Cases on National Courts Protecting the Resumption of Work during the Epidemic Period (Second Batch) (Mainland China)

Jolene Chen

On March 31, 2020, the Supreme People’s Court released the Cases on National Courts Protecting the Resumption of Work during the Epidemic Period (Second Batch) in showing how the courts took judicial action in cases involving corporate reorganization and bankruptcy, using measures such as extending the reorganization plan implementation deadline, the use of trusts to maintain business operations and others so as to help them through those difficult times, protect the rights of the bankrupt entity and its creditors, and provide support to medical supplies for the epidemic period, thereby achieving wins for multiple parties.  This article will select two typical cases for brief introduction.

In the case involving the reorganization of Zhejiang Yuansheng Pharmaceutical Chain Co., Ltd., (“Yuansheng”) the Kaihua County People’s Court of Zhejiang Province ruled to accept the bankruptcy reorganization of Yuansheng on November 5, 2019.  In entering the reorganization process, the pharmaceutical company was no longer able to operate independently and 11 of its 36 stores were closed down, with the remainder facing supply shortages and imminent shutdown, and over a hundred employees about to become unemployed.  After accepting the case, in order to maintain the operating value of the enterprise, the court decided to keep the company running to maintain its operating value.  After investigating and assessing the company’s business operations, the bankruptcy administrator conducted public invitation and screening before handing over all of the existing stores of the pharmaceutical company to be operated by Kaihua Yiniantang Pharmaceutical Co., Ltd., with the existing employees keeping their jobs. 23 stores resumed operation in January 2020. Since the outbreak at the end of January, the administrator proactively responded to the emergency demands of the state, and the 23 stores were able to remain open for business and promised to sell products for fair prices, thereby fulfilling their social responsibility through actions and properly ensured meeting the protection needs of the people.  In this case, the court decided to keep the company running after listening to the opinions of the company’s main creditors and effectively preserved and increased of value of debtor’s assets by guiding the administrator to invite appropriate investors to participate in the reorganization negotiations.  In addition, by ensuring the medical needs of the people during the epidemic, this was a great contribution to maintaining social stability.

In the case of a procedural transfer from enforcement to bankruptcy of Sichuan Southwest Medical Equipment Co., Ltd. (“Southwest”), Southwest specializes in the development, production, sales, after-sales service and consultation of medical X-ray machines.  Impacted by market changes and the overall losses of the group after 2014, Southwest gradually encountered operational difficulties and has incurred about RMB 760 million in direct liabilities and guarantees for around RMB 450 million, with more than 300 known creditors of various types.  During the enforcement process, Southwest took the initiative to apply to the court for a procedural transfer from enforcement to bankruptcy.  The People’s Court of the Chengdu High-tech Industrial Development Zone of Sichuan Province accepted Southwest’s bankruptcy procedure transfer in September 2019 in consideration of the fair repayment to all creditors and the timely transfer for review.  During the epidemic, an entity outside the province wished to use Southwest’s clean facilities to produce protective masks, while the medical X-ray machine market continues to flourish.  The court comprehensively considered the necessity and feasibility of such cooperation under the epidemic and the positive impact of the resumption of work and production through attracting potential investors to reorganize the enterprise, so when Southwest filed the application on February 3, 2020, the court approved this venture to produce protective masks and resume production and operation of medical X-ray machines.  As a result of the positive impact from the resumption of work and production, currently there are two interested investors that have proposed to participate in the reorganization and investment scheme.  In this case, the court accurately identified the cause of bankruptcy and timely grasped the window of opportunity to approve Southwest’s cooperation proposal, thereby maximizing the benefits of the creditors, the debtor’s asset value and social effects at large, as well as creating a precious cash flow for the company.  This not only effectively alleviated the shortage of local medical protection supplies, but also enhanced the value and possibility of corporate reorganization by successfully attracting potential investors to offer an “olive branch” and actively setting up the conditions for the return of the enterprise.