Company restructuring is generally a complex process, one of the major challenges of which is ensuring the continued management of day-to-day operations while dealing with a more or less acute crisis. For international groups and companies, it becomes even more delicate when it needs to be carried out abroad.
In China, restructuring operations, and even the liquidation of companies, have specific local characteristics. Understanding the issues and best practices of such a process is essential to limit financial losses, social impact, and to preserve the legal security of stakeholders, including the company’s leadership.
This is what we will address in this article.
Judicial liquidation procedure: Differences between France and China
Let’s recap some fundamentals of liquidation and the operational differences between France and China. Liquidation is the final stage of the process of ceasing business operations for a company, triggering the realization of assets to repay creditors. To reach this stage, the procedures differ from one country to another.
The French case
In the case of voluntary liquidation (or cessation), it is the simplest. The leader of a company whose assets exceed liabilities can request its liquidation. This procedure is only possible if the company is not in a state of payment cessation.
When a company in France is in financial distress and reaches the point of no return in terms of payment cessation, its leader must then declare this situation to the commercial court. A decision of the court then opens a judicial reorganization, or even the judicial liquidation of the company if its situation is deemed too precarious.
In the case of judicial reorganization, the company is kept in operation under the responsibility of a judicial administrator. Financially, it stops paying rent and non-essential expenses for its survival but continues to pay employees and suppliers, as well as its commercial activities. In terms of decision-making, the powers of management are transferred to the judicial administrator. This procedure can lead to a judicial reorganization plan, but more often than not, it leads to a sale plan, or if no other solution is possible, judicial liquidation.
Note that this safeguard and/or cessation of activity mechanism is quite similar in all countries with bankruptcy protection laws (such as Chapter 11 in the United States). These laws provide a significant degree of legal security to leaders and offer a clear and relatively predictable framework for stakeholders (shareholders, employees, creditors, leaders).
The Chinese case
In China, the concept of judicial reorganization also exists in law (the term is translated as “reorganization”). In practice, and according to many consulted experts, it is a mechanism that is rarely used.
When a Chinese company is in payment cessation, the court often does not provide a specific procedure to protect it from creditors. Therefore, these creditors will turn to the commercial court and sue the company to demand their rights and the settlement of their debts through a claim process.
The court’s decision is generally favorable to the creditors, and if the company’s coffers are empty, these creditors can request the seizure of assets and/or the freezing of bank accounts. Meanwhile, the company is still considered “active,” meaning it has not yet been declared bankrupt.
Bankruptcy is pronounced by the court, which can be petitioned by a creditor. Similar to the French system, when the company is liquidated, the court appoints a judicial liquidator who realizes the assets and distributes them among the creditors. However, unlike France, this period of payment cessation and liquidation can be very challenging for the leader, who is left to fend for themselves and may be personally liable for banking operations, including retroactively.
Company restructuring in China: Key actions to take
1/ Anticipate challenges
If a company finds itself in payment cessation in China and is considering a restructuring plan, it is likely already too late. The consequences in terms of leadership responsibility can be delicate.
Therefore, it is essential to anticipate challenges and not wait until payment cessation to initiate a restructuring process. This involves two top-priority measures:
- Cost Reduction: By any means possible, whether through negotiating payment delays or a more extensive debt restructuring.
- Prioritize the Social Aspect: As mentioned earlier, there is a strong desire in China to protect employees. If a company plans to go bankrupt without paying its employees and associated social charges, it will face competent authorities (similar to URSSAF in France), and the company’s bankruptcy situation can take a disastrous turn. In case it is impossible to avoid this situation, it is crucial for the leader to always justify good faith and explain the unforeseeable event that led to this situation.
2/ Clarify group governance
When the financial and/or legal situation becomes precarious, having impeccable governance is essential, especially for international groups. In such organizations, multiple entities may depend on each other hierarchically and may even involve regional intermediaries. Each of these entities must have its own organization and governance, and the relationships between different stakeholders must be accurately documented. If corrective measures need to be taken and certain acts or decisions regularized, do it as soon as possible, without waiting for difficulties to arise. The processes can be lengthy, so don’t delay!
If financial transactions exist between a parent company and its subsidiaries (which is usually the case), it is imperative to document all transactions and interactions between them, just as if they were independent entities. This is done to establish a complete history that justifies, proves, and explains the relationships between the different companies.
Finally, it is essential to ensure that each subsidiary has legitimate leaders. These leaders must be officially appointed and recognized as the true leaders of their respective companies. If there is a failure in this regard, it is imperative to remedy the situation (note that this can take time). Additionally, you should check if the current leaders are trained, informed, and aware of their responsibilities and the actions they must take or avoid.
3/ Adapt operations to insolvency and anticipate financing
It is crucial to adapt operations to insolvency and anticipate the necessary financing. If measures are taken early enough, it is possible to continue managing the company while adapting it to the economic context. This may involve:
- Layoff plans, conducted in the most respectful and organized manner possible.
- Emergency bank accounts: freezing assets (including bank accounts) can be detrimental and counterproductive in limiting financial damage. By having emergency bank accounts, the leader can continue ongoing operations, generate income, and utilize remaining assets in the best interest of the company and its creditors.
- Independent management companies: It may be useful to have management companies independent of operational companies. For example, one company could handle the payment of directors and advisers, while the operational company handles day-to-day operations. With this arrangement, the management company can be financed by the group, without depending on the financial difficulties of the subsidiary. These backup companies also allow for continued management by taking over certain projects, with the aim of limiting losses or gaining time while increasing asset value, again in the best interest of the company and its creditors.
- Involvement of subcontractors: It may be necessary to involve subcontractors or freelancers in the conduct of operations or the restructuring project itself. These freelancers or subcontractors can be located in China or abroad and can be financed by the operational company or the management company, whether located in China or abroad. The situation can quickly become complex. Fortunately, solutions exist with international platforms (such as Deel), allowing the recruitment of subcontractors and employees in a cross-border situation, even a complex one. These solutions allow operations to continue and preserve value.
4/ Protect company leaders
The company must ensure the protection of its leaders. In China, when a company’s situation becomes delicate, and creditors initiate legal action, leaders are at the forefront. The Chinese regulatory framework is much more restrictive and uncertain than in other jurisdictions: restrictive and preventive measures can be taken against them, which can have practical and dramatic repercussions (such as a travel ban or restrictions on certain personal expenses). Each leader must therefore take measures based on the risks they face.
Naturally, there are insurance policies that cover the personal liability of leaders (D&O insurance). These insurance policies are international and are generally taken out at the group level. Of course, these insurance policies must be taken out (and paid for) in advance of a crisis. Furthermore, they generally contain numerous specific clauses that must be checked. Leaders must be trained on the details of these clauses and the responsibilities they carry. How many leaders of international groups have read the details of the insurance policies that cover them?
Company restructuring in China: Key takeaways
The paradox of restructuring is that it needs to be planned and anticipated when everything is still going well, which, of course, doesn’t excite anyone when all indicators are green. Conversely, when difficulties accumulate, debts become untenable, and the company can no longer meet its commitments, it is generally too late to organize an effective restructuring: the best elements leave the company, it is difficult to finance external service providers (interim managers, lawyers, financial advisors), and even profitable businesses generating positive cash flow become challenging to execute.
Unfortunately, the array of amicable and collective procedures that allow for effective (and relatively leader-protective) treatment of difficulties is not available in China, and leaders must then cope with significant uncertainty.
Therefore, we can only advise leaders of international groups present in China to anticipate as much as possible:
- Clear and unambiguous governance among entities.
- Legitimate, regular, and trained leaders.
- Available financing and distress operations management solutions when needed.
- As comprehensive D&O insurance as possible.
- Corrective action plans (restructuring, turnaround) decided and launched well ahead of foreseeable difficulties.
We hope no company finds itself in such difficulties, and fortunately, leaders are rarely confronted with them. That’s why guidance from restructuring specialists, trained and experienced (interim managers, financial advisors, lawyers), is essential as early as possible when difficulties arise, especially in jurisdictions as complex as China.
It is precisely here that expertise in restructuring, like that of Tanlience’s teams, can make the difference.
Note: This article was written by a Western company leader in China with experience in restructuring operations on-site. It provides practical advice on the subject but does not legally bind anyone. To experts in the field reading this content, please feel free to provide any comments, omissions, or factual errors that could add more substance.
Photo de Abbe Sublett ; LYCS Architecture ; Sebastian Herrmann