Risks for Foreign Investors Highlighted by China's Bankruptcy Landscape

Dalian, China - Recent developments in China's bankruptcy landscape have raised significant concerns for foreign investors, as illustrated by the troubling case of a pork producer that unexpectedly continued operations after a court-ordered liquidation.

In 2019, an American investor placed a substantial sum into Dalian Chuming Meat Processing through a U.S.-listed entity, Energroup Holdings. Despite years of dividend non-payment, Chuming was believed to be a stable supplier of pork and had shown profitability as recently as 2016. However, the situation took a drastic turn when a Dalian court declared Chuming in liquidation in 2021, initiating a lengthy process of asset auctions and debt repayments that led investors to abandon hopes for unpaid dividends.

The turning point came in June 2024, when the Chinese food regulator revealed that Chuming was still operational, contradicting the court's liquidation ruling that had been finalized months earlier. Inspections confirmed that the company had passed health and safety checks, raising questions about the legitimacy of the liquidation process. This unexpected news left investors bewildered, especially as they had been informed of the company's demise.

Investigation into Chuming's situation revealed a pattern of opaque dealings and questionable bankruptcy filings that have become more frequent as economic conditions in China worsen. Experts suggest that gaps in the enforcement of bankruptcy laws can lead to scenarios where companies exploit the system to avoid financial obligations, or asset appropriation occurs without necessary scrutiny.

Investor claims indicate that Chuming failed to adhere to Chinese regulations by not securing shareholder approval for its bankruptcy and obstructing access to financial records. Previous legal actions taken by shareholders in U.S. courts against Chuming executives for asset mismanagement yielded no recourse within the Chinese judicial system.

China has witnessed a surge in bankruptcy filings, with over 30,000 cases processed last year, a stark increase from the approximately 10,000 cases in 2020. This spike reflects a broader economic downturn characterized by high-profile collapses in various sectors, notably in real estate.

Legal experts indicate that while bankruptcy filings can provide temporary relief for certain firms by halting payment obligations, the process is fraught with risks and is not always transparent. Companies are required by law to cease operations shortly after a liquidation is finalized, yet instances of continued trading like that of Chuming raise serious concerns.

Shareholders have expressed frustration over their inability to access information regarding the financial state of Chuming during the bankruptcy proceedings. Allegations of financial misconduct have been reported, including claims that Chuming continued to operate without the necessary oversight and permissions, leaving creditors unable to ascertain the viability of their investments.

Amidst these challenges, foreign investors are increasingly wary of the legal landscape surrounding bankruptcy in China. Many have experienced difficulties in pursuing claims in local courts, which tend to favor domestic interests over those of foreign shareholders. This has led to calls for reforms to better protect investors and ensure fair treatment under the law.

The complexities of China's bankruptcy system, which operates under different principles than those in more developed markets like the U.S., often leave creditors with prolonged uncertainty. As the country navigates its economic challenges, the hope remains that the government will implement measures to enhance transparency and safeguard the rights of investors.