Government Agencies Made Administrators of Dongbei Bankruptcy

(Beijing) — A court in Dalian has put government entities in charge of the bankruptcy of China's largest special steel producer, a move that sources say has created anxiety among creditors who fear their rights may be undermined by local officials.

Dongbei Special Steel Group convened bondholders Wednesday afternoon to reveal a court document that designated Liaoning provincial government authorities the bankruptcy administrators of the steel maker, according to creditors who were present and saw the document.

The administrators include the province's Assets Supervision and Administration Commission, the Development and Reform Commission, and the Industry and Information Technology Commission.

The document has not been made public.

China's bankruptcy law, revised and implemented in 2007, is controversial because bankruptcy administrators are designated by a court and not the creditors.

Some bondholders told Caixin that the lawful rights of the creditors cannot be protected well since local government dominates the bankruptcy process.

Dongbei was forced into bankruptcy in late September after defaulting on its debt of 3.6 billion yuan ($534 million) for the eighth consecutive month since March. Dongbei's troubles exemplify the deeply indebted industry as a whole, which has suffered huge losses amid a global supply glut and a dramatic drop in steel prices.

The company has not released any financial reports since September 2015 despite persistent pressure from creditors. But bond investors told Caixin that a financial report is expected to be released at the first creditors' meeting, scheduled for Dec. 1.

Dongbei once said its debt-to-asset ratio was less than 85%. But a government document that was seen by a Caixin reporter in July shows that the steel producer is insolvent, with a debt-to-asset ratio of 120%, and that the company's liabilities in May had jumped 10 billion yuan since September 2015, to 55.6 billion yuan.

According to China's bankruptcy law, administrators' duties include taking over the assets of the debtor, investigating the debtor's financial status, deciding the daily expenditures of the debtor, and calling creditors' meetings.

The fundamental problem is that judicial independence cannot be guaranteed, as governments constantly meddle in the legal process of insolvency, said Yin Xiuchao, a senior partner of Beijing Dacheng Law Firm.

He said that in the U.S., the court only designates interim administrators, and that a creditors' committee has the right to appoint new ones. But in China, the appointments made by courts are final.

Contact reporter Dong Tongjian (tongjiandong@caixin.com); editor Ken Howe (kennethhowe@caixin.com)