When the Good Times Come to An End: "Bankruptcy in China"

Last year I asked one of my professors about what exactly his UCC: Article 9 class covered. After his quick primer on Article 9, he suggested that a practice combining Article 9 and bankruptcy would be smart because the lawyer would be prepared to handle the legal issues in good times and bad times of secured financing. We (the world[?]) are in a bad time with secured financing. So bad that stores are having trouble getting inventory and/or floor plan secured financing from lending institutions. Without this financing they can't restock with stuff from China. Without orders from abroad (with other possible factors), many Chinese manufacturers are going out of business. A fine article in this week's Economist, Silent busts, runs down some cons and more cons of the three ways Chinese business owners shut down their companies.

Informal Agreements With Employees
Portrayed as the second best option, this apparently consists of negotiating with all concerned parties until a satisfactory payout is decided upon. The example given in the article is from a manufacturer in Shenzhen, and it is unclear whether he actually reached a deal with the more than twelve government agencies that got involved. Apparently everybody wanted a piece of the action, and the price increased each day.

Bankruptcy Reorganization Through the Courts
The Enterprise Bankruptcy Law (and some SPC Provisions) is described as "incomplete and poorly understood." Vagueness in the claim priority of lenders is suggested as the main problem. This makes new lenders unwilling to lend to the firm because they have no idea where they sit in a priority dispute which means that these proceedings rarely have any effect.

Walking Away
The article doesn't go into detail, but I presume that the argument goes that if you lock the gates and flee, and angry workers don't catch up with you it's cheaper and easier to just walk away[?]. As a law student aspiring to be an attorney, this position is impossible to endorse.

I'm not sure I could endorse any of the above. Don't let your business go bankrupt in China. I'd write a winking smiley face as punctuation for that last sentence, but I'm really trying to avoid emoticons in this blog.

The Fourth Way
I said three, right? Well it is China, and it'd probably be a mistake to not look for the fourth way. This fourth way would be the quiet informal recapitalization by the local government of a prestigious local firm that might even be publicly listed. Helena Huang of Kirkland & Ellis is paraphrased as saying it is not uncommon for a local government to bailout a company for fear of workers losing jobs and knocks against the bureaucrats' reputations.

To sum up the Fourth Way: be too big to fail (think AIG), or be buddies with the people in power (refresh my memory, who did Hank Paulson used to work for?).