Notes for debtors filing for bankruptcy protection

By Wang Zhenxiang, Jingtian & Gongcheng
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Debtors satisfying bankruptcy conditions under the Enterprise Bankruptcy Law may file with a competent court to gain protection in the form of ceasing interest accrual, release of preservation, suspension of execution, release from unfulfilled contracts, or restoration of credit.

Lawful entry into bankruptcy proceedings grants debtors an edge in negotiations, preserving asset integrity and operational sustainability to pave the way for revival after reorganisation or liquidation of debts.

Wang Zhenxiang, Jingtian & Gongcheng
Wang Zhenxiang
Partner
Jingtian & Gongcheng

Debtors should consider filing for bankruptcy to gain protection in the following circumstances: (1) If not, assets will be partitioned and severely depreciated, compromising the company’s ability to revive operation; (2) relationship between debtor’s assets and debts are too complicated for enforcement, causing interests to pile up; (3) certain creditors, lacking basis of enforcement, may lose the opportunity for compensation, triggering guarantors’ joint and several liabilities; and (4) substantial administrative, overdue and criminal fines may encroach upon civil resources for creditor claims.

Debtors filing for bankruptcy should pay attention to the following matters.

CONDITIONS AND PETITIONS

Conditions for filing bankruptcy denote that the debtor filing for bankruptcy should be unable to settle due debts and lack sufficient assets to settle all debts, or be evidently insolvent. Bankruptcy petitions satisfying the conditions will be accepted by the courts, but this does not mean the debtor is already bankrupt or has entered liquidation or cancellation.

Petitioner for bankruptcy may be the debtor itself, or in accordance with laws and agreements, the liquidation group and creditor. The debtor and filer for enforcement may submit written material to the execution court requesting the judge to pass the case on for bankruptcy review.

JURISDICTION

If a company files for bankruptcy, the court where the debtor is domiciled – or where the main office is located – shall have jurisdiction. In practice, to prove its main office is located within the jurisdiction of a certain court, the filer may submit proof of the right to use real estate, such as a title certificate, house lease contract, property service agreement, property company certificate, any address disclosed in judicial or commercial activities, or related documents.

Generally, the office address of the company’s authority, such as directors, supervisors and senior management, or displayed on the official website or other online platforms, is easily accepted. But notarised documents issued by a notary may also be provided if necessary. If the debtor’s main office is different from the place of registration, the court may determine the address registered with the market supervision and management department as its domicile.

In substantive merger and bankruptcy cases of affiliated companies, the court where the core entity is domiciled shall be competent, or where the principal property is located if the core entity is unclear. In “enforcement to bankruptcy” cases, jurisdiction will be determined based on the domicile of the subject of enforcement.

In terms of the level of the court, the basic court, or a specially established bankruptcy court at the debtor’s domicile, will have jurisdiction. In Shanghai and other regions, cases of listed companies, financial institutions and enterprises approved and registered by the State Administration for Market Regulation are handled by intermediate courts, the same as for companies approved and registered by provincial/municipal/autonomous market supervision bureaus, qualified in scale of assets, or as needed for other reasons.

DOCUMENT SUBMISSION

Debtors intending to enter bankruptcy should prepare the following documents:

Proof of debtor’s qualification as subject and application documents made through legal procedures. The debtor should submit: A bankruptcy petition or reply concurring to the petition, listing the debtor’s basic status, type of bankruptcy filed for, and related facts and reasons; proof of the qualification as subject and business registration materials; and proof that the shareholders’ meeting or other organ of authority consented to filing for bankruptcy, such as board resolution for foreign-invested companies, or consent document issued by the statutory agency performing investor’s responsibilities for solely state-owned enterprises.

Documents describing the debtor’s property and liabilities. The debtor should present written statements of financial position, breakdown of external investments and accountant’s reports or annual audit reports within three years, along with a list of outstanding contracts and list of debtors, as well as a list of creditors and descriptions of known litigations, arbitrations and enforcement.

Documents preferably provided in case of reorganisation or settlement. Debtors with such intentions are advised to prepare an employee placement plan listing plans for compensation, difficulties in placement and main solutions; and a reorganisation feasibility analysis report explaining the salvage value, and presenting arguments and proof of how the company can resume sustainable operating capacity via bankruptcy proceedings.

Special documents required for certain types of companies. If the debtor is a listed company, notification and stability maintenance plans from the provincial government to the China Securities Regulatory Commission (CSRC) should be submitted, as well as the CSRC’s reply.

If the debtor is a financial institution, the reorganisation feasibility analysis report as well as the regulator’s consent or approval should be submitted.

If the debtor is a solely state-owned enterprise or state-owned capital holding company, it must secure approval from a higher-level authority.

RELIEF FOR FAILED PETITION

When filing for bankruptcy, the debtor may request the court to issue proof of receiving the petition and supporting documents. If supplementary and correction materials are needed, the court should notify the debtor to provide them within five days of receiving the petition.

If the court fails to accept the petition, issue the proof of receipt or make a decision on whether to accept the petition, the debtor may file for bankruptcy with a higher court. If the court decides against accepting the petition, the debtor may instead file an appeal to the higher court within 10 days of receiving the decision.

Wang Zhenxiang is a partner at Jingtian & Gongcheng

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Jingtian & Gongcheng

Room 3001, Area A, China Resources Tower
No.1366 Qianjiang Road, Hangzhou 311500, China

Tel: +86 571 8992 6523

Fax: +86 571 8992 6501

E-mail: wang.zhenxiang@jingtian.com

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