The advantage of the reorganisation for saving the listing corporation
By Zhibin Zheng
Posted: 17th February 2015 09:01
Reorganisation refers to a legal systemin which the review by the court, according to the petition of an interested party, believes it is possible to avoid the enterprise’s bankruptcy and achieve the aim of regeneration by restructuring the debtor’s credits and debts through the judicial decisions, reorganising asset or re-arranging managements.
The reorganisationsystem strives tomaintainthe business value,to repay the debtsbythe income produced from the enterprise remaining in business, thus avoiding bankruptcy liquidation ofthe enterprise. Thereforethe reorganisation is recognised as the most positive and effective law system to preventfrom enterprise bankruptcy. Oncethe enterprise is involved in the reorganisation program, the law allowsthe debtor to pay off the debtand recoverprofitabilitythrougha variety of methods, and bymeasuresof the debt relief, debt to equityand equity structure adjustment to eliminate the causes of the bankruptcy, enabling the enterprise to achieve regeneration as a whole.
The system is not only focusedon the interest of all the parties included in the enterprise, but also with regards to its social economic life and the impactof the enterprisesurvival on society in general. Compared to the process of out of court restructuring, reorganisation procedures emphasise the national judicial intervention inthe private rights. This provides the restructuring program with a unique advantage for saving the troubled listing corporation, compared to the process of out of court restructuring.
Stronger juducial guarantee and higher success rate through reorganisation
Mandatory information disclosuremay solve the problem of asymmetric information. There is a stricter information disclosure requirements onthe procedure of reorganisation than the process of out of court restructuring, and information is more transparent, effectively solve the information asymmetry problem in the process of out of court restructuring. All the interested parties canpress fully their demands through properly informed participation in the reorganisation procedure.
The reorganisation plan takeslegal effect over all stakeholders, according to which the debtor isexempted from other debt liability,except for the creditor's rights, right of guarantee and equity which isprovided by reorganisation plan or issubjectedto legal recognition. Creditors and shareholdersare both restricted in the reorganisation plan. Any interested person has no right to claim against the debtorif their right was not part of the reorganisation plan provisions.
The compulsory rule system is an important system to guarantee the success of the reorganisation. According to Article 87 of the Enterprise Bankruptcy Law of PRC “Where a voting group that does not adopt a draft plan for reorganisation refuses to take another vote on it or the draft plan is not adopted even by a second vote but it meets the captioned legal requirements, the debtor or administrator may apply with the people's court for approval of the draft plan.”
The execution of the reorganisation plan is more secure. The execution of the reorganisation plan is with powerful judicial guarantee, therefore is more secure. So far it iswithout precedent in the practice caseson listing corporation reorganisation that the bankruptcy liquidation of the enterprise was due to the reorganisation plan failed to execute.
Reorganisation can improve the business operation environment
The administrator or the debtor may choose to perform the favourable contract. According to the provisions of the Enterprise Bankruptcy Law of PRC, after the court accepts an application for bankruptcy, the administrator shall have the right to decide to rescind or continue to perform a contract that is concluded before the acceptance yet remains to be fulfilled by both the debtor and the counterparties and shall notify the counterparties of his decision. The counterparties of the contract who were suffering from the administrator’s refusing to perform contract may declare the creditor's rights against the claim right for damage compensation due to the termination of the contract. So as to grant the administrator or debtor a right to choose the contract which has yet to be completed. The administrator or debtor may choose to continue to perform thecontracts in favour of the reorganisation procedure and to refuse to perform unfavourable contracts to the reorganisation.
Reorganisation offersa variety of judicial protection for the debtor enterprisetoremain hisbusiness. The provisions of the Enterprise Bankruptcy Law of PRClist a number of measures designed to protect the debtor incontinuing tooperate business and the security of the enterprise property, prevent creditors from hinderingenterprise’s continuingto operate and detractingfrom the value of the enterprise property by individual litigation and enforcement procedures. These measures provide valuable breathing space to the debtor. Reorganisation can facilitate a more favourable financing environment. During the period of reorganisation, should the debtor or theadministrator borrowmoney tomaintaintheir businessthey may set the security for the loan.
The reorganisation procedure is more conducive for findingand handlinglongstanding problems
The court and administrator are more neutral than the management of the company and shareholders, the court andthe administrator have no personal interest vested in the reorganisation, therefore they are more neutral.
The legal consequence of reorganisation isclearand the debt liquidation is more thorough. During the period of the reorganisation for the listing corporation, a variety of claims will be declared, even if the individual creditor fails to declare during the period of reorganisation, and declare his claims after the reorganisation plan was adopted, it onlycan be according to the reorganisation plan to determine the rate of settlement without the full repayment, thus the reorganisation greatly eliminates the debt risk for restructuring party.
Reorganisation provides high incomeat a low cost
The reorganisation proceedings, in accordance with the law to stop interest bearing debt, can save a lot of financial expenses.
Debts were greatly reduced. In thecases oflistedcorporation restructuring, the efficiency is very high. Ordinary creditor'sliquidity ratio tends to be low, and some are as little as2%. Restructuring costs have been greatly reduced and it is difficult tohave the same resultin out-of-court restructure.
Parties share the reorganisation cost. The support fromshareholders, creditors,employees and other partiesto share losses will be needed for a successful reorganisation. In order to save the listedCorporation, shareholders and creditors should work together. Obviously, creditors and shareholders’ work is not enough in distressed companies’ saving; the restructuring side should be introduced. The investment of restructuring side can be reduced through an arrangement that all the parties share the cost. In this way, the “shell value” will be more attractive, and the company will rebirth in a short time.
Zheng Zhibin is a partner of King & Wood Mallesons' Bankruptcy and Reorganization Group in Beijing. He started to practice bankruptcy law in 1996 and he has been appointed by the Chinese court to carry out administrative duties for the liquidation of nearly 100 companies. He is one of the first lawyers to provide legal service on the bankruptcy of securities companies and corporate reorganisation. He participated in the revisions of the Enterprise Bankruptcy Law of the People's Republic of China and the drafting of the Regulation of Risk Management of Securities Companies. Mr. Zheng is a member of the INSOL International and the vice-chairman of the Bankruptcy Law Committee of the Beijing Lawyers Association.
Mr. Zhibin Zheng joined King & Wood Mallesons in 2001. Prior to this, he was employed with the Foreign Economic Relations and Trade Commission of the Jilin Provincial Government, Jilin Guoli Law Firm, and Guangdong Huabang Century Law Firm. He obtained his LL.B. and LL.M. degrees from Jilin University and is currently a Ph.D. candidate at Jilin University. Mr. Zheng was admitted as a Chinese lawyer in 1995.