Initiative for China to establish a dual model of mixed corporate governance on bankruptcy reorganization: An empirical analysis based on 93 listed companies

Abstract

Corporate governance in reorganization is an important guarantee for the success of troubled firms' rescue. Using a dataset of 93 listed companies in reorganization in China over the last 16 years and through a binary division of decision making in reorganization, the paper presents the first empirical study of governance in the manager management model and the debtor’s own management model during reorganization, found that the manager governance was plagued by the manager’s insufficient ability of business decision-making, which was difficult to improve the operating value of the enterprise; Under the self-management of the debtors, they were vulnerable to the manipulation of the controlling shareholder, and the allocation of losses from reorganization decision was unfair. This paper proposed to change the current model of the manager or debtor fully implementing the reorganization decision and business decision during the bankruptcy reorganization, and construct the dual model of mixed corporate governance for the manager to execute the reorganization decision and the debtor to implement the operation decision separately. The study provides a novel model for corporate governance in bankruptcy reorganization.

Bankruptcy reorganization; Operation decision; Reorganization decision; Dual governance; DIP.

1. Introduction

Corporate governance is a persistent and important issue in the field of corporate law. The research results of scholars on corporate governance under normal circumstances are abundant,1 but the issue of corporate governance in abnormal bankruptcy reorganization has not attracted enough attention. With the implementation of the PRC Enterprise Bankruptcy Law in 2007, the study of reorganization has entered a new period, in which a large number of research results have emerged, and a certain amount of research on corporate governance structure in reorganization has been conducted in Chinese bankruptcy law. According to He Dan (2006), the essence of the reorganization system is to allocate the power of the company among different stakeholders [1]. Qi Ming (2009) argues that corporate governance in bankruptcy is influenced by the objectives of bankruptcy legislation and constrained by the debtor’s procedural choices, arguing that corporate governance in bankruptcy is different from the norm [2]. Zhang Ting (2011) discusses different subjects in reorganization; the attribution of business rights; the supervisory power of the administrator; and the judicial power of the court from various aspects [3]. Wang Zuofa (2013) proposes the fiduciary duty of the controlling party, the monitoring and checking mechanism of creditors and minority shareholders, the litigation mechanism, and the role of the court in the governance of listed companies in reorganization [4]. Gao Simin (2017) argues that the court can adopt the judgment rule of best interest test when approving debtors' self-management, and debtors who self-manage can be regarded as subjects burdened with new fiduciary obligations [5]. According to Zhang Shijun (2021), the decision-making authority of a reorganized company should be a meeting of shareholders and creditors; the management authority of a reorganized company can be the bankruptcy administrator or the debtor’s executives retained by law; the supervisory authority of a reorganized company should be appointed by the court, and their respective composition and duties should be improved in the bankruptcy legislation [6]. The above studies mainly focus on theoretical research, and mainly for the research of a specific authority of the administrator, debtor or creditors' meeting (committee) in the reorganization, although some scholars have dabbled in the governance of the reorganized company, but the relevance and empirical evidence are still insufficient.

This paper takes the listed companies as the entry point, and takes 93 listed companies' reorganization during the 16 years from the implementation of the Bankruptcy Law of the People’s Republic of China in 2007–2021 as the empirical sample, and extracts two subjects for each listed company’s reorganization case: management mode during reorganization and type of administrator. We collected announcements of listed companies during their reorganization period (with emphasis on the draft reorganization plan of listed companies) on three platforms, namely the Shenzhen Stock Exchange, Shanghai Stock Exchange and Juchao Consulting Network, to quantitatively study the real governance situation of listed companies during their reorganization period and to empirically analyze the relevant cases. The preliminary findings of the study include: the unclear division of authority between the administrator and the debtor’s executives under the administrator management model, the weak business capacity of the administrator, and the tendency to protect the interests of original shareholders and weaken the protection of creditors' interests in the apportionment of reorganizing losses under the debtor’s own management. In response to the above problems, this paper innovatively proposes a dual model of corporate governance for bankruptcy reorganization, i.e., the reorganization decision is made by the administrator during the reorganization period and the operational decision is made by the debtor. The proposed model can better solve the current corporate governance problems in reorganization and provide a new model for corporate governance in bankruptcy reorganization, which is helpful for the development of reorganization practice and the improvement of bankruptcy reorganization theory.

The main structure of this paper is divided into three parts. The first part focuses on the core of corporate governance in bankruptcy, suggesting that there are reorganizing decisions and operating decisions in reorganization. The second part tries to present the current situation and findings of reorganization decisions and operating decisions of managers and debtors of 93 listed companies from the perspective of empirical evidence. The third part explains the path to solve the current corporate governance problems in reorganization and argues the rationality of the solution path.

2. Lesson: defining the core of corporate governance for bankruptcy reorganization

2.1. General concept of corporate governance

It has been difficult for scholars to unify their concepts of corporate governance. The more representative discussions were carried out from the aspects of economics, law and management. Wu Jinglian (1994) believed that corporate governance was the restraint between organizational structures (owners, board of directors and senior managers) [7]. Zhang Weiying (1996) proposed that corporate governance was composed of formal contracts and informal contracts, and revealed that the control right of the enterprise would be transformed from shareholders to creditors when the enterprise reached the bankruptcy limit [8]. Liu Junhai (2015) believed that corporate governance generally referred to the concept, institutional arrangement and business practice of corporate management being responsible to shareholders and stakeholders [9]. The “Corporate Governance Research Center of Nankai University” claimed that the essence of corporate governance was the scientific decision-making that would directly affect both the survival and development of enterprises [10]. Zhao Xudong (2020) argues that the core issue of corporate governance is firstly to curb the abuse of control power, at the same time, the exercise of control power should also be reasonably guided and regulated, and the mechanism of power substitution by the controlling shareholder acting as the shareholders' meeting is an important way to innovate the corporate governance system and regulate the exercise of control power [11]. According to Youzhi Xue (2022), enterprises are no longer the private property of shareholders, but a community of interests, and corporate governance should be highly concerned about the stakeholders [12]. The author agreed with this view and believed that the core and key issue of the company was the decision-making of the company’s management, while the governance of the decision-making behavior would determine the survival and development of the company. The ultimate goal was not checks and balances for their own sake but simply were the means to achieve corporate governance. The final result of checks and balances was to regulate the decision-making behavior of the management and maximize the rights and interests of shareholders and stakeholders.

2.2. Decision-making behavior in reorganization

2.2.1. The core of reorganized corporate governance

Corporate governance issues under normal circumstances are mainly business decision-making issues, involving company investment, capital increase, guarantee, merger, demerger and business strategy. The main governance bodies involved are the shareholders' meeting, the board of directors and the supervisory board, of which the shareholders' meeting is the power organ, the board of directors is the executive organ and the supervisory board is the supervisory organ. When an enterprise enters into the special procedure of bankruptcy reorganization, the power of the original corporate governance body will be restricted by the bankruptcy procedure, but the core of corporate governance is the regulation of decision-making behavior will not change. Corporate governance in bankruptcy reorganization mainly involves the allocation of decision-making power in the reorganization. Generally speaking, in a bankruptcy reorganization, two important tasks need to be addressed in corporate decision-making: the liquidation of the enterprise’s debts and liabilities, and the maintenance of the enterprise’s operating value. Matters such as the disposal of the debtor’s property will be limited in the shareholders' meeting and the board of directors. Creditors can only assert claims based on contracts and do not participate in corporate governance per se. In a bankruptcy reorganization, however, creditors will be involved in the reorganization process and will make decisions about the disposal of the debtor’s property in corporate governance. Implementing good corporate governance is not an easy task. The interests of the managers are different from those of the shareholders, which involves a principal-agent problem [13]. But the goal is clear, at least in theory: managers must be motivated to act in the best interests of shareholders [14]. In the case of bankruptcy, the situation is significantly more complex. When a company files for bankruptcy and reorganization, many different, even contrasting, interests must be balanced [15]. The main interest groups in insolvency are shareholders, creditors and employees [16], where decision-making behavior is different from the norm. New governance bodies will be added: the insolvency representative, the court and the meeting of creditors (creditors' committee). The decision making objectives in the reorganization will focus on the protection of creditors' interests and the realization of the operational value of the enterprise.

2.2.2. Proposal of reorganization decision and operation decision

When discussing a series of decisions that must be made during the reorganization, in the American judicial practice2 and American bankruptcy professionals there have been two kinds of plans, business plan and reorganization plan.3 On the one hand, the company needed to make a series of decisions to recover losses and restore its financial stability, This was commonly referred to as a business plan which generally required the unprofitable parts of the enterprise to be sold or cut off and the expenses of the remaining parts to be reduced; Another series of decisions were about the financial reorganizing of the company, including the decision on which type or group of creditors and shareholders should share and which kind of payment (or combination of multiple payment forms) they should receive: cash, bills, bonds and stocks. This series of decisions were incorporated into the document of “reorganization plan” [17]. In fact, there have been two important decisions involved in enterprise reorganization. One is the distribution of enterprise claims and the adjustment of equity, while the other is the business strategy of how to resume operation, which can be corresponding to the reorganization decision and operation decision of the enterprise respectively. The reorganization decision is to formulate the reorganization plan and distribute the losses from enterprise reorganization. The operation decision is to realize enterprise regeneration and business reorganization.

2.2.3. Relationship between reorganization decision and operation decision

Reorganization decision and operation decision are not distinguished with no intersection. There are both differences and connections between the two of them. To begin with, the difference is mainly reflected in the purpose and content of decision-making. The reorganization decision mainly realizes the distribution of asset value and loss from debtor’s reorganization with the help of the reorganization plan, and the operation decision is mainly sustaining the operation and development of the enterprise; Reorganization strategy mainly involves a series of decisions on the generation and implementation of reorganization plans. Operation decision mainly includes a series of business decisions. Next, their connection is mainly reflected by: First, the parties of operation decision and reorganization decision are of unity. In reorganization, the proposed model can better solve the parties managing the debtor’s property and the business affairs will implement these two kinds of decisions simultaneously; Second, creditors will supervise both the reorganization decision and operation decision, but in different ways. Creditors' supervision over operation decisions is mainly realized through creditor meetings and creditor committees. The supervision of reorganization decisions is mainly achieved by exercising the voting power at the creditors' meeting; Third, in some cases, there is a certain correlation between the operation decision and reorganization decision. For example, in the United States, the manager or debtor might apply operation decisions to bypass the procedure that the reorganization decision must be voted at the creditors' meeting and be approved by the law court, so that completed enterprise reorganization. The reorganizations of GM and Chrysler took advantage of the provisions in article 363 of the “US Bankruptcy Code” on the debtor’s use, sale or lease of the property of the bankrupt estate, to sell assets in entirety to finally achieve the goal of reorganization [18]. Articles 25 and 26 of China’s “Bankruptcy Law” also stipulate that the administrator can manage and dispose of the debtor’s property, while paragraph 3 of Article 69 stipulates that the administrator owns the right to “transfer all the inventory or business”.

The decision-making behavior in reorganization was divided into reorganization decision and operation decision, which not only highlighted the essence of corporate governance but also reflected its particularity in reorganization. China’s “Bankruptcy Law” has not strictly distinguished the decision-making behaviors in reorganization. The operation decision is mainly reflected in: article 25,4 the duties of administrator; article 61,5 the powers of creditors meeting; article 68,6 the powers of creditors committee; article 73,7 the debtor autonomously manages the property and business affairs; article 74,8 the administrator employs the former management to manage the property and business affairs. The reorganization decision is mainly reflected in: articles 799 and 80,10 the joint formulation of reorganization plan by the administrator and the debtor; articles 8211 and 85,12 the group voting of creditors on the reorganization plan and the voting of investors on the reorganization plan; articles 8613 and 87,14 the general approval and the compulsory approval of reorganization plan.

2.3. Assumptions of the study

Bankruptcy reorganization has special characteristics: in addition to the original debtor’s management, a meeting of managers and a meeting of debtors. Based on the division of the two modes of governance during reorganization under Chinese bankruptcy law, this paper attempts to explore the differences between these two types of subjects in reorganization decisions and business decisions under the managerial management mode and the debtor’s own management mode. The managerial and debtor-in-possession models have different effects on reorganization governance.

In terms of differences, the composition of the liquidation team, the management capacity of the intermediary structure, the apportionment of reorganization losses in reorganization, and the allocation of reorganization value would be different from the normal corporate governance. The managerial management’s ability to make business decisions will affect the effectiveness of corporate governance, and the managers in the debtor’s self-management model may be swayed by the majority shareholder in favor of the debtor company’s shareholders in the allocation of reorganization losses. The hypothesis is that the managerial and debtor-in-possession models of corporate governance in bankruptcy reorganization have different governance objectives, and there are differences in operational and reorganization decisions.

3. Reflection: an empirical reorganization of models of bankruptcy reorganization governance

Professor Christopher W. Frost believed that corporate governance was closely related to a country’s bankruptcy policy [19]. Based on different bankruptcy policies, there have generally been three models of corporate governance during reorganization. The debtor’s self-management model represented by the United States [20], the administrator’s management model represented by the United Kingdom [21], and the either-or management model represented by Japan (selecting from either the administrator’s or the debtor’s management model to be responsible for reorganization decision-making and operation decision-making simultaneously).15 China’s legislation is similar to that of Japan with the either-or model. However, China gives the priority to the administrator’s management model, while Japan prefers the model of debtor’s self-management.16

3.1. Description of the study methods and sample

3.1.1. The importance of empirical research

“Empirical research focuses on and confronts the real aspects of the system, has a distinct empirical orientation, adheres to an objective research position, and pursues universality [22].” Empirical research is particularly important for disciplines such as corporate law, which is more practical, because “empirical legal research can test the effects of the system outside the system, and thus identify problems, point out directions, and clarify values [23].” Quantitative analysis is central to the empirical study of corporate governance in bankruptcy reorganizing. “Empirical research corresponds to discursive research in that it is concerned with the quantitative or qualitative study of relevant information in specific social situations in accordance with certain procedural norms and rules of thumb [24].” This section examines the content of the reorganization plan, the ultimate vehicle for reorganization and business decisions during reorganization, by taking a parallel approach of quantitative statistical analysis, which aims to reveal the “collective features” of governance in reorganization governance, and case study, which aims to identify the typical The former aims to reveal the “collective characteristics” of governance in reorganization, while the latter aims to identify the thinking and characteristics of governance in typical cases, and finally to return the problems identified by the empirical analysis to the bankruptcy theoretical system for reflection, and to seek solutions on this basis.

3.1.2. Note on samples

Since an empirical case study is very similar to an epidemiological survey intended for epidemic control, it is always necessary to find a large enough sample to conduct it. The prerequisite for an empirical study is to have sufficient and quantifiable sample data, and the acquisition of a sample is crucial [25]. The samples applied in this section are all listed companies' reorganizing plan texts, and the sources of sample selection are specifically: 34 cases from listed companies reorganized on the Shanghai Stock Exchange and 61 cases from listed companies reorganized on the Shenzhen Stock Exchange. In the time dimension, the reorganization of listed companies occurred between mid-2007 (i.e., the implementation date of the bankruptcy law) and the end of 2021, a period of 16 years.

For each listed company reorganization case, 2 subjects were extracted: management mode during reorganization and type of administrator. Under the management model during the reorganization period, 2 secondary accounts were split: administrator management and debtor’s own management. Under the debtor’s self-management account, four tertiary accounts are split: abbreviation of the listed company, adjustment of the equity of the contributors, reduction of the proportion of general claims, and holding status. Under the type of administrator, 2 level 2 accounts are split: management of intermediaries and management of liquidation group.

Due to various factors, the research method in this section may have some limitations. On the one hand, the limited access to search for listed companies' reorganization plans and the difference in the intensity of announcement of listed companies' reorganization plans may limit the sample size. On the other hand, when the bankruptcy law was first enacted, listed companies' reorganization plans were relatively simple to formulate and sometimes lacked the presentation of important facts, which could affect the effectiveness of the assessment.

3.2. Empirical evidence of administrator’s management model

3.2.1. Empirical evidence of managerial decision making

The subjects chosen for the empirical study of the management model of the manager are: the model of the composition of the manager, the shareholders' meeting, the board of directors and the supervisory board, the original governance organs in the manager’s business decisions.

• (1)Composition of the administrator and management model

The administrator is generally called “Bankruptcy trustee [26]” in countries of common law and the “Bankruptcy administrator”17 in countries of civil law like China’s “Bankruptcy Law”.18 It is the core role in the bankruptcy procedure. With the commencement of the procedure, the administrator takes the responsibility of managing, changing prices and distributing for the bankrupt estate, and should have no interest with the bankrupt estate.19

Article 13 of China’s bankruptcy law stipulates that if the People’s Court decides to accept the bankruptcy application, it shall appoint an administrator at that very moment; Article 25 stipulates the duties of the administrator, mainly for the management of the debtor’s property and business affairs; Paragraph 1 of Article 24 stipulates that the administrator may be an accounting firm, law firm, bankruptcy liquidation firm and other social intermediary institutions established according to laws, or a liquidation group composed of personnel from relevant departments and institutions under certain circumstances. The original intention of setting up the administrator system was to render services by intermediaries like accounting firms and law firms with professional skills or qualified individuals, but in practice, the liquidation group accounted for a major proportion of administrators. Until December 2021, a total of 9320 listed companies in China had implemented the bankruptcy reorganization procedures, including 71 with the liquidation group21 and 22 with the intermediaries as their administrators respectively.

During the investigation, it was found that 70 enterprises were managed by the administrator and 23 were managed by the debtor autonomously. The specific data are listed as follows:

• (2)Empirical evidence of management governance in managerial management

During the reorganization period, the administrator will implement the reorganization decision and business decision. The reorganization decision mainly involves the adjustment of equity and claims which is one of the key factors for the success of the reorganization. In practice, administrators generally do not have direct interests with creditors, contributors and the bankruptcy estate, and will generally adhere to the principles of fairness and impartiality when adjusting claims and equity.25 In this paper, the governance of three typical listed companies during reorganization is selected as a sample for the examination of business decisions. The details are shown in Table 3.

Table 3.

List of former corporate bodies during the reorganization of *ST Taibai, *ST Beisheng and *ST Xinye

Original Institution	*ST Taibai (Managed Operation)	*ST Beisheng	ST Xinye (Hire the former management level to operate)
Contents of shareholders' meeting and resolutions	1.Meeting held: Announcement of Resolutions of the First Extraordinary General Meeting of 2012. (Announcement No.: 2012–06) 2.Contents of the resolution: (1) Considered and adopted the Proposal on the signing of <Commissioned Processing Agreement> and change of sales contract between the Company and Wuxi Haopu Titanium Industry Co. (2)Considered and passed the Proposal on Borrowing from Wuxi Haopu Titanium Industry Co.		1.Meeting held: Announcement of the resolutions of the 2012 Annual General Meeting of Shareholders. (Announcement No.: 2013–071) 2.Content of resolutions: (1) Consideration of the Company's 2012 Annual Report on the Work of the Board of Directors; (2) Consideration of the Company’s 2012 Annual Report on the Work of the Supervisory Committee and 13 other items.26
Contents of the Board of Directors and Resolutions	1.Meeting held: Resolution of the 44th (provisional) meeting of the 3rd session of the Board of Directors. (Announcement No.: 2011–86) 2.Contents of the resolution: (1) Considered and passed the “Proposal on Borrowing from Wuxi Haopu Titanium Industry Co”. (2) Considered and passed the Proposal to convene the First Extraordinary General Meeting of 2012.		1.Meeting held: Announcement on the resolution of the eighth meeting of the seventh session of the Board of Directors. (Announcement number: 2013–049) 2.Contents of the resolution: (1) Consideration of the 2012 Annual Report on the Work of the Board of Directors; (2) Consideration of the full text of the 2012 Annual Report of the Company and the Summary of the Report and eleven other items.27
			1.Meeting held: Announcement of Resolutions of the Ninth Meeting of the Seventh Session of the Board of Directors. (Announcement No.: 2013–064) 2.Contents of resolutions: (1) Consideration and adoption of the proposal to amend the Articles of Association of the Company; (2) Consideration and adoption of four resolutions, including the proposal to amend the management method of connected transactions.
Supervisory Board and the content of resolutions	1.Meeting held: Announcement of Resolutions of the Twenty-eighth (Interim) Meeting of the Third Session of the Supervisory Board. (Announcement No.: 2011–87) 2.Content of the resolution: Considered and passed the Proposal on Borrowing from Wuxi Haopu Titanium Co.		1.Meeting held: Announcement of Resolutions of the Fourth Meeting of the Seventh Session of the Supervisory Committee (Announcement No. 2013–050) 2.Contents of the resolution: (1) A consideration of six items, including the 2012 Annual Report of the Supervisory Committee of the Company.28
Independent Directors	Independent Directors' Review Opinion on the Company's Borrowing from Wuxi Haopu		1.Meeting held: Special opinion of independent directors of Huludao Xinye Co. 2.Contents of the meeting: (1) Six opinions on the special explanation and independent opinions on the appropriation of funds and external guarantees by controlling shareholders and other related parties.29
Managers and meeting content	1.Meeting held: Announcement of the resolution of the managers' meeting. (Announcement No.: 2012–15) 2.Contents of the meeting: The System of Accountability for Material Errors in Annual Report Disclosure was considered and adopted.	1.Meeting held: Announcement of the resolution of the manager's meeting. (No.: Pro 2008–077) 2.Content of the meeting: It was decided to appoint Mr. Wu Bin as the designated liaison person of the Company with the Shanghai Stock Exchange and relevant securities regulatory authorities during the bankruptcy reorganization period.	1.Meeting held: Huludao Xinye Co., Ltd. administrator Announcement on the progress of the company’s reorganization. (Announcement No. 2013–045) 1.Content of the meeting: The first creditors' meeting of Zinc Co. was successfully held. Supplementary filing has been started for the claims that were not timely filed before the first creditors' meeting.
	1.Meeting held: Announcement of the resolution of the Manager's meeting. (Announcement No.: 2012–34) 2.Contents of the meeting: (1) Consideration and adoption of the 2011 Annual General Manager's Report; (2) Consideration and adoption of the 2011 Annual Audit Report and other contents.30
		1.Meeting held: Announcement by the administrator on matters relating to adjustment of interests of contributors in the draft reorganization plan. (No.: Pro 2008–085)
	1.Meeting held: Announcement of the resolution of the managers' meeting. (Announcement No.: 2012–58) 2.Content of the meeting: The meeting considered and adopted nine items, including the Proposal on the Draft Reorganization Plan of CNNC Huayuan Titanium White Company Limited (including the Adjustment Plan for the Rights and Interests of Contributors).31

3.2.2. Sample presentation of managerial decisions

First, Tables 1 and 2 show that the managerial management model accounts for a large proportion of the reorganizing of Chinese listed companies, up to 75%, and the liquidation group accounts for 76% of the managerial management.

Table 1.

List of managers of listed companies.

Administrator type (Proportion)	Name of the listed company
Intermediaries (24%)	22 of *ST Beisheng, * ST Shentai, * ST Chuangzhi, * ST Hongsheng, * ST Shenzhonghua, * ST Chaori, * ST ChuanHua, * ST Tianhua, * ST Fugang, * ST Lianhua, Jianruivoneng, * ST Tianyu, Tianhai Defense, * ST Pegasus, * ST Suoling, * ST Zhongnan Culture, * ST Zhongtai, * ST Hemei, Tianxiangtui, * ST Jiaxin, * ST Huaying and * ST Huachang.
liquidation group (76%)	71 of *ST Canghua, S* ST Tianyi, S* ST Lanbao, S* ST Haina, S* ST Chaohua, S* ST Changling, * ST Huayuan, * ST Baoshuo, * ST Jiufa, S* ST Hualong, * ST Huayuan, * ST Beiya, S* ST Xingmei, * ST Dixian, S* ST Xin’an, * ST Beisheng, * ST Qinling, * ST Xiaxin, S* ST Xintai, * ST Danhua, * ST Jinhua, S* ST Guangming, * ST Pianzhuan, * ST Deheng, * ST Yuanfa, * ST Jincheng, * ST Titanium Dioxide, * ST Jinding, *St Hailong, * ST Shixian, * ST Zhongji, * ST Zinc industry, * ST Xiancheng, * ST Fenghuang, * Xindu, * Xinyi, * ST Yunwei, * ST Chongqing Steel, * ST Liuhua, * ST Xiagong, * ST Zhongrong, * ST Shenji, * ST Pangda, * ST Salt Lake, * ST Antong, * ST Baoshi, * ST Yinyi, * ST Lifan, * ST Yongtai, * ST Liyuan, * ST Jingui, * ST Zhongnan, * ST Zhongfu, * ST Guiren, * ST Langqi, * ST Songjiang, * ST Daji, *ST HNA, * ST Foundation, * ST Yabo, * ST Dongwang, * ST Carey.

Table 2.

Management model in reorganization.

Governance model in reorganization	Quantity	Proportion
Administrator' management	7022	75%
Debtor’s self-management23	2324	25%

Second, Table 3 shows that the administrator during the reorganization period implemented operating decisions have three patterns: the first was the administrators entrusting the debtor’s enterprise to other corporations with strong operation abilities, so that relieved themselves from this duty. In practice, such as ∗ ST Titanium Dioxide, its administrator would hold a meeting of administrators to review the major issues of the company (such as the company’s budgets, business plans and profit distribution plans).32 Besides, the administrator also performed the function of supervision on the entrusted operator. The second type was the administrator entrusting the operation decision to the former management of the debtor and did not participate in the business activities. In practice like ∗ ST Zinc Industry, its business activities were carried out normally and orderly, and the debtor’s shareholders meeting, board of directors, board of supervisors and independent directors all actively performed their powers. Meanwhile, the administrator should fulfill the obligation of information disclosure and implement the activities of supervision on the management personnel.33 The third type was the administrators neither employing the debtor’s former management nor entrusting the debtor’s operation to other parties. In practice like ∗ ST Beisheng, the company’s operation was at a standstill at that moment. The administrator then only implemented the reorganization decision without any operation decision.34

3.3. Empirical evidence of debtor’s self-management

3.3.1. Parties of self-management by the debtor

“Debtor’s self-management model” can also be called “debtor’s management model” or “debtor in possession model” (debtor in possession, DIP model).35 According to the definition in the “Legislative Guide to Insolvency Law” issued by UNCITRAL in 2004, the debtor in possession was the one who had full control over the bankrupt enterprise because the court had not yet appointed an insolvency representative for the bankruptcy reorganization proceedings. The structural preference of DIP model in American bankruptcy reorganization reflected the consideration of the interests of the debtor, shareholders, managers and other parties in bankruptcy reorganization [27]. The reorganization in Chapter 11 enabled the debtor to own and operate a bankrupt company [28]. Through the simulation by the law, the DIP model has been performing the important responsibilities in Chapter 11 of American Bankruptcy Law. Without bankruptcy law, the role of DIP would not even exist [29]. It also caused some major problems of corporate governance because the debtor’s management had great motivation to favor certain parties before or during bankruptcy, such as fraudulent or prioritized transfers. On the contrary, the mechanism of controlling the management of the debtor has been very weak [30].

China’s legislation has not specified any particular party as the debtor in the reorganization, but “the United States Federal Bankruptcy Rules” 9001 (5) stipulate the specific candidates to be the debtor. If the debtor is not a natural person, the bankruptcy court may appoint the following persons as the debtor: (a) if the debtor is a business, it can be any or all managers, board members, controlling shareholders or any other controller; Or (b) if the debtor is a partnership, it can be any or all of the general partners or any other controller [31]. During the reorganization practice of listed companies in China, the specific parties of the debtor were generally the managers of the enterprise. The managers were familiar with the debtor’s enterprise and maintained certain abilities of operation and management. In practice, they have been generally capable to deal with the enterprise’s operation problems during reorganization in a timely manner.

3.3.2. Distribution of losses from the debtor’s reorganization decision

The bankruptcy reorganization decision involves the distribution of reorganization losses, which is reflected by the adjustments of claims and equities in the reorganization plan. DIP will also determine the allocation of assets among different parties [32]. Due to the damage to the interests of creditors and other interested parties caused by the fault management of DIP, the United States strengthened the applicability of administrators and supervisors under the background of the prevention against bankruptcy abuse and the promulgation of the Consumer Protection Act in 2005 [33]. A total of 23 listed companies have implemented debtor self-management over a 16-year period from 2017 to 2021. The following table focuses on the specific status of reorganization losses to 12 of the 23 listed managed by the debtor.36

3.3.3. Decision analysis of debtor’s self-management

The sample in Table 4 presents the following phenomena:

Table 4.

Adjustments of equities and claims under the self-management by debtors of some listed companies in China.

No.	Abbreviation	Adjustment of equities	Reduction ratio of ordinary claims	Controlling details
1	*ST Huayuan (2008/12/1737)	All holders' shares cut by 25%	88%	Xi’an Puming Logistics Trade Development Co., Ltd. (private enterprise)
		Major shareholder cut equity by 87% and the others by 24%
2	*ST Shengrun (2010/10/22)	Major shareholder cut by 77%	69.95%	Controlling shareholder Laiyingda Group (wholly state-owned)
		Medium&Minor shareholders did not adjust
3	*ST Hongsheng (2012/4/24/)	None.	88%	Xi’an Puming Logistics Trade Development Co., Ltd. (private enterprise)
4	*ST Fangxiang (2012/5/16)	Major shareholder cut by 66.67%	80.32%	Major shareholder Beitai Group (private enterprise)
5	*ST Kejian (2012/5/18)	The first and second major shareholders cut by 40%	Large amounts by 64.75%	Kejian Group (wholly state-owned)
			Small amounts by 50%
6	*ST Jincheng (2012/5/22)	Major shareholder cut by 30%	Amounts ≤ 100,000 by 0	Jinzhou Xintian Paper Co., Ltd. (Sino-foreign joint venture)
		Other shareholders cut by 22%	Amounts > 100,000 cut by 95%
7	*ST Zhonghua (2013/11/5)	The first and second major shareholders cut by 10%	69.33%	Shenzhen Guosheng Energy (private enterprise)
		Other shareholders cut by 8%
8	*ST Xinyi (2015/12/31)	Capital reserve converted into equity	Ordinary claims shall be paid off at one time within the execution period of the reorganization plan following the adjustment plan.	Xinjiang Wanyuan Huijin Investment Holding Co., Ltd. (not the state-owned legal person)
9	*ST Fugang (2018/11 22)	Capital reserve converted into equity	Amounts <=RMB500,000 shall be paid off in cash at one time; Amounts > RMB500,000 shall be retained and repaid by equity.	Northeast Special Steel Group (state-owned legal person holding shares)
10	*ST Deao (2020/4/22)	Capital reserve converted into shares	For each creditor, Amounts <= RMB500,000 shall be paid off in cash; Amounts > RMB500,000 shall be paid with 85% in cash and exempt the rest by Deao Navigation.	Beijing Wutong Xiangyu Investment Co., Ltd. (not the state-owned legal person)
11	*ST Dafu (2021/8/10)	Capital reserve converted into equity	Amounts < RMB200,000 shall be paid off in cash; Ordinary creditor’s financial rights shall be paid off with shares.	Yulian group (not the state-owned legal person holding shares)
12	*ST Daji (2021/10/31)	Capital reserve converted into equity	Amounts <=RMB10,000 shall be paid off; Amounts > RMB10,000 shall be paid off with shares.	HNA Commercial Holding company (state-owned legal person holding shares)

First, before 2015, in the reorganization plans of Chinese listed companies, the debtors generally preferred to protect the shareholders' rights and interests in the allocation of reorganization losses, therefore the reduction ratios of equity rights and interests were lower than that of ordinary claims. And there were certain cases of only reducing the creditor’s but not the equity's rights, and the allocations of reorganization losses were also unfair. For example, ∗ST Hongsheng, when the claims were not fully paid off, the shareholders retained the significant interests, which seriously deviated from the principle of absolute priority. This principle demands that the legal priority of repayments of all rights shall not be changed, meaning the obligees in the latter order shall not get paid off before those in the former order. But in the judicial practice of China's bankruptcy law, the absolute priority principle was only applied to paying off the creditors of different right orders and was not adopted between creditors and shareholders.

Second, before 2015, the contents of the reorganization plans showed a special phenomenon that the corporate natures of controlling and major shareholders would affect the extents of adjusting equity and claims. For example, the controlling shareholder of ∗ST Hongsheng was a private enterprise. To protect its rights and interests, it had not adjusted its equity rights, which resulted in the paying-off rate of ordinary creditor group being only 12%. Moreover, the controlling shareholder of ∗ST Shenzhonghua was also a private enterprise and the major shareholder of ∗ST Jincheng Holdings was a Sino-foreign joint venture. The practices of major shareholders of these two companies were different from that of ∗ST Hongsheng, which had adjusted the equity rights in the reorganization plan. However, the major shareholder of ∗ST Shenzhenhua only transferred 10% of the equity, and the major shareholder of ∗ST Jincheng Holdings only did 30%. Compared with the 8% and 22% equity rights individually transferred by the minor shareholders of these two enterprises, there was little difference in their ratios of transfer. As a consequence, the paying-off rates of ordinary claims of these two enterprises were merely 30.67% and 5% respectively. On the contrary, controlling shareholders of ∗ST Huayuan, ∗ST Shengrun and ∗ST Kejian were wholly state-owned and state-controlled, while the equity reduction ratios of their major shareholders had reached 87%, 77% and 40% respectively. As a result, ordinary creditors had received the relatively higher amounts of repayment, and these state-owned enterprises had suffered relatively larger losses from their bankruptcy reorganizations.

However, this phenomenon of controlling and major shareholders' natures affecting the adjustment ratios of equity and claims stopped appearing after 2015. This reflects that China pays more attention to protecting the balance of interests in the listing companies' reorganization plans, so that the corporate governance in the reorganization keeps making further progress and development.

Third, in the post-2015 reorganization plans, the adjustment methods for equity and claims have changed to a certain extent. Different from the direct reduction of equity in the early years, ∗ST Daji and ∗ST Dongwang have adopted the form of converting capital reserve into shares as the adjustment to investors' rights and interests. The actual equities of controlling and other shareholders have not been reduced, but the company's share capital has increased, hence the actual control of the company might change. In terms of claims adjustment, the reduction ratios of ordinary claims are significantly lower than those in earlier years. Small claims are normally paid in cash, while large claims are generally paid in transferred shares. Although the amount of claims has not been directly reduced and the full repayment is realized by paying off the debt with shares, there is still significant uncertainty about realizing the claims and interests by the way of debt-to-equity swap.

3.4. The findings of the empirical study of two models

Through the reorganizing plan of listed companies and a series of announcements issued during the reorganizing period, the study finds that: (1) under the administrator management model, the majority of the Chinese administrators are composed of the liquidation team, and the liquidation team is composed mainly of leaders of government departments related to listed companies, which reflects the deeper involvement of the state administrative power in the reorganizing of Chinese listed companies. This indicates that the degree of marketization of the reorganizing of Chinese listed companies is not high and administrative intervention is common. (2) During the reorganizing period, some listed companies have stagnant operation, entrusted operation and trusteeship operation due to the lack of management ability of the administrator, which indicates that the administrator generally does not have operation management ability in the reorganizing. (3) During the period of debtor's self-management, the management of private listed companies is easily swayed by the controlling shareholder and does not abate equity in equity adjustment or the abatement of equity is less than the abatement of claims, etc. (4) In April 2015, the 11th meeting of the Central Leading Group for Comprehensively Deepening Reform in China considered and adopted the Opinions on the Implementation of the Reform of the Registration of Cases by the People's Courts, which led to a large increase in the number of listed companies' reorganizing cases. interests protection, it starts to respect shareholders' rights and interests instead of directly denying the shareholders' rights and interests existing in the listed company reorganizing. The above findings prove that the direction of the research hypothesis is correct.

4. Reconstruction: implement the dual model of mixed governance for bankruptcy reorganization

In response to the problems in the empirical analysis, the author purposefully proposes that in the future revision of the Bankruptcy Law, the current two-choice model of administrator management and debtor self-management during reorganization should be changed, and a dual governance model of operating decisions implemented by debtors and reorganization decisions implemented by administrators should be established.

4.1. Reorganization decisions are implemented by the administrator

It is reasonable that the reorganization decision in bankruptcy reorganization is implemented by the administrator.

First, it has been difficult for the management of the debtor to exercise self-discipline to distribute reorganization losses fairly and squarely. In reorganization, both the administrator and the management of the debtor have fiduciary obligations to the creditors, who should aim at protecting the interests of the creditors. However, in practice, the management is generally appointed or recommended by the controlling shareholders and actual controllers of listed companies, there has been a principal-agent relationship between them. As a consequence, multiple obstacles have arisen to the management achieving the fair and square distribution of reorganization losses in the formulation of reorganization plan.

However, the administrator can effectively avoid the unfair distribution of reorganization losses. Because the bankruptcy procedure is a compulsory execution procedure in law for all creditors against the bankrupt company, the administrators must be appointed by the courts. They are similar to the civil servants of the enforcement organ, who have a public law relationship with the bankrupt company and the bankrupt creditors without interest. In the adjustment of the debtor's debts and equities, the administrator is entrusted to reasonably, fairly and squarely determine the adjustment extents according to not only the debtor's nature but also the identities and positions of creditors and shareholders [34]. The equity adjustment in the reorganization shall be following the relevant provisions of the “Minutes of the Symposium on the Trial of Bankruptcy Reorganization Cases of Listed Companies” issued by the Supreme People's Court. That is, if the controlling shareholder, the actual controller and their related parties cause damages to the company by illegal occupation, guarantee and other acts before the bankruptcy reorganization proceedings, the equities of the controlling shareholders and those under the actual controller shall be adjusted according to their individual faults when formulating the draft of reorganization plan, and the adjustment extents shall be different from that to other shareholders. However, given the managers of the debtor is likely to have been manipulated by the major and controlling shareholders, their implementation of the reorganization loss distribution would follow the hypothesis of economic man theory to facilitate the controlling and major shareholders transferring their deserved losses to the small-medium shareholders and creditors, compromising the interests of creditors and the company. Such situations have occurred multiple times in the practice of reorganization.

Second, the performing of reorganization decisions by administrators can obtain greater support from local governments, creditors and employees. On the one hand, the reorganization of listed companies involves thorny issues like taxation support, major asset reorganizing, credit restoration, refinancing and employee resettlement. The members of the liquidation group as the administrator include the regulators, administrative departments, lawyers and other personnel at the location of the listed company, which is not only conducive to the communication and coordination between the liquidation group and the government for smoothly promoting the reorganization of listed companies, but also contributory to successfully reorganizing the listed companies. On the other hand, the reorganization of listed companies involves a wide range and great influence, requiring the coordination of different stakeholders. The main conflicts in reorganization are between creditors and shareholders, shareholders and employees, creditors and managers, respectively. The implementation of the reorganization decision by the administrator will effectively avoid the direct conflict of interest between the relevant parties and promote the smooth formulation of the reorganization plan. Meanwhile, the identity of the administrator is helpful to coordinate a series of contradictions of the debtor with the employees' claims, the special claims, and especially the claims of banks. For some special sensitive claims in the bankruptcy reorganization, the administrator, especially the liquidation group, can apply their advantages to communicate and negotiate for the trust of creditors, so that effectively promote the reorganization procedure, which will also be conducive to the smooth adoption of the reorganization plan.

4.2. Operation decision are implemented by the debtor

It is reasonable for business decisions in bankruptcy reorganization to be implemented by the debtor. The main reasons are as follows:

First, the debtor's implementation of operation decisions can avoid the failure of enterprise reorganization caused by the discontinuity of management. The original managers of the debtor are more familiar with the enterprise, and allowing them to continually participate in the operation and management of the enterprise will avoid the cost increase and business interruption caused by the dismissal of the managers [35]. It should be noted that if the management bears inescapable responsibility for the plight of the debtor, the shareholders' meeting should be allowed to elect the new management to implement the decision-making in the reorganization.

Second, the debtor's implementation of operation decisions is beneficial to the rapid self-rescue of the enterprise and the improvement of the success rate of reorganization. Article 73 of the bankruptcy law stipulates that the debtor may apply for the management of property and business affairs under the supervision of the administrator. If the administrators take over the property and business affairs, they shall hand over them to the debtor; Article 74 stipulates that the administrator may employ the debtor's operation personnel to be responsible for business affairs. In the practice of reorganization of listed companies, there were also a wide range of cases in which the administrator entrusted the operation decision-making power to the debtor's management for implementation due to the administrator's poor management. Although the article considered the relief measures under the insufficient management ability of the administrator, it still neglected the urgency of reorganization, which was bound to cause problems such as the complicated procedures of reorganization, disconnection of work, time delay and else.

Third, generally speaking, it has been difficult for administrators to have good ability of operation. At present, there are two major reasons for the appointment of administrators. One is the “Regulations of the Supreme People's Court on the Appointment of Administrators in the trial of Enterprise Bankruptcy Cases” issued by the Supreme People's Court in April 2007, and the other is the “Spirit of the Kunshan Conference” in October 2007 from the conference jointly participated by the Second Civil Tribunal of the Supreme People's Court, the law department of the China Securities Regulatory Commission (CSRC) and the supervisory departments of listed Chinese companies in Kunshan. The meeting decided that if it was inappropriate to appoint by regulations an intermediary institution as the administrator, the liquidation group may act as the administrator. In practice, according to the spirit of the 2007 Kunshan meeting, the administrators in the reorganization of listed companies everywhere have usually been the liquidation groups consisting of relevant government agencies, hired financial advisers and legal consultants. In reality, generally speaking, the liquidation group has not obtained sound ability of operation, which is prone to causing negative consequences such as stagnation of production and operation during reorganization. For the example of ∗ST Beisheng, the administrator failed to make any operation decision and the enterprise stopped the production. To reorganized enterprises with good reputation among customers or employees, the temporary suspension of operation may damage their goodwill (for instance, an airline's suspension of operation for even a few days might put its customers all over the country into trouble), and this kind of loss may be irrecoverable [36].

5. Conclusion

A reasonable construction of corporate governance model in bankruptcy reorganization will effectively improve the success of rescue of reorganized enterprises. This paper adopts a quantitative statistical analysis and a case-by-case approach in the empirical study, and finds that: the main reorganizing model in the governance of Chinese listed companies is the managerial management model, in which the managerial liquidation group accounts for a larger proportion and the debtor's self-management is smaller; the managerial management has insufficient management decision-making ability, and the allocation of reorganizing losses in the debtor's self-management is also controlled by the major shareholder, and the proportion of equity reduction is lower than that of debt reduction. The proportion of equity reduction is lower than the proportion of claim reduction. The paper innovatively proposes that a dualistic hybrid corporate governance model should be established in bankruptcy reorganization, i.e., the reorganization decision is made by the administrator and the operating decision is made by the debtor. This finding provides a new model for corporate governance theory and provides a new contribution to the improvement of bankruptcy reorganizing theory. However, the limitation of channels for retrieving information on listed companies' reorganizing and the difference in the strength of announcement of listed companies' reorganizing plans may limit the sample size, which in turn may affect the effectiveness of the empirical study assessment. Future research on corporate governance in bankruptcy reorganizing also needs to focus on the influence of creditors, employees, investors, and other stakeholders on corporate governance in reorganizing and the specific ways of the impact.

Declarations

Author contribution statement

Song yuxia, Ph. D: Conceived and designed the experiments; Performed the experiments; Analyzed and interpreted the data; Contributed reagents, materials, analysis tools or data; Wrote the paper.

Funding statement

This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors.

Data availability statement

The authors are unable or have chosen not to specify which data has been used.

Declaration of interest’s statement

The authors declare no competing interests.

Additional information

No additional information is available for this paper.