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The Art of Bankruptcy

By Zheng Zhibin
Posted: 10th March 2016 10:17
According to Darwinian evolution, survival of the fittest is one of the most important rules in nature.  This rule can also works on capital market, every year, there are many failing companies go into bankruptcy proceedings.  Bankruptcy merger and acquisition refers to the mergers and acquisitions targeting distressed enterprise.  In addition to bankruptcy, merger and acquisition is completed in insolvency proceedings generally.  But in practice bankruptcymerger and acquisition expand to include out-of-court restructuration and pre-reorganization.
The US provides important support to the development of bankruptcy and merger.  Bankruptcy merger and acquisition became popular in the 1970s in US and made great progress because of the promulgation of the United States Bankruptcy Code in 1978, which launched the reorganization system, that made the bankruptcy merger and acquisition had more legal support.  1990 was a turning point in the financial year in the U.S., the stock market began to slump and a large number of bankruptcy merger and acquisitions began to appear.  Since then, the distressed enterprise market has rapidly expanded.
Why should we study the history of American bankruptcy and merger?  According to research during those years, what happened in the U.S. 20 or 30 years ago is happening in today’s China.  Taking risk disposition of security companies during 2003-2010 for example, 30 companies went into liquidation, including bankruptcy liquidation.  When we translated Securities Investor Protection Law of United States (1970), we found that the behaviour of infringement among security companies in the United States during the 70s – such as embezzled deposit and other illegal means –closely resembled our situation during 2003-2010.  However, the punishment aimed at resolving these illegal threats were different in the US and China.  The United States focused primarily on judicial punishment, whereas the emphasis in China was to combine administrative punishments with judicial punishments.
The United States Bankruptcy Code set new rules for the reorganization proceedings leading to a swathe of large-scale reorganization by listed companies. Similarly in China, there have been 47 listed companies reorganized since 2007. The reasons behind the problems with these companies and the way they were treated are similar to the bankruptcy listed companies in the United States. Again, if the path of development in bankruptcy business in China is in accordance with the experience of the United States, as we suspect, bankruptcy merger and acquisition in China is due to become a very hot topic indeed.
The financial crisis in 2008 brings great opportunities to bankruptcy merger and acquisition.  Simultaneously the increased complexity of the market and the count of bankruptcy has resulted in the uniqueness of derivatives market in some cases and conflicts of interest disrupt market order in others.  These vulture investors have become an important force affecting the development of the company.  Bankruptcy is not a science or a template that can apply to all reorganization, actually, bankruptcy is an act.
Distressed enterprises have different complexities.  Aiming at different enterprises, we need to choose different investment strategies, such as in-court investment, out-of-court investment and advance investment.  The person who works on bankruptcy, mergers and acquisitions business needs to find its value from a different phenomenon.  Bankruptcy and merger lawyers also need the quality of perseverance and the time to find goals.  The time to be taken and the pressure to be endured during the bankruptcy proceedings are extremely huge.  Moreover, working on bankruptcy and merger requires outstanding abilities and creative thinking method.  Bankruptcy law indeed has exceedingly complex rules.  According to bankruptcy law, there is not only legal issues in bankruptcy which need to be fixed, conflicts in civil law, commercial law even criminal law are also incorporated.  In the field of bankruptcy, relevant benefits conflict with each other, public judicial power also intervene with private rights and changes that are brought by corporate governance structure which make the rules of bankruptcy and merger become even more intricate.  Due to this situation, if there is no professional investor, there is generally not enough courage to get involved in a specific investment.
Merger and acquisition are the eternal theme of the market; especially following new changes to the capital market and the emergence of delisting rules which will make the prospect of bankruptcy merger and acquisition massive in the future.  We have reason to look forward to vulture investment, from the view of the economic environment that the downturn of the current economy and the emergence of several major surplus industries, we also have such conditions.  In addition, we have new bankruptcy law and reorganization system which can support bankruptcy merger and acquisition greatly.  China has already had a bankruptcy law drafted imitating the United States’, bankruptcy proceedings emphasize the balance of interest, Chinese traditional culture which pay more attention to harmony and balance may make bankruptcy law develop better in China .  Investors of Chinese bankruptcy merger and acquisition must do better in a sector which we believe is about to – or already has – taken off.

Zheng Zhibin is a partner of King & Wood Mallesons' Bankruptcy and Reorganization Group in Beijing.  He started to practice bankruptcy law in 1996 and he has been appointed by the Chinese court to carry out administrative duties for the liquidation of nearly 100 companies.  He is one of the first lawyers to provide legal service on the bankruptcy of securities companies and corporate reorganization.  He participated in the revisions of the Enterprise Bankruptcy Law of the People's Republic of China and the drafting of the Regulation of Risk Management of Securities Companies.  Mr. Zheng is a member of the INSOL International and the vice-chairman of the Bankruptcy Law Committee of the Beijing Lawyers Association.
Mr. Zhibin Zheng joined King & Wood Mallesons in 2001.  Prior to this, he was employed with the Foreign Economic Relations and Trade Commission of the Jilin Provincial Government, Jilin Guoli Law Firm, and Guangdong Huabang Century Law Firm.  He obtained his LL.B. and LL.M. degrees from Jilin University and is currently a Ph.D. candidate at Jilin University. Mr. Zheng was admitted as a Chinese lawyer in 1995.

Zheng can be contacted on 8610-58785588  or by email at 

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