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It has been mostly doom and gloom for China¡¯s real estate industry since 2021. In the market, financial-like companies are facing unprecedented challenges, many having defaulted on their offshore debt obligations, and seeking solutions. This article provides distressed companies with practical advice to resolve offshore debts through restructuring plans involving dual or multi-tiered transactions.

A plan that complies

When resolving overseas debts, companies often formulate their restructuring plans through multiple rounds of negotiations with their overseas creditors. To implement the plan, the steps are usually as follows:

1. Submit the restructuring plan to the courts in offshore jurisdictions (Hong Kong, Cayman Islands or British Virgin Islands);
2. Declare with the Bankruptcy Court for the Southern District of New York under chapter 15 of the US Bankruptcy Code if US creditors are involved; and
3. Trigger court protection measures for the company¡¯s assets in the US through these judicial procedures.

With the restructuring plan, the defaulting business and its foreign subsidiaries issue new notes and shares to overseas creditors ¨C convertible with the debts ¨C while completing the overall extension of standardised public debts, either domestically, overseas or cross-border. For such restructuring plans involving dual or multi-tiered transactions, the company¡¯s stakeholders and professionals across various jurisdictions need to work very closely together.

Matters that may be governed and regulated by Chinese law in these restructuring transactions include, but are not limited to:

1. Registering the medium and long-term foreign debt of the enterprise with the National Development and Reform Commission (NDRC);
2. Filing for overseas securities issuance with the China Securities Regulatory Commission (CSRC);
3. Conducting outbound guarantee procedures with the State Administration of Foreign Exchange (SAFE); and
4. Ensuring compliance of the restructuring plan, in part and as a whole, domestically and overseas, under Chinese law, with the purpose of attracting high-quality assets from a potential third party to ultimately save the business from delisting or bankruptcy liquidation.

The competent administrative authority will evaluate the compliance and credit status of the applying enterprise, its controlling shareholders, actual controllers and senior management personnel, to see whether it is qualified to initiate the application. In particular, it will check their criminal records to see if there were any serious violations of the law within China, or if there was any case filed due to suspected major illegal acts or criminal offences.

Furthermore, the authority will review the internal decision-making process, how they approve decisions/give authorisations, both internally and externally, and whether the funds raised have been legally utilised, among other things, to determine whether the application meets the requirements for approval, filing and registration procedures.

Improving the odds

However, unlike other companies that issue overseas bonds to support daily operations, distressed companies regard such issuances as an important means of debt resolution. In many cases, these companies no longer have good credit standings, so it is possible that they cannot legally issue any overseas securities, or become listed. This may present difficulties for distressed companies wishing to resolve their debts in such a manner.

For distressed companies resolving overseas debts via dual or multi-tiered restructurings, the authors would like to offer some practical advice.

Always ensure compliance with the laws, and treat the debt resolution process as an opportunity to accelerate compliance development. For any matters before, during or after the restructuring, all registration and filing needs to be handled timely and carefully.

Pay close attention to the compliance issues related to China¡¯s foreign exchange management if the plan involves cross-border guarantees. Companies should carefully study the national foreign exchange management regulations and fully communicate with the SAFE to assess the necessity of outbound guarantee procedures for overseas loans.

Review prohibited matters under Chinese law when submitting applications to the NDRC and CSRC regarding foreign exchange procedures. Please note that the authorities will check the bondholder¡¯s feedback for domestic standardised public debt products issued by the company, as well as its affiliations with senior management, which includes anything that might seriously affect the issuance.

If there are inconsistencies with the conditions for issuance and restructuring transactions or even prohibited circumstances, the company and its entrusted PRC legal counsel should promptly adopt methods such as diversified dispute resolution or compliance construction and promptly initiate a regulatory response, including negotiations with stakeholders of existing and/or prospective assets, separate engagement of external professional mediation, special arbitration and litigation to handle the situation in a manner and mindset similar to that of a reorganisation administrator.

Ensure the authenticity and completeness of provided materials. During the approval, filing and registration procedures, the relevant application documents and supporting materials issued by the company and its engaged professional institutions should truthfully disclose the objective situation of the company and strictly avoid concealment, false or misleading statements, or any material omissions. These parties should also provide sufficient reasoning based on the actual situation and particularities of the company in a practical and realistic manner.

To the greatest extent possible, uphold the company¡¯s credit standing. For any lawsuits or breaches that already existed, the company should seek possible solutions, for example, credit repair, settlements with the counterparties, and special compliance development. Most importantly, do not allow the company¡¯s credit to go further downhill.

To summarise, close co-operation between experts, both domestic and overseas, along with the company¡¯s compliance management are key for distressed companies to resolve their debts through complex restructuring plans and live to fight another day.

Jeffrey Quan is a senior partner at ETR Law Firm. He can be contacted by phone at +86 20 3718 1230 and by email at qzh@etrlawfirm.com
Isabella Yeung is a partner at ETR Law Firm. She can be contacted by phone at +86 20 3718 1333 and by email at isa@etrlawfirm.com