Jia Yueting’s “shrewdness” in bankruptcy restructuring and the difficult choices of China’s creditors

On October 14, 2019, Jia Yueting filed for bankruptcy in the United States under Chapter 11 of the U.S. Bankruptcy Code. The main purpose of Chapter 11 bankruptcy filing is to carry out bankruptcy reorganization, which is very different from the true sense of bankruptcy in Chapter 7. Jia Yueting’s bankruptcy service institutions have published relevant documents, including the Asset and Liabilities Statement and the Reorganization Plan. Combined with the bankruptcy application before Gan Wei’s divorce application, you can get a glimpse of Jia Yueting’s old trick.

I. Jia Yueting’s debt and assets (in US dollars)

贾跃亭破产重组之“精明” 及中国债权人之艰难选择

贾跃亭破产重组之“精明” 及中国债权人之艰难选择

The main part of the asset is the shares of a non-listed company, whose value is as follows (in US dollars):

贾跃亭破产重组之“精明” 及中国债权人之艰难选择

On the whole, Jia Yueting has a liability of US$3.77 billion, assets of only US$1.42 billion, and most of the assets are shares of non-listed companies (the valuation is not fair), so Jia Yueting is in a state of serious insolvency, and his bankruptcy filing is in accordance with the law. (Note: The black part of the standard is the estate of the bankruptcy reorganization)

Jia Yueting’s debt is divided into two parts: 1. Real personal debt is USD 632,587,273.46; 2. Debt stake arising from security liability is USD 3,113,109,842.24.

Among the debts, there are 24 guaranteed parts, mainly related to Changjiang Securities, Industrial and Commercial Bank of China, Minsheng Trust, Everbright Xinglong Trust, Guotai Junan Securities, Huafu Securities, Huarong Securities, Huaxing International Trust, Oriental Securities, Ping An Bank, Ping An Securities, Shanghai Lazy Finance, Shanghai Departure MoonMing, Western Securities, Wuhan Credit and so on. In the case of secured debt, there is also a risk that the value of collateral (e.g. LeEco shares) will be reduced and cannot cover the debt.

There are 79 unsecured non-priority obligations, with the top 10 unsecured non-priority creditors as follows (in US dollars):

贾跃亭破产重组之“精明” 及中国债权人之艰难选择

Second, Jia Yueting’s restructuring plan

According to the Reorganization Programme, the details are as follows:

1. Jia Yueting put all all of his overseas property in an American trust, which is distributed after the listing of Faraday’s shares;

2. The property placed in the trust includes: 1) 100% west Coast LLC shares; 2) Smart King Ltd. 147,058,823 shares.

The figure of Faraday’s equity structure disclosed by Jia Yueting is as follows:

贾跃亭破产重组之“精明” 及中国债权人之艰难选择

As can be seen from the image above, West Coast LLC and Smart King Ltd. mainly correspond to Faraday’s interests. Jia Yueting in the restructuring plan in a large part of the description of Faraday’s grand business plan, to show creditors: 1. Faraday’s business is promising; 2. It is now a critical stage of Faraday’s financing; 3 Faraday’s listing will distribute benefits to creditors through trust after listing; and 4. If the restructuring fails, the forced sale of Faraday’s business will greatly reduce the likelihood of creditors being paid.

3. The restructuring programme is adopted by:

1) A voluntary reorganization without the participation of the court (Consensual Restructuring shall be approved with more than 90% of the principal of the claim;

2) If the criteria for voluntary reorganization are not met, but more than 2/3 of the affected claims amount or more than 1/2 of the affected creditors, and approved by the court, may also implement the reorganization organized by the court (Prepackaged Plan, in a manner and effect with the Restructuring is almost like).

4. Consequences of the adoption of the restructuring programme

The creditor participating in the acquisition of the trust interest is regarded as the settlement of the debt. All creditors shall not take any act of recovery in relation to the debt and release the relevant recovery measures. Jia Yueting was able to extricate himself from debt, and so were co-debtors of related debts, such as Gan Wei.

5. Consequences of the failure of the restructuring programme

Jia Yueting has repeatedly stated that he hopes that creditors will agree to the reorganization plan, if the reorganization plan fails to pass, Jia Yueting may apply for bankruptcy under Chapter 7, when all assets in his name will be dealt with by the court, and the court’s treatment does not reflect the true value of these assets( especially Faraday’s career.

6. Pens in the reorganization scheme

1) Incentive Plan

After the restructuring was approved, Faraday may implement an equity incentive plan to motivate senior executives, including Mr Jia, which will dilute Faraday’s current stake. The rights and interests obtained by Jia Yueting under the incentive plan are the legal property of the individual and are not subject to the reorganization plan.

2) The scope of the restructured property

The reorganization of property includes only property outside China for the reasons that: (1) the Us trust cannot be placed in Chinese property in terms of legality, and (2) more importantly, if the secured creditor stake in China agrees and the reorganization plan is adopted, the corresponding assets may be lifted from restrictions and re-established as legally unburdened property such as Jia Yueting.

The difficult choice of China’s creditors

Before Jia Yueting filed for bankruptcy reorganization, Chinese creditors could claim rights in China, obtain an effective ruling, apply for enforcement in China, or go to the United States to apply for recognition and enforcement, or even bring a lawsuit in a U.S. court.

If Jia Yueting’s bankruptcy reorganization plan is approved, all creditors will not be allowed to claim rights in the United States, and valid court judgments and arbitral awards obtained by Chinese creditors shall not be allowed to apply for recognition and enforcement in the United States, so at least Jia Yueting will be “free to live” in the United States.

The legal consequences of bankruptcy reorganization objectively force Chinese creditors to make choices. If they agree to the restructuring, creditors in China and the United States will no longer be allowed to claim debt from Jia Yueting, only hoping that Faraday’s electric car business can be successfully listed in order to share the benefits from the trust. It sounds a bit like the second time “Let’s suffocate for dreams.” If the reorganization is not approved, Chinese creditors can continue to claim rights within China, after all, the U.S. bankruptcy proceedings will not be recognized by Chinese justice. For China’s guaranteed (mortgage, pledge) Chinese creditors, Jia Yueting’s bankruptcy reorganization will not affect their security interests; If you do not agree to regroup, then even the possibility of “suffocating for the dream” is gone.

From the Asset and Liabilities Statement, it can be seen that many of Jia Yueting’s main creditors have both secured and unsecured claims, and many of these creditors have taken judicial measures in the country to control the security, if they apply to participate in the reorganization plan, whether to stop and lift the judicial measures already taken? The possibility of giving up the benefits currently available in exchange for a future listing in Faraday would be faced with more complex considerations than mere unsecured creditors.

The beauty of divorce

According to the Asset and Liabilities Statement, Gan Wei filed for divorce in Chengdu on October 11, 2019. The combination of U.S. bankruptcy reorganization and China’s technical divorce is exactly what Jia Yueting’s technique is.

According to the provisions of China’s Marriage Law and a series of debt documents signed by Gan Wei and Jia Yueting, Gan Wei, as a joint debtor, has 16 claims involving a total amount of US$1,037,175,740.76. For these debts, Jia Yueting in the bankruptcy restructuring plan specifically stated that “consent to the restructuring plan, meaning that Jia Yueting, Gan Wei and so on to give up the right to pursue”, so if the restructuring plan is passed, then Gan Wei for the joint debt of marriage does not need to be repaid. After the technical divorce, Gan Wei does not have to bear any debts after the divorce Jia Yueting, so the U.S. bankruptcy reorganization and divorce will also make Gan Wei “free body.”

It is said to be a technical divorce, because Jia Yueting in the “asset and liability statement” disclosed: 1. In the year before the bankruptcy filing, Jia Yueting gave Gan Wei a total of 510,000 Dollars, to do household expenses. 2. Most of the income of more than $70,000 per month is also used for household living expenses. Such a thoughtful arrangement does not see that “the feelings have indeed broken down”.

贾跃亭破产重组之“精明” 及中国债权人之艰难选择

V. Several points of analysis

1. Will Jia Yueting return home?

Mr Jia’s return is unlikely until the country’s debts are fully liquidated. Jia Yueting’s u.S. bankruptcy operation can only guarantee that he will no longer be affected by debt in the U.S., and that Chinese creditors who are not involved in bankruptcy restructuring can also claim their claims through judicial channels in China, so Jia Yueting still has to pay his debts in China.

2. Has Jia Yueting established an irrevocable trust?

An irrevocable trust is a kind of trust in which the founder can no longer revoke the trust and retrieve the trust property after the establishment of the trust. In general, irrevocable trusts are considered to have a true function of segregating debt and tax risk.

In the Statement of Assets and Liabilities, Mr Jia disclosed that he had not transferred property to a trust or similar institution (asset protection mechanism) he had established in the 10 years prior to his bankruptcy filing.

Moreover, before the establishment of the trust, the trustee shall investigate the financial situation of the set-up, and if it is found that the person who set up the establishment is suspected of infringing the creditor, the trustee will not accept the entrustment of the set-up, and even if the founder conceals the financial situation and then establishes the trust, such a trust is illegal and invalid, and the transfer of property to the trust is also invalid, There are many such cases in the United States.

From Jia Yueting’s high-level pledge of LeECO stocks in 2016, to the defeat of the United States, several financing, to today’s bankruptcy, divorce, we can only lament Jia Yueting shrewd, old hot, but really can not pick out his obvious illegality.

3. The Enlightenment of this Case to the Risk Isolation of Entrepreneurs

Entrepreneurs should use various legal institutional instruments and financial instruments to carry out risk isolation operations when the risk is not apparent, for example, Jia Yueting may set up an irrevocable trust abroad and actually deliver the trust assets (cash, insurance, stocks, etc.) in the early stages of LeEco’s listing and without having to bear the guarantee obligations. Such an operation can be more legal divestiture of security assets, trust property will not be affected by Jia Yueting’s own debt. Many of fshore-listed entrepreneurs transfer their stakes in the company to a trust holding before the company goes public, based on this risk isolation consideration.

Author: Tian Xiaoxuan Source: Interface

The writer is a partner at Beijing Dehe Heng Law Firm and a member of the International Association of Trust and Property Planners, STEP Of Trust and Estate Planning.

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