Bankruptcy courts to deal with surge in bond defaults
China’s Supreme People’s Court (SPC) said the country is going to launch its first specialised bankruptcy courts to deal with a rising tide of bankruptcy filings.
The development, announced in an SPC statement earlier this month, brings hope to Chinese investors who previously were unable to claim payment in the event of a company defaulting on a bond.
In developed markets, following a default, if a company is unable to reach agreement with creditors through negotiations, bondholders can ask the bankruptcy court to order debt restructuring or bankruptcy liquidation, forcing the company to sell assets to repay its debts.
However, Chinese investors have faced enormous difficulties pursuing that path and generally become mired in endless out-of-court negotiations. Although a bankruptcy law has existed since 2006, it’s seldom used in practice and has never been applied to a bond default case.
“One of the reasons is that China doesn’t have specialised bankruptcy court until now,” said Jamie Tadelis, co-founder and head of sales at SC Lowy, a fixed income specialist focused on Asia-Pacific, Europe and Middle Eastern markets.
“Although the launch of bankruptcy courts may not have an immediate impact in the near term, I think it’s a positive step forward and will push negotiations between debtor and creditor from corporate boardrooms into court rooms, where creditors should have more leverage via a clear and controlled process.”
The supreme court is also launching a new centralised system on the web for investors who fall foul of bond defaults, which will provide debtor information, allow creditors to file and report claims, and generally keep up to date with case proceedings.
“But it will be a painful process with a steep learning curve before China has a complete system in place,” said Tadelis. “For example, it will take years of overseeing cases before China establishes a deep pool of specialised and educated judges to handle complex corporate bankruptcy cases.”