Distressed asset purchases carry legal risks in China

By Zhong Zhifen and Jeffrey Quan, ETR Law Firm

An increasing number of institutional investors are investing in China’s distressed assets. However, due to the special nature of distressed assets, the long period required to dispose of them, and the variety of disposal factors, investors need acute risk identification and operational capabilities. This column analyzes issues requiring investors’ attention.

钟智芬 ZHONG ZHIFEN 广信君达律师事务所合伙人 Partner ETR Law Firm
ETR Law Firm

Validity of claim transfer contracts. It often happens that a state-owned enterprise (SOE) debtor, or the acquirer of distressed assets, claims that the claim transfer contract is invalid. The courts will hold that an SOE debtor has the right to claim that the contract is invalid, but will require it to institute a separate legal action and provide litigation security.

Many plaintiffs claim that the contract is invalid on the grounds that there were defects in the disposal procedure, for example: the claim transfer announcement violated relevant regulations; no valuation was carried out, or it lacked fairness; the public bid invitation or auction procedure did not comply with regulations; and the approval or recordal procedure was not carried out.

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Zhong Zhifen is a partner at ETR Law Firm. She can be contacted on +86 20 3718 1333 or by email at 355345330@qq.com

Jeffrey Quan is a senior partner at ETR Law Firm. He can be contacted on +86 130 0517 0192 or by email at qzh@etrlawfirm.com