Vol 11 (2014) - Issue 3

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Corporate Reorganisation Case Analysis under China’s New Bankruptcy Law

The Chinese Enterprise Bankruptcy Law 2006 ('EBL 2006') is a more advanced and complete bankruptcy law in many aspects and is supposed to assist in the development of China’s market economy. However, the number of bankruptcy cases did not experience a huge increase since the implementation of the new law as was expected. Until 2013, there are about 30 reorganisation cases of listed companies and 200 reorganisation cases of private companies. This article will highlight the current situations of corporate reorganisation under the EBL 2006 and explore the notable features from the perspective of case analysis.

The differences in the reorganisation between a listed company and a private company
Bankruptcy law exerts a huge impact on China’s securities market. There are many ST listed companies now struggling in the securities market. (ST here refers to special treatment. According to Shanghai and Shenzhen Stock Exchange Rules, if the net profit of a listed company has been negative for the past two fiscal years, 'ST' must be placed in front of the name of the company in securities markets to alert the investors that this company is in danger of being delisted. If the ST company is still in financial trouble for the third year, the listing of its stock will be suspended.) ST companies can maintain their value as shell companies because of the immense cost of listing in China. Thus, quite a lot of ST companies become reorganisation and acquisition targets for outside investors. However, before EBL 2006, the negotiation cost of reorganisation outside of the courts could be very high and uncertain, therefore, reorganisations of ST companies out of court did not always have happy endings. Now that EBL 2006 stipulates reorganisation as a viable option, ST companies can maintain their listing status at relatively low cost and investors are provided with a new listing pattern. On the other hand, the local government may help the ST companies to remain listed because the government will benefit from a listed company providing jobs. The local government may get involved to exert pressure on the creditors and debtors to reorganise the company. Reorganisations of ST companies have been fairly active since EBL 2006.
ST Huayuan is one of those listed companies which finally managed to resume trading through reorganisation. According to Shanghai Stock Exchange Rules, trading of ST Huayuan was suspended because it had been losing money from 2005 to 2007. In August 2008, Shanghai Taishengfu Enterprise Development Company Limited ('Taishengfu'), one of the creditors of ST Huayuan, applied to Shanghai Second Intermediate People’s Court for the reorganisation of ST Huayuan. And the court accepted the case in September 2008. In fact, Taishengfu is one of the subsidiaries of ST Huayuan, and ST Huayuana and Taishengfu are all controlled by Hong Kong China Resources (Holdings) Company Limited ('China Resources'). Thus, the applicant is actually the debtor itself. ST Huayuan was the first central-administered state-owned enterprise that applied for reorganisation.