With the ever increasing number of bankruptcy cases, it is increasingly important that a people’s court tries bankruptcy cases in orderly fashion pursuant to law. On June 15, 2016, the Supreme People’s Court released for the first time ten model cases involving bankruptcy and promotion of supply-side structural reform, including bankruptcy reorganization cases, liquidation cases, joint bankruptcy of affiliated enterprises, conversion of reorganization proceedings to liquidation proceedings, referral of enforcement cases to bankruptcy review, etc. The common philosophy reflected by the cases is that enterprises that may still be saved can be revived through bankruptcy reorganization and the reorganization system, and those that are not likely or have no value to be saved may a timely initiate a liquidation proceeding. The ten cases released by the Supreme People’s Court carry important significance for the present implementation of the Enterprise Bankruptcy Law and for the cleanup and disposal of “zombie” enterprises. A detailed explanation about highlighted cases is as follows:
1. The court should be prudent in exercising its compulsory approval right and help revive enterprises by providing guidance to the active conduct of administrators. In the bankruptcy reorganization case involving China Bicycle (Holdings) Limited, the company had been deep in losses and was requested by the Shenzhen Stock Exchange to adopt a reorganization plan or be delisted, but the reorganization plan of the company was not adopted by the ordinary creditors. The Shenzhen Intermediate People’s Court provided guidance to the administrators on taking active action, such as giving a full explanation to the ordinary creditors that a reorganization could greatly increase the asset repayment ratio, and the reorganization plan was then adopted with overwhelming votes. Even when the reorganization plan appeared to have failed, the people’s court did not resort to its compulsory approval right, but instead simply guided the administrators on their actions which ultimately saved the company. This case would carry greater significance to courts in the future in the sense that the autonomy of the parties should be respected and seek to persuade the creditors through a focus on their interests and future development.
2. If a court finds in the course of enforcement that a target enterprise meets the conditions under the Enterprise Bankruptcy Law for hearing a bankruptcy case, the bankruptcy process shall be used to clean up the debts so that all creditors may be paid fairly. In the course of enforcing bankruptcy liquidation case involving Zhejiang Anji Tongtai Leather Co., Ltd., the court in Anji found that the enforced party was the defendant and the enforced party in multiple cases in the province, which means that the company does not have sufficient capital to pay its debts. After obtaining the written consent of some of the enforcement petitioners, the court referred this case to bankruptcy review. In the end, all debts to the employees and all unpaid taxes were fully repaid, and the repayment ratio for ordinary debts was relatively high. The conversion of the enforcement proceeding to a bankruptcy proceeding not only realized fair repayment to the creditors but also resolved enforcement difficulty issues, which should prove to be instructive to future courts handling enforcement cases where the company has insufficient capital to repay its debts.
3. Courts actively explored incorporating out-of-court restructuring arrangements into reorganization plans. In the bankruptcy reorganization case involving China’s Second Heavy Machinery Factory (hereinafter, “SHMF”) and SHMF’s Deyang Heavy Industries Co., Ltd. (hereinafter, “DHIC”), the two companies have continually incurred losses for several years. With the support of the relevant units under the State-owned Assets Supervision and Administration Commission of the State Council, various creditors engaged in out-of-court restructuring negotiations with SHMF, DHIC and their shareholders and arrived at a framework for restructuring arrangements. When an ordinary creditor petitioned to the court for reorganization afterwards, the court approved the reorganization plan, terminated the restructuring proceeding and incorporated the principles formed in the restructuring arrangements in the reorganization plan. Ultimately, 100% of the financial claims were satisfied, and other non-financial claims were to be satisfied in the next two to five years. The courtÕs active pursuit to find and realize out-of-court restructuring in judicial reorganization has set a repeatable example for the judicial reorganization of a business that has fell into difficulties but has a chance to rise again.
4. When the draft reorganization plan was voted upon but not adopted, the court may timely convert the reorganization proceeding into liquidation. In the case involving the joint bankruptcy of Zhijiang Glass Co., Ltd. and its affiliated companies, all four companies were in debt due to poor management. Since each of them have satisfied the requirements for proceeding with bankruptcy and they all still possess production capability, the court believed that they have a certain reorganization value. However, the draft reorganization plan was subsequently not approved by the ordinary creditors during the deliberation on the draft reorganization plan. Ultimately, the court terminated the reorganization proceeding and switched to liquidation. In the liquidation proceeding, the companies were put into “trustee operations” to allow them to continue production during bankruptcy. Even as it appeared to be impossible to continue the reorganization proceeding, the court respected the autonomy of the parties and timely switched to liquidation while managing to maintain normal production capabilities, all of which helped to protect social stability.
5. In hearing bankruptcy reorganization cases, the court should protect the creditorsÕ rights pursuant to law in order to resolve financial issues effectively. In the case involving the bankruptcy reorganization of Wuxi Suntech Power Co., Ltd., the court recommended the liquidation group to select various intermediaries through market-based operation to fill out the composition of the liquidation group. In the end, by hiring a company with rich experience in the field, whose meticulous selection of strategic investors and flexible repayment arrangements allowed it to leverage the great advantages in the bankruptcy proceeding in cleaning up financial debts so that economic order may be maintained and protected.