that all three shareholders of company X had not fully paid their contributions.
Through various means such as public channels, case file reviews, inquiries with creditors and examination of litigation case information, the administrator eventually contacted Shen, the legal representative of company Y, and shareholder of company X.
In addition to applying for bankruptcy, creditor A also filed a lawsuit against the debtor’s shareholders in Shanghai Putuo District People’s Court for damaging the interests of creditors, adding company X as a third party.
During the litigation process, the administrator represented company X as a third party in the lawsuit and actively guided both parties in negotiations.
After the court session, the administrator conducted several rounds of negotiations with the creditors and debtor’s shareholders on the specific amount of reconciliation. Ultimately, a reconciliation plan was facilitated with the debtor’s shareholder, company Y, fulfilling its contribution of RMB150,000 (USD20,600) to settle the claims with creditors.
The administrator then legally applied to transition the case from liquidation to reconciliation proceedings and drafted a bankruptcy reconciliation agreement.
After approval at the creditors’ meeting, the court recognised the agreement and concluded the bankruptcy proceedings.
From entering the reconciliation procedure to court recognition and conclusion of bankruptcy proceedings, the entire case took less than a month.
Because the procedure was short, efficient and cost-effective, clearing debts, a win-win situation was achieved for both debtors and creditors.
Bridging communication
As drivers and executors in bankruptcy proceedings, administrators play an indispensable role in reconciliation procedures.
They bridge communication between debtors and creditors, ensuring accurate information exchange.
In practice, administrators often face situations where debtor enterprises or their controllers are unresponsive, have unclear information, or refuse contact.
In such cases, they are required to conduct a thorough investigation of the debtor’s details and related litigation, making every effort to establish contact with the debtor to lay the groundwork for reconciliation.
Developing a reconciliation plan
Reconciliation plans should specifically detail debt repayment methods, schedules, funding sources and other key issues.
A well-structured and detailed approach to implementation helps minimise time spent on repeated negotiations, and reduces the risk of conflicts during communication.
At the same time, administrators must balance protection of creditor interests with sustainability of the enterprise’s future operations, striving to protect the rights and interests of creditors while leaving room for the enterprise’s long-term development.
Balancing interests
With legal rights of creditors and debtor interests inherently at odds, administrators must maintain a neutral and impartial stance, ensuring both sides are fairly considered within the framework of justice and legal principles.
While creditors seek to recover their claims as soon as possible to minimise losses, debtor enterprises need time and resources to regain solvency.
Therefore, the reconciliation procedure needs to provide enterprises with a reasonable debt repayment period and conditions, while also protecting the interests of creditors, giving them a chance to regain operational vitality.
In summary, bankruptcy reconciliation not only preserves the enterprise’s legal status and operational value. With inherent flexibility, simplicity and low cost, it also becomes an excellent option for enterprises in difficulty that lack resources for bankruptcy reorganisation to achieve rebirth.
Compared with reorganisation, reconciliation allows debtors to independently raise the funds needed for reconciliation, avoiding the time and cost required to recruit strategic investors, making it considerably less complex to implement.
Limitations
However, the scope of reconciliation is limited to resolving debt repayment issues between debtors and creditors. It does not address adjustments to the debtor’s business model. Therefore, for debtor enterprises with operational issues, reconciliation is not enough to resolve their inherent operational risks or prevent potential failure.
This limitation highlights that reconciliation primarily serves to temporarily alleviate debt pressure, rather than fundamentally improve the enterprise’s operational condition.
Recommendation
Under the current Enterprise Bankruptcy Law, the reconciliation system still requires improvement. It is hoped that future legal revisions will address these issues, enhancing the practicality of reconciliation procedures and contributing to optimise the domestic business environment.
As a practitioner in the field of bankruptcy, the author meanwhile continues exploring practical, diversified solutions to help enterprises facing challenges to get out of difficulties and regain vitality.
Qian Xin is a senior partner at Joint-Win Partners. He can be contacted by phone at +86 180 1978 7906 and by email at qianxin@joint-win.com
