Jurisdiction - China
Reports and Analysis
China – Recovering Value From Offshore Entities.

15 August, 2014

 

 

Introduction


Over the last two decades, offshore companies have played a key role in bringing foreign investment into the People’s Republic of China (PRC). International investors have structured billions of dollars of investment through offshore holding companies or special purpose vehicles, with the British Virgin Islands (BVI) and Cayman Islands often being the domiciles of choice. Since 2009, changes in PRC regulatory policy on foreign direct investment have also led to BVI and Cayman registered entities being used in Variable Interest Entity (VIE) structures, which allow PRC companies to receive foreign investment in restricted or prohibited sectors and are a means by which PRC entities can list on international stock exchanges.


Today, BVI and Cayman Islands registered entities are common features of PRC and Hong Kong corporate structures:

 

  • There are over 460,000 active BVI companies and 80,000 Cayman companies in existence;
  • It is estimated that over 50% of these have operations in Asia, especially the PRC; and 
  • Around 60% of Hong Kong listed companies are incorporated in the Cayman Islands.
 

Even though there are many challenges to dealing with distressed investments in the PRC, whether held through VIE structures, Hong Kong listed structures or otherwise, recovering value is by no means impossible. Our experience shows that optimal recoveries are usually made by studiously avoiding a formal insolvency process over an operating entity in the PRC, but rather by gaining control over it, through an appointment over the offshore BVI or Cayman holding company.


Insolvency And Enforcement Remedies


Insolvency and enforcement remedies will depend upon the contractual rights of the investors. If they hold the requisite security, they will have the ability to appoint a receiver over the shares or assets of the BVI/Cayman holding company. Otherwise, they may need to present a winding-up petition (as well as an application to appoint a provisional liquidator in urgent cases or where there is a threat of asset dissipation). 


The appointment of a receiver or liquidator in BVI or the Cayman Islands will not, by itself, provide a solution, but is a crucial first step. The Caribbean office holder will then need to take steps to attain control of the underlying operating subsidiaries in the PRC and possibly elsewhere. This may include intermediate companies registered in Hong Kong or Singapore or Wholly Owned Foreign Entities (WOFEs) registered in the PRC. 


The recovery strategy will vary based on the circumstances of each case, but the outcome will be determined by the skill, expertise, resources and practical experience of the office holder and team involved.


A typical scenario will involve the Caribbean receiver or liquidator immediately taking steps to: 

 

  • Get custody of books and records (paper & electronic) from directors and service providers in the Caribbeanand PRC.
  • Examine records to establish corporate structure and underlying subsidiaries/operating companies and get control of shares.
  • Take possession of chops for PRC entities and, if required, pass shareholder resolutions to change directors/legal representatives.
  • Formulate realisation strategies for valuable operating subsidiaries, preferably without PRC insolvency process.
  • Work with management and stakeholders to implement strategies.
 

To carry out these tasks effectively, the Caribbean office holder must collaborate closely with a team of experienced restructuring professionals in the PRC — and often elsewhere — drawing on the skills and expertise of a multi-disciplinary team of specialists with experience dealing with forensic accounting, investigations, computer forensics, corporate finance and interim/operational management roles in the PRC.

 

FTI_Logo_cmyk

 

For further information, please contact:

 

Matthew Richardson, Director, FTI Consulting

matt.richardson@fticonsulting.com

 

David Griffin, Director, FTI Consulting

david.griffin@fticonsulting.com

 

Homegrown International Trade Law Firms in China

Comments are closed.