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Creditors Allowed To Recommend Bankruptcy Administrators – Insolvency/Bankruptcy



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As part of the State Council’s efforts to reform the
overall business environment, six major cities – Beijing,
Shanghai, Chongqing, Hangzhou, Guangzhou and Shenzhen – have
since the end of October 2021 been part of a pilot programme aimed
at creating a more transparent and efficient exit mechanism for
market players. Among the reforms, creditors of bankrupt companies
will be allowed to recommend administrators to be appointed by the
courts.

CURRENT SYSTEM

Under the current Enterprise Bankruptcy Law and its
interpretations, courts appoint administrators from a local
register by means of, among others, random selection, open
invitation to bid, and recommendations from financial regulators.
In practice, however, administrators are rarely appointed through
recommendation.

RECOMMENDER OF ADMINISTRATORS

Judicial policies are transitioning from the recommendation of
financial institutions as bankruptcy administrators by regulators,
to recommendation by main creditors or debtors of non-financial
institutions as administrators. Creditors may make the
recommendation in cases applicable to pre-reorganisation, or where
a financial institutional creditors’ committee has been
formed, or for administration in mainland China of court-recognised
Hong Kong bankruptcy proceedings.

The determination of main creditors varies between regions. In
Beijing, when the aggregate creditors’ rights of one or
multiple creditors, as evidenced by the debtor’s accounting
report, debt inventory, financial statements and other documents,
exceeds half of the total known debt, such creditors will be
regarded as main creditors.

They will then be entitled to recommend one or two
intermediaries as administrators. When aggregating creditors’
rights, there should be no double counting for joint and several
claims, inclusion of debt relations between affiliated companies,
or double counting for affiliated companies acting as joint and
several debtors for each other.

The determination of main creditors does not exclude objective
and genuine shareholder loan claims and other claims formed by
affiliated companies.

APPLICABILITY AND PROCEDURE

In terms of what type of cases are suitable for the
recommendation of administrators, policies vary widely from one
region to another. In Beijing, administrators may be recommended
if: the debtor undergoes out-of-court reorganisation or
pre-reorganisation; the affiliated companies all enter bankruptcy;
or the case involves a large number of stakeholders and has a
significant local impact.

In Chongqing, a recommendation is limited to bankruptcies
involving a relatively small amount of capital, a moderate amount
of debt, and concentrated creditors’ rights. In Hangzhou,
administrators cannot be recommended in bankruptcies of financial
institutions, large state-owned enterprises, listed companies or
debtors with a total property value exceeding RMB300 million (USD45
million), or in other socially impactful or complex bankruptcy
cases.

All regional regulations require that the creditors and debtors
should issue written consent agreeing to a certain intermediary as
the administrator and state the reasons. In Beijing, where a
financial institutional creditors’ committee makes the
recommendation, it shall do so according to its working regulations
and issue a written resolution.

In Chongqing, an announcement should be published on the public
service network platform of the local court for no less than five
days, and there should be no fewer than two intermediaries of
different types. In Hangzhou, the proposer of an administrator
should make a written submission within 15 days from the date of
filing for a bankruptcy application review.

POST-RECOMMENDATION REVIEW

In many cities, including Beijing and Chongqing, it is clearly
stipulated that the recommended intermediary should, in principle,
be an agency listed on the register of administrators of the local
court, and which has been reviewed to ensure it has the personnel
and ability to perform its duties, and that there is no
pre-existing interest that may affect its faithful performance of
that duty.

To review potential conflicts of interest of a recommended
intermediary, regional policies dictate that the agency must make
sufficient filings and disclosures to allow a thorough court
examination. As bankruptcies can affect a significant number of
creditors, and bankruptcies of large enterprises almost invariably
involve financial institutions, to demand there are absolutely no
interests between competent intermediaries and the creditors or
debtors may result in most ideal candidates being disqualified.

Therefore, the court is often given the final say on whether the
pre-existing interests disclosed by the intermediary are
significant enough to affect its faithful performance of duty.
Courts tend to focus on the time and duration of the disclosed
events, the size of interests in question, and the breadth of
intermediary service provided.

In Beijing, the provision of out-of-court reorganisation,
pre-reorganisation and other bankruptcy-related services does not
necessarily constitute pre-existing interest, but basic information
should nevertheless be disclosed. In Chongqing, if there is a
previously unknown creditor-debtor relationship between a
registered administrator and the creditor or debtor, or the
administrator has been a regular provider of intermediary services
to the debtor within three years prior to the acceptance of the
bankruptcy filing, the court will form a review committee to make
the determination.

If it was found that the intermediary refused to disclose or
deliberately concealed information, it would be disqualified from
acting as the administrator for the case it was recommended for,
and be subject to a penalty that restricts its qualification as an
administrator for a period ranging from six months to almost two
years.

OBJECTION OF OTHER CREDITORS

If other creditors or debtors object to the recommendation by
the main creditors, the parties should resolve their differences
through negotiation. In Beijing, other creditors may recommend a
different administrator to the court before it makes a formal
appointment, and the court will decide whether or not to accept its
candidacy. In Chongqing, if more than two main creditors recommend
different administrators and fail to reach a consensus after
negotiation, the court will no longer use recommendations to
appoint the administrator.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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