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SCMP Reporter

Creditors to bankrupt Guangdong International Trust and Investment Corp (Gitic) have been told illegal and improper behaviour by management is likely to complicate the recovery of company assets for many months.

 At the second creditors' meeting held for the Guangdong conglomerate, Gitic's liquidation committee yesterday reported the company's business operations had 'seriously contravened' laws and regulations.

 However, the committee also revised downwards its estimates of company liabilities and increased estimates of recoverable assets, raising the prospects of higher recovery rates for verified company creditors.

 Gitic was declared bankrupt in January in the largest corporate failure in mainland history.

 The committee yesterday put recoverable assets at 7.68 billion yuan (about HK$7.16 billion), following staff and salary payments, representing an increase of 1.18 billion yuan over estimates provided at the first creditors' meeting in April.

 The committee also provisionally reported total company liabilities at 24.33 billion yuan, representing a dramatic decline of 14.44 billion yuan from April's estimates of 38.77 billion yuan.

 The primary reason behind the change was the liquidation committee's removal and rejection of dozens of contingent guarantees offered by Gitic, primarily in the form of comfort letters.

 The committee warned that many of its rejections were now being challenged and, in the end, the amounts admitted might change substantially.

 Objections had been raised to 40 complete and partial rejections, involving 3.73 billion yuan from the 120 claims concerning 5.89 billion yuan, that the liquidation committee rejected.

 Also likely to increase Gitic's admitted liabilities is the existence of 4.35 billion yuan worth of unspecified claims that have not yet been processed and were not included in yesterday's liquidation committee report.

 Louie Choi, a partner with Gitic liquidation advisers KPMG Peat Marwick-Huazhen, said the liquidation committee intended to dispose of 'good' assets within a year and complete the company's bankruptcy within two years.

 Asset recovery work is likely to be complicated by Gitic's own sub-standard and often illegal business practices, which extended from irregular and illegal loan agreements to undocumented investments.

 Although the committee said it would seek to resolve asset recovery disputes through negotiation, it also admitted that legal disputes were likely.

 The liquidation committee was particularly critical of Gitic's business relationships with its wholly owned subsidiaries, where 'the allocation, re-allocation or transfer of investment projects between the group companies almost invariably failed to comply with the legal formalities'.

 Without proper legal documentation for many of Gitic's inter-group loans and investments, the committee estimated it would recover only 2.95 billion yuan from book assets of 7.31 billion yuan.

 Many of the 263 creditors attending the meeting, while expressing satisfaction with the committee's progress, were critical of the decision-making surrounding the bankruptcy process. Of particular concern was the handling of billions of dollars worth of foreign lending to Gitic that was not registered with the State Administration of Foreign Exchange (SAFE), as required by law.

 The committee announced the full principal of non-SAFE registered lending would be verified.

 However, loan interest rate payments would be assessed at below bank rates.

 'I see attempts to be transparent but it doesn't measure up to the kinds of standards we in the West are used to seeing,' said Thomas Bottini, a lawyer with Armstrong Teasdale, a member of the liquidation chairmanship committee.

 Mr Choi said disbursement of recovered Gitic property would start once 5 per cent of total assets were recovered.

 That is expected to take place around the time of the third creditors' meeting, forecast to take place early next year.

 At present, the liquidation committee has recovered 98.7 million yuan.

 However, Mr Choi said an imminent settlement with Hopewell China over a guarantee dispute regarding the Guangzhou-Shenzhen-Zhuhai Superhighway would provide an additional 296 million yuan to bankruptcy coffers in coming weeks.



Illegal Gitic deals delay payouts