On May 7th, Jia Yueting released a video in response to the information received by Faraday Future (hereinafter referred to as "FF") regarding the Nasdaq delisting opinion letter. Jia Yueting said that FF is facing a very high risk of delisting, but it has not already been delisted. He said, "If FF really delists, it will not only cause irreparable harm to FF's investors, shareholders, creditors, suppliers, and all Chinese and American employees and families, but also cause significant losses to the Chinese, American, and global automotive industry."
Previously, Jia Yueting had written to creditors stating that the debt issue would be resolved by transferring his FF equity to a debt repayment trust, and that all personal assets would be transferred to the creditor trust after the court's injunction was lifted. On June 26, 2020, Jia Yueting completed his personal bankruptcy reorganization proceedings in the United States, and at the same time, the reorganization plan officially came into effect. His creditor trust was also officially established and began operating.
Therefore, if FF is delisted, it may cause losses to creditors. Regarding this, Li Yongyuan, Managing Partner of YK LAW Law Firm (Yingke Los Angeles Office) in the United States, stated that it is currently unclear how many shares have been reduced and distributed by the Creditor Trust. If the creditors have not yet received the repayment specified in the Debt Restructuring Plan, once FF is delisted, its stocks will have no liquidity in the future, and the trust will naturally not be able to obtain distributable assets.
Debt Relief in Personal Bankruptcy Cases
In addition to responding to rumors of FF delisting, Jia Yueting also posted a video claiming that over the years, he has repaid over $10 billion on behalf of the company and LeEco. Five years ago, I applied for a personal debt restructuring in the United States and reached and completed a restructuring plan. There is no longer any debt under the US legal system.
Jia Yueting's claims of "having repaid over $10 billion in debt" and "no longer having any debt under the US legal system" have sparked widespread discussion. Subsequently, Jia Yueting once again responded to issues such as repayment of over 10 billion US dollars.
Jia Yueting said, "There are rumors that the accumulated repayment of around $10 billion between me and the company was made through FF stock debt trust, which is completely wrong and false. In fact, almost all of this $10 billion was repaid through cash."
It is understood that Jia Yueting voluntarily applied for personal bankruptcy reorganization (Chapter 11) in the United States on October 13, 2019. After the bankruptcy reorganization plan is completed, a creditor trust will be established simultaneously, and all assets in the United States will be transferred to creditors when the conditions are met.
On May 21, 2020, Jia Yueting's personal bankruptcy reorganization was finally confirmed and passed by the California Central District Bankruptcy Reorganization Court, with the support of a majority of creditors. On June 26 of the same year, Jia Yueting completed his personal bankruptcy reorganization application in the United States, and the reorganization plan officially came into effect. At the same time, the creditor trust was officially established and began to operate.
Regarding Jia Yueting's statement that "there is no longer any debt under the US legal system," Li Yongyuan said that I understand he is referring to personal debt relief in bankruptcy cases. Li Yongyuan analyzed that on the basis of confirming the substantial performance of the Debt Restructuring Plan, the US Federal Bankruptcy Court issued an Order of Discharge on March 8, 2021, confirming that the debt relief date was March 8, 2021.
Li Yongyuan stated that according to the Debt Release Order, all debts, liabilities, and obligations incurred by Jia Yueting on or before March 8, 2021, regardless of whether they have been sued, whether there has been a court judgment, and whether they have been compensated in bankruptcy proceedings, will be released. No one shall make any further claims against Jia Yueting for the previous debts, and no court shall make any judgment against Jia Yueting for the previous debts. Therefore, it can be considered that under the US legal system, as of March 8, 2021, Jia Yueting no longer has any personal debts.
But he also pointed out that the US Federal Bankruptcy Court's Debt Release Order will not take effect on any new debt arising after that date.
Billion US dollars repayment or from collateral auction
According to the previous statement of Jia Yueting's debt handling group, Jia Yueting solved his personal debt problem by establishing a creditor trust. The trust property of the creditor trust consists of all the equity and related income rights of FF Company held by Jia Yueting himself, which are controlled and managed by the creditor committee and the trust trustee. Each creditor receives trust benefits based on the distribution of claim debts.
Dr. Yang Xiang, a researcher at the Finance and Law Research Center of Tsinghua University Law School, stated that there is a personal bankruptcy system in the United States. Jia Yueting applied to the US court for personal bankruptcy. After completing a series of debt disposals, he met the conditions for personal bankruptcy. After the court ruled, Jia Yueting was no longer responsible for repaying the debts of the original creditors, and these creditors were repaid by the assets entrusted by the creditors.
Therefore, after Jia Yueting announced on video that he had repaid over $10 billion in debt, the public speculated that the accumulated debt repayment of over $10 billion mentioned by Jia Yueting was to be repaid through a "debt to equity" conversion by a creditor trust holding FF stocks.
But later, Jia Yueting denied this statement. Jia Yueting said, "In fact, almost all of the $10 billion was repaid through cash, and during the repayment process, many assets were sold at low prices and forcibly auctioned in order to quickly raise funds." Jia Yueting gave an example, stating that the auction price of the Shimao Gong San Jia LeEco Building, with a fair value of nearly 5 billion, was less than half of its actual value.
Li Yongyuan analyzed that Jia Yueting's so-called "10 billion US dollars" repayment should refer to payments made outside of bankruptcy proceedings, and is not related to the aforementioned bankruptcy proceedings or creditor trusts. Jia Yueting also clarified in the video that this $10 billion is not related to FF equity and creditor trusts. He gave an example of the LeEco Tower auction, which belongs to the realization of domestic collateral.
At the same time, Li Yongyuan pointed out that Jia Yueting's Debt Restructuring Plan itself allows Chinese secured creditors to continue exercising their rights over the collateral within China and within the scope of the collateral. Therefore, based on Jia Yueting's statement, this $10 billion repayment seems to belong to this part, as well as assets that he voluntarily or executed before initiating bankruptcy proceedings.
The shares held by FF delisted creditor trust may lose liquidity
The introduction of the YT restructuring plan of Jia Yueting's debt disposal group shows that the important trust assets of its creditor trust include the following five parts: 10% equity of FF Intelligent Mobility Global Holdings Limited (after the lifting of the BVI ban); 20% Pacific Technology preferred shares (indirectly holding 6.16% equity in FF), and including the following additional equity (after FF IPO, Pacific's $815.7 million preferred distribution rights, 10% residual income preferred distribution rights, and 20% ultimate beneficial distribution rights); Repurchase rights for the equity of Season Smart; After completing the existing judicial procedures in China, the remaining portion of Jia Yueting's assets frozen by the judiciary before the bankruptcy takes effect (if any); Litigation rights against Yidao Asset (Dongfang Cheyun).
After the lifting of the ban in the British Virgin Islands and the execution of the exchange certificate, the creditor trust will hold 20% of Pacific Technology preferred shares and 10% of FF shares. Trust is controlled and managed by the creditor committee and the trust trustee. After the completion of the debt restructuring plan, Jia Yueting will no longer hold any equity in FF.
FF announced that on April 24th, the company received a letter from NASDAQ stating that due to the stock closing price being below $0.1 for ten consecutive trading days, which does not comply with NASDAQ listing rules, NASDAQ staff decided to delist FF's stock from the NASDAQ market.
What impact would the delisting of FF from NASDAQ have on creditor trusts, and how would it affect creditor rights? Li Yongyuan stated that it is currently unclear how many shares have been reduced and distributed by the creditor trust. Of course, if creditors have not yet received the payments specified in the Debt Restructuring Plan, once FF is delisted, its stocks will have no liquidity in the future, and the trust will naturally not be able to obtain distributable assets. Due to the fact that the duration of the trust is only 5 years and the expiration date is approaching, further observation is needed to determine how much distributable assets creditors can actually receive at that time.
According to the introduction of the YT restructuring plan obtained by the reporter, the Creditor Trust will sign a lock up period clause with the FF listed underwriter after the IPO (for directly holding 10% of the shares): during the IPO, with the underwriter's permission, no more than 5% of the FF equity in the trust can be sold; In the first year after IPO, up to 1% of the FF equity in the trust can be sold per month (cumulative 17%); In the second year after IPO, up to 2% of the FF equity in the trust can be sold per month (cumulative 41%); In the third year after IPO, up to 3% of the FF equity in the trust can be sold per month (cumulative 77%); In the fourth year after IPO, up to 4% of the FF equity in the trust can be sold per month (cumulative 100%).
Inspiration from the Domestic Personal Bankruptcy System
The debt repayment controversy of Jia Yueting has also brought personal bankruptcy into the public eye. Currently, China is actively exploring issues such as personal bankruptcy. Recently, the Chinese government's online publication issued a response from the State Administration for Financial Supervision and Administration to netizens regarding the suggestion to "improve policies such as credit fund supervision and stimulate the vitality of private enterprises", and to "enact a personal bankruptcy law".
The State Administration for Financial Supervision and Administration stated that it will actively cooperate with legislative bodies to conduct research and argumentation on whether personal bankruptcy is included in the law, the practical needs and positive effects of inclusion, whether the timing is appropriate, and whether the supporting conditions are met. The first personal bankruptcy regulation in China, the Shenzhen Special Economic Zone Personal Bankruptcy Regulations, was implemented on March 1, 2021.
Regarding the purpose of the personal bankruptcy system, Cao Qixuan, the presiding judge of the bankruptcy court of the Shenzhen Intermediate People's Court, who participated in the drafting of the Shenzhen Special Economic Zone Personal Bankruptcy Regulations, stated that the most essential meaning of the personal bankruptcy system is relief, and "honesty" and "misfortune" are the two key words for applying for bankruptcy. This means that only honest and trustworthy debtors can receive personal bankruptcy protection and help them escape from debt crises, participate in socio-economic activities again, and create more wealth in the unfortunate event of a debt crisis.
In addition, since 2018, various National People's Congress and Chinese People's Political Consultative Conference members have been calling for the formulation of a personal bankruptcy law. In July 2019, 13 departments including the National Development and Reform Commission, the Supreme People's Court, and the Ministry of Industry and Information Technology jointly issued a document requesting the reform of the market exit mechanism, proposing the gradual establishment of a natural person bankruptcy system. In May 2020, the Opinions of the Central Committee of the Communist Party of China and the State Council on Accelerating the Improvement of the Socialist Market Economy System in the New Era also explicitly called for the improvement of the bankruptcy system and the promotion of personal bankruptcy legislation.
Li Shuguang, a professor at China University of Political Science and Law and director of the Bankruptcy Law and Enterprise Restructuring Research Center, believes that the current implementation of personal bankruptcy in China faces four major obstacles in terms of social traditional concepts and business transaction models: firstly, the culture of "face" and the concept of auspiciousness. Traditional Chinese culture values "face", so personal bankruptcy, and even the term "bankruptcy", is often not accepted by the public.
Secondly, the family or family forms a property community and assumes external responsibilities. There are a large number of family owned enterprises in China, and it is common for entrepreneurs, spouses, and children to jointly assume joint and several debt responsibilities for the enterprise. This has a significant impact on the personal bankruptcy system based on personal responsibility.
Thirdly, the concept of "exploiting loopholes". The concept of "exploiting legal loopholes and finding institutional loopholes" is widely present in commercial transactions in our country.
Fourthly, the phenomenon of evading and abolishing debts. The transfer, concealment of assets, and evasion of repayment responsibilities still widely exist in commercial transactions in China.
Therefore, Li Shuguang stated that in order to study and construct a personal bankruptcy system within China, it is necessary to combine the cultural and commercial characteristics of our country.