The retired Apple executive from Albuquerque had invested about $100,000 last decade in Dalian Chuming Meat Processing through a U.S.-listed holding company, Energroup Holdings. Chuming had not paid dividends for many years, but it supplied pork to Walmart (WMT.N) and had been profitable at least as recently as 2016.
For Hill, who turns 86 in May, the loss of his funds has been painful.
But a bigger surprise greeted Hill and other shareholders in June 2024: They learned from China’s food regulator that Chuming was still operating, almost four months after the court had declared its liquidation complete.
Reuters couldn’t determine whether Chuming is still trading. In March, Reuters found a factory operating at Chuming’s last registered address in Dalian, where signs bore Chuming’s logo but a slightly different name, Dalian Chengsan Chuming Food Processing. That company didn’t respond to questions about its relationship with the liquidated Chuming.
Reuters reviewed dozens of court and company records and interviewed nine people, including lawyers and investors, who described growing concern about the potential misuse of China’s bankruptcy process and the heightened risks it poses for investors as insolvencies rise during the country’s economic downturn.
In the case of Chuming, some of its investors assert that it violated Chinese regulations by failing to obtain shareholders’ consent for the bankruptcy; refusing to allow shareholders to examine its accounts; and continuing to operate after liquidation.
Details of the case, and another involving a Chinese developer’s contested bankruptcy, haven’t been previously reported. China’s justice ministry didn’t respond to questions about courts’ handling of the cases and bankruptcy matters broadly.
Walmart didn’t respond to questions.
Bankruptcies are increasing in China, where a protracted economic slowdown and property slump have triggered high-profile collapses, including developer China Evergrande Group and shadow bank Zhongzhi.
While the figures don’t identify the proportion of bankruptcies considered malicious, four lawyers told Reuters that such cases had increased as China’s economy had slowed.
For company managers, there can be an upside to filing for bankruptcy: Doing so triggers a stay on enforcement of payment obligations against the firm, said Sven-Michael Werner, partner at Bird & Bird in Shanghai.
Chinese law also specifies that in some circumstances, shareholders have a right to check the accounts of an entity filing for bankruptcy. Companies can be fined for failing to provide accounts during the process.
This prevented creditors such as Precious Sheen, a wholly owned foreign enterprise held indirectly by U.S.-based Energroup, from assessing whether Chuming was really bankrupt, he said.
Kun said he complained to Dalian police about Chuming’s actions during the bankruptcy, but they declined to pursue it due to insufficient evidence. The police didn’t respond to a request for comment. In 2022, Kun sued the manager of the bankruptcy proceedings for failing to disclose information on the company, but court documents show the judge rejected the case as lacking legal basis.
To enter a Chapter 11 reorganisation in the U.S., for example, a company need only have difficulty paying its debt. In China, the bar is higher - in theory.
In the case of Chuming, the investors said the company did not submit sufficient evidence. Court documents don’t indicate whether Chuming did so, and the Dalian court didn’t respond to a request for comment.
Since the 1970s, China’s local governments have raised funds by selling land to developers. But construction went into free-fall several years ago after policymakers moved to rein in leverage and speculation.
One goal of bankruptcy law “is to identify whatever value a failed business or an individual has and to distribute that as fairly as we can among creditors to spread the loss,“ said Jason Kilborn, law professor at the University of Illinois Chicago.
In 2019, a creditor, Fangtai Construction Group, following a payment dispute alleged Hunan United was insolvent, public company records show. Zhou alleges Fangtai, which didn’t respond to questions, took the step to strip his company of its assets.
In an echo of the Chuming case, Zhou says Hunan United wasn’t insolvent. He told Reuters he argued unsuccessfully in court that the firm’s asset value exceeded its debt. The court didn’t respond to questions about the case.
“The local, regional courts in China always favour their local citizens and seem to ignore the rights of U.S. shareholders,“ said Hill.
Kun, who said he lost hundreds of millions of dollars in Chuming’s demise, hopes China’s government steps up to shield private companies from malicious bankruptcies.
China’s State Council did not respond to a request for comment.
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