Under the administrator-centric framework of the Bankruptcy Law, the administrator is a pivotal figure in bankruptcy proceedings. With the growth of China’s market economy and the rise in bankruptcy cases, corporate legal teams must understand the crucial roles and obligations of bankruptcy administrators to ensure better collaboration and safeguard corporate interests during bankruptcy-related matters.
This article delves into the roles and obligations of bankruptcy administrators, offering insights for corporate reference.
Combination of roles
Partner
W&H Law Firm
Tel: +86 138 1193 9449
E-mail:
wangzhaotong@weihenglaw.com
Considering the complexity and unique nature of bankruptcy proceedings, the administrator embodies a combination of roles.
Organiser. Bankruptcy proceedings involve pooling, managing and distributing assets to settle claims. In this stakeholder-driven process, the administrator serves a central role as the organiser, responsible for notifying creditors, issuing announcements and arranging meetings.
Proposer. The administrator is to present plans for matters requiring resolutions of the creditors’ meeting, such as asset management, asset valuation, distribution plans, reorganisation drafts and bankruptcy settlement agreements for decisions by the creditors’ meeting or the court.
Decision maker. The administrator is required to make independent decisions on routine operations and urgent matters that cannot await resolutions of the creditors’ meeting, such as the prompt sale of perishable, depreciating or high-maintenance assets.
Judiciary. Administrators should approach the review of creditor claims, recovery rights and set-off applications as quasi-judicial bodies, making assessment and decisions in line with judicial standards.
Executor. The administrator must strictly enforce resolutions passed by the creditors’ meeting and decisions issued by courts. If changed circumstances hinder execution, the administrator should seek amendments from the creditors’ meeting or the courts.
Supervisor. The administrator acts as a supervisor in the debtor-managed reorganisation proceedings and in the execution of the reorganisation plan. The oversight spans prior, in-process and subsequent stages, covering both specific major issues and the overall situation.
Obligations
Article 27 of the Bankruptcy Law mandates that the administrator perform duties diligently and faithfully. Such obligations, rooted in the fiduciary and diligence duties of directors, are broadly applied throughout the bankruptcy process. Key areas of focus include the following:
Effective team structure. The administrator, usually acting as an institution rather than as an individual, should form a team suited to its responsibilities, ensuring alignment in team size, professional expertise and work approach.
Proactive investigation. Considered by the bankrupt company as an external intervenor, the administrator is tasked with actively driving the bankruptcy process and must swiftly acquire essential information to facilitate its duties. The top priority is to lawfully and effectively investigate key facts, including those related to assets, liabilities, pending contracts and labour relations.
Appropriate information disclosure. As per regulations, the administrator must present to the creditors’ meeting the required reports on performance, asset investigations and creditor reviews. Individual creditors are also entitled to access key financial and operational information necessary for bankruptcy proceedings, including the debtor’s property status report, creditors’ meeting resolutions, creditors’ committee resolutions, and administrator supervision reports. Inaccurate, incomplete or false disclosures may expose the administrator to liability.
Prevention of self-dealing. Self-dealing refers to transactions conducted by fiduciaries for personal gain, rather than the benefit of others. Under the Bankruptcy Law, the administrator is to remain neutral and impartial. Therefore, it is required to refrain from self-dealing, neither engaging in transactions with the bankrupt entity it represents nor improperly seeking personal benefits during the bankruptcy process. The administrator is entitled only to its remuneration as legitimate compensation.
Prompt process advancement. The administrator is required to expedite proceedings to promptly define the rights and obligations of involved parties. While the Bankruptcy Law imposes clear deadlines for reorganisation proceedings, it lacks specific timelines for liquidation and settlement processes, leading to prolonged case delays. In practice, unreasonable procedural delays constitute a breach of the administrator’s duty of diligence.
Positive communication with creditors. During the bankruptcy proceedings, the administrator should maintain open dialogue with creditors. Prior to creditors’ meetings, the administrator should extensively seek creditors’ feedback, transparently disclose decision-making contexts, build consensus on proposed plans and address common concerns raised by creditors.
Adherence to professional standards. Given the inherent risks of business decisions, the administrator as a decision-maker is shielded by the business judgment rule from liability for decisions later deemed improper, except in cases of wilful misconduct or gross negligence. However, any violation of laws, regulations or professional standards constitutes a breach of duty of diligence, warranting accountability.
As bankruptcy law implementation progresses, the bankruptcy administrator framework is set to evolve, bolstering market players with stronger legal protections.
Wang Zhaotong is a partner at W&H Law Firm. He can be contacted by phone at +86 138 1193 9449 and by email at wangzhaotong@weihenglaw.com
