26 August 2020
China's Key Document Introduced Covid-specific Restructuring and Insolvency Measures
Being the first country affected by Covid-19, China is also the first to bear the brunt of the economic blow from the pandemic, and the impact continues. To promote economic recovery, "various government departments, such as those in charge of tax, finance, human resources and social security, etc., have introduced a full suite of measures, ranging from temporary loan moratorium to targeted enterprises to tax reliefs on imports of pandemic control supplies and deferment of social security contribution", shared Shen Yuhan, of counsel with King & Wood Mallesons in Shanghai. "These measures have been particularly effective in alleviating the burden on small and medium-sized enterprises".
What sets China apart from the other jurisdictions we have previously published updates on is that the country has introduced specific Covid-19 insolvency responses. Yuhan pointed us to a key document titled Guiding Opinions of the Supreme People's Court on Several Issues concerning the Proper Hearing of Civil Cases Involving the Covid-19 Pandemic Pursuant to the Law (2) (《关于依法妥善审理涉新冠肺炎疫情民事案件若干问题的指导意见（二）》) (Opinions).
By Paragraph 19 of the Opinions, measures are introduced to suspend or freeze existing process, including interim and preservation orders and judgments. For example, if an enforcee (i.e. a party that is subject to enforcement) is found during enforcement proceedings to have causes for bankruptcy due to Covid-19 but still has rescue value, the court should guide the enforcee or its creditors to convert the case to bankruptcy review by providing clear explanations or by other means, and make reasonable use of methods available under the Enterprise Bankruptcy Law, such as enforcement stay, lifting of preservation measures, interest and payment cessation, etc., to effectively preserve the going-concern value of the business and win space for its rehabilitation.
In addition, the threshold for a creditor to petition for a debtor's insolvency has also been raised, although not in an explicitly monetary way. Under Paragraph 18 of the Opinions, when examining whether the conditions for accepting a bankruptcy application against a debtor are satisfied, the court should specifically look at whether the debtor is in difficulty due to Covid-19. If the debtor was in good shape pre-pandemic, but is now unable to pay off debts that fall due as a result of business difficulty or tight working capital caused by Covid-19, the court should comprehensively judge the debtor's debt repayment capability based on its ability to carry out sustained operations and the development prospects of the industry that the debtor is in, and should not simply base its decision to put under bankruptcy a debtor who is originally capable of surviving on the debtor's capital flow and assets and liabilities during a specific period.
Further, the Opinions also contains measures targeting specific elements of the bankruptcy procedure. Paragraph 20 makes it possible to suspend or extend the operation of a rescue plan and the associated deadlines. Specifically, when a reorganization plan is already under implementation, if it becomes difficult for the debtor to continue implementing the plan due to Covid-19, the court should actively guide the parties to make changes to the plan, and the new plan should then be voted on pursuant to relevant provisions and be submitted to the court for sanction. However, if the implementation period is the only aspect that will be changed, the court may straightaway rule on the change per the application of the debtor or a creditor, provided that the extension should generally not exceed six months. Further, Paragraph 23 of the Opinions calls for more in-depth use of information technology in bankruptcy announcement and notification, claims filing, holding of creditors' meetings, inquiry and disposal of debtors' assets, introduction of investors, etc.
"Speaking as an insolvency practitioner, I won't be surprised if the number of bankruptcy applications accepted in the second half of 2020 increases significantly. Tourism businesses and consumer product companies may be those affected most." commented Yuhan. "But it is important to also look at this in perspective. The increase is not entirety due to Covid-19. The much more sophisticated exit mechanism on the Chinese market is another factor. To insolvency practitioners like me, this will be both a challenging and an exciting journey!".
Shen Yuhan is the co-author of the China report in Corporate Restructuring and Insolvency in Asia 2020. To learn more about China's corporate restructuring regime, read her co-authored report here.