The bankruptcy restructuring process for listed companies plays a crucial role in the intricate landscape of China’s capital market, providing distressed enterprises a second chance while ensuring optimal resource allocation and market stability.
A significant milestone in this restructuring framework was passed on 31 December 2024 with the Supreme People’s Court (SPC) and China Securities Regulatory Commission (CSRC) jointly issuing the Minutes of the Symposium on Effectively Adjudicating Listed Company Bankruptcy Restructuring Cases (2024 minutes).
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Responding to changing times. In 2012, the SPC established a preliminary regulatory framework for handling restructuring cases with the Minutes of the Symposium on Adjudicating Listed Company Bankruptcy Restructuring Cases (2012 minutes).
This unified judicial standards and facilitated the restructuring of numerous distressed listed companies.
However, the evolving capital market has given rise to new transaction models and risk factors, which the 2012 minutes proved inadequate in addressing.
Against this backdrop, the 2024 minutes were introduced to tackle current challenges and align restructuring practices with the changing market.
Integrating judicial and administrative oversight. Unlike the 2012 minutes, which were issued solely by the SPC and focused on standardising legal application and procedural justice from a judicial perspective, the 2024 minutes now have the CSRC as a co-issuer.
Given the CSRC’s extensive experience in overseeing listed companies, regulating capital operations and protecting investors, this collaboration marks a shift from a purely judicial perspective to an integrated judicial-administrative regulatory approach.
As a result, the courts will be able to better align their rulings with securities regulatory policies and ensure accurate assessment of corporate compliance in information disclosure and operational standards.
In the meantime, the CSRC can leverage judicial consensus of the 2024 minutes to combat securities violations during restructuring of listed companies, safeguarding market order and investor interests.
Advancing trial principles. The 2024 minutes make significant breakthroughs in adjudication principles. By highlighting the goal of “fostering the healthy development of the capital market”, they require the courts to assess restructuring cases within the context of the capital market ecosystem, weighing their impact.
For instance, for the restructuring of blue-chip companies, emphasis is placed on evaluating their impact on index stability and investor expectations on long-term value. On the other hand, for emerging industry firms, the focus should be on whether the process can drive innovation and industrial upgrades.
There is also a shift from rescuing distressed enterprises to enhancing the restructuring quality and efficiency, addressing pain points in previous practices.
The 2012 minutes took a rescue-oriented approach, which aimed at short-term financial relief with limited means, often leaving distressed companies with weak core businesses and low competitiveness after restructuring.
The 2024 minutes, however, emphasise improving core business operations through diverse measures, such as identifying root causes of distress, adopting new technologies, expanding market channels and optimising corporate governance. This holistic approach aims to enhance financial health, business performance and governance for sustainable development.
Calibrating jurisdiction identification and restructuring value. Under the 2012 minutes, the jurisdiction of a listed company was determined based on its domicile, leading to disputes over jurisdiction of shell companies that undermined judicial fairness and the restructuring order.
To address this, the 2024 minutes require a listed company’s domicile to be active for at least one year before it is used to determine the appropriate court for jurisdiction. This effectively curbs jurisdictional arbitrage and ensures cases are handled by courts familiar with the company’s circumstances. Furthermore, they refine the co-ordination mechanism for cross-regional and cross-border restructuring cases, so judicial resources can be allocated in an optimal way.
Additionally, due to the lack of clear and objective criteria for restructuring eligibility, the 2012 minutes allowed some struggling companies to enter the process without a realistic chance of recovery, ultimately leading to a waste of resources.
In contrast, the 2024 minutes establish a list that excludes companies with serious legal violations or major disclosure deficiencies, aiming to direct resources to viable enterprises and improve the market environment.
Optimising key processes. A well-crafted proposal is essential for a successful restructuring case. The 2024 minutes therefore establish stricter requirements for such proposals, mandating detailed plans on debt repayment, asset disposal and operational improvements, alongside clear profit forecasts and benchmark indicators.
Information disclosure has, meanwhile, evolved from selective reporting at key milestones to continual and dynamic disclosure.
Core content of the proposal is also required to be presented in an easy to understand way across diverse platforms.
Introduction of a financial advisory system marks another key enhancement. Bringing financial expertise into the restructuring process, experienced securities firms now serve as financial advisers to help draft the restructuring plans, identify potential investors, design financing instruments and supervise information disclosure.
The 2024 minutes also reinforce collaboration between the judicial and regulatory bodies. Through a major event reporting mechanism, courts and the CSRC can promptly exchange information on detected violations and co-ordinate responses.
By data sharing and aligned standards, they can jointly oversee critical aspects to foster a transparent and regulated environment throughout the restructuring process.
Key takeaway
The 2024 minutes are a timely response to evolving needs of the capital market. By refining the bankruptcy restructuring framework for listed companies, they provide clearer guidance for distressed enterprises and establish well-defined rules for market participants.
Despite challenges ahead, enforcement of the 2024 minutes is expected to advance the legalisation of bankruptcy restructuring in China and inject vitality into the capital market.
Peng Wei is a partner at Kangda Law Firm. He can be contacted by phone at +86 10 5086 7703 and by email at wei.peng@kangdalawyers.com
