CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
Claims of the state and local governments take prec- edence over ordinary civil claims. Secured Claims Fourth in priority are secured claims, which are debts backed by specific assets such as mortgages, pledges, equity, or receivables. Secured creditors may recover from the proceeds of the collateral before oth- er creditors, but recovery is limited to the value of the collateral. Any shortfall beyond the collateral’s value is treated as an unsecured claim. Unsecured Claims Finally, unsecured claims include ordinary supplier debts, contractual obligations, and other claims not backed by collateral. Unsecured creditors are repaid from the remaining bankruptcy assets according to the order of claim registration or proportionally as determined by the court, and only after higher-priority claims have been satisfied. 7.3 Length of Insolvency Process and Recoveries In China, bankruptcy liquidation proceedings typically take one to three years, while judicial reorganisation proceedings also generally take one to three years, although complex cases may take longer. Secured creditors usually achieve a relatively high recovery rate, but the amount recovered is limited to the val- ue of the collateral. The recovery rate for unsecured creditors is uncertain and often falls below the value of the company’s assets at the time of bankruptcy filing. Enforcement and recovery for cross-border claims or cases involving complex asset structures are more complicated, requiring careful consideration of proce- dural delays and potential market discounts. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency In China, outside insolvency proceedings, companies can access three types of non-insolvency rescue or reorganisation procedures to improve financial con- ditions and avoid bankruptcy, all of which are widely used in practice. • Debt restructuring: companies may negotiate with creditors to adjust debt terms, such as extending repayment periods, reducing interest rates, partially
forgiving debts, or converting debt to equity. This is common in agreement-based restructuring involv- ing major creditors like banks and suppliers, with the agreement detailing repayment priority, default liabilities, and dispute resolution methods to ensure legal validity. • Equity or asset restructuring: companies optimise capital structure by selling non-core assets, intro- ducing strategic investors, increasing registered capital, or transferring equity, following the Compa- ny Law and Securities Law. Listed companies must comply with CSRC and stock exchange rules, and some cases combine debt-to-equity conversion for dual adjustment of debt and equity. • Settlement and mediation: companies can use courts, arbitration institutions, or industry associa- tions as platforms to reach settlement agreements with creditors. Signed agreements have legal effect, and some obtain judicial confirmation to enhance enforceability, particularly in cases involv- ing many creditors and complex debt structures. 7.5 Risk Areas for Lenders If the borrower, security provider, or guarantor becomes insolvent, lenders face multiple risks. For the borrow- er, insolvency eliminates their ability to repay, leaving lenders unable to fully recover principal and interest. Lenders must participate in bankruptcy proceedings to assert their claims, often ranking below employee claims and tax claims, resulting in a very low recovery rate. When a security provider is insolvent, the secured assets may be included in bankruptcy estate. The lend- er’s priority rights over these assets may be restricted by bankruptcy procedures or may fail to be fully realised due to asset depreciation or claims from other credi- tors. A guarantor’s insolvency limits the performance of guarantee obligations; if the guarantor lacks suffi- cient bankruptcy assets, the lender’s security interest is lost, and they can only participate in distribution as an ordinary creditor, increasing loss risks. Additionally, insolvency of any of the three parties may lead to pro- longed legal procedures, extending the lender’s fund recovery cycle and resulting in additional time and cost.
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