Bankruptcy protection extends a lifeline to an enterprise from the time it experiences operational difficulties until it is finally wound up, but in general it is difficult for such an enterprise to turn things around on its own. Through acquisition by a quality enterprise, not only can the enterprise in bankruptcy protection be given a shot of adrenaline, but more importantly, the industrial structure can be optimised, resulting in a better allocation of resources and an enhancement in the competitiveness of the quality enterprise.
However, due to information asymmetry, under an equity acquisition, the occurrence of contingent debts and tax risks make the recovery of the enterprise in bankruptcy protection impossible, and can also drag the acquiring enterprise into an unpredictable predicament. If an asset acquisition is opted for, it is impossible to obtain the qualifications or licences, and the acquiring enterprise will find it fails to achieve its objectives, and in some instances will additionally be required to bear management risks. Furthermore, pursuant to relevant tax regulations, enterprise income tax will be levied on the difference between the forgiven debts of the debtor in bankruptcy protection and the tax base as enterprise income, and if the debtor is forgiven huge liabilities, just the income tax will make the earliest recovery by the enterprise in bankruptcy protection difficult.
The core significance of asset-backed securitisation is “bankruptcy remoteness”. If asset-backed securitisation is brought into the process of acquiring an enterprise in bankruptcy protection, the risks borne by the acquiring enterprise may be reduced and the operational and funding pressures on the acquiring enterprise, and the enterprise in bankruptcy protection, can be reduced through the creation of financial instrument financing, providing ample time for the success of the corporate transplant.
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Wu Jian is a partner and Guo Shujing is a lawyer at Zhonglun W&D Law Firm
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Beijing, 100028, China
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