Change is in order

The commencement of reorganisation

Either a debtor ex parte or any of its creditors can petition the court to order a reorganisation of the debtor. Where liquidation is filed for, the debtor or shareholders holding at least 10% of the registered capital of the debtor can still file a reorganisation application with the court before the court that has accepted the liquidation declares the debtor bankrupt.

Formulation, approval, and implementation

The debtor or administrator (depending on who handles the assets and business of the debtor) has six months to draft and submit a reorganisation plan to the court. This period commences from the day on which the court rules the reorganisation. The Law, nevertheless, allows for the submission of the plan even after the expiration of six months, but within nine months after the court's approval of the reorganisation upon a request of either the debtor or administrator and upon a justifiable ground. If the court rules a debtor-in-possession regime, the debtor controls its assets and business under the supervision of an independent administrator to be appointed by the court if there is no administration order in force when reorganisation is filed for. Where an independent administrator is in control of the reorganisation, at any time during the reorganisation period, the debtor can petition the court to allow it to manage its assets and business under the administrator's supervision. If the court so orders, the administrator must hand over the operation of its assets and business to the debtor. At this point, the debtor takes over the administrator's powers, functions and duties.

The court must summon creditors' meetings within 30 days of receiving a reorganisation plan. Creditors that will participate in a creditor's meeting to discuss and vote on the plan by class are categorised as secured creditors, employees, the tax authority and unsecured creditors. A sub-class of small claims may be established within the class of unsecured creditors as the court deems necessary. Notably, the shareholders of a debtor are entitled to vote on the plan as a separate class, provided that their equity interests are adjusted by the plan.

A resolution adopting the plan must be approved by more than half of the creditors present and voting at the meeting of each voting class, representing at least two-thirds of the total amount of claims in the relevant class. In case any of the voting classes does not approve the plan at the meeting, the debtor or administrator has the power to lobby the members of the non-consenting voting class(es) to adopt the plan through negotiation, and a compromise which might be reached between the parties shall not be disadvantageous to other voting classes. Where the non-consenting voting class(es) again votes against the plan or abstains from re-voting, the debtor or administrator can apply to the court to approve the plan provided that a few conditions are met. These are that the secured creditors, employees, and the tax authority are paid in full, unsecured creditors obtain no less amount than they would if the debtor went to insolvent liquidation, creditors within the same class receive fair treatment by the plan and the payment order of the creditors' rights adheres to Article 113 of the Law, the adjustment of the debtor's shareholders' equity interests involved in the plan is fair and impartial, and the management scheme put forward by the debtor is practical and actionable.

Within 10 days from the adoption date of the plan, the debtor or administrator must make a further application to the court for approval of the adopted plan. The court must, within 30 days of receiving such an application, examine whether the plan meets all the provisions provided for by the Law, and terminate the reorganisation proceeding by approving the plan ascertained to have satisfied such requirements. If approved by the court, the plan is binding on the debtor and all its creditors.

Upon the court's approval of the adopted plan, the execution of the plan's final stage begins. The plan is implemented within the timeframe prescribed therein, and the administrator in charge of the reorganisation shall hand over the operation of its assets and business to the debtor. He becomes the supervisor of the plan to ensure that it is being implemented by the debtor as agreed, regularly receiving compulsory reports from the debtor on implementation of the plan and on its financial status until the end of the supervision period. He is officially discharged from his duties and functions upon the submission of a supervision report to the court. In case the plan fails to be implemented until the expiration of the supervision period, the court may, upon a request of the administrator, extend the supervision period. The Law entitles the parties in interest to review the administrator's supervision report to the court.

Moratorium for secured creditors

During the course of reorganisation, the Law pigeonholes secured creditors' rights over assets pledged to them. However, the court may, upon request of a secured creditor, lift the automatic stay where the secured asset(s) is exposed to destruction or the dramatic depreciation of its value reaches the extent that compromises the rights of that secured creditor.

Stabilisation and sustenance of business operations

The Law permits the debtor or administrator to pledge securities with a view to borrowing additional funds for the business to carry on during the course of reorganisation.

Termination of the reorganisation process and plan

During the reorganisation, the court, at a request of the administrator or any interested parties, must terminate the reorganisation proceeding and declare the debtor bankrupt where a) the financial position of the business deteriorates to the point where its solvency is in question; b) the debtor acts with fraud, maliciously reduces its assets, or commits other acts that are conspicuously detrimental to the interests of its creditors; or c) the act of the debtor makes the administrator unable to perform his functions and duties.

In case of failure to comply with the prescribed time limit(s) in submitting the plan, the court must order a termination of the reorganisation proceeding and announce the debtor bankrupt.

Also, there are two cases where the reorganisation proceeding will be terminated and the debtor will be declared bankrupt. The first is if the court does not approve the plan that is not adopted due to any dissent from a voting class and which does not meet the statutory cram-down requirements, and the second is if the court does not approve the adopted plan either because it does not meet the requirements stipulated in the Law or because the debtor is unable to or refuses to implement the plan.

Consequences of termination of the plan

Upon termination of the plan, promises made by creditors to release debt as part of the plan become ineffective. Any repayments obtained by creditors as a result of the plan remain valid, and the unpaid proportion or percentage is treated as debt in bankruptcy. Creditors may continue to receive distributions, providing that other creditors of the same rank of debt have been repaid pari passu. Additionally, any security given for the reorganisation remains valid.

Conciliation

The commencement of conciliation and conciliatory agreement approval

Only a debtor can apply to the court by petition for conciliation. The debtor can also make a conciliation application after the court accepts its application for bankruptcy, but before it is declared bankrupt. However, if, after an application for bankruptcy is accepted by the court, the debtor and its creditors unanimously reach an agreement on a settlement of the debtor's credits and debts, the debtor or any of its creditors can request the court to confirm the agreement and terminate the procedures for bankruptcy.

The court must make an order approving the conciliation, announce it, and convene a creditors' meeting for the purpose of discussing and voting on the agreement, where the conciliation application meets the requirements stipulated in the Law.

A resolution adopting the agreement must be agreed upon by a majority constituting more than half of the creditors entitled to vote, and who are present at the meeting, representing at least two-thirds of the total claims unsecured by property.

The court has discretion as to whether to approve an adopted agreement. If, in its opinion, it should be approved, the court must terminate the conciliation procedure. Once the creditors' meeting and court have approved the agreement, it becomes binding on the debtor and its creditors. The administrator must hand over the management of its assets and business to the debtor and submit a report on the performance of his functions and duties to the court.

Moratorium for secured creditors

There is no moratorium on secured creditors' claims. A holder of a secured claim on the debtor's specific asset(s) can exercise its right as of the date of the approval of the conciliation.

Termination of the agreement

Where the agreement fails to be adopted at the creditors' meeting, or the adopted agreement fails to be approved by the court, or the debtor is unable to or refuses to implement the agreement, the court must rescind the conciliation proceeding and declare the debtor bankrupt. Additionally, where an agreement is reached as a result of the debtor's fraud or other unlawful acts, the court will rule that the agreement is invalid and declare that the debtor is bankrupt.

Consequences of termination of the agreement

Upon termination of the agreement, promises made by creditors to adjust debt as part of the agreement become ineffective. Any repayments made to creditors as a result of the conciliation remain valid, and the unpaid proportion/percentage is treated as debt in bankruptcy. Creditors may continue to receive distributions, only where other creditors of the same rank of debt have been repaid pari passu. Furthermore, any security provided as a result of the conciliation remains valid.

Cagman Palmer, Shanghai Nan Guang Law Firm, Shanghai