For some companies the pandemic was the last straw, but there may yet be redemption and a chance to start again. Frankie Wang explains the latest developments in bankruptcy and restructuring in China
LeTV, a GEM-listed company that in 2015 was worth RMB170 billion (US$24 billion), was the first video streaming company to go public in China, but has now been delisted forcibly with over RMB10 billion in debt. Its founder, Jia Yueting, found himself trapped in a long trail of debt for giving a personal guarantee for LeTV and related businesses. Jia, who once majored in accounting, decided to take advantage of the personal bankruptcy system to survive.
On 21 May, the Chapter 11 personal bankruptcy and restructuring proposal filed by Jia was approved by a bankruptcy court in California. Although once being accused of consistently engaging in “untrustworthy behaviour” by the US Trustee of the Department of Justice, Jia’s resort to personal bankruptcy offers lessons to beleaguered entrepreneurs. The lack of a personal bankruptcy regime in China at national level has long been a concern for Chinese entrepreneurs, and the law is often described as “half of a bankruptcy law” in China.
“The actual controllers usually need to be joint, and have several guarantors when the [private] companies raise funds, which means that even though the companies may resort to bankruptcy law, the entrepreneurs are seldom exempted from the debt by virtue of the same proceeding,” says Zhang Wenliang, a partner at Merits & Tree Law Office in Beijing. “A lack of a personal bankruptcy system adds a burden on the private entrepreneurs.”
Local courts have embarked on some relevant experiments, from the pilot programmes of personal debt clearance cases with de facto bankruptcy functions in Zhejiang and Jiangsu provinces, to the consultation draft of Personal Bankruptcy Rules of Shenzhen Special Economic Zone. The latter, now soliciting public opinions on the website of the Standing Committee of the Shenzhen Municipal People’s Congress, if approved, could herald personal bankruptcy legislation in Shenzhen, the first of its kind in China.
Nafisa Nihmat, a partner at Zhong Lun Law Firm’s Shanghai office, believes that this tendency reflects a practice-comes-first and bottom-up legislation logic of China, which means that a national personal bankruptcy system will be built on the best practices of pilot localities. “The personal bankruptcy law might be enacted sooner than expected,” she says.
Personal bankruptcy, which aims to relieve “honest but unlucky debtors”, has drawn a great deal of attention across the nation of late because of the small and medium-sized companies in the private sector that have borne the brunt of damage from the pandemic. Many entrepreneurs are in financial trouble as a result of company bankruptcy, which was an issue even before the pandemic, due to the economic downturn.
As reported by Legal Daily and Xinhua News Agency, the courts nationwide accepted 8,436 company bankruptcy and restructuring cases in 2019 (up 14.8% year-on-year), and closed 4,500 cases (a 174% increase). Shanghai alone has heard 750 bankruptcy and restructuring cases, up 83.4% on the same period the previous year.
“For some time, Chinese companies were blessed with easy money, which was lavished on M&A to shore up their extensive expansions,” says Zhang, from Merits & Tree. “As the short-term loans are invested in long-term projects, the net incomes are not enough to cover the financing cost, and when credit is tightened, the companies are plunged into precarious situations.”
With downward economic pressure, the pandemic has become the last straw for some companies. So, what are the ways out for companies in such dire financial condition? And how do the parties in a proceeding secure their own rights and interests?