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Last month, when shareholders of Chinese solar company Shunfeng Photovoltaic International Ltd. approved a $500 million acquisition of bankrupt Wuxi Suntech Power Co., it was the end of what was once the world’s largest solar panel manufacturer.
Many observers hailed it as a groundbreaking example of the Chinese government allowing a leading company to succumb to market forces. “Those who still think Chinese companies will never fail because the government will always send a check need to change their minds,” says Wang Xinxin, a bankruptcy law professor at Renmin University in Beijing. “This case clearly shows those days are gone.”
That’s hardly welcome news to the company’s creditors, especially its foreign ones. While Chinese creditors of Wuxi Suntech stand to recover around 30 percent of their $1.7 billion in claims, overseas creditors of the company’s New York Stock Exchange-listed parent, Suntech Power Holdings Co., have most likely lost the entirety of their investments, a total of nearly $600 million.
“The way this Suntech bankruptcy plays out will create negative sentiment on investors’ confidence in Chinese companies,” says Mark Fairbairn, a Hong Kong partner at DLA Piper specializing in restructuring who is not involved in the Suntech matter. “The offshore bondholders didn’t think they were treated fairly.”
It has long been understood that there are risks inherent in the offshore structures that foreign investors use to put money in Chinese companies, generally to avoid foreign investment or currency exchange restrictions. Suntech’s structure—an offshore parent holding company on top of an onshore company that operates the actual business—is quite a common one. If the latter becomes insolvent, there is no money to go up the corporate chain to the holding company, explains Fairbairn. The parent will have access to the subsidiary’s assets only after the subsidiary’s creditors are paid, if there is anything left at all.
Philip Gilligan, head of the insolvency practice with Hong Kong law firm Deacons, who is also not involved in the Suntech case, says many overseas investors ignore the perils because of their eagerness to participate in the Chinese growth story. “Some of the risks are foreseeable, but people never remember,” he says. “And it’s not easy to look away from China with the low yields investing elsewhere.”
But Gilligan says it is also true that from experience, many investors have come to expect the Chinese government to rescue failing companies, especially high-profile ones. “There aren’t many high profile bankruptcy cases in China,” he says. “It’s not necessarily a bail-out; some companies will get extended credit from state-owned banks.”
Fairbairn also says there has been a tendency for the government to act. “From a public policy perspective, the Chinese government is all about social stability,” says Fairbairn. “There is no independent judiciary; the court and various government bodies apply policies. In [the Suntech] case, the local government has a stake because they need to maintain social stability and make sure workers stay employed.”
Founded in Wuxi in China’s eastern Jiangsu province in 2001, Suntech grew rapidly on the strength of exports to overseas markets. By the late 2000s, though, a worldwide glut of solar panels was badly hurting its sales. Its problems intensified a few years later when the company was hit with tough tariffs in both the United States and European Union, who accused the Chinese company of dumping its panels on their shores at below-market prices. In March 2013, Suntech Power defaulted on $541 million worth of convertible bonds.
Wuxi Suntech, the company’s wholly owned main production unit, was forced into bankruptcy by its Chinese creditors, mainly large state-owned banks like Bank of China, Industrial and Commercial Bank of China and Agricultural Bank of China. Suntech Power was left with no choice but to file for bankruptcy itself. On Nov. 9, 2013, Suntech Power was granted provisional liquidation by the Grand Court of Cayman Islands with two liquidators appointed from PwC Corporate Finance & Recovery (Cayman) Ltd. Earlier this year, the company successfully petitioned the U.S. District Court for the Southern District of New York to enforce the Cayman proceeding, giving the liquidators authority over Suntech’s assets.
But that didn’t stop the Wuxi Intermediate People’s Court from approving Shunfeng’s acquisition on Nov. 15. The liquidators were also galled that the Chinese court approved the transfer of Suntech Power Japan Corp., the company’s successful, debt-free Japanese subsidiary, to Shunfeng along with Wuxi Suntech.
Wuxi Suntech was represented by King & Wood Mallesons on the acquisition. Shunfeng Photovoltaic was advised by Herbert Smith Freehills on Hong Kong law and Paul Hastings on U.S. law. The three firms declined to comment for this article.
Suntech Power says the sale to Shunfeng and the transfer of the Japanese unit were improper on the grounds that neither the parent’s directors nor liquidators gave their approval. Ryan Ulrich, a Wuxi-based spokesman for Suntech Power, says the parent is now working with all parties including Shunfeng to try to get as many assets back as possible. Meanwhile, the liquidators are considering challenging the Chinese court’s decision.
But Shunfeng says everything was handled appropriately. “We did not buy Wuxi Suntech from Suntech Power. We bought it from the administrators,” Shunfeng chairman Zhang Yi told Chinese newspaper National Business Daily last month. “Wuxi Suntech was an independent legal entity. Everything we did followed the Enterprise Bankruptcy Law. The transaction was approved by the court. If Suntech Power has a problem with it, they should take it up with the court.”
Han Chuanhua, a bankruptcy partner at Beijing-based Zhongzi Law Office, says the law in China is on Shunfeng’s side, noting that it makes a difference that the creditors filed for bankruptcy instead of the company itself. “If the bankruptcy was filed by creditors, like in Wuxi Suntech’s case, the court doesn’t need the parent’s permission to declare it bankrupt,” he says.
Furthermore, Han points out that while Suntech Power’s overseas creditors and liquidators have a right to vote for or against the transfer of Wuxi Suntech shares to Shunfeng, this right means little in practice. “Even if they disapprove, the court can force a bankruptcy or restructuring without the consent of its creditors,” says Han.
Leonard Goldberger, a New York bankruptcy lawyer with Stevens & Lee who has advised on litigation relating to China’s solar industry but is not involved in the Suntech case, says he doesn’t think Suntech Power’s creditors have much of a shot challenging the Wuxi court’s decision.
“Chinese courts will not likely enforce orders from U.S. courts that might give the U.S. creditors at least equal rights to those assets,” he says. “The way these cases get administrated will often rely on local bankruptcy law and local courts, which tend to favor domestic creditors against foreign creditors.”
The local government in Wuxi did consider trying to rescue Suntech Power. Last October, after Shunfeng agreed to take over Wuxi Suntech, Wuxi Guolian Development (Group) Co. Ltd., an investment group owned by Wuxi municipal government, offered to invest $150 million in Suntech Power if its creditors agreed not to push for liquidation. The creditors initially decided that wasn’t enough and went ahead and filed an involuntary liquidation petition against Suntech Power. They later agreed to dismiss the petition in expectation of a higher offer. But Wuxi Guolian had a management change earlier in the year, and the new management has shown very little interest in bailing out Suntech Power.
Fairbairn says many expected Beijing to step in and save the day. “It is broadly accepted that the central government decides what they want to save and what they don’t want to save,” he says. “This time, people expected the central government to say, ‘This is an important industry, and we are going to save it.’ But it didn’t.”
Goldberger says the government is indeed sending a message to investors and creditors in both China and internationally not to count on its guarantee. As a result, he says, there will be more bankruptcies in China as well as disputes between domestic and overseas assets. “This will be a test for the Chinese legal system and government policies as to how to deal with these kinds of failures,” he says.