Finding reorganisation investors through online bidding

By Xu Bangwei and Yang Hui, Jingtian & Gongcheng
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The combination of China’s structural reforms with the coronavirus pandemic has forced many companies into bankruptcy proceedings. Bankruptcy and reorganisation offers a brand new opportunity for companies with advanced technology, valuable brands or high-quality assets. However, successful reorganisation depends on the outcome of the process for recruiting new investors.

Ideally, prospective investors obtain qualification as a reorganisation investor under a company reorganisation plan by going through certain procedures, and are able to breathe new life into a bankrupt enterprise through a capital injection or other form of investment. In the absence of any specific procedure or requirement for investor recruitment or qualification in the current PRC Enterprise Bankruptcy Law, online bidding has emerged as a common method for selecting reorganisation investors. What are the rules, advantages and risks in adopting online bidding for this purpose?

The rules

The rules for online bidding were established by administrators based on their experience in judicial and insolvency auctions, under which they determine the qualifications of reorganisation investors by way of open bidding on online auction platforms such as Taobao and JD.com. In recent

徐邦炜,-Xu-Bangwei,-Jingtian_NPA-(final)
Xu Bangwei
Partner
Jingtian & Gongcheng

years, more administrators have turned to this mechanism to recruit reorganisation investors. Where applicable, the bidding rules mirror the Provisions of the Supreme People’s Court on Several Issues Concerning Online Judicial Auctions by People’s Courts, but there remain certain differences between online bidding and judicial auctions.

Different organisers. Online bidding for reorganisation investors is organised by the administrators while a judicial auction is organised by the court. The administrator would assist the successful investors in realising their rights under the company’s reorganisation plan, such as completing the property transfer procedures. In judicial auctions, courts usually directly issue ruling documents pertaining to a change in property ownership, in order to determine the right of the successful bidder.

Different bidding rules. The starting price, range of price increase or reduction, number of bidding rounds, discounts, amount of deposit, pre-emptive rights, order of priority and other such matters may be determined by the administrators based on the actual circumstances, without having to strictly adhere to the supreme court’s provisions.

Different bidder qualification requirements and due diligence procedures. When announcing an online auction, the administrators usually list all required qualifications for prospective investors and tips for due diligence investigations of the bankrupt company/reorganised assets. Administrators usually set out the qualifications for

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Yang Hui
Counsel
Jingtian & Gongcheng

reorganisation investors according to the circumstances of the bankrupt company.

Prior to the bid, prospective investors are entitled to perform due diligence on the bankrupt company, through the administrators, and enquire about the rights and obligations of investors under the reorganisation plan to weigh their own benefits and drawbacks in entering the bid. In judicial auctions, on the other hand, few admittance criteria are imposed on the bidders and courts generally take no part in the bidder’s due diligence efforts.

Advantages of online bidding

Compared with the traditional public recruitment, negotiation and recommendation methods, the authors believe that online bidding has the following advantages:

  • The online bidding process and rules are open and transparent. With professional third-party auction platforms handling the proceedings, creditors have few reasons to doubt the legitimacy of the results. This helps reduce disputes, accurately assess the value of reorganisation assets and ensure a generally smooth process. In one notable bankruptcy in Chongqing, the administrator selected reorganisation investors by appraising prospective candidates instead of online bidding. However, the evaluation procedures and results were questioned by the creditors, who filed a lawsuit against the administrator.
  • Online bidding makes use of the faster spread of information on the platform and focuses on locating the highest bidder, safeguarding the interests of both the bankrupt company and the creditors. On auction platforms such as Taobao and JD.com, there is a deep pool of non-performing asset Online bidding procedures can improve the efficiency of information dissemination, effectively promote competition, determine investors in a market-oriented way, and protect the rights and interests of creditors and debtors.

Risks for investors

Prospective investors risk making faulty decisions due to difficulties in detecting defects in the bankrupt companies or reorganisation assets. The period of due diligence, as stipulated under the bidding announcement, is usually short and unlikely to be extended, especially with multiple prospective investors. In addition, compared with regular acquisition projects, due diligence in reorganisation investment is limited in terms of source of information, which makes it even more challenging to form a thorough risk profile in the required timeframe.

Administrators have great discretion in determining the online bidding process of reorganisation investor qualification, hence their different decisions on specific procedures – e.g. the content of bidding announcement, due diligence methods – could have a significant impact on bidding costs, risk exposure and eventual price that prospective investors are willing to pay. Therefore, prospective investors should make prudent and timely decisions according to their own trading status and the conditions of the bankrupt companies/reorganisation assets.

Even after winning the bid, there remains a chance that the reorganisation plan fails to receive administrative support and cannot be implemented. In practice, apart from the support of the court and administrators, reorganisation plans are usually subject to the approval of government departments and industry supervisors.

For example, a real estate project under construction will require the approval of competent authorities in the fields of, among others, land, planning, construction commission and real estate.

Without such approvals, the reorganisation plan is at risk of being delayed, if not cancelled altogether. For this reason, we recommend reorganisation investors take advantage of the “executive-judicial linkage” and other relevant mechanisms, to obtain the support of government departments as early as possible.

Xu Bangwei is a partner and Yang Hui is a counsel at Jingtian & Gongcheng

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