New bankruptcy law faces severe test

“The issue the EBL has brought up is some judges may not be willing to accept applications until they can find out whose local toes will get trodden on,” says Bruce Cooper of Freshfields Bruckhaus Deringer.

A process with an uncertain outcome will put off most investors and their legal advisers. The EBL is also quite high level, according to Cooper, which has left foreign investors querying how the bankruptcy process will actually work for them. Many are likely to decide to avoid using the Law altogether, as it may not meet their needs.

“If you can avoid a formal and public process, then that's desirable,” he says. “There is more prospect of foreign companies taking a view [that] the value will come out in consensual discussions, rather than through re-organisation proceedings under the EBL or relying on the EBL as an absentee stakeholder.”

There have been positive steps, including a judicial interpretation which requires the people's courts to accept bankruptcy applications against debtors whose whereabouts is unknown. One case involving a foreign company has been accepted in the courts – the bankruptcy proceedings of Dan Yao Real Estate, in which the debtor is a joint-venture and the biggest creditor is a Japanese company.

However, until more cases involving foreign investors are successfully accepted and handled by the courts, it is unlikely that there will be a lot of confidence in the system. More novel approaches to dealing with problems are inevitable.

“The next year will be instructive,” says Cooper.

(This article is part of the New directions for China in 2009 special feature)

The failed dragon

The failure of River Dragon, a textile printer, offers a salutary lesson to China creditors. When the company shut down on October 7 2008, the owners vanished, leaving behind more than US$290 million, according to USA Today. The company's demise put 4,000 workers on the street and jilted hundreds of suppliers and creditors.

The company's owners are still reportedly on the run. Their supplier claims to have lost more than US$860,000 from the company's collapse.

About 300 suppliers and creditors descended on the River Dragon complex, looting warehouses. Hundreds of workers demonstrated in the streets, demanding back pay for August and September. Worried about the unrest, the local government reimbursed them. “The government paid the workers to keep society stable,” a textile analyst
told the newspaper.

The company's failure is a microcosm of China's struggle with bankruptcy. A socialist planned economy with a unionised workforce will demand assets. And the likelihood of an unrelated creditor gaining access to its assets before the workforce is unlikely, say counsel. “Very often in China, the shareholders are the government; the creditors are the banks. And who owns the banks? The government!” says Xiaoming Li of White
& Case.

(This excerpt appears courtesy of Asialaw.)