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Restructuring and insolvency laws are adapting with more innovative approaches toward bankruptcy case management. here we look at developments and analysis from three major jurisdictions

CHINA

HONG KONG

INDIA

颁丑颈苍补’蝉 bankruptcy law system moves toward maturity

It took 12 years to bring 颁丑颈苍补’蝉 Enterprise Bankruptcy Law into existence, with it finally being enacted on 1 June 2007. On 16 April 2024, during the 23rd Chairman’s Meeting of the Standing Committee of the 14th National People’s Congress, the first revisions to the Enterprise Bankruptcy Law, agreed over a full six years, will be incorporated into the annual legislative work plan.

Bankruptcy trial work

Amid the cyclical economic adjustments and structural transformations affecting various industries, Chinese courts persist in their active response to both domestic and international risks and challenges. This concerted effort aims to refine the business environment and foster the development of novel productive forces.

In March 2024, the Supreme People’s Court revealed that in 2023, courts at all levels nationwide concluded an impressive total of 29,000 bankruptcy cases, involving claims amounting to RMB2.3 trillion (USD316.7 billion). Among these, 1,485 cases of reorganisation and settlement were finalised enabling 762 distressed companies to successfully restructure and ensuring stable employment for 118,000 workers. Numerous cases were resolved through the execution-to-bankruptcy procedure, charting a course for the future handling and processing of execution cases.

Across the country, 2,445 primary people’s courts have adjudicated bankruptcy cases, 356 intermediate people’s courts have handled such cases, and 23 high people’s courts have overseen bankruptcy proceedings. There are 17 specialised bankruptcy courts nationwide. Correlating with economic development levels, bankruptcy cases are predominantly concentrated in Jiangsu, Zhejiang and Guangdong provinces.

The administrator, being the pivotal and central figure in managing bankruptcy cases, has an indispensable role. In China, 230 bankruptcy administrator associations have been established, comprising 6,289 registered administrators and 3,728 active administrators who have engaged in handling bankruptcy cases. The administrator’s responsibilities extend beyond mere asset liquidation and debt repayment; they also encompass the co-ordination of all parties’ interests to ensure both fairness and efficiency in the bankruptcy process.

Bankruptcy trends

颁丑颈苍补’蝉 central government embarked on addressing and resolving the challenges faced by state-owned enterprises in 2015. By 2016, the focus had shifted towards optimising the business environment to stimulate economic development and foster innovation. In 2018, the government initiated supply-side structural reforms aimed at optimising resource allocation, promoting economic restructuring and enhancing sustainable economic growth.

By 2023, the government proposed the concept of “establishing the new before abolishing the old”, concentrating on balancing institutional innovation and enterprise development, and promoting more flexible and innovative approaches to bankruptcy case management. These policy shifts have provided companies with a more supportive environment and policy backing, influencing the volume and direction of bankruptcy cases adjudicated by Chinese courts.

The advent of the internet economy and new online shopping paradigms have profoundly impacted physical stores, culminating in the bankruptcy of 25,290 companies in the wholesale and retail sector. The year 2023 witnessed numerous bankruptcy cases within financial institutions, including trust companies and insurance firms, with 11 financial companies seeking dissolution or bankruptcy.

Additionally, 15 listed companies applied for reorganisation in 2023, with 13 successfully navigating the prepackaged reorganisation process, underscoring its efficacy. 颁丑颈苍补’蝉 first government financial restructuring, in the city of Hegang, Heilongjiang province, was also completed in 2023.

Since 2021, the central government has adopted various policies for the real estate industry, including purchase restrictions, loan restrictions, land supply restrictions and strengthened financial supervision. Affected by the cyclical adjustment of the industry and these policies, 18,883 real estate companies went bankrupt. Evergrande Group, China Aoyuan, Sunac Group and other large real estate companies have since applied to the US Court of the Southern District of New York for recognition of overseas debt restructuring procedures.

The supply and demand dynamics of 颁丑颈苍补’蝉 real estate market have changed significantly. The government has established a special team to make comprehensive plans to support the sector, including a whitelist system and financing support.

Commercial banks are involved in reviewing and approving project lists, establishing green channels for compliant projects, optimising the loan approval and issuance processes, allowing separate authorisation quotas, treating projects of different ownership housing enterprises equally, and providing financing support through new loans, extended existing loans, and merger and acquisition loans.

Additionally, separate accounts for projects were created to ensure closed operations and management. The government also retains the option to purchase commercial buildings for conversion into affordable housing.

Cross-border bankruptcy

Chinese courts have recognised several international bankruptcy rulings and procedures, including those from Germany, Japan and Hong Kong. The Beijing Bankruptcy Court applied the principle of legal reciprocity to recognise a bankruptcy ruling of the Aachen District Court in Germany; the Shanghai No. 3 Intermediate People’s Court recognised the compulsory liquidation proceedings of Hong Kong Haoze International Group and the identity of the liquidator, and recognised Japanese civil rehabilitation proceedings made by the Tokyo District Court.

The Xiamen Court in Fujian province accepted the request for judicial assistance in the voluntary liquidation case of the creditors of Shell Environmental Technology Group; the bankruptcy liquidation case of Guangdong Overseas Construction Corporation heard by the Guangzhou Intermediate People’s Court was recognised and assisted in execution by the Hong Kong High Court. The High Court of Hong Kong also ruled on the execution of the keepwell agreement in Nuoxi Capital Co Ltd v Peking University Founder Group, clarifying that the keepwell obligations are binding and enforceable.

As China continues to open up to the outside world, cross-border bankruptcy cases have gradually increased. This requires Chinese courts to be familiar with domestic bankruptcy laws, understand and follow international bankruptcy laws, and actively co-operate with international judicial institutions to ensure the smooth resolution of cross-border bankruptcy cases.

The implementation of amendments to the Company Law and its implications for the Enterprise Bankruptcy Law. China will implement the Company Law amendment on 1 July 2024. The new law stipulates that when a company considers applying for bankruptcy, it should listen to the opinions of the company’s labour union and seek the opinions and suggestions of employees through the workers’ congress, or other forms.

Based on the principle of social responsibility, more entities can become priority creditors or be recognised as common benefit debts in bankruptcy proceedings and receive priority in repayment.

If the company cannot pay its due debts, the company or creditors have the right to require shareholders to pay capital contributions in advance, and the company’s board of directors is stipulated to have payment and liquidation obligations.

If a shareholder uses two or more companies under their control to abuse the company’s independent status as a legal person and the limited liability of shareholders, evade debts and seriously damage the interests of the company’s creditors, they shall bear joint and several liability for the company’s debts. This provides clear rules for de facto merger bankruptcy and lifting the corporate veil.

The new company law enhances shareholders’ right to information. Should a company refuse inspection, shareholders are entitled to file a lawsuit in the People’s Court. Entities or registration authorities responsible for revoking, closing or cancelling a company can request the court to appoint personnel to form a liquidation team. These amendments provide a solid legal foundation for applying for and processing bankruptcy cases.

Looking ahead

Looking forward to the bankruptcy legislation in China in 2024, attention can be drawn to the following aspects:

1. The precise amendments to the Corporate Bankruptcy Law;
2. The specific impact of the new Company Law on corporate bankruptcy;
3. The effects of implementing bankruptcy proceedings for real estate companies, including cross-border US-dollar debt restructuring;
4. Strategies for managing the bankruptcy of financial institutions; and
5. The standardisation, regulation and refinement of bankruptcy management work.

As the legal system continues to improve and enforcement becomes stronger, 颁丑颈苍补’蝉 bankruptcy law system will become more mature, providing a strong guarantee for optimising the business environment, protecting the rights and interests of creditors and debtors, and promoting high-quality economic development.

DACHENG LAW OFFICES
16-21/F, Tower B, ZT International Centre,
No.10, Chaoyangmen Nandajie,
Chaoyang District, Beijing, 100020, China
Contact details:
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Email: beijing@dentons.cn

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India and the evolution of an insolvency code

The Indian experience and evolution of insolvency laws has been slow, in contrast to the economic strides made by India in the past few decades. This gap was addressed with the introduction of the transformative Insolvency and Bankruptcy Code, 2016 (IBC) altering the restructuring and insolvency regime in India. The IBC is designed to consolidate and amend laws relating to reorganisation and insolvency in a time-bound manner.

This article provides an overview of the evolution, framework and impact of the IBC in India, including key statistics and vital landmark cases, with an emphasis on corporate insolvency.

Need for a consolidated code

Before the advent of the IBC, restructuring and insolvency laws in India were fragmented and ineffective. The framework comprised several laws that had varied and conflicting legislation and jurisdiction, creating a “race to collect” among creditors, which often gave the first mover an advantage, leading to inefficient distribution.

The IBC, being a consolidated code, supplemented with establishment of dedicated tribunal and appellate bodies, was a welcome jumpstart to the insolvency regime in India. This overhauled regime is monitored by a central body, the Insolvency and Bankruptcy Board of India (IBBI), which regulates the process as well as the profession of insolvency professionals, including recommending amendments to the IBC.

These practical experiences have led to regular amendments plugging several loopholes and bottlenecks in the short lifespan of the code. Landmark rulings have furtherclarified and settled numerous issues promoting the robustness and processes under the IBC.

Success of the IBC

The soul of the IBC is to restructure and rehabilitate insolvent entities. According to data from the IBBI, as of June 2023, out of 6,815 cases admitted under the IBC, 2,622 (55%) of the closed cases had been rescued. The average recovery for creditors has ranged between 32 to 43 cents per US dollar for an ongoing concern, or about 168 cents/USD on the liquidation value of stressed assets.

The robustness of the IBC has also allowed complex and high-value businesses such as Essar Steel and Bhushan Steel to be rescued, resulting in substantial recovery in excess of USD4-5 billion for creditors in such cases, or a rare 100% recovery of the debt of about USD1 billion for several creditor banks in the resolution of Binani Cements.

The establishment of special tribunals like the National Company Law Tribunal (NCLT) has further expedited the resolution process, substantially reducing the time undertaken for the resolution process.

This success can be furtherassessed by the fact that more than USD100 billion worth of debt stands resolved since inception of the IBC from both direct debt resolution through the Corporate Insolvency Resolution Process (CIRP) and out-of-court settlements.

The IBC process

Admission. The CIRP is a creditor-led process and can be initiated by either a financial creditor, operational creditor, or the corporate entity itself by way of an application before the NCLT. The Supreme Court, in Innoventive Industries, the first insolvency case before it under the IBC, clarified the law that once a debt (over the threshold) is established and the application is complete, then the NCLT is bound to admit the entity into the CIRP.

Upon admission, the NCLT appoints an interim resolution professional (IRP) to take charge of the debtor, its assets and business operations. The IRP is dutybound to ensure the entity runs as a going concern and takes over all assets for resolution.

Committee of Creditors and resolution professional. The first step of the IRP is to create a Committee of Creditors (CoC), each having a voting right based on the value of debt held. The CoC has the authority to confirm the IRP, oversee the CIRP, and approve or reject resolution plans submitted by prospective applicants towards the debtor.

All decisions of the CoC require a minimum of 66% majority vote, and their approval is crucial for many decisions including the acceptance of a resolution plan. As held by the Supreme Court, the commercial wisdom of the CoC is paramount and cannot be interfered with by the judiciary.

The resolution professional (RP) once confirmed plays a crucial role in managing the debtor’s assets, running the business as a going concern, and facilitating the resolution process by preparing an Information Memorandum, and inviting and scrutinising potential resolution plans.

However, the role of the RP including his/her duties have not been short of controversies, where the Supreme Court has confirmed in the resolution of Essar Steel (rescued by ArcelorMittal India) that the RP is only a mere facilitator of the CIRP and accordingly affirmed fetters on his/her powers.

Moratorium. Upon admission, there is an imposition of a moratorium or automatic stay on all pending legal proceedings, and prohibition on the initiation of new civil proceedings against the debtor entity including the stoppage of interest payments.

Such period is initially imposed for 180 days (extendable for another 90 days, but with a maximum period of 330 days) to allow the RP to file an approved plan before the NCLT. The moratorium helps to prevent asset stripping until culmination of the CIRP, and allows the entity to run as a going concern.

Resolution plan, appeal process and challenges. Resolution plans submitted by prospective applicants are evaluated and approved by the CoC on aspects like technical compliance, rescue process and debt recovery. Once a plan is voted upon and approved, it is submitted to the NCLT for final approval.

The NCLT is to ensure that the resolution plan complies with all statutory requirements, and upholds and safeguards the interests of all stakeholders. The resolution plan becomes binding on all parties upon approval. The acceptance of the plan by the CoC is considered a business decision and cannot be generally interfered with by the courts.

Another important judicial development is the evolution and acceptance of the “clean slate doctrine” initially propounded by the Supreme Court, and now codified, where all previous pending, adjudicated or unadjudicated debts and liabilities are treated as cleaned from the entity on the approval of the terms of the resolution plan by the NCLT.

However, the IBC is not without challenges, with delayed pre-admission timelines (which at times have exceeded 1.5 years), and appeals against NCLT decisions. Additionally, issues such as the valuation of assets, disputes among creditors, and appeals by former promoters of debtor companies against the resolution plans pose significant hurdles in a timely completion of the process.

Liquidation

When no viable resolution plan is approved within the stipulated timeframe, the debtor is ordered into liquidation. The RP is often appointed to the role of the liquidator to oversee the liquidation process, sell the debtor’s assets and distribute the proceeds among the creditors in a piecemeal manner on the basis of priority of debt.

However, secured creditors in liquidation have the option to either enforce their security outside the liquidation process or relinquish their security interest and participate in the liquidation proceeds for common bargaining power.

Extraordinary powers

The RP or liquidator also possesses extraordinary powers to void transactions made prior to admission into insolvency that are deemed undervalued, preferential or fraudulent, to recoup value for the creditors and turn back wrongful gains from unscrupulous promoters. However, these are often delayed by legal challenges by unscrupulous promoters or persons with vested interests.

Conclusion

The IBC has undoubtedly transformed 含羞草社区 insolvency and restructuring landscape, providing a streamlined, efficient and time-bound process for resolving insolvency. Despite the challenges and complexities involved, the IBC has shown significant promise in improving recovery rates for creditors and ensuring the timely resolution of distressed assets.

LUTHRA AND LUTHRA LAW
OFFICES INDIA
1st and 9th Floors, Ashoka Estate,
24 Barakhamba Road, New Delhi – 110 001,
India
Contact details:
Tel: +91 11 41215100
Email: delhi@luthra.com

 

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Focus on restructuring and insolvency in Hong Kong

Courts in Hong Kong – generally a creditor-friendly jurisdiction – may wind up local companies and, if certain conditions are met, foreign companies incorporated in other jurisdictions. Hong Kong has no statutory corporate rescue regime similar to the UK administration regime and the US chapter 11 debtor-in-possession regime.

The Hong Kong provisional liquidation regime also does not provide a viable tool for debtors to restructure debts because:

1. the powers of the management are displaced by the court-appointed provisional liquidator; and
2. a provisional liquidator cannot be appointed solely to restructure a company’s debts.

Schemes of arrangement remain an important restructuring tool but do not provide the debtor with any moratorium against creditors’ actions (including filing for the winding-up of the debtor). Accordingly, distressed conglomerates have had to find creative arguments to fend off winding-up petitions and to find breathing space to restructure their debts.

This article summarises how the courts have recently addressed arguments from debtors to dismiss winding-up petitions or adjourn winding-up hearings on the following bases:

• Bondholders’ standing to petition for winding-up;
• Adjournments to further restructuring discussions;
• Soft-touch provisional liquidations in the company’s place of incorporation; and
• Disputes concerning debts subject to arbitration clauses and/or exclusive jurisdiction clauses

Bondholders’ winding-up petitions

In recent bond defaults, debtors have sought to dismiss winding-up petitions from indirect beneficial bondholders on the basis of lack of standing. They argue that the indirect beneficial bondholders are not creditors, nor contingent or prospective creditors with standing to petition for winding-up in Hong Kong.

This is because, in a global note structure, the trustee holds the benefit of the bonds, and the actual global note itself is typically held by a common depository (or its nominee) as a single holder, while indirect beneficial bondholders hold their interests in the global note only indirectly through the clearing system via various layers of custodians and other intermediaries.

In the case of Leading, the court refused to recognise indirect beneficial bondholders’ standing to present a winding-up petition as a contingent creditor. The court found that an “existing obligation” is required for a person to qualify as a contingent creditor, and in the case of an indirect beneficial bondholder, no such obligation arose unless a definitive note is issued.

The court considered that the global note structure for bonds is premised on action to be pursued by the trustee exclusively on behalf of the bondholders as a class, as can been inferred from the “no action” clause, and recognising a mere beneficial holder of the note as a contingent creditor may lead to duplicity of action and give rise to potential abuse.

The Leading decision is significant because it means that, to overcome the standing hurdle, indirect beneficial bondholders must work proactively with the trustee and factor in minimum instruction thresholds and trustees’ indemnity requirements. These requirements (and associated costs) may discourage bondholders from taking action against debtors following a default.

In typical New York law indentures, bondholders must hold at least 25% in outstanding principal amount of the bond tranche (which may be a sizeable stake) to instruct the trustee to take action. The indentures typically do not oblige trustees to take action until instructing bondholders provide satisfactory pre-funding and indemnity.

Restructuring discussions

Debtors have also sought adjournment of winding-up hearings on the basis that negotiating and implementing a company’s debt restructuring needs time. Recent cases reaffirm that it is not sufficient for a company to cite commercial discussions with creditors or generally assert that it has been actively pursuing a restructuring proposal.

In the Jiayuan case, the court indicated the debtor should demonstrate that it has prepared a concrete restructuring proposal with the support of the requisite majorities of creditors to prove that adjourning the petition serves some useful purpose.

The court did not allow further adjournment of the winding-up hearing if:

1. The debtor announced its intention to terminate the exchange offer, which was intended to consummate the restructuring;
2. The winding-up hearing has been adjourned for eight months without meaningful progress; and
3. Some creditors supported the debtor’s immediate winding-up.

In the Dexin case, although the company is listed, the court issued a winding-up order against the company on the first hearing before the company judge without any adjournment. The company could not produce even a term sheet for the restructuring after the company has been in default of payment on its notes for over 18 months. Apparently only a small percentage of its noteholders opposed the winding-up.

Soft-touch provisional liquidations in the company’s place of incorporation. Given the absence of a statutory moratorium regime, distressed Hong Kong companies incorporated in offshore jurisdictions have sought to appoint a “soft-touch” provisional liquidator in the offshore jurisdiction where they are incorporated (e.g. Cayman Islands). Subject to recognition by Hong Kong courts, this would allow them to:

1. benefit from the stay of proceedings in the “soft-touch” provisional liquidation; and
2. use the offshore soft-touch provisional liquidation to seek adjournment of the Hong Kong winding-up hearing (if filed in Hong Kong).

In recent cases, the effectiveness of the above-mentioned technique has become questionable given that the courts have become more conservative in recognising liquidators and provisional liquidators appointed in a foreign jurisdiction where the company is incorporated, if the company has sufficient connection with Hong Kong and could have been wound up there.

Thus, debtors with their centre of main interest in Hong Kong and local creditors cannot readily rely on offshore soft-touch liquidations to import a moratorium into Hong Kong as a slingshot tactic to fend off winding-up petitions, or to appoint provisional liquidators solely to pursue a restructuring.

In the Lamtex case, the court ruled that recognition of an offshore provisional liquidator does not automatically give rise to a stay of proceedings. It declined to adjourn the Hong Kong winding-up petition to give primacy to the company’s Bermudan proceedings and appointment of provisional liquidators, as doing so would be artificial given the company’s centre of main interest and its creditors were in mainland China and Hong Kong.

Similarly, in the China Bozza case, the court was concerned that the soft-touch provisional liquidators failed to show regard to creditors’ interests by not providing details of the restructuring, or evidence to support the application for their appointment. The court found it unnecessary to appoint offshore provisional liquidators for the restructuring. To adjourn the petition in Hong Kong, the company should have sought restructuring advice locally and negotiated with creditors instead.

Disputes concerning debts subject to arbitration clauses and/or exclusive jurisdiction clauses. Debtors have also sought to argue that if there is a dispute over the underlying debts and such debts are subject to arbitration or exclusive jurisdiction clauses, the court should stay the winding-up proceedings so that the proper forum can resolve the underlying disputes.

In recent cases, the court deferred disputes of the underlying debt to the pre-agreed dispute resolution forum, except in countervailing factors such as when the dispute borders on the frivolous, or abuse of process. This approach makes it more difficult for creditors to use winding-up petitions as a pressure point or recovery tactic if the underlying agreements contain arbitration clauses and exclusive jurisdiction clauses in favour of non-Hong Kong courts.

In the Guy Lam case, the court affirmed the principle barring countervailing factors such as risk of insolvency affecting third parties, or a dispute that borders on the frivolous or abuse of process, the court would stay winding-up proceedings so that the dispute can be resolved in the foreign court specified in the exclusive jurisdiction clause.

In the Simplicity case, the court considered the situation in which the debtor company had not complied with an arbitration clause by failing to actively pursue arbitration. The court held that an intention to arbitrate was sufficient to stay the winding-up petition, in the absence of a “frivolous or abuse of process” defence.

In the Arjowiggins case, the court upheld a stay on a winding-up petition in which the debtor company raised a cross-claim subject to an arbitration agreement.

The Hong Kong courts’ approach is different from that in the latest Privy Council decision in the Halimeda case, which held that winding-up petitions will no longer be subject to an automatic stay even if the disputed debt is subject to an arbitration or exclusive jurisdiction clause. How the Hong Kong Court will reconcile between Halimeda and the line of authorities described above remains uncertain.

LATHAM & WATKINS
18th Floor, One Exchange Square,
8 Connaught Place, Central, Hong Kong
Contact details:
Tel: +852 2912 2500

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