How are financial institutions reorganizing themselves via creditors committees?


When heavily indebted nonfinancial corporations suffer from a cash crunch or default on repayment, creditors can often panic and trigger an all-out stampede to get their money back that seems intent on draining the debtor company. To enable a more orderly resolution of corporate debt problems, regulators are gradually improving and expanding the system of creditors’ committees of financial institutions, requiring members to analyze and determine the restructuring and reorganization options of each debtor company on a systematic basis, on a case-by-case basis.

At the same time, large companies such as Dongbei Special Steel and Wintime Energy are trying to deal with their own debts and reorganize themselves through creditors committees.

How the creditors committee works

The reform plan to accelerate the improvement of the exit system for market participants, jointly released by the National Development and Reform Commission and 12 other departments, called for the development of the creditors’ committee system and the clarification of the mechanism for procedural conversion and recognition of decisions between creditors committees of financial institutions and courts.

Wang zhenxiang
Partner
Jingtian and Gongcheng

According to the working procedures of the creditors ‘committees of financial institutions jointly issued by the China Banking and Insurance Regulatory Commission and three other departments in December 2020, financial institutions now authorized to initiate a creditors’ committee include, in addition to banks, bancassurance institutions with creditors (or which have asset management products with creditor rights) legally serving as bond trustees, as well as securities and fund operators.

Advisory, self-regulatory and temporary, a creditors ‘committee includes no less than three financial institutions with creditors’ rights, depending on the hierarchy, size and commercial complexity of the debtor company. Two institutions will serve as the chair and vice chair of the committee, which will lead a committee working group to fully, accurately, and timely share critical information with all members through communication with the debtor company and other non-creditors. financial.

In accordance with the organizational structure, rules of procedure, work process and decision-making mechanism provided for in the creditor agreement entered into by all members, the committee deliberates and takes decisions on funding adjustments, restructuring of debt and bankruptcy. The working procedures further set out the different roles to be played by committee members, professional associations and regulators in debt restructuring and reorganization.

Connect

Current judicial practice indicates that out-of-court restructuring must be linked to reorganization to give the best results. Since financial institutions often hold the largest share of creditors’ rights in bankruptcy and reorganization, creditors committees, as interim organizations working alongside financial institutions, are able to make a substantial contribution. the link between extrajudicial and judicial proceedings.

First, creditors committees effectively redress the information asymmetry between financial institutions and debtor companies. This prevents institutions from aggressively seeking financial or legal sanctions, causing indebted companies to reorganize for fear of a further decline in the value of their assets or their creditworthiness. Considering that the recovery plans must be submitted by law to a vote within nine months, insufficient communication and reflection can seriously affect the prospects of seeking investors for the recovery and the voting procedure.

Second, compared to governments, courts or administrators, financial institutions are naturally more familiar with the market, and therefore in a better position to determine the prospects and value of corporate debtor reorganization. Committees are also able to analyze the market value and prospects of companies’ products or services, which can be invaluable in soliciting future investors or voting on the reorganization plan.

Third, creditors’ committees, established on the principles of “commodification and rule of law”, can help unify the views of creditors of financial institutions. This makes the committee an ideal platform for financial institutions to participate in bankruptcy, as it helps deter investors and reorganization administrators from ignoring the divergent views of creditors of individual financial institutions, while reducing costs. of the latter to exercise the rights to supervise the bankruptcy proceedings.

Finally, due to the professionalism of its members and cooperation bodies, creditors committees can recommend qualified investors and administrators in reorganization to the court. This speeds up the reorganization process, reducing the losses caused by the moratorium on accrued interest and the risk that debtor companies will suffer from a massive drop in solvency due to exceeding the aforementioned nine-month limit.

Suggestions

A creditors’ committee may, on behalf of its members, recommend to the tribunal legal, independent, fair and equitable administrators. Drawing on their own management expertise, committees can also communicate with debtor companies, local governments and courts to determine whether the debtor company should manage its own debt and, if so, develop a plan. This means that debtor companies no longer need an independent court decision or wait for a decision to be taken at the first meeting of creditors on the issue of self-administration, thus avoiding any administrative vacuum. or decline in solvency during the reorganization.

In carrying out its functions, a creditors’ committee may engage accounting firms or law firms to advise on matters such as the desirability of a reorganization of the debtor company, the protection of rights and legal claims. supervision rights of creditors of the financial institution and negotiations on the reorganization plan. In addition, they may seek cooperation with financial asset management companies and local asset management companies to provide integrated financial services to support financing and operations during a business reorganization.

Taking advantage of the expertise of their members as financial advisers, creditors’ committees guide their sub-groups to participate in soliciting and negotiating with reorganizing investors and help inform the opinions of financial institutions on how and the repayment term. This effectively prevents debtor companies from going into liquidation due to the passive acceptance or rejection of the reorganization plan.

Members should be clear about their internal workflow and responsibilities regarding the creditors committee, as well as the authorization mechanism to attend committee meetings. Before any major decision, for example whether a debtor company needs to reorganize, members should analyze the situation independently and vote cautiously.

Once effective, the decision must be duly executed, lest the member be held accountable by regulators. In addition, members can maintain their own interests while participating, voting and leaving the creditors committee. The enforceability of the agreement with creditors does not mean that a member’s own rights and interests should be limited.

Wang Zhenxiang is a partner at Jingtian & Gongcheng

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Jingtian and Gongcheng

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No.1366 Qianjiang Road, Hangzhou 311500, China

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