The author of this article is Tian Xiaoyu, a partner of Beijing Deheheng Law Firm, and the Society of Trust & Estate Planning (STEP). Affiliate member. This article is from Interface News
On October 14, 2019, Jia Yueting filed a bankruptcy application under Chapter 11 of the US Bankruptcy Law in the United States. The main purpose of Chapter 11 bankruptcy filing is to carry out bankruptcy reorganization, which is very different from the real bankruptcy in Chapter 7.
Jia Yueting’s bankruptcy service agency announced relevant documents, including: “Debt and Liability Description” and “Restructuring Plan”. Combined with Gan Wei’s divorce application before the bankruptcy application, you can get a glimpse of Jia Yueting’s old operation.
I. Jia Yueting’s debt and assets (in US dollars)
The main part of the assets is the shares of non-listed companies, the value of which is as follows (unit: US dollars):
Overall, Jia Yueting has a debt of 3.77 billion US dollars and assets of only 1.42 billion US dollars, 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. The filing of bankruptcy is in compliance with the law. (Note: the black part is the bankruptcy reorganization property)
Jia Yueting’s debt is mainly divided into two parts: 1. The real personal debt is USD 632,587,273.46; 2. The debt due to the guarantee liability is USD 3,113,109,842.24.
Among the debts, there are 24 guarantees, mainly related to Changjiang Securities, Industrial and Commercial Bank, Minsheng Trust, Everbright Xinglong Trust, Guotai Junan Securities, Huafu Securities, Huarong Securities, Huaxing International Trust, Orient Securities, Ping An Bank, Ping An Securities, Shanghai Lazy Finance, Shanghai Qicheng Yueming, Western Securities, Wuhan Credit, etc. For secured debt, there is also a risk that the value of the collateral (such as LeEco shares) will be reduced and the debt cannot be covered.
There are 79 non-guaranteed non-priority debts. The top ten unsecured non-priority creditors are as follows (unit: US dollar):
Second, Jia Yueting’s reorganization plan
According to the Reorganization Plan, the details are as follows:
1. Jia Yueting puts all his overseas Chinese property into a US trust, and the trust distributes after the listing of Faraday’s shares;
2. The property of Jia Yueting placed in the trust includes: 1) 100% shares of West Coast LLC; 2) Smart King Ltd. 147,058,823 shares.
The Faraday shareholding structure disclosed by Jia Yueting is as follows:
As can be seen from the above figure, West Coast LLC and Smart King Ltd. mainly correspond to the interests of Faraday. In his reorganization plan, Jia Yueting described Faraday’s grand business plan in a large space and showed creditors:
Faraday’s business is promising; 2. It is now a key stage of Faraday financing; 3 After Faraday’s listing, the trust will be distributed to the creditors through the trust; 4. If the reorganization fails, the Faraday business will be forcibly sold, which will greatly reduce the possibility of creditors being compensated.
3. Reorganization plan adoption method:
1) Consensual Restructuring without court participation should be passed by 90% of the principal of the debt;
2) If the standard of voluntary reorganization is not met, but more than 2/3 of the affected creditor’s rights or more than 1/2 of the affected creditors pass, and approved by the court, the reorganization under the court’s organization may also be implemented ( Prepackaged Plan, the way and effect is similar to Consensual Restructuring).
4. Consequences of the adoption of the restructuring plan
Participating creditors obtain trust benefits and are deemed to have settled their debts. All creditors may not take any recovery action on the debt and lift the relevant recovery measures. Jia Yueting was able to escape from the debt, and the common debtor of the relevant debts (such as Gan Wei) was also freed.
5. Consequences of failure of the reorganization plan
Jia Yueting repeatedly indicated that he hopes that the creditors will agree to the reorganization plan. If the reorganization plan fails, Jia Yueting may apply for bankruptcy under Chapter 7. When all the assets under his name will be dealt with by the court, the court will handle it. It does not reflect the true value of these assets, especially the Faraday business.
6. The foreshadowing in the reorganization plan
1) Incentive Plan
After the restructuring plan, Faraday may implement an equity incentive plan to encourage executives (including Jia Yueting), which will dilute Faraday’s current share of equity. The interest acquired by Jia Yueting in accordance with the incentive plan is the legal property of the individual and is not subject to the restructuring plan.
2) Restructuring property scope
Restructuring property only includes property outside China for the following reasons: (1) In the legality, the US trust cannot be placed in Chinese property; (2) More importantly, if the secured creditor in China agrees and the reorganization plan is passed, The corresponding assets may be lifted and restricted, and they will become legal and unburdened property such as Jia Yueting.
Third, difficult choices for Chinese creditors
Before Jia Yueting applied for bankruptcy reorganization, Chinese creditors could claim rights in China, apply for enforcement in China after obtaining an effective ruling, or apply to the United States for recognition and enforcement; or even file a lawsuit in a US court.
If Jia Yueting’s bankruptcy reorganization plan is passed, all creditors may not claim rights to Jia Yueting in the United States. The effective court judgments and arbitral awards obtained by Chinese creditors are not allowed to be recognized and enforced in the United States. Therefore, at least Jia Yueting will obtain in the United States. “Free body.”
The legal consequences of bankruptcy reorganization objectively force Chinese creditors to make choices. If you agree to the reorganization, the creditors in China and the United States will no longer be able to claim credit to Jia Yueting. They can only hope that the Faraday electric vehicle business can be successfully listed, so as to share benefits from the trust. It sounds a bit like the second time “Let us suffocate for the dream.” in caseDisagreeing with the reorganization, Chinese creditors can continue to claim rights within China. After all, the US bankruptcy procedures will not be recognized by China. For Chinese creditors with guarantees (mortgage, pledge), Jia Yueting’s bankruptcy reorganization will not affect their guarantee interests; for unsecured Chinese creditors, it is obvious that Jia Yueting’s personal property in China is no longer able to provide any liquidation. I hope that Jia Yueting’s Faraday assets in the United States. If you disagree with the reorganization, there is no possibility of “suffocating for a dream.”
As stated in the Statement of Assets and Liabilities, many of Jia Yueting’s main creditors have both secured claims and unsecured claims, and many of these creditors have already taken judicial measures and controlled collateral in the country. If they apply to participate in the restructuring plan, do they want to Stop and lift the judicial measures that have been taken? In the case of abandoning the benefits currently available, in exchange for the possibility of Faraday’s listing, it is more complicated to consider than a pure unsecured creditor.
Four divorce
The Statement of Assets and Liabilities shows that Gan Wei filed a divorce lawsuit in Chengdu on October 11, 2019. The combination of US bankruptcy reorganization and China’s technical divorce is the subtlety of Jia Yueting’s technique.
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, involved a total of 16 claims, amounting to 1,037,175,740.76 US dollars. For these debts, Jia Yueting specifically stated in the bankruptcy reorganization plan that “consent the reorganization plan, which means giving up the recourse rights to Jia Yueting and Gan Wei,” so if the reorganization plan is passed, then Gan Wei does not need to repay the joint debt of marriage. After the technical divorce, Gan Wei does not have to bear any debts of Jia Yueting after the divorce. Therefore, the bankruptcy reorganization and divorce in the United States will also enable Gan Wei to obtain a “free body.”
There is a technical divorce because Jia Yueting disclosed in the Statement of Assets and Liabilities: 1. Within one year before the bankruptcy application, Jia Yueting gave Ganwei a total of $510,000 to make family expenses. 2. Most of the monthly income of more than 70,000 US dollars is also used as family living expenses. Such a thoughtful arrangement does not seem to say that “the feelings have broken down.”
Five, analysis
1. Will Jia Yueting return to China?
Before thoroughly repaying domestic debt, JiaIt is unlikely that Yueting will return to China. The operation of Jia Yueting’s bankruptcy in the United States can only guarantee that he will no longer be infested by debts in the United States. Chinese creditors who do not participate in bankruptcy and reorganization can also claim credits through judicial channels in China. Therefore, Jia Yueting still has to pay debts in China.
2. Does Jia Yueting have an irrevocable trust?
An irrevocable trust is a trust in which an creator cannot revoke a trust and retrieve the trust property after the trust is established. In general, an irrevocable trust is considered to have a true function of segregating debt and tax risk.
Jia Yueting disclosed in the Statement of Assets and Liabilities that he had not transferred assets to his own trust or similar institution (asset protection mechanism) within ten years before the bankruptcy application.
Moreover, before the establishment of the trust, the trustee should investigate the financial situation of the creator. If the founder has suspected infringement of the creditor, the trustee will not accept the commission of the creator; even if the creator conceals the financial situation In turn, trusts are established. Such trusts are also illegal and invalid. The transfer of property to trusts is also ineffective. There are many such cases in the United States.
From Jia Yueting’s high price in 2016, to the loss of the United States, several financings, to the bankruptcy and divorce, we can only sigh Jia Yueting’s savvy and old-fashioned, but I can’t really pick out his obvious violations. .
3. Implications for the risk isolation of entrepreneurs
Entrepreneurs should use a variety of legal institutional tools and financial instruments to conduct risk isolation operations when risks are not apparent. For example, Jia Yueting can set up an irrevocable trust overseas before the listing of LeTV. And the actual delivery of trust assets (cash, insurance, stocks, etc.), such operations can be more legally stripped of safe assets, the trust property will not be affected by Jia Yueting’s own debt. Many overseas listed entrepreneurs, based on the risk isolation considerations, before transferring the company’s equity held by the company to the trust.