Political Realities Keep Bankruptcy Filings Low in China
BY PAN LIDONG, PARTNER, WANG JING & CO.
The Law of the People’s Republic of China on Enterprise Bankruptcy was promulgated in 1986 on a
trial basis following the start of China’s
economic reform and opening-up policy
in 1978. However, the 1986 Enterprise
Bankruptcy law was only applicable to
lacked guidelines for the reorganization
of private companies. Enterprises that
were not wholly owned by the state
could only rely on the old PRC Civil
Procedure Law, which was primitive and
lacking in good operability in practice.
Bankruptcy Law that were exposed
as a result of a number of major
bankruptcies involving large SOEs. In
particular, because the government
has as its main consideration social
stability and therefore holds the interests
of employees as a priority, the 1986
Enterprise Bankruptcy did not protect
the interests of creditors. Due to the lack
of a detailed legal system and a mature
market-oriented economy, bankruptcy
cases were not handled successfully.
unavailable in the 1986 Enterprise
Bankruptcy law, including:
giving secured creditor claims priority
over employees’ current and accrued
of a bankruptcy administrator by
restructuring or reorganization.
In the late 1990s, due to the fallout from
the Asian Financial Crisis, countries such
as Indonesia and others were required
to reform their laws on bankruptcy as a
condition of obtaining loans from the
they enacted and implemented Western-style insolvency laws incorporating
various corporate rescue mechanisms,
with varying degrees of success.
As a result of these realities of the
Chinese business and political
environments, as well as China’s rapid
integration into the world economy,
the reform of the Enterprise Bankruptcy
Law, which started in 1994, was
considered a top legislative priority.
After 12 years of efforts, the Law of the
People’s Republic of China on Enterprise
Bankruptcy was adopted on August
27, 2006, and became effective June
1, 2007. In 2011, the Supreme People’s
Court promulgated the first Judicial
Interpretation of the Bankruptcy
Law to guide how bankruptcy cases
are handled on the judicial level.
Generally speaking, the procedure for
bankruptcy in China is mainly as follows:
Application for Bankruptcy.
The first step is to file an application with
the court at the company’s location. Both
the company and its creditors may file
applications for bankruptcy in China.
Whoever initiates the bankruptcy
proceedings, the main reasons for the
PRC court are the same: the enterprise
fails to pay its debt when due and its
assets are not sufficient to pay off all the
debts or the company is incapable of
paying its debts.
Unlike other Asian countries that
suffered severely from the financial
crisis and reformed their bankruptcy
laws as a result, China’s initiative to
reform its bankruptcy law stemmed from
shortcomings of the 1986 Enterprise
The Bankruptcy Law introduced a
number of key new rules previously
Appointment of Administrator. The
success of the first step is measured by
the court’s acceptance of a bankruptcy