Business Bankruptcy In China. The Five Fold Path.
Will Lewis at Experience Not Logic dissects an Economist article to come up with four methods failing businesses in China employ when faced with having to shut down their business:
1. Informal Agreements With Employees and the Government. Work out an agreement with your employees and the relevant governmental bodies to allow you to shut down.
2. Court Supervised Bankruptcy Reorganization. The laws are too vague to give confidence to lenders seeking to lend to the troubled company, so this "relief" is virtually never undertaken.
3. Walk Away. Lock the gates and leave town and hope nobody follows. Hundreds of small Korean owned companies did this in Qingdao last year.
4. Informal Governmental Recapitalization. If you are too big or important to fail, get the local government to prop you up to save jobs and the local economy.
I add my own fifth one, which is no doubt getting more difficult due to the credit crunch:
5. Get A Foreign Company To Buy You Out . Whenever a client would tell me that some local government was encouraging it to purchase or work with a local company, I would always encourage them to be wary. Many times, local governments encourage foreign companies to purchase or work with failing local companies in the hopes the foreign company's involvement will preserve local jobs.
Comments (4)
Read through and enter the discussion by using the form at the endBrad Luo - October 16, 2008 7:03 AM
In addition to your five steps, I would also consider searching for funding from private equity funds established in China. Of course, the success of this approach depends upon the attractiveness and potential for return of now bankrupt business.
Twofish - October 18, 2008 10:08 AM
Get a foreign company to buy you out is something that doesn't work only with Chinese companies. There was a desperate attempt to get foreign capitalinto American investment banks.
The trouble with these efforts is that people turn to foreigners only after they can't get money from locals, and if they can't get money from locals, you have to ask yourself why.
It means that they are very desperate. If they are desperate then this means that you might be able to negotiate a very good deal, but in negotiating a deal you need to make sure that 1) you aren't overpaying 2) you have controlof the enterprise and 3) you actually have some expertise that could turn the enterprise around.
Twofish - October 18, 2008 10:15 AM
Also over time it is likely that (2) is going to be more important. The interesting thing about bankruptcy law is that the actual determination of who gets what isn't that important, what is important is that there is a clear process and method for figuring out who gets what. Over time, as people go through court supervised bankruptcies, the rules will get clearer and clearer, which makes it more likely that this method will get used.
One other thing about (1), is that informal processes work for local enterprises in which you can get anyone who cares into a room. In situations where you have a huge national and multi-national enterprise with complex ownership then (1) won't work and so the only alternative is (4).
The trouble with this is that this gets you into "too big to fail" which is why the central government is trying to get (2) to work, so that big enterprises can fail without causing the end of the world.
Charles Brown - October 17, 2010 11:02 PM
It's been a long time since you have written on China bankruptcy laws/matters. Any chance of an update soon?