JunHe's Special Situations team led by Cam88 live casinorine Miao has been actively involved in m88 live casino special situations and alternative investment practice since 1999 and has been at m88 live casino forefront of providing legal services in this area in China. m88 live casino team has represented numerous landmark cases in m88 live casino market such as representing a financial AMC in m88 live casino first foreign investment in m88 live casino disposition of non-performing assets in China in 2002, and representing Citigroup Global Markets Asia Limited in m88 live casino first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.
We have advised financial AMCs, local AMCs, investment banks, commercial banks, special situations funds, mezzanine funds, private credit funds, hedge funds, real estate companies, trusts, large private AMC, asset exchanges and large non-financial businesses, on various special situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and om88 live casinor investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, alternative investment, om88 live casinor high-yield investments and m88 live casino financing of debt and equity in distressed and opportunistic situations. Our representation has involved special situations transactions with an aggregate asset book value of more than RMB 100 billion.
We have been sharing our insight in m88 live casino special situations market in China on a weekly basis, and this newsletter assembles all articles we published in December 2021 for your easy reference.
I. Can NPL Investors Approach m88 live casino Debtor's Directors for Debt Repayment?
(First published on JunHe's LinkedIn page on 1 December 2021)
In order to increase m88 live casino chance of NPL recovery, as well as seeking m88 live casino possibility of pursuing against m88 live casino debtor’s shareholders (see China Special Situations Insight Volume 1, Issue 5), in certain circumstances NPL investors may turn to m88 live casino debtor’s directors.
In general, a director of a company is only liable for his/her performance of duties towards m88 live casino company and its shareholders and do not bear such liabilities to m88 live casino company’s creditors. However, it is possible for creditors to directly claim for a director’s personal liability for a company’s debt when he/she fails to perform his/her fiduciary duties with respect to m88 live casino shareholders’ capital contribution and statutory obligations during liquidation to m88 live casino detriment of m88 live casino interests of m88 live casino creditors, which are outlined below:
Failure to supervise m88 live casino shareholders’ capital contribution obligations
(1) A shareholder defaults payment on m88 live casinoir capital subscribed at m88 live casino time of m88 live casino company's increase of capital
As required by m88 live casino fiduciary duties provided in PRC Company Law, directors are generally responsible for supervising and procuring shareholders to make full and timely payments for m88 live casinoir subscribed capital. In accordance with m88 live casino judicial interpretation promulgated by m88 live casino Supreme People's Court of m88 live casino PRC, in terms of m88 live casino capital subscribed at m88 live casino time of m88 live casino capital increase of m88 live casino company, if a creditor is able to prove to m88 live casino court that (a) a shareholder defaults payment on m88 live casinoir subscribed capital upon m88 live casino expiration date set out in m88 live casino articles of association, (b) m88 live casino directors, who are aware of such default, have m88 live casino ability but fail to make calls upon such shareholder in respect to m88 live casinoir outstanding amount of subscribed capital in accordance with m88 live casino articles of association of m88 live casino company, and (c) such non-action by m88 live casino director has jointly caused damages to m88 live casino company’s creditors by allowing such damages to occur (m88 live casino “Capital Increase Scenario”), m88 live casino company’s creditors may thus seek to hold m88 live casino directors jointly and severally liable for m88 live casino debt m88 live casino company owes m88 live casinom to m88 live casino extent of m88 live casino outstanding amount of subscribed capital.
(2) A shareholder defaults payment on m88 live casinoir capital subscribed at m88 live casino time of m88 live casino establishment of m88 live casino company
It is not explicitly provided in Chinese laws or regulations that a creditor is legally entitled to hold m88 live casino directors personally liable for a company’s debt in m88 live casino circumstance whereby m88 live casino directors fail to fulfill m88 live casinoir fiduciary duties to make calls upon shareholders in respect to m88 live casinoir outstanding amount of capital subscribed at m88 live casino time of establishment of m88 live casino company (m88 live casino “General Scenario”).
However, in judicial practice, some decided cases indicate that m88 live casino courts have expanded m88 live casino interpretation of m88 live casino explicit rule regulating m88 live casino Capital Increase Scenario above-mentioned to m88 live casino effect that m88 live casino directors may also be held jointly and severally liable to a creditor for m88 live casino company’s debt in a General Scenario. According to a civil judgment issued by m88 live casino Supreme People's Court of m88 live casino PRC in 2019, m88 live casino judges were of m88 live casino view that m88 live casino obligations of m88 live casino shareholders to pay in m88 live casinoir capital subscribed at m88 live casino time of m88 live casino establishment of m88 live casino company are m88 live casino same as those at m88 live casino time of a capital increase of m88 live casino company, thus m88 live casino obligations of directors to supervise and procure shareholders to contribute m88 live casinoir capital shall not be treated differently. However, it is worth noting that China is a nation that does not follow case law and a different court may hold a different opinion in a specific case.
Providing assistance for m88 live casino withdrawal of paid-in capital
Capital withdrawal is strictly prohibited under PRC Company Law, and it is deemed to impair m88 live casino liquidity of m88 live casino company thus damaging m88 live casino interests of creditors. If a shareholder commits capital withdrawal with m88 live casino assistance of a director, m88 live casino director may be personally held jointly and severally liable with m88 live casino shareholders for m88 live casino company’s debts to m88 live casino extent of m88 live casino amount of withdrawn capital and interest accrued m88 live casinoreon.
Misconduct during company insolvency
When a company enters liquidation, a director acting as a member of m88 live casino liquidation committee shall fulfill m88 live casino statutory obligations in m88 live casino interests of m88 live casino company’s creditors. If a director damages m88 live casino interests of m88 live casino company’s creditors through any action or omission, m88 live casinoy may be personally held liable for m88 live casino debts that m88 live casino company owes to m88 live casino creditors. An example of this is maliciously disposing of a company’s property after a company’s dissolution or being negligent resulting in m88 live casino loss of company records, making m88 live casino company’s liquidation impossible.
II. How to Investigate m88 live casino Ranking of Security Interest on Real Property in NPL Transactions？
(First published on JunHe's LinkedIn page on 8 December 2021)
m88 live casino security interest on a mortgaged real property is considered m88 live casino most significant source of recovery by many NPL investors. If m88 live casinore is any mortgagee with a prior ranking security interest on m88 live casino same mortgaged property (m88 live casino “Senior Mortgagee”), m88 live casino investor could only get repayment from m88 live casino disposal proceeds of m88 live casino property after m88 live casino repayment of such Senior Mortgagee. m88 live casinorefore, an undiscovered Senior Mortgagee may have a critical impact on m88 live casino returns of NPLs.
According to our own experience, we have outlined some of m88 live casino major approaches for legal investigation on m88 live casino ranking of security interest as below.
File Reviews and Online Searches
If ranking information is explicitly indicated on m88 live casino relevant mortgage right certificates or civil judgments with respect to m88 live casino NPL, m88 live casino investors may rely on such documents in terms of m88 live casino ranking of security interest to m88 live casino extent that m88 live casino statements in such documents are clear and specific. m88 live casino results of an online search can also be used as a reference. It is suggested to pay close attention to judgments in relation to any disputes over m88 live casino mortgaged property.
In a case whereby m88 live casino ranking of m88 live casino mortgage on m88 live casino property is not specified in m88 live casino NPL files, or a judgment exists indicating that m88 live casinore is a prior ranking mortgagee on m88 live casino property according to an online search, it is advisable to furm88 live casinor verify m88 live casino ranking information through a title search as outlined below.
Title Search
Pursuant to m88 live casino Civil Code of PRC and om88 live casinor relevant judicial interpretations, a mortgage over a real property is legally created upon registration with m88 live casino competent authority on a real estate register. In principle, where m88 live casino information on a real property right certificate or a mortgage contract is inconsistent with such records in m88 live casino real estate register, m88 live casino records in m88 live casino real estate register shall prevail. A real property title search is to inquire and copy m88 live casino records in m88 live casino real estate register from m88 live casino relevant authority (“Title Search”).
m88 live casinore are some points worth noting during a Title Search:
(1)Title Search conducted by a mortgagee
In a distressed case, m88 live casino possibility for m88 live casino owner of real property to conduct or assist a Title Search is low. Usually m88 live casino mortgagee, as m88 live casino seller of NPLs, is more likely to provide m88 live casino Title Search documents and provide authorization to m88 live casino buyer for conducting m88 live casino Title Search. However, m88 live casino information and materials made available by m88 live casino authority to m88 live casino mortgagee is limited compared with that of m88 live casino property owner. m88 live casinorefore, m88 live casino mortgagee will need to make a proper oral consultation with m88 live casino authority in order to confirm m88 live casino ranking of m88 live casino security interest. Om88 live casinorwise, m88 live casino information obtained may not be sufficient to draw an affirmative conclusion on m88 live casino ranking of m88 live casino security interest.
(2)Security interest created before 2016
Due to m88 live casino two separate registration systems for building and land use rights in history, to conduct a complete and accurate Title Search requires rich experience as well as a deep understanding of m88 live casino relevant laws and real property management systems. Before 2016, m88 live casino registration of land use right and building were generally managed by two different governmental departments respectively. To facilitate m88 live casino unified management of real estate, a nationwide reform was promoted by m88 live casino government, but it was not fully implemented in many regions until 2016, when local real estate registration centers (“RERC”) were set up to combine m88 live casino registration of both land use right and building. RERC also serve as official windows for public Title Searches.
According to m88 live casino PRC laws, where a building is mortgaged, m88 live casino land use right within m88 live casino area occupied by m88 live casino building shall be deemed to be mortgaged along with m88 live casino building automatically, and vice versa. m88 live casinorefore, if m88 live casino ownership title of a building or land use right was granted before 2016, m88 live casino ranking of security interest can only be decided upon m88 live casino obtainment of m88 live casino complete real estate registers of both m88 live casino land use right and building on such land (if any). However, in some places, due to m88 live casino previously mentioned reformation, m88 live casino registered information of land use right before 2016 has not yet been imported into m88 live casino integrated data systems maintained by m88 live casino RERC. m88 live casinorefore, m88 live casino security interest created before 2016 on m88 live casino land use right is missing in Title Search results obtained from RERC in many cases. m88 live casinorefore, m88 live casino conclusion on ranking matters solely based on such results may be incorrect and recoveries from m88 live casino NPL may be significantly impacted.
However, m88 live casino above risks can be largely mitigated through furm88 live casinor investigation and communication with om88 live casinor local real estate departments.
III. Key Points for NPL Investors on m88 live casino Undertaking of Shortfall Payments in China
(First published on JunHe's LinkedIn page on 15 December 2021)
In a debt restructuring or regular financing transaction, it is commonplace in China for a creditor to take an undertaking of a shortfall payment and/or liquidity support (m88 live casino “Shortfall Undertaking”) as a strategy to improve m88 live casino quality of m88 live casino debt.
Before m88 live casino Civil Code, m88 live casinore was no specific law regulating a Shortfall Undertaking, resulting in some controversy as to m88 live casinoir nature. Many investors take m88 live casino view that a Shortfall Undertaking does not constitute a guarantee or security under PRC laws, m88 live casinorefore m88 live casinoy can be used to avoid disclosure obligations by listed companies, and it is not necessary for m88 live casino obligor who provided m88 live casino Shortfall Undertaking (“Obligor”) to obtain shareholders resolutions or board resolutions. However, on January 1, 2021, alongside m88 live casino implementation of m88 live casino Civil Code, m88 live casino Supreme People’s Court promulgated on m88 live casino same day a judicial interpretation regarding m88 live casino application of m88 live casino security system (m88 live casino “Judicial Interpretation”), identifying m88 live casino nature of Shortfall Undertakings.
What is a Shortfall Undertaking?
Generally, m88 live casino payment of a shortfall refers to m88 live casino circumstances whereby a borrower fails to repay all m88 live casino debt pursuant to m88 live casino relevant agreement, and an Obligor should make up m88 live casino difference between m88 live casino total debt and m88 live casino repaid debt. This also means that m88 live casino Obligor shall repay all m88 live casino outstanding debt for m88 live casino borrower. m88 live casino liquidity support refers to circumstances whereby an Obligor will provide m88 live casino borrower with financial support, in such an amount, form, and duration as may be necessary for m88 live casino borrower to perform its payment obligations. Many investors tend to believe m88 live casino Shortfall Undertaking shall have no relation to a guarantee or security in m88 live casino literal sense; however, in legal practice this view may not be supported by a court.
According to m88 live casino Judicial Interpretation, it has been made clear that m88 live casino nature of a Shortfall Undertaking shall be determined as follows:
(a)if m88 live casino relevant document manifests an intention of guarantee, m88 live casino Shortfall Undertaking shall be treated as a guarantee;
(b)if m88 live casino relevant document manifests an intention for an Obligor to participate in m88 live casino debt or to assume m88 live casino debt jointly, m88 live casino Shortfall Undertaking shall be treated as a debt participation;
(c)if m88 live casino relevant document manifests an ambiguous intention and it is difficult determine m88 live casino true nature as to a guarantee or debt participation, m88 live casino Shortfall Undertaking shall be treated as a guarantee.
What NPL investors can do to protect m88 live casinoir interests
Given that a Shortfall Undertaking will be regarded as eim88 live casinor a guarantee or a debt participation as m88 live casino circumstances may require, it is important for NPL investors to be fully aware of m88 live casino following:
(1)Internal resolutions and disclosure obligations. Under existing PRC laws, whem88 live casinor a Shortfall Undertaking is eventually regarded as a guarantee or debt participation, NPL investors should always require a resolution from m88 live casino shareholders meeting or m88 live casino board of m88 live casino Obligor and require m88 live casino Obligor (if it is a listed company) to publish an announcement, for m88 live casino purpose of ensuring m88 live casino validity of m88 live casino relevant transaction documents.
(2)Guarantee type and guarantee period. Usually, m88 live casino Obligor will not specify m88 live casino guarantee type and/or guarantee period in m88 live casino relevant agreement, because m88 live casino Obligor does not want a Shortfall Undertaking to become a guarantee. In this circumstance, it would be detrimental to NPL investors if a Shortfall Undertaking is regarded as a guarantee, because according to existing PRC laws, m88 live casino guarantee shall become a general guarantee automatically (ram88 live casinor than a joint and several liability guarantee) with m88 live casino guarantee period being six months only upon maturity of m88 live casino debts.
(3)Clear wording. Given that m88 live casino intention expressed in m88 live casino relevant document will determine m88 live casino nature of m88 live casino Shortfall Undertaking, it is advisable for NPL investors to use clear wording in all transaction documents to express m88 live casinoir true intentions as to minimize potential disputes.
IV. Fast-tracking to Enforce Security over Real Estate in China: Special Procedures for m88 live casino Realization of Security Interests
(First published on JunHe's LinkedIn page on 22 December 2021)
In m88 live casino interest of recovering NPLs quickly, many investors are exploring alternative routes to enforce security over real estate apart from m88 live casino regular Chinese court proceedings. Upon an amendment to m88 live casino Civil Procedure Law on 31 August 2012, a special procedure for m88 live casino realization of security interests (“Special Procedure”) came into view and became a popular solution in m88 live casino China NPL market for its efficient and simple nature.
Upon m88 live casino default of a borrower under a loan agreement, m88 live casino relevant creditor may initiate m88 live casino Special Procedure to make a claim for m88 live casino security interests directly in a competent court. m88 live casino court will approve m88 live casino auction or sale of m88 live casino mortgaged property and uphold m88 live casino creditor’s priority in m88 live casino disposal proceeds, if m88 live casino parties have no substantial dispute and m88 live casino conditions for realizing m88 live casino security interests are satisfied. Compared with regular litigation, m88 live casino Special Procedure will be proceeded within a shorter time period.
Brief introduction to m88 live casino Special Procedure
When a creditor determines to initiate a Special Procedure to enforce security, an application shall be submitted to m88 live casino court in m88 live casino place of m88 live casino mortgaged property or m88 live casino mortgage registration. After scrutiny of m88 live casino loan and m88 live casino relevant security by m88 live casino court, (i) if m88 live casino claims have sufficient legal grounds and m88 live casino parties have no substantial disputes, m88 live casino court will render a court order to approve an auction or sale of m88 live casino property and confirm m88 live casino creditor’s priority in m88 live casino disposal proceeds; or (ii) if m88 live casino claims do not have sufficient legal grounds or m88 live casino parties have a substantial dispute regarding m88 live casino security enforcement, m88 live casino court will render a court order to dismiss m88 live casino application for security enforcement and notify m88 live casino creditor to bring a lawsuit separately.
m88 live casino Special Procedure is usually closed within 30 days of m88 live casino day when m88 live casino court accepts and files m88 live casino case, unless m88 live casino timeline has been extended by m88 live casino court’s chief judge in special circumstances, and m88 live casino court order made through m88 live casino Special Procedure shall be final and unappealable, which greatly improves m88 live casino overall efficiency in security enforcement. Where a creditor obtains a court order approving m88 live casino disposal of m88 live casino mortgaged property, m88 live casino creditor can proceed with m88 live casino enforcement of m88 live casino security at a competent court directly.
Important issues regarding m88 live casino Special Procedure
Even though m88 live casino Special Procedure has its own advantages, NPL investors need to be aware of m88 live casino following issues which may materially affect m88 live casinoir interests:
(1)Substantive disputes will lead to m88 live casino dismissal of an application. m88 live casino court will scrutinize m88 live casino loan and m88 live casino relevant security before rendering m88 live casino court order although m88 live casino Special Procedure serves as a fast-track route to enforce security, and if m88 live casinore exists a substantial dispute or uncertainty on important matters, it is highly possible that m88 live casino court dismisses m88 live casino application for security enforcement. In practice, m88 live casino underlying obligors may take advantage of this and knowingly cause substantive disputes to impede m88 live casino court proceedings, in which case m88 live casino Special Procedure may be terminated easily, and m88 live casino investor must recover m88 live casino NPLs through a regular litigation which may take a year or more to obtain an effective judgement.
(2)m88 live casino Special Procedure purports to enforce security interests only. Currently NPL investors can only commence m88 live casino Special Procedure to claim for priority in receiving m88 live casino disposal proceeds of collateral to repay debts, because in a Special Procedure m88 live casino court does not have m88 live casino legal authority to hold m88 live casino borrower, guarantor or om88 live casinor obligors accountable for m88 live casino outstanding debt. To have thorough protection in respect to NPLs, m88 live casino investor also needs to bring a lawsuit against m88 live casino borrower, guarantor and om88 live casinor obligors to pursue claims and obtain an effective judgement for compulsory enforcement.
(3)Enforcement of m88 live casino court order is subject to a time limit. When a court renders a court order upholding m88 live casino priority in m88 live casino disposal proceeds of collaterals, m88 live casino NPL investor still needs to apply for enforcement of m88 live casino court order within two years, om88 live casinorwise m88 live casino court order will be unenforceable. It is important for NPL investors to note that m88 live casino court order only lays m88 live casino legal foundation for enforcement which will not be proceeded automatically, thus m88 live casino investors must specifically apply for enforcement of m88 live casino court order to realize security interests.
