In March, a local export-oriented manufacturer of tote bags and toys in the city, Dongguan Fantastic Toy Company, collapsed after overseas orders dried up, leaving some workers with unpaid salaries, the local labour authority said last month. The government has ordered the factory’s landlord to pay the outstanding wages.
Chinese business owners who can no longer afford to maintain operations face a number of hurdles before they can walk away from a company.
If an insolvent firm wants to cancel its company registration, it needs to go through bankruptcy procedures or show a liquidation report confirming it had no unpaid debt or other obligations.
Once shareholders or creditors file for bankruptcy, it can take months for courts to accept the case, followed by a long process of verification, creditors’ meetings and asset sales, said Li Haifeng, a partner at Baker McKenzie FenXun.
“I expect a surge shortly after the situation settles down. We know many enterprises are already on the verge of bankruptcy. It’s just that they don’t have to declare or file for bankruptcy immediately,” Li said, adding he had received many queries on the matter in recent months.
Fears over a growing number of companies going bust also appears to have played some part in Chinese courts rejecting and delaying bankruptcy filings, according to lawyers and official documents.
Creditors who filed on behalf of suppliers that helped contain the coronavirus or companies on the brink of bankruptcy as a direct result of the pandemic usually had their claims knocked back, dozens of court documents filed over the past two months showed.
We know many enterprises are already on the verge of bankruptcy. It’s just that they don’t have to declare or file for bankruptcy immediately Li Haifeng
The courts in these cases encouraged the creditors to reconcile with the struggling firms and ride out the difficulties.
This – along with disruptions to court proceedings due to virus lockdowns – helped slow the review of bankruptcies in Chinese courts to 1,770 in February and March, from 2,160 filings in January, according to the national enterprise bankruptcy information disclosure platform.
“The delay and rejection of taking corporate bankruptcy cases is certainly intended to keep the economy going. Too many bankruptcies cases do not do much to help economic recovery,” Zhu said.
China’s central leadership has maintained it wants to hit economic targets for this year, even as the country braces for a possible second wave virus outbreak.
The delay and rejection of taking corporate bankruptcy cases is certainly intended to keep the economy going Zhu Bao
Ma Jun, an academic member of the People’s Bank of China’s monetary policy committee, is one prominent voice that has suggested Beijing drop a set target amid the uncertainty caused by the virus outbreak.
However, others like Yu Yongding, an economist from Chinese Academy of Social Sciences, said it was necessary to anchor the country’s economic expansion, though the government should be realistic about the goal, reported the Beijing-based financial media group Caixin.