On January 29, 2021, the Chinese HNA Group Co., Ltd. ("HNA") published on its website that they had received a formal notice from the Hainan High People’s Court according to which a creditor has filed an application for the initiation of a reorganization procedure against HNA, on the grounds that HNA cannot pay off debts due to the creditor. HNA stated they will comply with the court’s instructions of judicial review in accordance with law, actively promote debt disposition, support the court to protect the legal rights and interests of creditors in accordance with law, and safeguard its normal business so it can be operated successfully.
What does this announcement mean for HNA and its creditors in China and abroad?
Prologue: What lead to the January 29, 2021 announcement?
HNA started as an air carrier in the 1990's. in the 2000's they expanded their business significantly, and entered markets like tourism, real estate, retail, finance, logistics, shipbuilding, technology etc., with assets spread all over the world with a total value which once exceeded one trillion RMB (approx. CHF 138.6 billion). The turning point for HNA's accelerated growth was in 2017. In June 2017, the China Banking Regulatory Commission (CBRC) required major banks in China to check the credit risks of large private enterprises involved in overseas M&A. Some companies in relation to HNA were found to have overdue debts and credit default, and pledged equity of listed companies were temporally frozen. In 2018, HNA started to sell a large number of previously acquired assets. Despite such measures, HNA failed to completely resolve the issues, and in early 2020, the People's Government of Hainan Province took the lead in setting up a joint working group.
On the same day that HNA made the announcement, January 29, 2021, the head of the joint working group announced internally that the bankruptcy reorganization would be "a step to steadily advance the risk resolution, and protect the company". According to local Chinese media, the head of the joint working group informed all employees of HNA that the reorganization of HNA was the only way for a new life, and that a reorganization plan has been drafted with the purpose of reorganization rather than bankruptcy. The draft of the reorganization plan was communicated to the main creditors and creditor's representatives.
The Chinese enterprise bankruptcy procedures at a glance
The Enterprise Bankruptcy Law of China provides for three statutory procedures:
- bankruptcy liquidation;
- bankruptcy reorganization; and
- bankruptcy conciliation.
The first procedure will eventually result in the dissolution and liquidation of the debtor. The purpose of the latter two procedures – even though they are also referred to as "bankruptcy" procedure - is to save the distressed company and avoid bankruptcy liquidation. It is possible to switch from one procedure to another, except between conciliation and reorganization.
If an enterprise is unable to pay off its debts due, and, additionally, either (i) its assets are not sufficient to pay off all its debts, or (ii) such enterprise is obviously insolvent, any of the three procedures may be initiated.
For the bankruptcy reorganization procedure, it is sufficient if it is to be likely that an enterprise is not capable to pay off his debts.
Bankruptcy reorganization procedure in particular
In the case of HNA, the bankruptcy reorganization procedure has been applied for by a creditor.
Such a reorganization procedure may be applied for by the debtor or any of its creditors. In addition, if a creditor has applied for liquidation of an enterprise, and the court has accepted the application, before the debtor is declared bankrupt, the debtor or its shareholders who hold more than 10% of the debtor’s registered capital may apply for reorganization.
If the court approves the application for reorganization, it may either appoint an administrator to manage the property and operation, or - upon request by the debtor -, leave the debtor in charge of its property management and operation under the supervision of the administrator.
During the period of the reorganization, in particular the following occur:
- As a rule, secured rights against property of the debtor are suspended.
- The administrator or self-administered debtor may raise a loan so that the debtor can go on with its business operation, which may be secured, by a debtor's related party or third party.
- As a rule, the right holder whose property is in the possession of the debtor on legitimate grounds cannot take back the property during the period of reorganization.
- The debtor's investor must not ask for distribution of profits.
- Without the approval of the court, the directors, supervisors or officers of the debtor shall not transfer their equities in the debtor to a third party.
Upon acceptance of the application for reorganization, the court will make a public announcement, in particular in the People's Court Daily (paper-based or electronic versions) and www.chinacourt.org. The creditors must submit their claims to the designated administrator in accordance with the specific public announcement. The time limit the court will set for submitting the claims will be in the range of 30 days to three months.
For creditors who have not submitted their claims within the set time limit, upon completed execution of the reorganization plan, they may request for repayment of their claims according to the repayment conditions prescribed for their kind of claim in the reorganization plan, but have to bear additional costs for examining and confirming their claims.
The debtor or the administrator shall subsequently draft a reorganization plan, and submit it to the court and the creditors' meeting at the same time. The plan must, in particular, specify the operation and management scheme of the debtor, the classification of the credits, and the execution arrangement of the plan.
The court shall convene the creditors’ meeting to vote on the draft. The creditors are divided into creditors' groups to discuss and vote on the draft.
If the draft is approved by all the creditors' groups, the debtor or the administrator shall submit it to the court for approval. If the court approves the plan, it makes a public announcement to that effect.
If not all creditors' groups have approved the draft, the debtor or the administrator may re-negotiate with the creditors' groups that have rejected the draft plan. If after the re-negotiations the draft is still not approved by all creditor's groups, the debtor or the administrator may still apply for approval from the court under certain conditions.
If the court does not approve the reorganization plan, it must declare the debtor bankrupt and initiate the bankruptcy liquidation procedure.
The reorganization plan approved by the court is binding on the debtor and all the creditor(s), and must be executed by the debtor under the supervision of the administrator during the supervision term specified in the plan.
If the debtor is unable to carry out or fails to carry out the reorganization plan, the court shall terminate the execution of the reorganization plan at the request of the administrator or an interested party, and declare the debtor bankrupt.
What comes next?
After the submission of a creditor's application for bankruptcy reorganization against HNA, and the court's formal notification, HNA has seven days to submit its objection to such application.
Based on the recent communication by HNA, it can be assumed that it will not object to the initiation of the bankruptcy reorganization procedure, and the decision by Hainan Provincial High Court on the application for reorganization can be expected within the next few weeks.
We recommend creditors of HNA or any of its group subsidiaries to closely follow the developments of HNA's reorganization procedure (in particular check the People's Court Daily [paper-based or electronic versions] and www.chinacourt.org) and stay in contact with the debtor, to ensure they file their claims in time and actively participate in the reorganization procedure.
For questions or in-depth advice, please do not hesitate to reach out to our China Desk team or your normal VISCHER contact person.