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Case Study 2: Prevent the borrower from escaping the debt through liquidation

1. Background

The creditor’s right held by Bank B includes 7 loan contracts. The outstanding principal of each loan contract is ¥24,840,000, ¥24,012,000, ¥2,000,000, ¥2,000,000, ¥1,540,000, ¥810,000 and ¥2,000,000 respectively. The total principal and interest as of June 20, 2003 is ¥110,075,399.

In Jun.2000, Bank B transferred those creditor’s rights to Asset Management Company D, and in 2005, the creditor’s rights was transferred to the current owner.  FYT was officially engaged to manage the portfolio in Mar.2005.

2. Challenge

The borrower is a state-owned enterprise and the business had been stopped. There are total 445 employees in staff list (including 148 laid-off workers and 297 current employees) and 806 retired employees. The relocation of the employees was a heavy burden on the borrower.

There are two mortgage loans and two guaranty loans in 7 loan contracts. Although there are collateral lists attached to the mortgage loan contracts, the collaterals were invalid because mortgage was not registered. Besides, FYT found out that the business license of guarantor was cancelled by Authority of Industry and Commerce on August 24, 1998. Moreover, there was no written evidence showed that Bank B had claimed its right to the guarantor during the guarantee period. The guarantor had been exempted from the liability.
The borrower’s major assets are 35989.4㎡land and some workshop and office building with a total floor area of 27860.6㎡. All of those assets have been mortgaged to other creditors and frozen by the court. Moreover, the borrower holds 45% equity shares of a local joint-venture enterprise. According to FYT’s investigation, the owner’s equity of this joint-venture enterprise was ¥87,120,000 in 2004. The value of borrower’s holding equity should be ¥39,200,000. However, other creditor had applied to freeze those equity on November 27, 2003 to claimed their creditor right of ¥77,760,000.
Other than the owner, the borrower also owed the money to its supervised company, the city’s land consolidation and rehabilitation centre, an asset management company as well as a bank, and facing a large scale of lawsuits. The borrower’s total debt was ¥420 million. Most of the assets were seized or frozen.
In Feb 2004, the borrower had been put into the State Council’s bankruptcy enterprises list by policy, but the bankruptcy has not been officially approved. The borrower and its supervised company have declared to apply for liquidation many times during negotiation with FYT. If the borrower goes to liquidation, it should firstly pay for the workers’ relocated fees of RMB 23.77 million and salaries & medical compensation of RMB 5.6 million. The asset value which could be used for distribution was only ¥9.83 million without calculating liquidation charge and unpaid taxes. The owner only entitles to 29% of total creditor’s rights. FYT also found out that the borrower’s supervised company had successful experience to liquidate its subsidiary to escape the debt.

3. Strategy

Since the real estate property of the borrower had been mortgaged to other creditors, the recovery would mainly come from 45% equity shares of the local joint-venture enterprise which holding by the borrower. It heavily depends on the attitude of the borrower’s superior company.
FYT found out that the court’s seizure on the 45% equity shares has been expired. No record showing in Authority of Industrial and Commercial that the seizure was renewed.
FYT asked the owner to sue the borrower immediately and successfully applied for the securing of the said equity shares property before litigation from court. At the mean time, FYT continued to negotiate with the borrower and its superior company.
FYT found out that the superior company of the borrower also sued the borrower several days before FYT successfully applied for sealing the equity shares. The superior company claimed a creditor’s right of RMB 40 million and intended to apply for securing the said equity shares property and try to help the borrower to escape the debt.
FYT noticed the foreign shareholder of the joint-venture company about the seizure of 40% equity shares. This action has stopped the borrower’s intention to transfer the equity shares among the shareholders. With analysis on the company financial situation, FYT believed that the joint-venture enterprise has future potentials. Therefore FYT actively negotiate with the foreign shareholder and persuade them to participate in the biding of 45% shares. These actions had created a favorable negotiation circumstance for our side, which would force the borrower to enter an earlier reconciliation.
Considering that the borrower might take measures to escape the debt, FYT actively studied on the effective ways to prevent the borrower to apply for bankruptcy.  FYT notified the borrower and its superior company that the bankruptcy will affect their interests on the joint-venture enterprise, so to compel them to reconsider the bankruptcy.

4.  Achievement

While actively negotiating with the borrower and its superiors company, FYT responded fast enough to successfully foreclosed the borrower’s equity in the JV, proactively stop the borrower’s intention to seal the equity shares by themselves and try to transfer the assets.
In Oct 2006, the borrower had been officially put into the State Council’s bankruptcy enterprises list by policy. FYT took effective action to force the borrower to accept the reconciliation before bankruptcy.
Started from ¥1.2million, the borrower finally accepted the settlement amount of ¥11million in cash.
The recovery of this creditor’s right was 19.23% of the principle (9.77% of the total principle and interest).

Author:  admin Dtae:  8/13/2008 Chick Num: 9156
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  Case Study 2: Prevent the borrower from escaping the debt through liquidation13/8/2008
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