Bargaining in the shadow of law and finance: the market-oriented debt to equity swap in China

ABSTRACT

This article presents a comprehensive review of China's recent market-oriented Debt-to-Equity Swap (DES) programme, a strategy developed to alleviate financial distress in companies and reduce the country's overall debt. The effectiveness of the programme in China remains a subject of debate, with particular concerns about government interference. This study uncovers that, while China's DES transactions show signs of becoming more 'market-oriented', the evolution is hindered by the current legal and financial institutions. The findings of this study reinforce the 'law and finance' theory, emphasising the crucial function of sound legal systems in enabling private bargains and promoting financial development and economic growth. To facilitate truly market-oriented DES and efficient corporate restructuring, the study underscores the need for China to foster reforms in legal and financial institutions. Key recommendations include promoting fairness in formal reorganisation, developing a separate restructuring framework, and exploring effective valuation methods.

KEYWORDS:

• Debt to equity swap
• law and finance
• insolvency law

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 J Chen, ‘What is a Debt/Equity Swap? How it Works and Who Benefits’ (Investopedia 2023) <https://www.investopedia.com/terms/d/debtequityswap.asp> accessed 17 July 2023.

2 SL Harris, ‘Financial Governance and Policy Learning in Korea: Analysing the Post-Crisis Experience’ (2008) 1 Journal of Asian Public Policy 267; N Goto and K Uchida, ‘How do Banks Resolve Firms’ Financial Distress? Evidence from Japan’ (2012) 38 Review of Quantitative Finance and Accounting 455; S Aiyar and others, A Strategy for Resolving Europe’s Problem Loans (International Monetary Fund 2015).

3 Economist Intelligence Unit, ‘China’s Supply-Side Structural Reforms: Progress and Outlook’ (2017) <https://www.andrewleunginternationalconsultants.com/files/chinas-supply-side-structural-reform.pdf> accessed 27 November 2022; J Daniel, J Garrido and M Moretti, ‘Debt-equity Conversions and NPL Securitisation in China—Some Initial Considerations’ (2016) <https://www.imf.org/external/pubs/ft/tnm/2016/tnm1605.pdf> accessed 27 November 2022.

4 For a brief discussion of policy-driven DES, see Section 3.1.

5 JY Lin and Z Li, ‘Policy Burden, Privatisation and Soft Budget Constraint’ (2008) 36 Journal of Comparative Economics 90; G Ma and BSC Fung, ‘China’s Asset Management Corporations’ (2002); G Ma, ‘Sharing China’s Bank Restructuring Bill’ (2006) 14 China & World Economy 19; S Breslin, ‘Financial Transitions in the PRC: Banking on the State?’ (2014) 35 Third World Quarterly 996.

6 D Lipton, ‘Rebalancing China: International Lessons in Corporate Debt’ (2016) <https://www.imf.org/en/News/Articles/2015/09/28/04/53/sp061016> accessed 15 April 2023.

7 ibid.

8 World Bank, Bankruptcy of State Enterprises in China: A Case and Agenda for Reforming the Insolvency System (World Bank, 20 September 2000) <http://documents.worldbank.org/curated/en/2000/09/14451105/bankruptcy-state-enterprises-china-case-agenda-reforming-insolvency-system> accessed 28 November 2022.

9 World Bank, ‘China Doing Business 2020’ <https://www.doingbusiness.org/en/reports/global-reports/doing-business-2020> accessed 6 May 2023.

10 R La Porta and others, ‘Legal Determinants of External Finance’ (1997) 52 The Journal of Finance 1131; LLSV, ‘Law and Finance’ (1998) 106 Journal of Political Economy 1113. LLSV, ‘Investor Protection and Corporate Valuation’ (2002) 57 The Journal of Finance 1147; LLSV, ‘Investor Protection and Corporate Governance’ (2000) 58 Journal of Financial Economics 3; LLSV, ‘The Economic Consequences of Legal Origins’ (2008) 46 Journal of economic literature 285. For a critical evaluation of LLSV’s theory, see RV Aguilera and CA Williams, ‘Law and Finance: Inaccurate, Incomplete, and Important’ [2009] BYU Law Review 1413.

11 DC North, ‘Institutional Change and Economic Growth’ (1971) 31 The Journal of Economic History 118; DC North, Institutions, Institutional Change and Economic Performance (Cambridge University Press 1990); J Faundez, ‘Douglass North’s Theory of Institutions: Lessons for Law and Development’ (2016) 8 Hague Journal on the Rule of Law 373.

12 SF Deakin, ‘Legal Evolution: Integrating Economic and Systemic Approaches’ (2011) 7 Review of Law & Economic 659.

13 Stacey Steele and others, ‘Trends and Developments in Chinese Insolvency Law: The First Decade of the PRC Enterprise Bankruptcy Law’ (2018) 66 American Journal of Comparative Law 669. See also discussions in Section 4.1.

14 Section 899, UK Companies Act 2006. See also discussions in Section 2.2.

15 See Section 4.2.

16 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on preventive restructuring frameworks (Directive 2019/1023). See also discussions in Section 2.2.

17 La Porta and others (n 10) 1131; LLSV, ‘Law and Finance’ (n 10) 1113; LLSV, ‘Investor Protection and Corporate Governance’ (n 10) 3; LLSV, ‘Investor Protection and Corporate Valuation’ (n 10) 1147; LLSV, ‘The Economic Consequences of Legal Origins’ (n 10) 285.

18 S Djankov, C McLiesh and A Shleifer, ‘Private Credit in 129 Countries’ (2007) 84 Journal of Financial Economics 299; A Schwartz, ‘A Normative Theory of Business Bankruptcy’ (2005) 91 Virginia Law Review 1199; S Paterson, ‘The Cost of Capital – the Normative Foundation of Corporate Law: A Reply’ (2017) 14 European Company and Financial Law Review 316.

19 CJ Milhaupt and K Pistor, Law and Capitalism: What Corporate Crises Reveal about Legal Systems and Economic Development Around the World (University Of Chicago Press 2014) 7.

20 See TH Jackson, The Logic and Limits of Bankruptcy Law (Beard Books 2001); TH Jackson, ‘Bankruptcy, Non-Bankruptcy Entitlements, and the Creditors’ Bargain’ (1982) 91 The Yale Law Journal, 857. Jackson’s theory is inspired by the seminal work of the Elinor Ostrom, see E Ostrom, ‘Collective Action and the Evolution of Social Norms’ (2000) 14 Journal of Economic Perspectives 137.

21 ibid.

22 ibid.

23 ibid.

24 A Schwartz, ‘A Contract Theory Approach to Business Bankruptcy’ (1998) 107 The Yale Law Journal, 1807; A Schwartz, ‘Bankruptcy Related Contracting and Bankruptcy Functions’ in B. Adler (ed), Handbook on Corporate Bankruptcy (Elgar Publishing 2017); BE Adler, ‘The Creditors’ Bargain Revisited’ (2017) 166 University of Pennsylvania Law Review1853; AJ Casey, ‘Chapter 11’s Renegotiation Framework and the Purpose of Corporate Bankruptcy’ (2020) 120 Columbia Law Review 1709. For a summary of this line of argument, see S Block-Lieb, ‘The Logic and Limits of Contract Bankruptcy’ [2001] University of Illinois Law Review 503; DG Baird and RK Rasmussen, ‘The End of Bankruptcy’ (2002) 55 Stanford Law Review 751.

25 See S Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-first Century’ (2016) 36 Oxford Journal of Legal Studies 697; MM Harner, ‘The Corporate Governance and Public Policy Implications of Activist Distressed Debt Investing’ (2008) 77 Fordham Law Review 703.

26 Asset stabilisation ensures the company stays in operation; asset separation distinguishes assets from creditors’ claims on such assets. See O Couwenberg and SJ Lubben, ‘Essential Corporate Bankruptcy Law’ (2015) 16 European Business Organization Law Review 39.

27 MJ Roe, ‘Bankruptcy and Debt: A New Model for Corporate Reorganisation’ (1983) 83 Columbia Law Review 527.

28 H Eidenmüller, ‘Comparative Corporate Insolvency Law’ in JN Gordon and WG Ringe (eds), The Oxford Handbook of Corporate Law and Governance (Oxford University Press 2018) 1003; M Crystal and R Mokal, ‘The Valuation of Distressed Companies – A Conceptual Framework’ (2006) 3 International Corporate Rescue 123.

29 TH Jackson and DA Skeel, ‘Bankruptcy and Economic Recovery’ (2013) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2306138> accessed 31 March 2023 (arguing insolvency law should be able to ‘reduce the frictions that otherwise would impede assets from moving to their highest-and-best use’).

30 AG Ahearne and Naoki Shinada, ‘Zombie Firms and Economic Stagnation in Japan’ (2005) 2 International Economics and Economic Policy 363. See also J Zhao and C Wei, ‘Zombie Companies in China in the COVID-19 Era’ (2023) 32 International Insolvency Review 1–27 https://doi.org/10.1002/iir.1501; J Zhao and others, ‘Eliminating Zombie Companies through Insolvency Law in China: Striking a Balance between Market-oriented Policies and Government Intervention?’ (2022) 29 Asia Pacific Law Review 264.

31 Ahearne and Shinada (n 30) 363.

32 JA Schumpeter, Capitalism, Socialism and Democracy (Routledge 2010).

33 See North, ‘Institutional Change and Economic Growth’ (n 11) 118; North, Institutions, Institutional Change and Economic Performance (n 11); Faundez (n 11) 373.

34 ibid.

35 Schwartz, ‘A Contract Theory Approach to Business Bankruptcy’ (n 24) 1807.

36 E Warren, ‘Bankruptcy Policy’ (1987) 54 The University of Chicago Law Review 775; R Mokal, ‘Corporate Insolvency Law – Theory and Application’ (14 April 2005) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=701402> accessed 13 April 2020; V Finch and D Milman, Corporate Insolvency Law: Perspectives and Principles (3rd edn, Cambridge University Press 2017) 35–39.

37 S Madaus, ‘Leaving the Shadows of US Bankruptcy Law: A Proposal to Divide the Realms of Insolvency and Restructuring Law’ (2018) 19 European Business Organization Law Review 615, 619.

38 ER Morrison, ‘Bankruptcy Decision Making: An Empirical Study of Continuation Bias in Small-business Bankruptcies’ (2007) 50 The Journal of Law and Economics 381.

39 S Paterson, Rethinking the Role of the Law of Corporate Distress in the Twenty-first Century (LSE Law, Society and Economy working paper series, 2014) <http://eprints.lse.ac.uk/60583/> accessed 28 May 2023. Also see Madaus (n 37) 615.

40 RJ Weijs, ‘Harmonisation of European Insolvency law and the Need to Tackle Two Common Problems: Common Pool and Anticommons’ (2012) 21 International Insolvency Review 67; Madaus (n 37) 615, 625.

41 MA Heller, ‘The Tragedy of the Anticommons: Property in the Transition from Marx to Markets’ (1998) 111 Harvard Law Review 621; LA Fennell, ‘Commons, Anticommons, Semicommons’ in K Ayotte and HE Smith (eds), Research Handbook on the Economics of Property Law (Edward Elgar Publishing 2011) vol 35.

42 Chen, What is a Debt/Equity Swap? (n 1).

43 A Krohn, ‘Rethinking Priority: The Dawn of the Relative Priority Rule and a New “Best Interest of Creditors” Test in the European Union’ (2021) 30 International Insolvency Review 75.

44 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on Preventive Restructuring Frameworks (Directive 2019/1023).

45 Steele and others (n 13) 669. See also discussions in Section 4.1.

46 11 U.S.C. § 1129(b)(2): The absolute priority rule, which sets the minimum standard for a fair and equitable test for creditors. The absolute priority rule and the fair and equitable test are legacies of the railroad bankruptcy and equitable receivership in the late 19th and early 20th centuries, and derive from the equitable power of the bankruptcy courts before they were codified by the legislature. See North Pacific Railway Company V. Boyd, 228 U.S. 482 (1913); Consolidated Rock Products Co. v. Du Bois, 312 U.S. 510 (1941). See also ES Adams, ‘Toward a New Conceptualization of the Absolute Priority Rule and its New Value Exception’ (1993) Detroit College of Law Review 1445; P Foohey, ‘Chapter 11 Reorganization and the Fair and Equitable Standard: How the Absolute Priority Rule Applies to All Nonprofit Entities’ (2012) 86 John’s Law Review 31; ST Brindise, ‘Choosing the Per-Debtor Approach to Plan Confirmation in Multi-Debtor Chapter 11 Cases’ (2016) 35 Emory Bankruptcy Developments Journal 81.

47 11 U.S.C. § 1129(a)(7): The best interests test, also known as the ‘liquidation test’, requires that each holder of a claim or interest in a dissenting class must receive at least as much under the plan as such a holder would receive if the debtor were liquidated under Chapter 7 of the Bankruptcy Code. See In re PWS Holding Corp., 228 F.3d 224 (3d Cir. 2000); In re Armstrong World Indus., Inc., 348 B.R. 111 (D. Del. 2006).

48 11 U.S.C. § 1129(a)(11): The feasibility requirement, which aims to prevent confirmation of visionary schemes, requires that the plan is not likely to be followed by liquidation or the need for further financial reorganisation of the debtor. See In re Armstrong World Indus., Inc., 432 F.3d 507 (3d Cir. 2005).

49 Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 979 (2017).

50 BA Markel, ‘Owners, Auctions, and Absolute Priority in Bankruptcy Reorganizations’ (1991) 44 Stanford Law Review 69; E Warren, ‘A Theory of Absolute Priority’ (1991) Annual Survey of American Law 9.

51 Bank of America National Trust and Savings Association v. North LaSalle Street Partnership, 526 U.S. 434 (1999); see also HT Hoang, ‘The New Value Exception to the Absolute Priority Rule after In Re 203 N. Lasalle Street Partnership: What should Bankruptcy Courts do, and How can Congress Help?’ (2000) 149 University of Pennsylvania Law Review 581.

52 LM LoPucki and WC Whitford, ‘Bargaining over Equity’s Share in the Reorganisation of Large, Publicly Held Companies’ (1990) 139 University of Pennsylvania Law Review 125.

53 RT Swaine, ‘Reorganisation of Corporations: Certain Developments of the Last Decade’ (1927) 27 Columbia Law Review 901; DG Baird, ‘Priority Matters: Absolute Priority, Relative Priority, and the Costs of Bankruptcy’ (2016) 165 University of Pennsylvania Law Review 1355.

54 American Bankruptcy Institute, ‘ABI Commission to Study the Reform of Chapter 11’ (Abi.org2014) <https://commission.abi.org/full-report> accessed 27 May 2023, 214.

55 Directive (EU) 2019/1023 of the European Parliament and of the Council of 20 June 2019 on Preventive Restructuring Frameworks (Directive 2019/1023). See generally G McCormack, ‘Corporate Restructuring Law–A Second Chance for Europe?’ (2017) 42 European Law Review 532.

56 Directive 2019/1023, Article 11.

57 R De Weijs and M Baltjes, ‘Opening the Door for the Opportunistic Use of Interim Financing: A Critical Assessment of the EU Draft Directive on Preventive Restructuring Frameworks’ (2018) 27 International Insolvency Review 223.

58 Krohn (n 43) 75.

59 Directive 2019/1023, Recital 57.

60 Directive 2019/1023, Article 12.

61 Directive 2019/1023, Article 9(3). See also Krohn (n 43) 75.

62 Directive (EU) 2017/1132 of the European Parliament and of the Council of 14 June 2017 relating to Certain Aspects of Company Law (Codification) (Directive 2017/1132).

63 Article 32 of Directive 2019/1023 amends Article 84 of Directive 2017/1132, allowing Member States to temporarily deviate from specific provisions of the latter (including Article 58(1), Article 68, Articles 72, 73, and 74, point (b) of Article 79(1), Article 80(1), and Article 81) as needed to implement the preventive restructuring frameworks established by Directive 2019/1023. See also Directive 2019/1023, Recital 96.

64 Directive 2019/1023, Article 14.

65 UK Corporate Insolvency and Governance Act 2020. For a general discussion of scheme of arrangement and the newly-introduced restructuring plan, see J Payne, Schemes of Arrangement: Theory, Structure and Operation (Cambridge University Press 2021).

66 Section 899, UK Companies Act 2006.

67 J Harris, ‘Class Warfare in Debt Restructuring: Does Australia Need Cross-class Cram down for Creditors’ Schemes of Arrangement’ (2017) 36 University Queensland Law Journal 73.

68 Companies Act 2006, s 901A. See also K van Zwieten, ‘Mid-crisis Restructuring Law Reform in the United Kingdom’ (2023) 24 European Business Organization Law Review 287.

69 Companies Act 2006, s 901G(2).

70 Companies Act 2006, s 566A.

71 State Council, Guiding Opinions on Market-oriented Conversion of Bank Debts into Equity (2016), appended to Opinions on Actively and Steadily Reducing the Leverage Ratio of Enterprises [关于积极稳妥降低企业杠杆率的意见] (2016, hereafter ‘DES Guidelines’); also see National Development and Reform Commission (NDRC) and others, Notice on Specific Policy Issues in The Implementation of Market-oriented Bank Debt to Equity [关于市场化银行债权转股权实施中有关具体政策问题的通知]. For an introduction to the general principles of market-oriented DES, see ‘Chinese Central Bank Issues Directive for Reduction of Enterprise Leverage Ratios – China Banking News (China Banking News 2019) <https://www.chinabankingnews.com/2019/07/30/chinese-central-bank-issues-directive-for-reduction-of-enterprise-leverage-ratios/> accessed 3 November 2023.

72 See G Ma and BS Fung, ‘China’s Asset Management Corporations’ (August 2002) Bank for International Settlement Working Papers No 115; G Ma, ‘Sharing China’s Bank Restructuring Bill’ (n 5) 19.

73 ibid.

74 DES Guidelines (see the discussion on the ‘market-based principle [市场化原则]’, which emphasise the pivotal role of the market in resource allocation and the government’s role in facilitating it. It states that ‘ … market participants such as creditors and debtors engage in or participate in deleveraging based on their own needs, independently negotiate prices and terms for various transactions, and bear the risks and enjoy the benefits’. Also see National Development and Reform Commission (NDRC) and others, Notice on specific policy issues in the implementation of market-oriented bank debt to equity [关于市场化银行债权转股权实施中有关具体政策问题的通知].

75 DES Guidelines (see the discussion on ‘systematic Implementation of Market-Oriented Bank DES [有序开展市场化银行债权转股权]’, which state that ‘ … it is strictly prohibited to use market-oriented DES for “zombie enterprises”, untrustworthy enterprises, and enterprises that do not comply with national industrial policies’).

76 China Banking and Insurance Regulatory Commission (CBIRC), Measures for the Administration of Financial Asset Investment Companies (provisional) [金融资产投资公司管理办法(试行)] (2018); NDRC and others, Notice on Encouraging Relevant Institutions to Participate in Market-Oriented Debt-to-Equity Swaps [鼓励相关机构参与市场化债转股的通知] (2019).

77 Commercial Bank Law (2015 revision), article 43.

78 China Banking Regulatory Commission (CBRC, now consolidated with the insurance regulator to be CBIRC), Administrative Measures for the Capital of Commercial Banks (provisional) [商业银行资本管理办法（试行)] (2012), Articles 63, 68.

79 DES Guidelines (see the discussion on ‘independently negotiat[ing] and determin[ing] market-oriented debt-to-equity swap prices and conditions [自主协商确定市场化债转股价格和条件]’, which emphasise ‘ … enhanc[ing] the policy for preferred stock issuance, allowing the conversion of debt into preferred stock through negotiation and established legal procedures, while legally and reasonably determining the rights of preferred stockholders’. Also see the discussion on ‘implementation and protection of shareholders’ rights in accordance with the law [依法依规落实和保护股东权利]’, which emphasises protecting shareholders’ rights after debt-to-equity conversion).

80 For discussions on the multi-tiered capital market in China, see L Lin, ‘Venture Capital Exits and the Structure of Stock Markets in China’ (2017) 12 Asian Journal of Comparative Law 1; W Xu, S Zhu and Z Wu, ‘Building a Junior Stock Exchange: Lessons from China’ (2020) 21 European Business Organization Law Review 139; X Li and I MacNeil, ‘Experimentation in Securities Market Structure and Regulation in China’ (2016) 16 Journal of Corporate Law Studies 241.

81 DES Guidelines (see the discussion on the adoption of multiple market-based approaches to equity exit [采取多种市场化方式实现股权退出], which list various avenues for investors to exit their positions in both listed and non-listed companies, including transactions on stock exchanges, the National Equities Exchange and Quotations (NEEQ), regional stock markets, and through mergers and acquisitions).

82 See T Huang, ‘Tracking China’s Debt-to-Equity Swap Program: “Great Cry and Little Wool”’ (2019) <https://www.piie.com/blogs/china-economic-watch/tracking-chinas-debt-equity-swap-program-great-cry-and-little-wool> accessed 20 May 2023; Xinhua, ‘Strong Efforts to Promote Market-oriented, Law-based Debt-to-equity Swaps’ (May 2019) <http://www.xinhuanet.com/english/2019-05/23/c_138081118.htm> accessed 8 April 2023.

83 ibid.

84 Zhonglun Law Firm, ‘Report on Market-oriented Debt-to-equity Swaps of Listed Companies [上市公司市场化债转股法律实务报告]’ (2020) <http://www.zhonglun.com/Content/2020/02-13/1937152503.html> accessed 15 April 2023.

85 ibid.

86 See X Chen, Market-oriented DES Tends to Mature [市场化债转股模式趋向成熟] (Shanghai Advanced Institute of Finance, 2019) <https://www.saif.sjtu.edu.cn/show-58-1423.html> accessed 19 April 2023; Reuters, ‘China Banks Agree Debt Restructuring Deal with Sinosteel: Bank of China’ (December 2016) <https://uk.reuters.com/article/us-sino-steel-debt/china-banks-agree-debt-restructuring-deal-with-sinosteel-bank-of-china-idUKKBN13Y104> accessed 22 April 2023.

87 ibid.

88 C Zhang, ‘Yunnan Tin’s Debt-for-Equity Swap Raises Market Concerns’ (October 2016) <http://www.scmp.com/business/banking-finance/article/2028794/chinas-local-debt-equity-swap-raises-doubts-over-market> accessed 17 January 2023.

89 L Guo and D Xia, ‘In Search of a Place in the Sun: The Shadow Banking System with Chinese Characteristics’ (2014) 15 European Business Organization Law Review 387; W Shen, ‘Wealth Management Products in the Context of China’s Shadow Banking: Systemic Risks, Consumer Protection and Regulatory Instruments’ (2015) 23 Asia Pacific Law Review 91; D Awrey, ‘Law and Finance in the Chinese Shadow Banking System’ (2015) 48 Cornell International Law Journal 1; G Sun, ‘China’s Shadow Banking: Bank’s Shadow and Traditional Shadow Banking (BIS Working Papers No 822)’ (2019) <https://www.bis.org/publ/work822.pdf> accessed 12 May 2023.

90 S Shen, M Jones and C Jim, ‘Analysis: What Lies Beneath? Hidden Debt Fears Feed China’s Property Woes’ (Reuters 2021) <https://www.reuters.com/world/china/what-lies-beneath-hidden-debt-fears-feed-chinas-property-woes-2021-10-20/> accessed 7 February 2023.

91 ibid.

92 G Wang, ‘Characteristics, Difficulties and Operational Options of Market-oriented Debt-to-Equity Swap’ [市场化债转股的特点、难点和操作选择] (2018) 452 Financial Research [金融研究] 1.

93 Securities Law (2019 revision).

94 AS Carson, ‘Vulture Investors, Predators of the 90s: An Ethical Examination’ (1998) 17 Journal of Business Ethics 543.

95 Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-first Century’ (n 25) 697.

96 See M Eisenberg, ‘When Hedge Funds Invest in Distressed Debt’ (2007) The New York Law Journal 11; DB Kamensky, ‘Furthering the Goals of Chapter 11: Considering the Positive Role of Hedge Funds in the Reorganisation Process’ (2014) 22 American Bankruptcy Institute Law Review 235; ES Hotchkiss and RM Mooradian, ‘Vulture Investors and the Market for Control of Distressed Firms’ (1997) 43 Journal of Financial Economics 401; Harner, ‘The Corporate Governance and Public Policy Implications of Activist Distressed Debt Investing’ (n 25) 703; J Wei and others, ‘Hedge Funds and Chapter 11’ (2012) 67 The Journal of Finance 513.

97 M Gietzmann, H Isidro and I Raonic, ‘Vulture Funds and the Fresh Start Accounting Value of Firms Emerging from Bankruptcy’ (2017) 45 Journal of Business Finance & Accounting 410; MM Harner, ‘Activist Distressed Debtholders: The New Barbarians at the Gate’ (2011) 89 Washington University Law Review 155.

98 F Partnoy and DA Skeel Jr, ‘The Promise and Perils of Credit Derivatives’ (2006) 75 University of Cincinnati Law Review 1019; HTC Hu and B Black, ‘Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications’ (2008) 14 European Financial Management 663; JC Lipson, ‘The Shadow Bankruptcy System’ (2009) 89 Boston University Law Review 1609 (suggesting mandate disclosure of positions of derivatives in Chapter 11 reorganisation); EI Altman, ‘The Role of Distressed Debt Markets, Hedge Funds, and Recent Trends in Bankruptcy on the Outcomes of Chapter 11 Reorganisations’ (2014) 22 American Bankruptcy Institute Law Review 75; Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-first Century’ (n 25) 697, 728.

99 Article 4.5, Economic and Trade Agreement Between The Government of the United States of America and The Government of the People’s Republic of China (2020), <https://d3i6fh83elv35t.cloudfront.net/static/2020/01/Economic_And_Trade_Agreement_Between_The_United_States_And_China_Text.pdf> accessed 4 May 2023

China shall allow US financial services suppliers to apply for asset management company licenses that would permit them to acquire non-performing loans directly from Chinese banks … When additional national licenses are granted, China shall treat US financial services suppliers on a non-discriminatory basis … 

100 Y Jiang, ‘The Curious Case of Inactive Bankruptcy Practice in China: A Comparative Study of US and Chinese Bankruptcy Law’ (2013) 34 Northwestern Journal of International Law and Business 559; Z Zhang, ‘Corporate Reorganisation of China’s Listed Companies: Winners and Losers’ (2016) 16 Journal of Corporate Law Studies 101; Steele and others (n 13) 669.

101 R Tomasic and Z Zhang, ‘From Global Convergence in China’s Enterprise Bankruptcy Law 2006 to Divergent Implementation: Corporate Reorganisation in China’ (2012) 12 Journal of Corporate Law Studies 295.

102 Z Wang, ‘Amending Insolvency Law to Deal with the Problem of Cram-down’ [修改破产法方可治理强裁之殇] (2016) <http://views.ce.cn/view/ent/201611/22/t20161122_18005414.shtml> accessed 26 January 2023.

103 For regulations on financial creditors' committees, see Notice on Effectively Completing the Relevant Work of the Creditors’ Committees of Banking Financial Institutions [关于做好银行业金融机构债权人委员会有关工作的通知] (2016); I CBRC, Notice on Further Improving the Relevant Work of Creditors' Committees of Banking Financial Institutions [关于进一步做好银行业金融机构债权人委员会有关工作的通知] (2017); CBIRC, Regulations on the Work of Creditors' Committees of Financial Institutions [金融机构债权人委员会工作规程] (2020).

104 The Supreme People’s Court Minutes of the National Courts’ Civil and Commercial Trial Work Conference in 2019 (the Ninth Civil Minutes) stipulated that creditors’ consent to the pre-insolvency agreement with the debtor should be treated as consent to the reorganisation plan (article 151). However, if the reorganisation plan alters the terms of the agreement and the creditors are adversely affected, the affected creditors must vote on the reorganisation plan. See also D Zhang, ‘Pre-Packaged Reorganisations in China and Creditor Protection’ (2018) 15 International Corporate Rescue 15.

105 See the reorganisation plan of Lutinanhua at <http://data.eastmoney.com/notices/detail/000912/AN201810101210555301,KlNUJUU1JUE0JUE5JUU1JThDJTk2.html> accessed 15 May 2023.

106 For regulations on financial creditors' committees, see Notice on Effectively Completing the Relevant Work of the Creditors’ Committees of Banking Financial Institutions [关于做好银行业金融机构债权人委员会有关工作的通知] (2016); I CBRC, Notice on Further Improving the Relevant Work of Creditors' Committees of Banking Financial Institutions [关于进一步做好银行业金融机构债权人委员会有关工作的通知](2017); CBIRC, Regulations on the Work of Creditors' Committees of Financial Institutions [金融机构债权人委员会工作规程] (2020).

107 T Shi and Q Ge, Improvement of the Operation Mechanism of Creditors' Committees of Banking Financial Institutions from a Legal Perspective (Yunqingsuan.com 2019) <http://www.yunqingsuan.com/news/detail/52081> accessed 19 December 2023.

108 ibid.

109 EBL 2006, Article 85.

110 EBL 2006, Article 87(4).

111 Supreme People’s Court, Minutes on Bankruptcy and Reorganization Cases of Listed Companies [关于审理上市公司破产重整案件工作座谈会纪要] (2012), Article 7.

112 Company Law (2018 revision), Article 103.

113 See the discussion on the EU Preventive Restructuring Directive in Section 2.2.

114 L Dong, The Exclusion of Shareholders’ Voting Rights in Reorganisation proceedings [资不抵债下股东在重整程序中的表决权排除] (Sohu.com 2019) <https://www.sohu.com/a/337336227_159412> accessed 5 July 2023.

115 See the discussion on the EU Preventive Restructuring Directive in Section 2.2.

116 EBL 2006, article 87(5).

117 M Qi, ‘The Misunderstanding and Way Out of the Mandatory Adjustment of Shareholders’ Rights and Interests in the Reorganisation of Listed Companies in China’ [我国上市公司重整中出资人权益强制调整的误区与出路] (2017) 7 Jurisprudence [法学] 164.

118 See previous discussions on the US new finance rule in Section 2.2.

119 OECD, ‘Corporate Ownership and Concentration Background Note for the OECD-Asia Roundtable on Corporate Governance’ (2022) <https://www.oecd.org/corporate/ca/Background-note-Asia-Roundtable-Corporate-ownership-and-concentration.pdf> accessed 19 July 2023.

120 Charles Lee, Yuanyu Qu and Tao Shen, ‘Reverse Mergers, Shell Value, and Regulation Risk in Chinese Equity Markets’ <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3038446> accessed 19 July 2023.

121 See previous discussions in Section 3.2.

122 H Zhou, ‘Debt-to-Equity Swaps in Perspective’ [透视重整程序中的债转股] (2018) <http://www.iolaw.org.cn/showArticle.aspx?id=5781> accessed 9 March 2023.

123 X Wang, ‘On Commercial Bank Debt-to-Equity Swaps in Corporate Reorganisation’ [企业重整中的商业银行债转股] (2017) 2 China Renmin University Journal [中国人民大学学报] 2.

124 Y Zhang, ‘Fairness and Unfairness of Dongbei Special Steel Reorganisation Plan’ [东北特钢破产重整方案的公与不公] (2017) <https://finance.caixin.com/2017-08-27/101136318.html> accessed 29 May 2023; J Dai, ‘The Deadlock of LDK Reorganisation’ [赛维破产重整陷僵局：受偿极低遭银行集体反对] (2016) <https://finance.sina.cn/2016-08-31/detail-ifxvitex9350568.d.html?from=wap> accessed 29 November 2022.

125 Supreme People’s Court, Minutes of the National Court Trial Work Conference on Bankruptcy Trial [全国法院破产审判工作会议纪要] (2018).

126 See the reorganisation plan of Yanhu at <http://data.eastmoney.com/notices/detail/000792/AN202001171374308772,KlNUJWU3JTliJTkwJWU2JWI5JTk2.html>.

127 J Wang, In Depth: Who are the Losers in the HNA Bankruptcy? (Caixinglobal.com 2021) <https://www.caixinglobal.com/hna-crisis/> accessed 19 July 2023.

128 ‘The First Case of Reorganisation of Provincial State-Owned Enterprises, Qinghai Province Investment Company is Wiped out as a Shareholder’ [省属国企破产重整第一案，青海省投国资股权清零] (Yunqingsuan.com 2023) <http://www.yunqingsuan.com/news/detail/100394?WebShieldSessionVerify=dKJYGtfEDIcstaFkKiEw> accessed 19 July 2023.

129 E Simpson and C Au-Yeung, ‘Restructuring the Offshore Debt of Chinese Real Estate Developers’ (Appleby 28 April 2022) <https://www.applebyglobal.com/publications/restructuring-the-offshore-debt-of-chinese-real-estate-developers/> accessed 19 July 2023. See also WY Wan, C Watters and G McCormack, ‘Schemes of Arrangement in Singapore: Empirical and Comparative Analyses’ (2020) 94 American Bankruptcy Law Journal 463.

130 ET Online, ‘Explained: Why China’s Crumbling Real Estate Sector Has the World on Edge’ The Economic Times (2022) <https://economictimes.indiatimes.com/news/international/business/explained-why-chinas-crumbling-real-estate-sector-has-the-world-on-edge/articleshow/93071962.cms?from=mdr >accessed 26 July 2023.

131 See the restructuring support agreement at <https://www.wertpapierinformationen.de/dam/jcr:f7be6198-7147-4211-8de9-a0a33cdfc4a2/XS1860402954_220921.pdf>. See also M. Niu and others, Troubled China Fortune Land Floats Restructuring Plan (Nikkei Asia October 2021) <https://asia.nikkei.com/Spotlight/Caixin/Troubled-China-Fortune-Land-floats-restructuring-plan> accessed 19 July 2023.

132 Sidley Austin, Kirkland Advise on Evergrande’s Debt Restructuring (Law.asia 2023) <https://law.asia/evergrande-debt-restructuring/> accessed 19 July 2023; C Spink and Y Pan, Fantasia Unlocks Property Solution (IFRe 2023) <https://www.ifre.com/story/3702263/fantasia-unlocks-property-solution-8rbcf8nnn2> accessed 19 July 2023.

133 China Builder Bonds Diverge as Offshore Creditors Lose Most (Bloomberg 2022) <https://www.bloomberg.com/news/articles/2022-04-25/chinese-developer-bonds-diverge-as-offshore-creditors-lose-most> accessed 19 July 2023.

134 ibid.

135 C Wei, G McCormack and X Huang, ‘Chinese Characteristics and Universalist Insolvency Ideals’ (2020) 50 Hong Kong Law Journal 1183.

136 E Lee, ‘The Cooperation Mechanism and Legal Harmonisation: Analysing the Past, Present and Future of Mutual Recognition and Assistance in Insolvency Proceedings Across Mainland China and Hong Kong, with Insights from EU Insolvency Regulations’ (2022) 22 Journal of Corporate Law Studies 1.

137 Crystal and Mokal (n 28) 123, 125–126.

138 ibid.

139 Eidenmüller (n 28) 1003, 1028–1029.

140 ibid.

141 F Buttignon, ‘Distressed Firm Valuation: Reorganization Plan and Going-Concern Capital Value’ (2015) <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2567651> accessed 24 November 2022.

142 ibid.

143 Crystal and Mokal (n 28) 123.

144 Re Bluebrook Ltd (In Administration) (IMO) [2009] EWHC 2114 (Ch).

145 Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-first Century’ (n 25) 719–723; S Paterson, ‘Debt Restructuring and Notions of Fairness’ (2017) 80 Modern Law Review 600, 619.

146 Paterson, ‘Debt Restructuring and Notions of Fairness’ (n 145) 600, 623.

147 S Paterson, ‘Bargaining in Financial Restructuring: Market Norms, Legal Rights and Regulatory Standards’ (2014) 14 Journal of Corporate Law Studies 333, 359.

148 Paterson, ‘Rethinking Corporate Bankruptcy Theory in the Twenty-first Century’ (n 25) 697, 717; Crystal and Mokal (n 28) 123, 131.

149 Crystal and Mokal (n 28) 123, 124–125.

150 M Simkovic, ‘The Evolution of Valuation in Bankruptcy’ (2017) 91 American Bankruptcy Law Journal 299.

151 LA Bebchuk, ‘Using Options to Divide Value in Corporate Bankruptcy (NBER Working Paper Series)’ (2000) <https://www.nber.org/papers/w7614.pdf> accessed 12 May 2023; American Bankruptcy Institute (n 54) 207.

152 Transfer of assets under circumstances such as restructuring and M&A requires the filing of an independent valuation report by an authorised asset appraiser with the CSRC and the SASAC if SOEs are involved. See Asset Appraisal Law [资产评估法] (2016); Notice of the Ministry of Finance on Issuing the Basic Rules for Asset Appraisal [财政部关于印发《资产评估基本准则》的通知] (2017).

153 Q Zhang, ‘On the Application of the Principle of Fairness in the Judicial Sanction of Reorganisation Plan [论公平原则在重整计划强制批准中的适用]’ (2018) 6 Law and Business Studies [法商研究] 111.

154 H Chi, Revisiting the Adjustment of Shareholders’ Interests and the Absolute Priority Principle in Reorganization Proceedings [再论重整程序中的股东权益调整与绝对优先原则] (Yunqingsuan.com 2020) <http://www.yunqingsuan.com/news/detail/70435> accessed 19 July 2023.

155 Baird, ‘Priority Matters’ (n 53) 1355.

156 J Chen and W Li, ‘Improvement of the Adjustment Mechanism of Shareholders’ Rights and Interests in the Bankruptcy Reorganisation of Listed Companies’ [上市公司破产重整中出资人权益调整机制之完善] (2021) 36 Journal of Shanghai University of Political Science and Law [上海政法学院学报] 27.

157 See previous discussion in Section 3.2.

158 See previous discussions in Section 3.1.

159 Regulation of major assets restructuring of listed companies [上市公司重大资产重组管理办法] (2008); Administrative Measures for the Material Asset Restructuring of Listed Companies [上市公司重大资产重组管理办法] (2008); CSRC, Provisions on Issues Concerning Regulating the Material Asset Restructuring of Listed Companies [关于规范上市公司重大资产重组若干问题的规定] (2008).

160 Significant losses of state assets arise during the 1990s restructuring of the SOE. The government is now wary of this and officials face severe punishment if they have caused loss of state assets. See DH Rosen, WY Leutert and S Guo, ‘Missing Link: Corporate Governance in China’s State Sector’ (2018) <https://rhg.com/wp-content/uploads/2018/11/Missing_Link_Corporate_Governance_in_China_s_State_Sector.pdf> accessed 1 April 2023. Regulations on state assets include: Rules on the Evaluation and Management of State Assets [国有资产评估管理办法 ] (1991); Measures for the Supervision and Administration of the Transactions of State-Owned Assets of Enterprises [企业国有资产交易监督管理办法] (2016); Law on the State-Owned Assets of Enterprises [企业国有资产法] (2018);企业国有资产监督管理暂行条例 [Interim Measures for the Administration of Assessment of State-owned Assets of Enterprises] (2019 revision).

161 See the valuation report of China Shipbuilding Industry Corporation (中国船舶重工) at <http://data.eastmoney.com/notices/detail/601989/AN201712121065513277,JWU0JWI4JWFkJWU1JTliJWJkJWU5JTg3JThkJWU1JWI3JWE1.html>.

162 See the valuation report of Chinalco (中国铝业), <http://data.eastmoney.com/notices/detail/601600/AN201802231094172509,JWU0JWI4JWFkJWU1JTliJWJkJWU5JTkzJTlkJWU0JWI8JTlh.html>.

163 See the valuation report of Huayou Cobalt (华友钴业) <http://data.eastmoney.com/notices/detail/603799/AN201912201372272839,JUU1JThEJThFJUU1JThGJThCJUU5JTkyJUI0JUU0JUI8JTlB.html>.

164 See the valuation report of Valin Steel (华菱钢铁) <http://data.eastmoney.com/notices/detail/000932/AN201907311341700142,JUU1JThEJThFJUU4JThGJUIxJUU5JTkyJUEyJUU5JTkzJTgx.html>.

165 See the valuation report of China Railway (中国中铁) <http://data.eastmoney.com/notices/detail/00390/AN201904191320940446,JWU0JWI4JWFkJWU1JTliJWJkJWU0JWI4JWFk.html>.

166 PBoC, ‘China Financial Stailibty Report’ [中国金融稳定报告] (2019), <https://www.gov.cn/xinwen/2019-11/26/5455673/files/8d8e5b3e9ffd40cc934f585c1fc1de8a.pdf>.

167 With its economic success and lack of effective formal rules for investor protection, China has been viewed as an abnormal case that cannot be explained by the ‘law and finance’ theory. One explanation is that China has informal finance networks and governance structures that could effectively replace formal corporate governance and financing mechanisms. See F Allen, J Qian and M Qian, ‘Law, Finance, and Economic Growth in China’ (2005) 77 Journal of Financial Economics 57. For counterarguments, see Z Zhang, ‘Law and Finance: The Case of Stock Market Development in China’ (2016) 39 Boston College International and Comparative Law Review 283.

168 C Kingston and G Caballero, ‘Comparing Theories of Institutional Change’ (2009) 5 Journal of Institutional Economics 151 (discussing both centralised institutional design and decentralised evolution as causes of institutional change).

Additional information

Funding

This research is kindly supported by the Guangzhou Key Research Institute of Humanities and Social Sciences Fund under the co-construction project ‘The Legal Mechanism to Support the Construction of Guangzhou's Modern Industrial System through the Lens of Doing Business Legal Environment’ [2023JDGJ18] and ESRC [Economic and Social Research Council] Newton Fund under the project ‘Boosting Growth through Strengthening Investor and Creditor Protection in China: How China can learn from the UK Experience’ [ES/P004040/1].

Notes on contributors

Chuyi Wei

Chuyi Wei is a Lecturer at Jinan University, China. Her research has focused on insolvency, corporate law and international commercial law.

Gerard McCormack

Gerard McCormack is Professor of International Business Law at the University of Leeds in the UK. He is also a Visiting Professor at the University of Vaasa in Finland. He has researched widely, particularly in the fields of International and Comparative Insolvency Law.

Jingchen Zhao

Jingchen Zhao is a Professor of Law at Nottingham Law School, UK and Distinguished Professor of Law at Guangdong University of Finance and Economics. He researches in the areas of corporate law, corporate governance, corporate social responsibility and Chinese law.