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Print articleChina: New Enterprise Bankruptcy Law
January, 2007 -
The Standing Committee of the National People’s Congress issued the Law of the People’s Republic of China on Enterprise Bankruptcy on 27 August 2006 to replace the Law of the People’s Republic of China on Enterprise Bankruptcy (for Trial Implementation) passed in 1986. The Law, which becomes effective on 1 June 2007, establishes the procedures for handling bankruptcy petitions, proceedings, restructurings and liquidations of enterprise legal persons (“enterprises”) in the People’s Republic of China (“PRC”).
Application
The Law applies to enterprises that are insolvent or at risk of becoming insolvent, and extends to property belonging to the debtor both in China and abroad. Under the proper circumstances, a bankruptcy petition can be filed directly to the people’s court by any of the following parties:
• a creditor;
• the debtor;
• the enterprise representative in charge of liquidation (when the enterprise has been dissolved but not yet liquidated).
The Law also covers the bankruptcy and restructuring of financial institutions and specifies that the petition must be made by the relevant financial regulatory authorities under the State Council.
The people’s court may also accept petitions for the recognition of foreign court bankruptcy rulings that pertain to property within the PRC. If accepted, these rulings will be recognised and enforced. Courts will consider any applicable foreign treaties and reciprocity when determining whether a foreign court award should be recognised.
The Administrator
The people’s court will appoint an independent administrator for the enterprise when it accepts the bankruptcy petition. While the Supreme People’s Court shall draw up rules on the qualifications and remuneration of administrators, the Law does set out the basic qualifications, duties and standards of conduct for administrators. According to the Law, the administrator will have power over the debtor’s assets and property, including the right to attempt to claw-back certain assets and to manage and dispose of the debtor’s property. If a restructuring is undertaken, the administrator will supervise the debtor’s management in the implementation of the restructuring. The administrator will report to both the creditors (at the creditors’ meeting) and the court.
Creditors
When the people’s court accepts the bankruptcy petition, it will announce its acceptance and the date by which creditors must file their claims. The court will then convene the first creditors’ meeting to review the claims with all known creditors, the debtor and the administrator. Bankruptcy distributions will be based on these claims if unchallenged.
All resolutions proposed during the creditors’ meetings will be adopted by a majority vote that must represent at least one-half of the unsecured claims. The creditors’ meeting shall monitor the administrator and adopt restructuring, settlement or property distribution plans, as the case may be. In addition, the creditors’ meeting can delegate certain of its powers to a committee comprised of a maximum nine representatives.
Restructuring
The Law allows for the restructuring of insolvent enterprises at the request of a debtor, creditor or an investor holding at least 10% of the registered capital of the debtor. The debtor or administrator can submit a draft business restructuring plan to the people’s court and the creditors’ meeting. If the creditors’ meeting rejects the restructuring plan, the debtor or the administrator may nevertheless apply to the people's court for the approval of the plan provided that it meets certain criteria. If the plan is also rejected by the people’s court, the restructuring will be terminated and the debtor will be declared bankrupt. If the plan is accepted, the debtor will be responsible for implementing it under the supervision of the administrator.
Settlement
The debtor can also petition the people’s court for a settlement of the outstanding debt. The creditors’ meeting and people’s court must approve the terms of the proposed settlement. If either the court or the creditors reject the settlement agreement, or if the debtor cannot uphold the terms in the agreement, then the debtor will be declared bankrupt.
Distribution
Unless the creditors decide otherwise, the property in bankruptcy will be sold at an auction and the enterprise may be sold off in whole or in part. Unlike the 1986 bankruptcy law, the new Law does not give employees priority over other creditors.
When there is no more property available to be distributed, the administrator will petition to conclude the bankruptcy process. If additional property or recoverable property is found within two years from the date of conclusion of the bankruptcy procedure, a creditor can petition the court for further distribution.
Application
The Law applies to enterprises that are insolvent or at risk of becoming insolvent, and extends to property belonging to the debtor both in China and abroad. Under the proper circumstances, a bankruptcy petition can be filed directly to the people’s court by any of the following parties:
• a creditor;
• the debtor;
• the enterprise representative in charge of liquidation (when the enterprise has been dissolved but not yet liquidated).
The Law also covers the bankruptcy and restructuring of financial institutions and specifies that the petition must be made by the relevant financial regulatory authorities under the State Council.
The people’s court may also accept petitions for the recognition of foreign court bankruptcy rulings that pertain to property within the PRC. If accepted, these rulings will be recognised and enforced. Courts will consider any applicable foreign treaties and reciprocity when determining whether a foreign court award should be recognised.
The Administrator
The people’s court will appoint an independent administrator for the enterprise when it accepts the bankruptcy petition. While the Supreme People’s Court shall draw up rules on the qualifications and remuneration of administrators, the Law does set out the basic qualifications, duties and standards of conduct for administrators. According to the Law, the administrator will have power over the debtor’s assets and property, including the right to attempt to claw-back certain assets and to manage and dispose of the debtor’s property. If a restructuring is undertaken, the administrator will supervise the debtor’s management in the implementation of the restructuring. The administrator will report to both the creditors (at the creditors’ meeting) and the court.
Creditors
When the people’s court accepts the bankruptcy petition, it will announce its acceptance and the date by which creditors must file their claims. The court will then convene the first creditors’ meeting to review the claims with all known creditors, the debtor and the administrator. Bankruptcy distributions will be based on these claims if unchallenged.
All resolutions proposed during the creditors’ meetings will be adopted by a majority vote that must represent at least one-half of the unsecured claims. The creditors’ meeting shall monitor the administrator and adopt restructuring, settlement or property distribution plans, as the case may be. In addition, the creditors’ meeting can delegate certain of its powers to a committee comprised of a maximum nine representatives.
Restructuring
The Law allows for the restructuring of insolvent enterprises at the request of a debtor, creditor or an investor holding at least 10% of the registered capital of the debtor. The debtor or administrator can submit a draft business restructuring plan to the people’s court and the creditors’ meeting. If the creditors’ meeting rejects the restructuring plan, the debtor or the administrator may nevertheless apply to the people's court for the approval of the plan provided that it meets certain criteria. If the plan is also rejected by the people’s court, the restructuring will be terminated and the debtor will be declared bankrupt. If the plan is accepted, the debtor will be responsible for implementing it under the supervision of the administrator.
Settlement
The debtor can also petition the people’s court for a settlement of the outstanding debt. The creditors’ meeting and people’s court must approve the terms of the proposed settlement. If either the court or the creditors reject the settlement agreement, or if the debtor cannot uphold the terms in the agreement, then the debtor will be declared bankrupt.
Distribution
Unless the creditors decide otherwise, the property in bankruptcy will be sold at an auction and the enterprise may be sold off in whole or in part. Unlike the 1986 bankruptcy law, the new Law does not give employees priority over other creditors.
When there is no more property available to be distributed, the administrator will petition to conclude the bankruptcy process. If additional property or recoverable property is found within two years from the date of conclusion of the bankruptcy procedure, a creditor can petition the court for further distribution.
