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In an underperforming economy, China’s bankruptcy regime is following a steep trajectory to maturity and doomed businesses are making a revival. Sophia Luo reports

ONCE REGARDED AS SOMETHING of a taboo, bankruptcy has now been generally accepted as an essential route for debt-ridden companies to deal with the burdens of the past, resolve debt overhang and take on a new lease of life.

Unfettered by bias towards the insolvency regime, which has long been perceived as debtor-friendlier, the market has embarked on an arduous and extensive journey, working to unravel the intricacies of achieving excellence in both bankruptcy approaches and execution. As China emerged from the grip of covid-19 and returned to a semblance of normalcy in 2023, the bankruptcy mechanism has been well on its way towards greater standardisation, normalisation and market orientation.

Economic recovery is by no means an overnight success, and many companies that managed to survive the covid winter have since had to close down.

Chen Feng, managing partner at Grandall Law Firm’s Shanghai office, says that the market value of bankrupt enterprises has currently expanded to hundreds of billions or even trillions of renminbi, compared with the previous range of billions and tens of billions.

Meanwhile, mixed ownership enterprises and even state-owned enterprises have begun to run into debt crisis.

From 2018 to 2022, as many as 69,700 bankruptcy cases were accepted by Chinese courts, accounting for more than 70% of the total number of cases since the promulgation of the Enterprise Bankruptcy Law in 2006. Among them, about 10% were related to reorganisation and reconciliation, resulting in the successful restructuring of nearly 3,200 companies.

Chen Feng, Grandall Law Firm

The growing number of insolvent enterprises, and courts’ extensive experience in hearing bankruptcy matters, have set the stage for a wide range of innovative practices and new financing tools to play a bigger role.

Parties of lawyers, accountants, bankruptcy judges and government officials have made concerted efforts on institutional innovation, represented by the government-court linkage mechanism, and revitalised distressed businesses.

Gao Meili, a senior partner at the Beijing headquarters of Dacheng Law Offices, says: “The parties involved nowadays pay more attention to the bankruptcy mechanism itself to essentially deliver enhanced value to businesses and rebuild value for stakeholders.”

Weighing in on investment openings

Fortune and misfortune are two buckets in a well. In the context of the great changes in the global economic cyclical adjustment and industrial optimisation and upgrading, the crisis gripping China’s real estate sector has cast a shadow over the world’s second-largest economy. It has also presented a host of fresh opportunities and complexities in the realms of restructuring and non-performing assets (NPAs).

Gao Feng, a senior partner at the Tianjin office of Winners Law Firm, says that bankruptcy and reorganisation have become common among real estate developers and construction companies, as well as enterprises struggling with production difficulties, prolonged payment periods, declining profits, or even inability to make ends meet due to the country’s previously harsh covid control measures.

Gao Meili, Dacheng Law Offices

He says this is exactly where the new opportunities come in. Most real estate development companies need to continue construction of property projects during the restructuring process, and thus “some construction companies have already shifted their focus of business development to it”.

“In addition, for companies on the brink of bankruptcy due to covid control measures, there is no lack of good ones known for their better product competitiveness and operation efficiency under normal production circumstances,” he says. “All of these merit close attention from relevant companies and investors.”

Besides the restructuring of real estate firms and listed companies that has long been in the spotlight, Hou Yunjian, a Beijing-based partner at Global Law Office, says that the recent emergence of reorganisation involving financial institutions and internet enterprises is a new trend that warrants attention.

Speaking on the investment side, Xiao Aihua, a partner at Tian Yuan Law Firm in Beijing, says that many large investment institutions, including financial investors as capital providers and industrial investors as technology providers, have exhibited a keen interest in the field of bankruptcy alongside their traditional investment activities.

Tang Jianhui, an equity partner at Zhong Lun Law Firm in Nanjing, says that “the introduction of these strategic investors can optimise the allocation of resources and boost confidence, which has a bearing on the success of the restructuring”.

Gao Feng, Winners Law Firm

However, everything is easier said than done. Xiao says that it is not an easy task for investors and enterprises eyeing bankruptcy reorganisation to find each other when constrained by an information gap.

Furthermore, the slow pace of administrators and the judicial process makes it difficult to seize a restructuring opportunity. Additionally, inexperienced investors, overwhelmed by the complexities of reorganisations, often hesitate or even feel too intimidated to make a decision.

In terms of the recruitment of investors for bankruptcy reorganisation projects, Tang has yet to see an efficient matching of quality resources, and therefore expects the mechanism of introducing strategic investors to be further improved.

Chen, of Grandall, shares a similar viewpoint. “A lot of restructuring cases have gone nowhere simply due to the failure to recruit suitable investors,” he says.

In response to this, cities across China have set about establishing a resource pool of investors, with the efforts led by local governments, courts and administrators’ associations. Chen believes the significance of this initiative in effectively enhancing the success rate of reorganisation is clear.

Then again, the successful completion of restructuring is far from the end of the journey. Zhang Jianjian, a Shanghai-based partner at Haiwen & Partners, says the inadequate optimisation of the operation and governance of a listed company after reorganisation deserves special attention.

“Considerable importance should be given to whether the restructuring investment plan carefully considers the company’s future sustainable development and is properly arranged,” he says.

Tang Jianhui, Zhong Lun Law Firm

In the meantime, due to the urgency of addressing debt and business crises, speculative risks are easily overlooked. “The supervision of the behaviour of all parties involved in the reorganisation process, as well as the prevention and control of the overall risk, should be strengthened,” suggests Zhang.

“Listed companies are advised to exercise caution when identifying the intentions of investors engaging in restructuring,” he adds.

Due to the complexity and involvement of a broad range of parties, the success of reorganisation can boil down to the right time in the right place, and with the right people. Amy Ren, a partner at Llinks Law Offices in Shanghai and Shenzhen, emphasises the importance of strong communication capabilities of all parties involved, a comprehensive awareness of market-oriented principles, and specialisation of work for the smooth progress of reorganisation practice.

In particular, Ren says that “market-oriented awareness is not only a direction, but also a whole set of methodology. Many key parts of the restructuring process, such as the selection and appointment of intermediaries, asset disposal and the recruitment of investors, are increasingly being carried out in a market-oriented manner. This has proven to be the least controversial approach, offering a solution that is most likely to satisfy all parties involved.”

Innovative plans

To enhance efficiency and unleash the full potential of bankruptcy reorganisation, the use of well thought out solutions and structures can make a big difference.

Zhang Jianjian, Haiwen & Partners

Xu Bangwei, a partner at Jingtian & Gongcheng in Beijing and Guangzhou, points out that setting up a fund dedicated to debt repayment through a trust can safely segregate assets and boost creditors’ confidence. “Additionally, introducing a valuation adjustment mechanism in the bankruptcy reorganisation agreement can incentivise management to actively promote the restructuring plan,” he says.

At the same time, Xu closely monitors the exploration and use of financial instruments such as debt restructuring securities and convertible bonds – tools now being actively tested by market participants in restructuring procedures.

Hou, of Global Law Office, possesses extensive knowledge on the significance of the trust system in bankruptcy reorganisation. He recalls his in-depth participation in the bankruptcy restructuring of Bohai Steel Group, which was the first case in China to apply trusts in practice, and the reorganisation of HNA Group. The case was known for the largest scale of trusts applied in China to date.

“It serves as a means to buy more time for asset disposal and debt settlement,” says Hou. “It is also a meaningful attempt to enhance asset value, optimise resource allocation, and improve the repayment rate of claims.”

However, he says that when it comes to the practical use of trusts, “certain issues such as trustee selection and determination of liquidation rate still persist”. He advises vigilance against the misuse of the trust system for corporate insolvency services to prevent administrators exploiting trusts as a vehicle for improperly transferring management responsibilities.

Amy Ren, Llinks Law Offices

In contrast to bankruptcy reorganisation cases in foreign jurisdictions, a debt-for-equity swap is a less common method of debt settlement in Chinese procedures, according to Chen, of Grandall. He says this discrepancy is largely attributed to factors such as the limited access to equity by creditors of financial institutions.

Hence, insolvent enterprises may suffer restructuring failures due to the inability to attract external investors. Even if they manage to reorganise, they still face significant financial pressure. The increasing occurrence of companies undergoing bankruptcy for a second time in recent years is not surprising.

Refining the linkage mechanism

As a significant safeguard mechanism for bankruptcy reorganisation practices, the government-court linkage mechanism has gradually developed from a case-by-case approach to a more normalised and detailed framework in recent years.

Notably, the high-profile bankruptcy reorganisation cases of large conglomerates such as HNA Group and Founder Group cannot go without the protection provided by the government-court linkage mechanism.

Ren, of Llinks, notes the active exploration of innovative paths by courts across the country based on this mechanism. She takes as an example Longyan Intermediate People’s Court of Fujian province, which adopted a model of “functional government departments + law firm” as administrators. This model precisely defines the facilitating roles of the government and integrates them into the court’s trial procedure to effectively promote the restructuring process.

Gao, of Dacheng, says the scope of co-ordination through the government-court linkage mechanism has expanded to include post-trial matters, such as enterprise credit repair.

Gao points out that, under the guidance and co-ordination of the Beijing High People’s Court, the Beijing No. 2 Intermediate People’s Court successfully applied the government-court linkage mechanism for the financial credit repair of a medical device manufacturer during its bankruptcy reorganisation.

Hou Yunjian, Global Law Office

Chen, of Grandall, has high hopes for the effective performance of courts and local governments in carrying out their respective functions. In certain situations, bankruptcy cases may lack clear provisions or successful precedents. He says that, “under such circumstances, when the administrator puts forward practical solutions, the court needs to show a certain degree of courage and commitment”.

In other situations, certain local governments neither proactively facilitate bankruptcy cases nor wish to get overly involved in case-related work, which results in slow progress, while a few local governments intervene too much, potentially jeopardising judicial independence.

“Consequently, it is essential for the relevant departments to collaboratively establish more systematic, clear, enforceable rules for the government-court linkage mechanism. This will help clarify the necessary obligations of the government and establish boundaries for their actions,” says Chen.

Booming NPA market

In the past few years, the NPA market has rapidly developed in response to the bankruptcy reorganisation regime. According to data from the National Administration of Financial Regulation, the outstanding non-performing loans of Chinese commercial banks reached RMB3.2 trillion (USD449.6 billion) by the end of the third quarter of 2023, representing an increase of RMB24.4 billion from the end of the previous quarter.


Amid the intricacies of bankruptcy reorganisation, lawyers have been displaying their prowess in innovative practices and deepening their understanding of the mechanism.

In the substantive consolidation of Nanjing Construction Group and 24 other companies with a total debt size of more than RMB130 billion (USD18.3 billion), Zhong Lun Law Firm was a co-administrator of the case. The firm is known among market participants for its pioneering endeavours in the field, and Tang Jianhui, an equity partner at Zhong Lun’s Nanjing office, led the case.

Besides the introduction of equity-type assets as a resource for restructuring investment – in the absence of investors willing to provide cash – and the setting up of a service trust to collect and control all debt-servicing resources, Tang says that repayment methods are also developed based on the characteristics of creditors.

Tang explains, the case is known for various structural financing debts involving a larger sum of money among a smaller group of institution-based creditors, and operational debts resulting from the main business of construction projects that involve a smaller sum of money among a larger group of natural person-based creditors.

According to Tang, the reorganisation plan is not simply pursuing fairness in form. Instead, the debt settlement plans are tailored to different types of ordinary claims to pursue fairness in substance, taking into account both the fairness of the liquidation and protection of people’s livelihoods.

The institutional exploration represented by the pre-reorganisation system also resonated with lawyers interviewed by China Business Law Journal. In the Nanjing Construction Group case, Tang says the out-of-court debt restructuring and pre-reorganisation go first to lay the foundation and build consensus, followed by the court judicial restructuring procedure to improve the system efficiency.

In a similar vein, thanks to the general completion of the declaration and review of claims, investor recruitment, drafting of the reorganisation plan and other related work, it only took 32 days for the reorganisation case of Aurora Optoelectronics from the court ruling that the company had entered restructuring to the implementation of the reorganisation plan, says Chen Feng, managing partner at Grandall Law Firm’s Shanghai office.

Beyond the general concerns of the reorganisation plan, such as the overall solution to debt problems and tackling the issue of capital appropriation, Zhang Jianjian, a Shanghai-based partner at Haiwen & Partners, gives equal importance to the introduction of restructuring investors matching the industry that listed companies belong to.

It is with this viewpoint that he participated in the investor bidding for the reorganisation of travel agency Caissa Tosun Development on behalf of the intended restructuring investor in 2023.

When laying out the plan, Zhang put special emphasis on the investor’s synergy with the industry of the listed company, the resource advantages it possessed, and the investor’s operational and business planning and arrangements for the listed company in the post-reorganisation stage. He believes this is at the heart of smooth bankruptcy reorganisation, and is where the original aspirations and mission lie.

However Xiao, of Tian Yuan, says that, faced with the pressures of an economic downturn, “NPAs nowadays may be more clear in the ‘non-performing’ attribute owing to the lack of means for follow-up revitalisation”.

“Additionally, the market environment characterised by investment contraction and risk aversion may hinder their real investment potential,” she says.

Xu Bangwei, Jingtian & Gongcheng

As a result, Xiao advises financial institutions that anticipate having a Midas touch to not only seek NPAs with revitalisation value, but also enhance their capabilities in risk discovery and resolution.

Using NPAs in the much-discussed real estate sector as an example, Xiao says that investors should pay special attention to the Official Reply of the Supreme People’s Court on Issues Concerning the Protection of the Rights of Commercial Housing Consumers. This reply determines the “absolute priority” rule for ordinary homebuyers.

In other words, when investing in non-performing real estate assets, financial institutions can no longer rely solely on the effectiveness of the public disclosure and credibility of property registration information, or merely trust the priority of claims in construction projects and the priority protection brought about by mortgages.

“They must verify home sales through online signatures and even private sales, so as to prevent the purchased equities and debts from losing the protection and value of the underlying real estate projects,” says Xiao.

In light of supporting policies such as the transfer of single household corporate non-performing loans, batch transfer of personal non-performing loans on a pilot basis, and tax relief for offsetting NPA claims in kind by financial institutions, Hou, of Global, suggests that financial institutions need to further strengthen the refined management of NPAs, especially the batch transfers of NPAs and the management of bad debt write-offs, to effectively mitigate financial risk.

“Special attention should be paid to the legal compliance of the disposal method,” says Hou. “Investors should stay alert to illegal disposal behaviours such as off-balance-sheet activities via the trusts.”

Xiao Aihua, Tian Yuan Law Firm

In addition, in the context of global economic cyclical adjustment and industrial optimisation and upgrading, Xu, of Jingtian & Gongcheng, says that the importance of cross-border reorganisation mechanisms and practice has come to the fore.

Specifically, in the field of NPA disposal, he suggests that domestic and foreign financial institutions should:

  1. Closely watch the updates of regulations and policies related to NPAs, and the approval process of acquisition and disposal;
  2. Keep abreast of and familiarise themselves with the latest practices of NPA cases handled by China’s courts; and
  3. Actively track China’s foreign exchange management policies to ensure the compliance of cross-border transactions.


As the crisis-hit property sector in China shows little sign of recovering, more troubled Chinese property developers are moving towards restructuring their debts.

However, it is no easy task for debt-stricken real estate firms to get out of the woods. On 29 January 2024, the High Court of Hong Kong issued a winding-up order against Evergrande. Justice Linda Chan said that the group’s progress in putting forward a viable reorganisation proposal was obviously lacking.

Nick Stern, a partner at the Hong Kong office of Maples Group, says many of the companies that are defaulting now have left it very late and can be short of hard cash, limiting the restructuring options.

Roberta Cheung, Linklaters

Creditors do not fare any better. According to Roberta Cheung, restructuring and insolvency counsel at Linklaters in Hong Kong, the only real option currently available to creditors in Hong Kong if they are not supportive of a company’s restructuring proposal is to petition for its winding up.

“This is a risky strategy because liquidation is typically highly value-destructive for all stakeholders, including creditors,” says Cheung.

Yet, in practice, Stern has seen recent court decisions in the Cayman Islands and Hong Kong that have said individual noteholders cannot petition to wind up a debtor. “Individual bondholders have less leverage than they might have thought,” he says.

The lack of a legislative option such as a restructuring regime and a statutory moratorium to control dissenting creditors could create a risk for all stakeholders in a distressed situation. Cheung explains that those minority and/or out-of-money creditors may try to use a winding-up petition as leverage to cut a side deal and get a preferential return.

Nick Stern, Maples Group

The key defence that a company has to avoid being wound up is to run a proper process and engage with its creditors so that there is a feasible restructuring that the company can show to the court, she says.

While the debt being restructured is offshore debt, most of the troubled mainland Chinese property developers have little to no offshore assets available for the offshore creditors, most of whom are unsecured.

Jamie Stranger, a partner at Stephenson Harwood in Hong Kong, says the result is that most deals being done at the moment are debt-for-equity swaps. “The offshore creditors don’t have much choice other than to take the equity and hope for the best,” he says.

Stern says: “Write-downs of debt and debt-for-equity swaps are becoming increasingly prevalent, almost market standard, elements of the restructurings.”

The hard fact is bank lenders often face difficulty accepting a debt-for-equity swap, and bondholders’ tolerance for a haircut could differ depending on their entry point.

Cheung suggests a holistic solution that seeks to restructure both the bank debts and the bonds has to cater to the diverse interests of bank and bond creditors and their different constraints. “Providing optionality for creditors in a restructuring proposal is key, as there isn’t one size that fits all,” she says.

Stranger highlights a need to obtain protection from offshore creditor action, which is usually in the place of incorporation, mostly the Cayman Islands, and also where any offshore assets are situated, mostly Hong Kong.

Such protective moves may include Evergrande Group’s filing for recognition of restructuring in the US under chapter 15 of the US Bankruptcy Code. Stern goes an extra step to correct a common misconception that a chapter 15 filing in the US is a bankruptcy filing in the traditional sense. He explains it is instead a move to obtain recognition of a non-US restructuring in the US.

Jamie Stranger, Stephenson Harwood

“In fact, obtaining the chapter 15 recognition is a crucial part of preventing a company from entering bankruptcy,” he says.

Taking Evergrande Group and Hong Kong Airlines as examples, Stranger says the recent reality is that the Hong Kong courts have effectively stopped creditor enforcement action unless and until it becomes obvious that the restructuring will not happen, although Hong Kong does not have corporate rescue legislation (and with that an automatic creditor moratorium on commencement of a proposed restructuring).

But a lack of legislation in Hong Kong remains a true issue. “Companies can only rely on a contractual or de facto standstill, or forbearance from creditors to create breathing space to implement a restructuring,” says Cheung.

She says the key to ensuring stability throughout the restructuring process is stakeholder management. “Companies that act without delay, maintain transparency, actively engage with creditor groups, and propose a fair restructuring proposal are much more likely to be able to run a successful restructuring process with fewer disruptions and come up with a restructuring proposal that is capable of being accepted by creditors.”

Looking ahead, Stern expects that 2024 is likely to see some significant casualties as creditor and court patience runs out.

“Companies that don’t make progress with their restructurings are going to be wound up, whereas creditor fatigue due to long-term lack of progress is acting as a brake on more aggressive action,” he says.


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