The measure to set up creditors’ committees among banking institutions is a key initiative to prevent financial risk and resolve insolvency crises. In the national banking work conference, held in 2016, Shang Fulin, the former chairman of the China Banking Regulatory Commission (CBRC), proposed rolling out this measure across the whole country, after carrying out several pilot programmes. With the guiding documents issued by the CBRC in 2016 and 2017, gradually the creditors’ committees have become a common mechanism in coping with the debt of financial institutions.
The creditors’ committees lack authority due to the lack of legislation. The creditors’ committees are run as per the Notices on the Administration of Creditors’ Committees of Banking Institutions (document No. 1196) and the Notices on Stepping Up the Administration of Creditors’ Committees of Banking Institutions (document No. 802) issued by the CBRC. There is, however, no higher-level law governing such committees.
A creditors’ committee is a temporary organisation based on negotiation and self-discipline. Hence, the operation of the committees hinge upon the instructions of the regulatory and government agencies. The co-ordination of the lead creditor and the negotiations between the creditor are not binding, resulting in low efficiency.
The creditors’ committee is limited to banking institutions, and does not adapt to situations where corporates’ creditors are diversified. Documents No. 1196 and 802 are not binding on the creditors, which are not banking institutions, which tend to take legal proceedings or other asset preservation actions against the companies in the case of insolvency, thus the corporate debt restructuring plans are foiled.
Merits & Tree Law Offices has served a number of creditors’ committees, and the members of committees, providing legal consultancy on a wide range of matters such as the establishment and operation of the committee, debt restructuring and asset restructuring, and other related issues. Based on its own experience, the firm has gained insight into how to run the committee efficiently.
Winning the leadership and support of regulatory, governmental and judicial agencies. As mentioned, the support of regulators, banking associations, governmental and judicial agencies is essential to the operational efficiency of creditors’ committees. Specifically, should the Supreme Court support the committee by assigning the jurisdiction of all of the cases, the creditors’ committee would be able to press ahead with its work in a favourable external environment.
Selecting a lead member with responsibility and commitment. A large corporate might have borrowed from more than 100 creditors who have shared and conflicting interests at the same time, making the job of the committee complicated and intricate. The lead bank of the committee heads the daily operations, and improper discharge of these functions will reduce the committee to an empty shell and render it unable to perform its role. Therefore, the amount of debt should not be the only criterion when selecting the lead member.
Uniting as many creditors as possible. Though the policy of setting a creditor’s committee is applicable to the banking sector, it does not exclude non-banking creditors from joining the committee. To guarantee the consistency of creditors’ behaviour, and to ensure the efficient operation of the committee, the committee should invite and convince as many creditors as possible to join the committee.
Holding a well-organised first meeting. The beginning is always the hardest. To a committee of a corporate, which is obligatory to numerous creditors, the job is time and effort consuming. So every meeting should be well prepared and organized to ensure that objectives can be obtained. The organisational structure of the committee and the orientation and principles of the work should be determined in the first meeting. It is highly recommended that, to lay a solid foundation for future work, the committee should pass a creditors agreement and committee negotiation rules in the first meeting, with rigorous preliminary preparation.
Having a rigorous and practical creditors agreement and committee negotiation rules. As there is no legislative support, the operation of the committee is based on the documents issued by the CBRC, the creditors agreement, and the negotiation rules of the committee. The latter two documents should be formulated with consideration of the business of the corporate and the creditorship, and debts of the corporate, and should be practicable.
Seizing the right restructuring timing and establishing a fair and feasible restructuring plan. To maximise the interests of the creditors, the committee should seize the golden time for executing the debt and business restructuring, based on the operations of the corporate.
Disentitling the creditor who takes separate action for additional unreasonable interest. The committee should establish the rule that any creditor who takes separate action will not be entitled to any unreasonable interest outside the framework of the committee. And the committee should make every effort to uphold this rule, so that such creditors will be disincentivized to challenge the committee, and the interest of all creditors can be maximised.
Setting bankruptcy as the benchmark and base line. To ensure that the committee is fair and just, the interests that are available to the creditors in the case of bankruptcy should be set as the benchmark of debt restructuring, and principally, the whole interest of the creditors should be larger than the interest available to them in the case of bankruptcy.
To summarise, the policy and mechanism of creditors’ committees represent an innovative co-operative approach to dealing with the company that has large amounts of debt, are in line with national industry policy, and have restructuring value. With collective negotiation and decision-making and consistent action, the committee helps to reshape the trust and co-operation mechanism among the banks, government and the companies, wins time and space to deal with the corporate debt in a balanced and comprehensive way, and effectively facilitates debt restructuring and resolves debt crisis.
William Zhang and Zhao Jiajia are partners at Merits & Tree Law Offices