EXCERPT FROM Strategies for Asset Recovery from Mainland China
BY HENRY W. LONGLEY | TEMPLE INT’L & COMP. L.J.
Full Article Here
A. Sino Clean Energy, Inc. v. Seiden—Corporate Governance Strategy in Action
In May 2014, a Nevada state court appointed Robert Seiden, Esquire,(171) the receiver of Sino Clean Energy, Inc. (Sino), after a group of U.S. investors requested the appointment when Sino went dark and caused economic losses.(172) Sino is a Chinese Reverse Merger holding firm incorporated in Nevada with subsidiaries in Mainland China that produce coal-water slurry.(173) The Sino bankruptcy case synthesizes the corporate governance strategy in the Chinese Reverse Merger context and shows some of the more creative techniques a receiver can employ when former firm insiders meddle with the recovery process.
In May 2015, the receiver filed criminal charges with H.K. police alleging that Sino’s chairman, Baowen Ren, fraudulently backdated a transfer of shares in Sino’s H.K. subsidiary to a British Virgin Islands firm that Ren controlled—pilfering Sino and its shareholders—without the receiver’s permission or knowledge.(174) Despite attempts by the receiver’s agents to resolve issues with Ren, Ren refused to settle or comply with the court’s receivership orders.(175)
In 2014, the court-appointed receiver installed a new board of directors at the Sino holding firm in Nevada.(176) Soon after, however, former board members, acting by and through Ren, filed a Chapter 11 petition for bankruptcy on behalf of the firm.(177) The receiver, Seiden, moved to dismiss, and the bankruptcy court granted the motion—a decision the former Sino directors later appealed.(178) In the Chinese Reverse Merger context, in addition to establishing board control over the U.S.- based holding firm, controlling the board of the operating firm in China allows the receiver to go into Mainland China as the legal owner of operating assets “standing in the shoes of the company.”(179) Accordingly, before January 2015, the Nevada court-appointed receiver reported removal and replacement of the board of directors of Sino’s operating firm in Mainland China with an American chairman.(180)
In February 2016, a Nevada district court judge overseeing the same action held Ren in criminal contempt for repeatedly violating its receivership orders.(181) In addition to an outstanding civil per diem penalty of $500 ordered in June 2015, the court ordered a bench warrant to imprison Ren for his contempt.(182) The court ordered Ren to be jailed until he transferred Sino’s official corporate seal, known as a “chop,”(183) to the receiver.(184) The court also held Ren’s illegal transfer of Sino’s assets to be invalid.(185) The receiver stated that the bench warrant would be sent to Interpol in Beijing, along with a request for assistance from Chinese authorities to arrest Ren.(186)
Meanwhile, the ongoing bankruptcy case against Sino also affected its existing contractual liability. The appointment of a receiver can change who possesses control over a firm, but it does not affect the corporate existence of a firm, which means the firm continues to be liable for its existing contracts after the appointment of a receiver.(187) According to the January 2015 report, the receiver communicated with Sino’s suppliers, business partners, and its customers around the globe, contacted Sino’s Chinese banks to change signatories and gain control over accounts, put in place an interim management team to run day-to-day operations, and selected an independent auditor to advise on the economic state of Sino and its subsidiaries.(188)
In Sino Clean Energy, Inc. v. Seiden, former directors of Sino appealed the dismissal of their 2015 bankruptcy petition—arguing that federal bankruptcy law preempts a receiver appointed under state law from barring a corporation from filing for bankruptcy.(189) In January 2017, the Court affirmed the bankruptcy court’s dismissal because appellants did not have authority to file for bankruptcy on behalf of Sino at the time of the petition. (190)
The court found the appellants’ argument unpersuasive because the receiver removed appellants in 2014—installing a new board of directors more than a year before appellants filed their bankruptcy petition in 2015.(191) The court’s order did not affect a corporation’s right to file for bankruptcy but prevented a former board of directors from filing by holding that only a corporation’s current board of directors can file for bankruptcy.(192) The district court’s decision demonstrates that a courtappointed receiver is unequivocally empowered to reconstruct the board of directors of a Chinese Reverse Merger holding firm based in the United States. Moreover, the Sino Clean Energy, Inc. saga shows that a court-appointed receiver with control of a Chinese Reverse Merger corporate structure can capably affect its Mainland China-based management at the operating business level as well.(193)
171. THE Seiden Law, supra note 134 (detailing that Seiden has vast experience with integrity monitoring and has been appointed receiver over twenty times in the United States); see also Stevenson & Goldstein, supra note 33 (“Robert W. Seiden is a Wall Street bounty hunter. He tracks down executives of Chinese companies that listed on stock exchanges in the United States and then blew up.”).
172. Sino Clean Energy Inc. v. Seiden, 565 B.R. 677, 679–80 (D. Nev. 2017); BVI Shell Company Allegedly Used to Steal US and Chinese Shareholder Interests in Energy Firm, CARIBBEAN NEWS NOW! (June 26, 2015), https://www.caribbeannewsnow.com/2015/06/26/bvishell-company-allegedly-used-to-steal-us-and-chinese-shareholder-interests-in-energy-firm/.
173. Sino Clean Energy Inc., 565 B.R. at 679–80; Sino Clean Energy, Inc. Prospectus, NASDAQ (Dec. 21, 2010), https://www.nasdaq.com/markets/spos/filing.ashx?filingid=7820499; see BVI Shell Company Allegedly Used to Steal US and Chinese Shareholder Interests in Energy Firm, supra note 172 (describing the corporate structure of Sino Clean Energy); see also Markus Aarnio, Sino Clean Energy Poised to Double Production Capacity in 2012, SEEKING ALPHA (Jan. 15, 2012, 7:45 AM), https://seekingalpha.com/article/319701-sino-clean-energy-poised-to-doubleproduction-capacity-in-2012 (describing Sino Clean Energy as the fifth largest producer of coalwater slurry fuel by sales in China).
174. BVI Shell Company Allegedly Used to Steal US and Chinese Shareholder Interests in Energy Firm, supra note 172.
176. Written Consent, supra note 168.
177. Sino Clean Energy Inc., 565 B.R. at 680.
179. Michael Rapoport, Court Appointee Chases (and Finds) Investor Cash that Vanished in China, WALL ST. J. (June 21, 2015, 4:28 PM), https://www.wsj.com/articles/court-appointeechases-and-finds-investor-cash-that-vanished-in-china-1434918506.
180. U.S. Court-appointed Receiver for Sino Clean Energy Inc. (Nasdaq “SCEI”) Taking Control of Chinese Company, PR NEWSWIRE (Jan. 25, 2015), https://www.prnewswire.com/newsreleases/us-court-appointed-receiver-for-sino-clean-energy-inc-nasdaq-scei-taking-control-ofchinese-company-300018796.html.
181. U.S. Court Orders China Businessman Jailed for Defying Court-Appointed Receiver and Judge’s Order to Cede Control of the Company to the Receiver, PR NEWSWIRE (Feb. 29, 2016), https://www.prnewswire.com/news-releases/us-court-orders-china-businessman-jailed-fordefying-court-appointed-receiver-and-judges-order-to-cede-control-of-the-company-to-thereceiver-300228158.html.
183. Dezan Shira & Assocs., Company Chops in China: What are They and How to Use Them, CHINA BRIEFING (May 10, 2017), http://www.china-briefing.com/news/2017/05/10/use-ofcompany-chops-in-china.html (explaining that “the chop” is mandatory to do business in Mainland China and functions as the company’s official signature).
184. U.S. Court Orders China Businessman Jailed for Defying Court-Appointed Receiver and Judge’s Order to Cede Control of the Company to the Receiver, supra note 181.
187. British Virgin Islands—Restructuring and Insolvency, OGIER (Nov. 4, 2013), www.ogier.com/publications/british-virgin-islands-restructuring-and-insolvency.
188. U.S. Court-appointed Receiver for Sino Clean Energy Inc. (Nasdaq “SCEI”) Taking Control of Chinese Company, supra note 180.
189. Sino Clean Energy Inc. v. Seiden, 565 B.R. 677, 679 (D. Nev. 2017).
190. See id. at 681, 683 (finding that Nevada law gives a corporation’s current board of directors exclusive power to file for bankruptcy); see also Richard Levin, Recent Developments in Bankruptcy Law, JENNER & BLOCK ¶ 4.1.a (July 2017), https://jenner.com/system/assets/assets/10294/original/Recent%20Developments%20in%20Bankr uptcy%20Law%20-%20July%202017.pdf (“State law here authorizes the current directors to authorize a filing.”).
191. Sino Clean Energy, 565 B.R. at 681.
192. Id. at 677; Levin, supra note 190.
193. See generally U.S. Court-appointed Receiver for Sino Clean Energy Inc. (Nasdaq “SCEI”) Taking Control of Chinese Company, supra note 180.