Hainan Airlines Department of Enterprise bankruptcy reorganization, I will not get the money?

Abstract: About the continuous brewing and fermentation of the bankruptcy reorganization of HNA Group Co., Ltd. (hereinafter referred to as "HNA Group"), public opinion has paid more and more attention to it. On January 29, 2021, HNA Group's official website released a statement saying: On January 29, 2021, HNA Group received the "Notice" issued by the Higher People's Court of Hainan Province, the main content is: Relevant creditors applied to the court for the bankruptcy reorganization of HNA Group because HNA Group is unable to repay debts when due. With HNA Department of Enterprise announcements have been issued, the assets once reached trillion-yuan Hainan landmark enterprises formally sounded the bell of bankruptcy reorganization. If the bankruptcy reorganization procedures, HNA Group will likely also face problems such as merger and reorganization with its subsidiaries, including several listed companies.

Keywords: HNA Group | Bankruptcy reorganization

 

I. Is the bankruptcy reorganization of HNA a good thing?

Simply put, a bankruptcy reorganization is a series of legal proceedings in which assets are revitalized and thus the ability to operate again, i.e., the "revival of the company".

HNA Department of Enterprise has high rescue value, including asset value, brand value, service value, etc. Bankruptcy reorganization is the best choice under the crisis. Given that the enterprise has lost the ability to repay its debts and cannot continue its production, operation and financial status, it is imperative to shed the historical burden through the bankruptcy reorganization procedure, and solve the debt and financial problems of HNA by reducing or deferring the relevant claims, disposing of assets, and introducing strategic investors. In the context of the construction of Hainan Free Trade Port, effectively integrating various social resources, and implementing the rule of law and market bankruptcy reorganization of HNA Group, will be the best way to promote its nirvana rebirth.

1. It can completely solve the debt problems of enterprises, and leave no dead corner of debts.

The reorganization plan approved by the court is binding on all creditors, including creditors who have not filed their claims, whose equity is equal to that of the creditors in accordance with the reorganization plan. After the reorganization plan is executed, the debtor will no longer be responsible for paying off the debts reduced or exempted during the reorganization process. After the reorganization process is completed, the liabilities of HNA Group will be reduced substantially and its operational burden will be reduced significantly.

2. It can retain its core assets, gradually realize profits, and restore its hematopoietic ability

The core objective of reorganization is to save enterprises. Through the reorganization procedure, an enterprise can retain its core assets and businesses and realize some non-core assets. On the one hand, it can receive part of the reorganization funds; on the other hand, it can solve its historical problems and burdens, and on the basis of retaining its core assets, it can recover its hematopoietic function, gradually turn losses into profits and realize a new life.

3. The debtor can manage its property and business affairs on its own

During the reorganization process, HNA Group can still maintain its production and operation, laying a solid foundation for continued operation. After the success of reorganization, HNA can continue to act as a reputable market subject, provide good services for the society and continue to contribute its own social value.

4. Bankruptcy reorganization shall be subject to court approval, and its legal validity shall be stable.

At the core of bankruptcy reorganization is a reorganization plan that is acceptable to all parties. During the reorganization process, creditors are generally divided into secured claims group, employee claims group, tax claims group and general claims group, and the draft reorganization plan is voted on. If the draft reorganization plan involves the adjustment of investors' rights and interests, a separate investors' group is established to vote on the reorganization plan. The reorganization plan is adopted when the draft reorganization plan is adopted by all the voting groups. The precondition for the adoption of the reorganization plan is that all the voting groups vote on it. It is thus clear that the reorganization plan is an agreement reached by the creditors, the debtor and the investors. After the reorganization plan is adopted by all the parties, the debtor or the administrator shall file an application with the court, which shall approve it if it considers it complies with the law after review. Even if the reorganization plan is not adopted by the creditors' meeting, the court may force the draft reorganization plan to be adopted in accordance with the relevant provisions of the bankruptcy law. The reorganization plan approved by the court is binding on the creditors, the debtor and the strategic investors, and its legal effect is stable.

II、 What will be the impact on the creditors of HNA after its bankruptcy reorganization?

After the court rules to accept bankruptcy reorganization, the creditors' right to fair repayment can be guaranteed, but there are restrictions on their exercise of such rights, for the purpose of ensuring the smooth progress of bankruptcy reorganization. Specifically, it has the following impact on the creditors:

1. The creditor is not able to apply for preservation and enforcement measures against the debtor's property;

2. The creditor's civil action or arbitration proceedings against the debtor shall be suspended;

3. The creditor's rights that are not due shall be deemed due, and the creditor's rights with interest shall cease to accrue interest;

4. The creditor may claim its rights against the joint and several guarantors; and

5. The creditors shall be repaid in the statutory order of repayment.

Article 113 of the Enterprise Bankruptcy Law stipulates: "After paying off bankruptcy expenses and debts of common interest in priority with the bankruptcy property, repayment shall be made in the following order:

(I) Wages, medical subsidies, disability subsidies and pension expenses owed to the workers by the bankrupt which are to be included in the basic pension insurance and basic medical insurance expenses of the individual accounts of the workers, as well as any compensation payable to the workers according to the provisions of laws and administrative regulations;

(II) Social insurance expenses owed by the bankrupt other than those specified in the preceding item and taxes owed by the bankrupt; and

(III) Ordinary bankruptcy claims.

Where the bankruptcy property is insufficient to repay all the repayment claims of the same order, it shall be distributed on a pro-rata basis. "

III. Where does the money come from for the repayment of debts after the bankruptcy reorganization of HNA?

After HNA Group enters the reorganization procedure, it will introduce powerful strategic investors that match the business of HNA Group and have advanced management concepts in accordance with the principles of rule of law and market orientation. Resolving debts is only the solution to the current survival problem, and the introduction of reorganization investors will solve HNA Group's problems for the future development and better life.

If the reorganization is completed, the claims of all creditors of HNA Group system will be properly arranged to avoid the transmission and spread of debt risks, and effectively prevent financial risks. And the creditors can continue to enjoy the dividends of the development of HNA Group from the reorganization of stocks and trust shares obtained by repayment of debts. One of the core issues in the reorganization plan is the adjustment of the rights and interests of the investors.

Adjustment of the rights and interests of the investors, i.e. Adjustment of shareholders' rights and interests, which refers to the corresponding adjustment of the existing equity structure of an enterprise (including total share capital, shareholders, shares held, shareholding ratios), etc., such as reduction of the capital contributions of the original shareholders or assignment of shares of capital contributions to new shareholders or increase of investment in order to change the investment structure of the enterprise, optimize the governance structure of the enterprise, maintain the production and operation of the enterprise and avoid bankruptcy liquidation of the enterprise. There are two main routes for adjusting the rights and interests of the investors as follows:

Path 1: Transfer of the shares of the controlling shareholder and its affiliates.

In the equity adjustment plan of the investors, the controlling shareholder and its affiliates may directly transfer shares without consideration, and then the strategic investor and its affiliates shall be introduced to the strategic investor by means of conditional transfer of shares to strengthen the management and operation of the reorganized company.

The transfer of shares in the context of bankruptcy reorganization shall be dominated by the court accepting the reorganized case, and the initiative shall be brought into play to coordinate the lifting of freezing and handling of transfer registration by various enforcement courts and securities depository and clearing companies.

Path 2: Conversion of capital reserves into new shares.

Conversion of capital reserves into new shares is the most important method for adjusting the rights and interests of the investors, for four main reasons: First, the conversion of capital reserves into new shares can introduce strategic investors to become the community of interests of the company, and promote all parties to achieve win-win situation by raising debt repayment funds, seeking market resources and opportunities for cooperation from the strategic investors. Second, the new shares converted into new shares can be used as debt repayment resources to offset debts against creditors (usually ordinary creditors) in order to increase the repayment ratio of creditor's rights. Third, the funds obtained by strategic investors can be used to pay the reorganized expenses, so as to ensure the smooth progress of the bankruptcy reorganization procedure. Fourth, although a capital company increases the total share capital by converting shares into new shares, it is not necessary to adjust the stock shares of the original shareholders and generally does not require the original shareholders to pay the consideration, which is popular with the capital contributors and debtors to a certain extent.

IV. How will the creditor be paid after finding the money?

In accordance with Articles 82, 109 and 113 of the PRC, Enterprise Bankruptcy Law, the creditor's rights shall be divided into secured creditor's rights, employee creditor's rights, tax creditor's rights and ordinary creditor's rights. The secured creditor's rights shall be paid in priority with specific property, while the employee creditor's rights, tax creditor's rights and ordinary creditor's rights shall be paid off in order with the bankruptcy property, and no other adjustment shall be made. In practice, the creditor's rights and tax creditor's rights are usually not adjusted in a reorganized plan (which shall be paid off in full in cash).

Given the huge scale of Hainan Airlines Group with numerous and miscellaneous creditor's rights, Hainan Airlines Group is bound to adjust part of its creditor's rights for the purposes of rescuing troubled enterprises, cutting debts and repaying debts, otherwise it will be difficult to protect the interests of creditors. The following discussion focuses on the adjustment and repayment scheme for ordinary creditor's rights and secured creditor's rights:

(I) A plan for the adjustment and repayment of secured creditor's rights

In general, the following two paths will be taken for the adjustment and repayment of secured creditor's rights:

Path 1: Maintaining the security relationship, and agreeing on the renewal of the retained debt.

Retaining the remaining debt in full to the extent of the assessed value of the corresponding secured property. With a view to maintaining the continuous operation of Hainan Airlines Group during the reorganized period, the administrator may stipulate in the reorganized plan that the original security relationship should be maintained during the reorganized period, and that the secured property should not be disposed of temporarily. If the company repays the corresponding creditor's rights during the reorganized period as agreed, the creditor's rights with secured property should be extinguished.

Path 2: Agreeing on the priority of compensation in cash within the scope of the income derived from the disposal of the secured property, and the part in excess of such income should be compensated as ordinary creditor's rights.

(II) A plan for the adjustment and repayment of ordinary creditor's rights

In view of the fact that ordinary creditor's rights are usually large and complex, the adjustment and repayment scheme of a reorganized enterprise usually adjust the repayment amount, term, and method of ordinary creditor's rights. In general, the following paths will be taken for the adjustment and repayment of ordinary creditor's rights:

Path 1: Dividing petty creditor's rights, and paying off the creditor's rights of ordinary creditor by means of cash settlement, creditor's rights offset, conversion of capital surplus into new shares, debt repayment by shares, debt retention, etc.

In order to increase the repayment ratio of ordinary creditor's rights, the reorganized plan usually divides ordinary creditor's rights in terms of amount. The ordinary creditor's rights below the threshold amount (including the threshold amount) shall be repaid in full or in proportion in cash; the ordinary creditor's rights above the threshold amount shall be repaid by different repayment methods according to the actual situation of listed companies. The main repayment methods are as follows: First, repayment shall be made in cash pro rata, and the part of ordinary creditor's rights in excess of a certain amount shall be repaid according to a fixed repayment proportion. Second, repayment shall be made by the external creditor's rights at a specified price. Third, repayment of ordinary creditor's rights by means of converting capital surplus into new shares, combining the offsetting of debts with shares and debt retention with extended repayment, or even by means of combining the offsetting of debts with extended repayment with extended repayment with cash.

For the adjustment of ordinary creditor's rights and setup of repayment scheme, the administrator may comprehensively consider the needs of different types of creditors and make different schemes in terms of repayment method, repayment proportion, repayment term, etc., for the creditors to choose at their own discretion, so as to improve the support rate for voting and passing the reorganized plan. For example, financial creditor's rights are usually interest-bearing liabilities, the amount of the creditor's rights is large, the interest rate stipulated is high, and the stipulations on interest-bearing clauses are relatively rigorous and complete, so in order to increase the repayment proportion of the creditor's rights, the financial creditor is more likely to accept the repayment of debts with shares. However, operating creditor's rights are usually of small amount with no agreed interest rate or the agreed interest rate is low, so the operating creditor is usually unwilling to accept the offsetting of debts with shares and prefers to obtain one-off cash repayment or choose to renew the whole debt retention. In addition, the administrator may also consider solving a package of debt problems of subsidiaries at the level of listed companies. If the reorganization plan of HNA Holding is involved, for the part of the reorganization plan involving the appraised value of the secured property of the subsidiaries, the specific adjustment and repayment scheme shall be resolved in the bankruptcy reorganization procedure of HNA Holding by reference to the scheme for extending the term of retained debts with secured claims.

Path 2: Establishing a property right trust and offsetting debts with the shares held under such trust.

Given the fact that there are some assets with relatively low market value and difficult to dispose of in the bankruptcy reorganization procedure within the system of HNA Holding, it may be possible to consider repaying the creditors' rights in the form of trust shares by establishing a property right trust. This path is mainly applicable to the main business assets or non-main business assets in the system of HNA Holding that are difficult to dispose of or difficult to introduce strategic investors, such as tourism, venture capital, real estate and other non-aviation main business areas.

The establishment of debt repayment by trust shares is conducive to achieving the appreciation and value maintenance of restructured assets, increasing the repayment rate of claims, facilitating effective asset collection and reducing the time for disposal of assets and repayment of debts (transfer of usufruct is deemed as full repayment).

 

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