Frank Habets
When Bankruptcies meet International Challenges
Generally, we deal with many positive aspects of (international) business law within our legal practice. Whether it may be for instance by putting all legal aspects of freshly negotiated trade-deals or employment relations in writing, or through the creation of newly invested entities (in China).
When business flourishes, all people involved (including us) become energetic and motivated to jointly grasp those opportunities and try to turn them into a solid success.
…Clouds Appear
However, due to all kinds of circumstances and despite all prior good intentions, things do not always work out exactly as everyone planned. When businesses then start to face an ever-growing debt load (without an equally growing ability to timely repay those debts) we ever-so-often see that a move towards bankruptcy or a decision to liquidate an entity cannot be avoided and that a legal strategy needs to be developed in order to cope with this situation.
Tackling Distress
Needless to say, with such pending bankruptcy or liquidation, the atmosphere amongst all people involved is different from the celebratory events described in the first paragraph, but this may gradually change with the right strategy being applied and when a sense of control is (finally) experienced.
Based on our experiences it is surprisingly achievable to minimize the stakeholders damages and to help enable executives involved to work towards a clean slate by actively assisting them with the transfer (sale) of viable parts of the distressed business to third parties, selling real estate (land lease) and machinery, obtaining clarity on tax obligations, pursuing litigation (property preservation), renegotiating debts or terminating staff in compliance with the local laws. When the entire process takes place in China we are able to make direct use of the very clear (and recently further simplified) steps for liquidation, but things may grow more complex when international factors come into play.
International Challenges
With corporate structures reaching across jurisdictions, combined with more complex asset portfolios, ‘selling off’ individual items during insolvency becomes basically a puzzle within a puzzle.
Mainly because the laws of other (foreign) jurisdictions do not (necessarily) recognize the elsewhere declared bankruptcy or the ‘effective executive powers’ of an appointed administrator. This may cause dubious situations, with former directors (technically lifted out of their position due to the bankruptcy), still managing to act on behalf of the company with respect to the assets elsewhere (for instance based on a proxy, linked to an overseas position, registered under local laws). Hence, taking immediate actions to change such mandates, (with notarized/legalized/translated resolutions and company registry extracts) and communicating such change to third parties is strongly advised.
The speed in which such actions can be taken obviously varies per jurisdiction (we often find that simple legalizations or notarizations cause the most significant slowdowns), but we also see that great efforts are taken to streamline international proceedings, for instance in the EU.
European Bankruptcies
Currently in Europe, huge progress is made with regard to streamlining legislation for bankruptcy proceedings across (EU) jurisdictions. To give you an example: we are currently working on a case where an entity established in one European country has been declared bankrupt by a court of another jurisdiction in which the entity was found to have its center of main interests pursuant to ‘Regulation (EU) 2015/848 on insolvency proceedings’.
Based on the final judgement, the bankruptcy was submitted to the register in the country of its establishment. Although a relative novelty, it is great to see how convenient this works out with actions efficiently taking place in one location. The bankrupt entity in this case holds substantial interests in Chinese companies and we are happy to share some of our general experiences with regard to the liquidation of those.
Chinese Assets
With a bankruptcy formally (provisionally) being initiated in Europe, we are able to take actions in China. In the aforementioned case that meant that we inter alia represented our client (the estate) during arbitrations proceedings, aiming to swiftly secure valuable assets held in China for which disputes have arisen. Meanwhile we also anticipate the sale of such assets. In this particular situation various administrative procedures will need to be followed, as a part of the assets consists of shares held in a listed company for which close communications with the clearing house and the stock exchange are required. Obviously parties need to continuously make sure that compliance standards are met (regardless of the eventual outcome).
Though these actions taken in China (securing assets, launching claims against fraudulent acts undertaken by company executives prior to the bankruptcy) are rather similar to actions that would normally also be taken in Europe, for China (and other cross border bankruptcies) additional procedures need to be executed to ensure that all changes at the level of company representation and subsequently the bankruptcy are indeed recognized. When doing all this it is best to prepare for a long haul.
Chasing Retribution
Throughout all the proceedings the key focus is, without any doubt, achieving the best possible outcome for all creditors of the estate.
There are many ways to achieve this and sometimes litigation is needed to provoke a solution. Of course, the decision to file for comprehensive litigation is not an easy one to take for administrators (there is always the risk of having thrown (more) good money after bad), but we obviously provide support with detailed risk assessments. Monetary ‘retribution’ is our absolute priority.
Nevertheless, this does not mean that throughout bankruptcy proceedings, monetary retribution is the only form of compensation that is achieved. Depending on the situation we often see that retribution is also obtained on other levels (e.g. restored reputation of management, decent transfer of employees to other employers and the continuation of the company’s contribution to society/research/development). We don’t want to romanticize too much at this point, but it is always pleasant to see at least one upside to a downside.
[1] This article merely aims to provide you with a general insight in our Chinese international bankruptcy practice.
Top Takeaways
When Bankruptcies meet International Challenges
When governing international structures it is important to be, at all times, aware of the powers attributed to officials in every jurisdiction and create a resolution framework.
As soon as financial distress looms, develop and centralize a liquidation strategy for each jurisdiction involved (if applicable, look at the recent EU-law developments), there are a lot of options to try to prevent a bankruptcy. If needed, carefully target litigation and aim for financial retribution, without neglecting social aspects.
Please feel free to contact us at DaWo Law Firm, we are always happy to help.
