DDebtors meeting the conditions for bankruptcy under the corporate bankruptcy law may file in a court of competent jurisdiction for protection in the form of termination of interest accrual, release from retention, stay execution, release of unexecuted contracts or restoration of credit.
Legal entry into bankruptcy proceedings gives debtors an advantage in negotiations, preserving asset integrity and operational sustainability to pave the way for recovery after reorganization or debt liquidation.
Debtors should consider filing for bankruptcy for protection under the following circumstances: (1) Otherwise, the assets will be split and severely depreciated, compromising the company‘s ability to resume operations; (2) the relationship between the debtor’s assets and debts is too complicated for enforcement, resulting in accrual of interest; (3) certain creditors, lacking a basis for enforcement, may lose the possibility of indemnification, triggering the joint and several liability of the guarantors; and (4) large administrative, delinquent, and criminal fines can tax civil resources for creditors’ claims.
Debtors filing for bankruptcy should pay attention to the following points.
CONDITIONS AND PETITIONS
The bankruptcy filing requirements state that the debtor filing for bankruptcy must be unable to settle the debts due and not have sufficient assets to settle all the debts, or be manifestly insolvent. Bankruptcy petitions meeting the conditions will be accepted by the courts, but this does not mean that the debtor is already bankrupt or has entered into liquidation or annulment.
The bankruptcy plaintiff can be the debtor himself or, in accordance with the laws and agreements, the liquidation group and the creditor. The debtor and the declarant for enforcement can submit written documents to the enforcement court asking the judge to refer the case for bankruptcy consideration.
In the event of a company filing for bankruptcy, the court of the debtor’s domicile – or of the registered office – is competent. In practice, to prove that its registered office is located within the jurisdiction of a certain court, the applicant may submit proof of the right to use real estate, such as a title deed, a house rental agreement, a real estate service contract, a real estate company certificate, any address disclosed in legal or business dealings, or related documents.
Generally, the office address of corporate authority, such as directors, supervisors and senior management, or displayed on the official website or other online platforms, is easily accepted. But notarized documents issued by a notary can also be provided if necessary. If the principal head office of the debtor is different from the place of registration, the court may fix as domicile the address registered with the service of supervision and management of the markets.
In substantive matters of merger and bankruptcy of affiliated companies, the court of the principal entity’s domicile is competent or that of the place where the principal asset is located if the principal entity is not clear. In cases of “forced execution”, jurisdiction will be determined according to the domicile of the object of execution.
In terms of level of jurisdiction, the court of first instance or a specially created bankruptcy court at the domicile of the debtor will have jurisdiction. In Shanghai and other regions, the cases of listed companies, financial institutions and enterprises licensed and registered by the State Administration for Market Regulation are handled by intermediate courts, as well as for licensed enterprises and registered by provincial/municipal/autonomous market surveillance offices, qualified in the scale of assets, or as required for other reasons.
Debtors intending to declare bankruptcy must prepare the following documents:
Proof of the debtor’s qualification as a subject and application documents established by legal procedures. The debtor must submit: A petition for bankruptcy or a concurring response to the petition, listing the basic status of the debtor, the type of bankruptcy filed, and the related facts and grounds; proof of subject qualification and business registration documents; and evidence that the shareholders’ meeting or other body of authority has consented to the bankruptcy filing, such as a board resolution for foreign-invested companies, or a consent document issued by the statutory body assuming the responsibilities of investor for companies with exclusively public capital.
Documents describing the assets and debts of the debtor. The debtor must submit written financial statements, a breakdown of external investments and accounting reports or annual audit reports within three years, together with a list of current contracts and a list of debtors, as well as a list of creditors and descriptions of known disputes, arbitrations and enforcement.
Documents to be provided preferably in the event of reorganization or settlement. Debtors with such intentions are advised to prepare an employee placement plan listing compensation plans, placement challenges and key solutions; and a Reorganization Feasibility Analysis Report explaining salvage value and presenting arguments and evidence of how the business can regain sustainable operating capability through bankruptcy proceedings.
Special documents required for certain types of businesses. If the debtor is a listed company, the provincial government’s notification and stability maintenance plans to the China Securities Regulatory Commission (CSRC) must be submitted, together with the CSRC’s response.
If the debtor is a financial institution, the reorganization feasibility analysis report and the consent or approval of the regulator must be submitted.
If the debtor is an exclusively state-owned company or a state-owned holding company, it must obtain approval from a higher authority.
REDRESS FOR FAILED PETITION
When filing for bankruptcy, the debtor may ask the court to issue proof of receipt of the request and supporting documents. If additional and corrective documents are required, the court must notify the debtor to provide them within five days of receiving the request.
If the court does not accept the request, does not issue the acknowledgment of receipt or does not make a decision whether or not to accept the request, the debtor can file for bankruptcy with a higher court. If the court decides not to accept the request, the debtor may instead file an appeal with the higher court within 10 days of receiving the decision.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
Room 3001, Area A, China Resources Tower
No.1366 Qianjiang Road, Hangzhou 311500, China
Tel: +86 571 8992 6523
Fax: +86 571 8992 6501