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Wang XInXIn profEssor of law at rEnmin (pEoplEs) univErsity of china and dirEctor of its Bankruptcy law rEsEarch cEntEr
Bankruptcy comes to china
china’s BusinEssmEn havE always nEEdEd rEsiliEncE, But now thEy must BEcomE
accustomEd to thE spEctEr of Bankruptcy. for china now has a Bankruptcy codE
with tEEth, and thE country’s courts arE BEginning to EnforcE it with rigor
ankruptcy legislation in china started right after Deng leaves cases over- or understaffed. consequently, the job of
Xiaoping launched his pro-market reforms three receiver, though it carries strict liabilities, is highly risky in terms of
decades ago. The law on Enterprise Bankruptcy (Trial reward. If no viable solution is found, no agency or individual will
Implementation), the first of its kind, was enacted in 1986. Its be willing to serve as the receiver in ordinary bankruptcy cases.
execution, however, was crippled by its very narrow scope another important innovation is the adoption of restructuring
for application, the absence of corresponding laws governing procedures based on other countries’ experiences. The
corporate restructuring, excessive government intervention, possibility of restructuring balances the interests of stakeholders
incompatibility with the policy-based bankruptcy procedure then and uses legal protections to help potentially risky enterprises
in place, technical errors, and a general inability to make the prevent or avoid bankruptcy if a bailout is worthwhile or possible.
code operational. But stricter and more reasonable standards should be
So, in 2006, a revised version of the law was enacted, established for courts’ approval of restructuring plans. For
marking an important milestone in china’s efforts to build an example, if the required majority of shareholders adopts such a
effective legal system as it moves towards a market economy. plan, the court should protect the rights of the minority of creditors
compared with the original bankruptcy code, the 2006 code is who may have opposed it. and if the liquidation rate for creditors’
firmly rooted in the needs of a market economy. common claims is defined as no lower than that at the time the
First, it aims to ensure that obligations are fairly and regularly draft restructuring plan was submitted for approval, compensation
met when a debtor becomes financially insolvent. Thus, it seeks must be considered in the event that payment is delayed.
to protect the lawful rights of both creditors and debtors.
The legislation also imposed a deadline to abolish “policy-
based bankruptcy” – the practice adopted by the State council The successful implementation of China’s revised
to liquidate loss-making state-owned enterprises (SOEs) and Bankruptcy Law hinges on its effective enforcement
resettle laid-off employees. Unlike the Bankruptcy law, the and abandonment of the mindset and practices shaped
administrative procedure has a different hierarchy of liquidation under the old version, especially in the era of policy-based
priorities: what a bankrupt SOE owes to its employees and the bankruptcy. Despite the difficulties that remain, China’s
resettlement charges must be covered first and foremost by
bankruptcy legislation is increasingly adapted to the market
its total assets, including the enterprise’s collateral, in order to
economy; the trend is irreversible
reduce dependence on local governmental budgets.
Yet this process leaves the rights of creditors undefended, Moreover, the Bankruptcy law, the company law, and
eliciting widespread criticism. The new Enterprise Bankruptcy the Securities law should be well coordinated and mutually
Law redefines its scope of application to preclude overlap with reinforcing. how can an enterprise being restructured, say,
other laws like the Social Security law and the labor law. find a way to issue securities for financing if it cannot meet
Indeed, resettlement of laid-off SOE employees, and other social conventional standards such as profitability and net asset value,
implications of layoffs, should now be addressed primarily by as required by the company law and the Securities law? The
government through the social safety net, rather than as part of law must contain specific provisions regarding such matters in
the bankruptcy process. order to ensure successful listing of restructuring firms.
The new code also introduces the concept of “administrative To prevent fraud, an acute problem in the past, the new law
receivership,” whereby lawyers, certified accountants, and established a “right of rescission,” whereby the receiver can
other intermediaries act as managers of enterprises undergoing ask courts to rescind any action by a debtor that involves fraud,
bankruptcy. The procedure abolishes the liquidation Team, evasion, or unfair liquidation in the prescribed period before
a long-standing regime that many alleged was unjust, a bankruptcy petition is accepted and assets recovered. The
aggressive in administrative intervention, unprofessional, and system now holds the key to fairness liquidation. Moreover, the
unaccountable. criminal law of the People’s republic of china now includes
In order for this part of the law to go ahead, the Supreme bankruptcy fraud.
People’s court issued judicial interpretations that set out who can The successful implementation of china’s revised
be designated a company receiver and the amount and type of Bankruptcy law hinges on its effective enforcement and
compensation they can be paid. Up to now, some 2,520 agencies abandonment of the mindset and practices shaped under the
and 388 individuals have been included on the list of receivers. old version, especially in the era of policy-based bankruptcy.
Yet problems remain. For example, receivers are paid Despite the difficulties that remain, China’s bankruptcy
unreasonably poorly in cases of limited assets; furthermore, the legislation is increasingly adapted to the market economy; the
random, indiscriminate appointment of receivers sometimes trend is irreversible.
TBA : To be advised : A Macau Business partner event
March 2010
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