17 October 2019

Five Elements for Chinese Companies trading with UK counterparts Part 3: Water

In our work with international companies supplying goods to the UK, we see a number of common issues arising regularly.  In our previous articles we looked at contractual payment protections for our clients. In this third of five articles based on the five elements of the Wu Xing, we take the theme of Water and explain what happens if a customer faces the fluid uncertainties of financial difficulties and descends into the winter of a formal insolvency process.

Water: understand what happens and your rights if your customer enters insolvency.

Most customers of our clients are English limited companies.  If they hit significant financial difficulty, they may well enter a form of English law insolvency. It is therefore important for all our international clients to understand what such an insolvency could mean for them.

If a customer enters administration, this means that there is a chance that the business can be saved as a going concern. The customer company will be under the control of an administrator, one of whose objectives will be to satisfy the company’s creditors. This is no guarantee that all creditors will receive full compensation as it depends on the value of the company’s assets and some creditors (e.g. employees, and the tax authority, HMRC) get paid in preference to unsecured creditors. An administration may be converted into a liquidation if it becomes clear at any point that there is no future as a going concern.  Many administrations end in a sale of the business and assets, which can be through a “pre-pack” process (where the sale is arranged before administrators are appointed to facilitate the deal).   In this case, liabilities stay with the company and are paid from the sale proceeds.  There is unlikely to be any recourse to the new owner of the assets.

If a customer enters liquidation, this is usually the first step towards being dissolved (ceasing to exist as a company).  The liquidator, like the administrator, will realise all the assets of the company to pay off the creditors to the extent possible. Usually, creditors only receive a % of the debt owed to them.  Once the assets are all sold, the company is dissolved (legally ended).

A company in administration or in liquidation is usually subject to a “moratorium”: no new claims can be made against it, and ongoing proceedings are stayed.  Creditors can however file a proof of debt and should do so.

If a customer enters into a voluntary arrangement, the management of the company stays the same. The objective is for the company and its creditors to come to an arrangement or restructuring that allows trade to continue while reducing financial pressure from creditors. The largest creditors (in value of the total debt) may be able to approve the arrangement even if not all creditors do not agree.

In all insolvency proceedings, the insolvency practitioners have wide discretionary powers under English law to fulfil their duties. For example, they can dispose of assets, start proceedings, manage the company as they see fit or again challenge antecedent transactions (which we look at next in Part 4 in this series).

A Guide to Doing Business in China

We explore the key issues being considered by clients looking to unlock investment opportunities in the People’s Republic of China.

Doing Business in China
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