Back from the brink

A critically ill company may get a new lease on life via reorganization under the bankruptcy regime, but balancing the interests of various parties can warrant skillful surgery, writes Richard Li

Intense market competition and a constantly changing economic environment seem to be pushing an increasing number of enterprises towards the precipice, with the word “bankruptcy” appearing ever more frequently in current economic activities. According to information published by the Supreme People’s Court on 24 February, courts around the country accepted 5,665 enterprise bankruptcy cases in 2016, an increase of 53.8% over 2015, among which 1,041 cases are reorganizations, an increase of 85.2% over 2015.

“Based on the current economic situations in China and abroad, in particular the gathering strength of trade protectionism in developed countries in America and Europe and the overall liquidity-absorbing trend in the US dollar, I anticipate that an even greater number of Chinese enterprises will be facing financial difficulties and require bankruptcy reorganization in the next two to three years, and this will include private as well as foreign-invested enterprises,” says Ji Nuo, a partner in the Shanghai office of Fangda Partners.

However, going into a bankruptcy procedure does not necessarily signify that the life of an enterprise is at its end. Under today’s bankruptcy system in China, in addition to liquidation, companies can also choose reorganization. Bankruptcy reorganization holds out the possibility for a company’s resurrection. Zhao Min, a partner in the Shanghai office of JunHe, says some companies see the word “bankruptcy” as taboo, fearing that going into a bankruptcy procedure will have a negative impact on their reputation. “In fact, ‘bankruptcy reorganization’ is not equal to ‘bankruptcy’,” he says. “The former is a legal mechanism for an enterprise to resolve its debt crisis so as to give it new life.”