Vol 15 (2018) - Issue 1

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Pre-packaged Reorganisations in China and Creditor Protection

Introduction
Pre-packaged reorganisation (hereafter 'pre-packs'), as one form of insolvency practical innovation originating from the US and UK, has recently gained popularity in China in the shadow of Chinese Enterprises Insolvency Law 2006 (hereafter 'CEIL'). This article will examine the features and main uses of Chinese pre-packs under the CEIL. The author argues that Chinese pre-packs are of a modest and traditional form, as a pre-insolvency creditors’ vote on the proposed reorganisation plans is generally required. This article also evaluates the benefits and drawbacks of Chinese pre-packs and argues that the unclear rules of Chinese pre-packs may do more harm than good to creditors. It suggests that market and insolvency practitioners should replace administrative intervention for better creditor protection.

1. Introduction of pre-packs
The main purpose of insolvency reorganisation or administration proceedings is arguably to preserve the going concern value of distressed companies for creditors. When a distressed company with valuable going concern value goes to court for help, it may be frustrated by the protracted and costly reorganisation proceedings, which in turn frustrates the purpose of reorganisation proceedings. As the value of that company may be melting away quickly, ideally, it will find buyers who can purchase the whole or part of the business and then use reorganisation proceedings to implement this deal. The benefits can be: reduced pressure to find adequate sources of refinancing to support the protracted full administration proceedings; preventing damage to goodwill once the formal insolvency proceedings are opened; and retaining key employees who are averse to insolvency.