11 September 2021
On April 28, 2021, the Supreme People’s Court publicly released model bankruptcy cases as part of the resolute implementation of the Party Central Committee policy deployments, the role of judicial trials, practical and effective measures to promote fair and efficient bankruptcy trials, facilitating relief to and liquidation of market entities, providing service in high-quality economic development, and in the establishment of a market-oriented, rule-of-law and international business environment. These cases demonstrate the effectiveness of China’s bankruptcy system in the following four aspects: (1) promote the optimal allocation of resources and focusing on maintaining an enterprise’s ability to continue its operations; (2) full protection of a creditor’s decision-making rights in the disposal of key assets and increase creditor participation in the process; (3) proper respect given to a creditor’s opinions in protecting the creditor’s right to recommend and replace administrators; and (4) apply the new voting mechanism in draft reorganization plan, in which creditors whose interests are un affected do not participate in the voting. The following is a summary of the specific details about Case 1, which pertains to the bankruptcy reorganization of Chongqing Huayuan Natural Gas Co., Ltd.
Brief description of the case: Chongqing Huayuan Natural Gas Co., Ltd. (“Huayuan”), an important natural gas supply enterprise in Dazu District, Chongqing, has a registered capital of RMB 20.1 million and 163 employees. Huayuan applied for reorganization before the Chongqing Dazu District People’s Court due to its serious asset deficiency. The court accepted the reorganization petition on November 28, 2016. According to the draft reorganization plan, Huayuan would establish a new company from all of its operating assets and other high-quality assets related to its natural gas business, while the rest would remain with Huayuan. Shandong Shengli Co., Ltd. (“Shengli”), the reorganization investor, acquired all the equity of the new company and assumed all the existing employees and the natural gas business. Shengli paid RMB 663.8 million for the equity transfer by installment to repay Huayuan’s bankruptcy liabilities on September 27, 2017, Shengli held a second creditors’ meeting in which the draft reorganization plan was approved by all voting groups. The court approved the reorganization plan on November 20th, 2017. During the implementation of the reorganization plan, the new company Chongqing Shengbang Gas Co., Ltd. continued to improve its operations and achieved a cumulative profit of approximately RMB 180 million.
The meaning of the decision and its significance as a model case: This case is a model case of utilizing a reorganization sale to preserve an enterprise’s overall operation value, saving it in a time of distress and protecting the rights and interests of various parties.
The substance of reorganization is to save the economic and social value of the debtor to achieve an optimal allocation of resources. A reorganization sale is an important form of reorganization in which the debtor’s viable operating assets are transferred to others so that they may continue on and grow under a new entity, while the creditors are repaid with the proceeds of the transfer. The debtor can keep its valuable operating assets by way of an overall liquidation and avoid improper disposition.
In this case, the investor was willing to take over the high-quality assets of Huayuan but does not wish to assume creditorship in consideration of the uncertainties in external accounts receivable. As a result, the court actively applied reorganization sale in divesting the assets with operating value to a new company. The strategic investor paid for the equity transfer and received an equity stake in the new company, and the equity transfer payment went to repay the debtor’s debts. This not only ensured that the operating value of the debtor’s assets was maximized, it also effectively safeguarded the rights and interests of the creditors.
For further information, please contact:
Di Wu, Partner, Lee Tsai & Partners
lawtec@leetsai.com
