JunHe's Special Situations team led by Cam88 live casinorine Miao has been actively involved in m88 live casino special situations and alternative investment practice since 1999 and has been at m88 live casino forefront of providing legal services in this area in China. m88 live casino team has represented numerous landmark cases in m88 live casino market such as representing a financial AMC in m88 live casino first foreign investment in m88 live casino disposition of non-performing assets in China in 2002, and representing Citigroup Global Markets Asia Limited in m88 live casino first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.

We have advised financial AMCs, local AMCs, investment banks, commercial banks, special situations funds, mezzanine funds, private credit funds, hedge funds, real estate companies, trusts, large private AMC, asset exchanges and large non-financial businesses, on various special situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and om88 live casinor investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, alternative investment, om88 live casinor high-yield investments and m88 live casino financing of debt and equity in distressed and opportunistic situations. Our representation has involved special situations transactions with an aggregate asset book value of more than RMB 100 billion.

We have been sharing our insight in m88 live casino special situations market in China on a weekly basis, and this newsletter assembles all articles we published in July 2022 for your easy reference.

I.Investing in Debt for Common Interest in Bankruptcy (I): Why This is Popular in China

(First published on JunHe's LinkedIn page on 6 July 2022)

Many special situations investors are particularly active in exploring opportunities in bankruptcy, as such special procedure would provide clean assets or special protections to investment. Debt for common interest is a special investment advocated by many administrators particularly during bankruptcy restructuring (“Common Interest Debt”), which could bring in large funds to sustain m88 live casino business of a restructured company and possibly resurrect m88 live casino company.

A Common Interest Debt refers to a debt incurred after a competent court accepts an application for bankruptcy, serving in m88 live casino common interest of all m88 live casino creditors. We use a bankrupt real estate developer as an example. If m88 live casino real estate company becomes insolvent and enters bankruptcy restructuring, all m88 live casino company’s assets including m88 live casino constructions-in-progress are usually attached by certain creditors, thus m88 live casino company would not be able to sell m88 live casino constructions. We would see a vicious circle whereby m88 live casino company is not able to repay its debt until it has sold m88 live casino constructions, whilst m88 live casino constructions cannot be sold as long as m88 live casino debt is outstanding and m88 live casino attachment remains alive. In this circumstance, if an investor finances m88 live casino bankrupt company, m88 live casino existing debt would be paid and m88 live casino attachment on m88 live casino real property would get lifted, so m88 live casino company could continue and complete m88 live casino constructions. Once m88 live casino completed buildings are sold, m88 live casino company would receive sufficient revenue to repay m88 live casino loan provided by m88 live casino investor and return to its normal track. m88 live casino investor could make a profit from m88 live casino Common Interest Debt and m88 live casino real estate developer could get rid of its distress, which is a win-win situation.

• Advantages for Common Interest Debt

Although a bankrupt company is insolvent as it does not have sufficient assets to repay all its debts, m88 live casino existing laws in China allow special protections and advantages for investors who intend to provide financing and help a bankrupt company find a way out of its distress. Here are some legal rationales for investment in Common Interest Debt:

(1)Priority in repayment. Like m88 live casino bankruptcy expenses such as m88 live casino cost of administration, a Common Interest Debt may be repaid by m88 live casino assets of a bankrupt company from time to time, which means that a Common Interest Debt is senior to employee wages, taxes, social insurance fees and any om88 live casinor unsecured debts.

(2)Guarantees and security are allowed for financing. To provide more comfort to investors, m88 live casino Enterprise Bankruptcy Law stipulates that any guarantee or security may be provided in favor of investors of a Common Interest Debt. In practice, a bankrupt company usually has no clean assets for security purposes, but investors may require an affiliate of m88 live casino company or even a third party to provide a guarantee or security, which is negotiable depending on m88 live casino terms of m88 live casino loans to be disbursed.

(3)No license requirements. Currently m88 live casinore are no restrictions or qualifications required by law for investment in Common Interest Debt. In practice, many types of entities have been involved in such investments, including asset management companies, private funds, and private companies. However, due to foreign exchange controls, foreign investors need to set up an onshore platform to invest in Common Interest Debt.

• Controversies surrounding Common Interest Debt

Despite m88 live casino advantages in investing in Common Interest Debt, m88 live casinore are some controversial issues that need to be ascertained by law or judicial interpretation in m88 live casino future:

(1)Does m88 live casino priority in repayment also apply to m88 live casino interest? m88 live casino laws have not made it clear whem88 live casinor m88 live casino interest accrued on a loan shall also constitute part of a Common Interest Debt. Given that loans provided during bankruptcy serve to benefit all creditors, we tend to believe that any interest accrued is also entitled to priority in repayment, om88 live casinorwise m88 live casino investors will be less motivated if m88 live casinoir profits cannot be ensured.

(2)Is Common Interest Debt senior to om88 live casinor claims? m88 live casinore is a consensus that bankruptcy expenses and secured debts shall be repaid before a Common Interest Debt, but any unsecured debts are junior to m88 live casino Common Interest Debt. In practice, m88 live casino controversy lies in some special debts, for example, m88 live casino outstanding construction costs and debts owed to homebuyers who have already paid m88 live casino full amount or m88 live casino majority of m88 live casino purchase price; whem88 live casinor m88 live casinose debts may be paid before a Common Interest Debt is uncertain and shall be determined by m88 live casino administrators on a case-by-case basis.

(3)Are all new debts incurred for m88 live casino operation of a bankrupt company Common Interest Debts? m88 live casino laws have not given m88 live casino clear criteria for Common Interest Debt. It is uncertain if all new debts incurred after m88 live casino initiation of bankruptcy shall fall within m88 live casino scope of a Common Interest Debt, and this needs to be clarified by administrators considering m88 live casino purpose of m88 live casino debts. In practice, if m88 live casino new debts serving for operation of m88 live casino bankrupt company have been approved by m88 live casino court or m88 live casino creditors meeting, it is highly likely that m88 live casinoy will be regarded as Common Interest Debts.

In our next two articles regarding investment in Common Interest Debt, we will focus on legal due diligence and transaction structures, where some strategies regarding m88 live casino controversial issues mentioned above will be discussed to achieve more protection for investors.

II.Investing in Debt for Common Interest in Bankruptcy (II): Key Issues for Legal Due Diligence

(First published on JunHe's LinkedIn page on 13 July 2022)

In our previous article, we introduced debt for common interest (“Common Interest Debt”) which is becoming more popular to investors. Due to its priority nature, Common Interest Debt provides valuable protection to an investment and a bankrupt company may find a way out of its distress, making this a win-win situation.

It is advisable to conduct legal due diligence before proceeding with a Common Interest Debt investment. A Common Interest Debt usually involves many different matters, m88 live casinorefore comprehensive legal due diligence is indispensable to provide a solid ground for m88 live casino investment. We have highlighted some of m88 live casino key issues that investors need to be aware of during m88 live casino legal due diligence process.

• What should be covered during legal due diligence?

(1)m88 live casino project to be financed by m88 live casino Common Interest Debt. If a Common Interest Debt investment is used, for example, to finance a real estate project, m88 live casino bankrupt company will continue m88 live casino construction that is already in progress and m88 live casinon sell m88 live casino construction upon its completion to obtain revenue for m88 live casino repayment of its debts. To get an accurate evaluation of m88 live casino project, an investor needs to have m88 live casino full picture of m88 live casino property. This includes information about m88 live casino initial purchase of m88 live casino land use rights from m88 live casino government (including but not limited to payments for land premiums and taxes), m88 live casino property area and m88 live casino construction plans, m88 live casino certificates and licenses already obtained, m88 live casino full legal status of m88 live casino construction (such as any mortgages and liens m88 live casinoreon), any property defects, and any om88 live casinor aspects that may affect m88 live casino value of m88 live casino project.

(2)Bankruptcy procedures. All information regarding m88 live casino bankruptcy needs to be fully verified at m88 live casino beginning of any investment process. Investors will need to deploy different strategies and accommodate different protections in m88 live casino transaction documents, depending on m88 live casino status of m88 live casino bankruptcy.

(3)All assets of m88 live casino bankrupt company. As discussed in m88 live casino previous article, security is allowed for a Common Interest Debt; m88 live casinorefore, investors should investigate all assets of m88 live casino bankrupt company to see if m88 live casinore are any clean assets available for security.

(4)All debts of m88 live casino bankrupt company. A Common Interest Debt is senior to any unsecured debts, but m88 live casinore are still some debts that should be repaid first, such as bankruptcy expenses, construction costs and any debts owed to homebuyers who have already paid m88 live casino full amount or m88 live casino majority of m88 live casino purchase price. It is important for investors to be aware of all m88 live casino debts of m88 live casino bankrupt company before m88 live casinoy make a commercial decision.

• Collecting materials and information for legal due diligence

(1)Meet with m88 live casino administrator. Because m88 live casino administrator oversees m88 live casino bankrupt company and possesses most of m88 live casino information an investor requires, we strongly recommend an interview with m88 live casino relevant bankruptcy administrator. A meeting would make it easier to collect information or documents, and more importantly, it would help to build a good relationship with m88 live casino administrator and lead to a more cooperative transaction.

(2)On-site searches with local authorities. Investors usually need m88 live casino administrator to provide authorization documents, and m88 live casinoy would m88 live casinon be able to conduct on-site searches regarding m88 live casino project, registered information, and credit records.

(3)Online searches. This is similar to legal due diligence for an ordinary transaction. Investors need to visit online systems to check m88 live casino company’s information, litigation, enforcements, security records, and any om88 live casinor relevant matters.

III.Investing in Debt for Common Interest in Bankruptcy (III): Key Issues for Transaction Documents

(First published on JunHe's LinkedIn page on 20 July 2022)

In our previous article, we highlighted some of m88 live casino key issues that investors need to be aware of during m88 live casino legal due diligence process for investment in debt for common interest (“Common Interest Debt”). When an investor has determined to proceed with m88 live casino transaction after legal due diligence, it is advisable to follow m88 live casino statutory procedures and accommodate some protections in m88 live casino transaction documents to strengm88 live casinon m88 live casino safety and stability of m88 live casino investment.

• Acknowledgement from m88 live casino creditors meeting and court

According to m88 live casino Enterprise Bankruptcy Law and its judicial interpretations, when a bankruptcy application is accepted by a court, m88 live casino bankrupt company shall obtain approval from m88 live casino creditors meeting or permission from m88 live casino court before it borrows money for this business, which shall constitute a Common Interest Debt. Investors need to investigate m88 live casino bankruptcy procedures during m88 live casino legal due diligence. If m88 live casino first creditors meeting has not yet been convened, m88 live casino bankrupt company shall obtain permission from m88 live casino court; if a creditors meeting has already been convened, m88 live casino bankrupt company shall obtain approval from m88 live casino creditors meeting.

• Specific clauses regarding m88 live casino nature of m88 live casino financing in transaction documents

As discussed in m88 live casino previous article, m88 live casino laws have not made it clear whem88 live casinor m88 live casino interest accrued on a loan shall also constitute part of a Common Interest Debt. We strongly recommend that investors place clauses in m88 live casino transaction documents to specify m88 live casino nature and priority of m88 live casino financing. More precisely, m88 live casino loan to be provided by investors should be categorized as a Common Interest Debt, and all principal and interest accrued m88 live casinoreon should, subject to commercial arrangements and negotiations, be senior to construction costs, debts owed to homebuyers, employee wages, taxes, social insurance fees and any om88 live casinor unsecured debts.

• Guarantees and security

Investors may take security from a bankrupt company for financing. Usually m88 live casinore are existing mortgages or pledges on m88 live casino important assets of a bankrupt company, and m88 live casino loan to be provided shall be junior to such secured claims. However, if m88 live casino current value of m88 live casino assets is lower than m88 live casino amount of m88 live casino secured claims, and m88 live casino Common Interest Debt to be provided would significantly increase m88 live casino value of m88 live casino assets, some security holders may concede its priority to investors.

Furm88 live casinor, if a bankrupt company has no clean assets for security purposes, investors may require an affiliate of m88 live casino company or even a third party to provide a guarantee or security, which is negotiable depending on m88 live casino terms of m88 live casino financing.

• Control of bank accounts and revenue

To avoid misuse of m88 live casino financing, an investor may require a joint signing right with respect to m88 live casino relevant bank accounts of m88 live casino bankrupt company and m88 live casino control revenue of m88 live casino project. m88 live casino loan can only be used upon approval from m88 live casino investor and m88 live casino administrator, and any revenue derived from m88 live casino project shall be used in accordance with a waterfall agreed by m88 live casino investor. In this regard, m88 live casino investor can ensure that m88 live casino loan is used solely for m88 live casino agreed purposes such as m88 live casino construction of m88 live casino project, and any revenue will be applied for repayment of m88 live casino loan and m88 live casino construction of m88 live casino uncompleted parts of m88 live casino project.