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In 1994, China announced that it intended to pass a new bankruptcy law.  Now, after discussion and debate lasting more than 12 years, it has.

The 23rd Meeting of the Standing Committee of the 10th National Peoples Congress (NPC) of the People's Republic of China (PRC) passed its Law of the PRC on Enterprise Bankruptcy on August 27, 2006 (the New Bankruptcy Law).  The New Bankruptcy Law will take effect on June 1, 2007, replacing the Enterprise Bankruptcy Law (Trial Implementation) passed in 1986 (the 1986 Bankruptcy Law).  

With 136 articles, the New Bankruptcy Law is more comprehensive and comes closer to incorporating international best practices than did the 43-article 1986 Bankruptcy Law.  However, in many aspects, the New Bankruptcy Law remains inadequate to address the myriad issues raised in bankruptcy and restructuring proceedings. 

Furthermore, the effectiveness of the New Bankruptcy Law remains uncertain, especially at the enforcement level. 

A discussion of the key strengths and weaknesses of the New Bankruptcy Law follows. 

Framework

Applicability and Accessibility

The New Bankruptcy Law comprehensively applies to all entities that hold legal person status, including private companies, foreign enterprises, limited liability companies, and companies limited by shares, as well as state owned enterprises (SOEs).  The 1986 Bankruptcy Law applied only to SOEs. However,  as a  transitional concession, some 2,100 SOEs will be permitted to conduct bankruptcy proceedings under the 1986 Bankruptcy Law if they file before June 1, 2007. 

With regard to financial institutions such as banks and insurance companies, the relevant authority of the State Council may apply for their restructuring or bankruptcy pursuant either to the New Bankruptcy Law or other relevant laws.  However, financial institutions are very important to the economy, as well as being commonly subject to unique concerns, such as special licensing, regulation, and supervision rules that do not apply to other enterprises.  That is why it would be preferable for the insolvencies of financial institutions to be dealt with through a separate law or through additional, clearly formulated regulations that would supplement the New Bankruptcy Law.   

The New Bankruptcy Law does not apply to insolvent partnerships and individuals.  The introduction of a bankruptcy law applicable to partnerships and individuals is being considered by the Chinese authorities.  At present, there is no personal bankruptcy system in China. 

Reorganization, Liquidation, and Settlement

The New Bankruptcy Law offers three different types of bankruptcy proceedings: liquidation (bankruptcy), restructuring, and settlement with creditors.  Laudably, it also allows for the conversion of restructuring and settlement proceedings into bankruptcy proceedings, which in turn can be terminated if the debtor or a third party has repaid all the debtor's debts. 

Commencement of Bankruptcy Proceedings

Under the New Bankruptcy Law, a creditor, the debtor, or, in the case of a financial institution, the relevant authority of the State Council may petition the People's Court to bankrupt or restructure a debtor. 

When a creditor has petitioned for the bankruptcy of a debtor, the debtor or an investor whose capital contribution accounts for more than 10 percent of the debtor's registered capital may petition the People's Court for restructuring, prior to a declaration of bankruptcy.  However, only the debtor may apply for a settlement agreement and must do so before the Court declares the debtor bankrupt.  Once it receives an application, the People's Court has 15 days to decide whether to accept the bankruptcy petition. 

The New Bankruptcy Law potentially gives the People's Court a great deal of leeway in deciding whether to accept a bankruptcy petition.  It remains to be seen how enthusiastic the People's Courts will be in accepting bankruptcy petitions, especially those involving SOEs or other protected enterprises. 

Perplexing Test for Insolvency

Once the People's Court decides to assume jurisdiction, it must decide whether the debtor in question is insolvent.  An enterprise must meet two criteria to be deemed insolvent: 

• the enterprise must be unable to pay its debts when due; and
• the enterprise's assets are not sufficient to repay all of its debts.

That is, the New Bankruptcy Law seems to require an enterprise to meet both a liquidity test¹ and a balance sheet test² when determining insolvency. 

The New Bankruptcy Law also refers to situations in which the enterprise is "clearly insolvent," although the law does not precisely spell out what that means.  This is a perplexing development since the bankruptcy laws in most other jurisdictions apply either one test or the other, and only rarely both.  The requirement to satisfy the balance sheet test in addition to the liquidity test may mean that an enterprise must wait until it is clearly balance-sheet insolvent before seeking access to the procedures under the New Bankruptcy Law-when it may well be too late to save the enterprise through restructuring. 

Moratorium and Suspension of Proceedings 

The New Bankruptcy Law allows the People's Court to impose a temporary stay on all ongoing civil proceedings and arbitrations relating to the debtor from the time the Court decides to accept the bankruptcy petition (not the date of application) until the administrator takes over the management of the debtor's property and assets.  This period is far too brief, since the People's Court is required to appoint an administrator upon accepting the bankruptcy petition. 

In other jurisdictions, the period of the stay typically lasts from the date the petition for bankruptcy is filed until the declaration of bankruptcy and thereafter, or the last date for compliance with a restructuring plan in the case of a court-based restructuring or the dismissal of the bankruptcy proceedings.  The brevity of the stay period under the New Bankruptcy Law could undermine the ability of the administrator to maximize asset values and interrupt the restructuring of viable businesses.

Although enforcement procedures are stayed, once the People's Court accepts the bankruptcy petition, civil actions and arbitration proceedings that have been instituted but not completed are stayed, but are then required to be resumed when the administrator takes custody of the debtor's property. 

This seems illogical.  Civil actions that have not yet been commenced may only be initiated in the People's Court which accepted the bankruptcy petition.  It is regrettable that a broader moratorium on creditor enforcement action was not incorporated in the New Bankruptcy Law in order to give restructuring efforts some realistic hope of success by providing the debtor enterprise with a limited breathing space from creditor actions to formulate a restructuring plan.

Management

Unfortunately, the New Bankruptcy Law does not give creditors a voice in choosing the administrator or setting the administrator's remuneration.  The People's Court appoints the administrator that takes custody of the debtor's property and administers the business and estate of the debtor.  Either the debtor can remain in possession for the implementation of a restructuring plan similar to Chapter 11 in the United States or the administrator can manage the restructuring under a system similar to that followed in the UK and Australia.  It is not known how the People's Court will decide which regime is the best, and there are presently no criteria to direct the People's Court on how to choose between the two approaches or how to determine the most  desirable. 

The administrator must carry out its duties and report to the People's Court and is subject to monitoring and supervision by the creditors.  The creditors may petition the People's Court to replace an administrator if they think the administrator is unable to carry out its duties in a lawful or impartial manner or if there are circumstances that would prevent the administrator from carrying out its duties competently.  An administrator can also resign, but only for good reason, and must obtain prior approval from the Court.  In all instances, final discretion involving administrators rests with the People's Court and not with the creditors.  We would like to have seen a more creditor-friendly system of appointing administrators, such as allowing creditors to nominate or approve administrators. 

Appointment of an Administrator

As already stated, the Court is required to appoint an administrator upon acceptance of the bankruptcy petition.  Just who can act as an administrator remains to be seen.  Article 24 of the New Bankruptcy Law permits the following to be the administrator:

• the "liquidation committee" composed of personnel from relevant departments and agencies;
• an intermediary organization established in accordance with the law, such as a law firm, accounting firm, or bankruptcy liquidation firm.

It is unlikely that foreign firms will be permitted to act as administrators, although the position on this issue remains to be clarified.  Recent comments suggest that a Supreme Court interpretation may be necessary prior to June 1, 2007 to clarify this gap in the New Bankruptcy Law, as well as many others.

Creditors and the Creditors' Committee

The New Bankruptcy Law provides for the establishment of creditors' meetings and creditors' committees.  The creditors' meetings allow unsecured creditors to participate in the following  activities:  

• verifying creditors' claims;
• petitioning the People's Court to replace the administrator and examine its expenses and remuneration;
• supervising the administrator;
• electing and replacing members of the creditors' committee;
• deciding on the continuation or cessation of business of the debtor;
• adopting restructuring plans and settlement agreements;
• adopting plans for the management of the property of the debtor;
• adopting plans for the sale of the debtor's assets; and
• passing and adopting plans for the distribution of property in bankruptcy. 

Secured creditors may vote on all of the above matters except for voting on settlement agreements and plans for the distribution of the debtor's assets, unless they waive their right to priority. 

A resolution will be passed by a majority of the creditors present at the meeting holding 50 percent or more of the total unsecured claims.  Resolutions passed at these meetings are binding on all creditors (other than secured creditors), though any creditor may, within 15 days of the passing, ask the People's Court to nullify resolutions that violate legal provisions or harm that creditor's interests.  This leaves significant room for the process to become bogged down.

The creditors' meeting may also appoint a creditors' committee of no more than nine members and delegate some of its powers to the committee.  Notably, however, the  creditors' committee must include a representative of the workers' union of the debtor.  The members of the committee are required to be approved by the Court.  The New Bankruptcy Law is silent as to what constitutes a quorum for the creditors' committee, if any is needed at all, and thus whether, for example, the one representative from the workers' union of the debtor or another creditor may delay action by the remaining creditors.  Hopefully, subsequent legislation or interpretations will clarify this matter prior to June 1, 2007.   

Collection, Preservation, and Disposition of Property

The New Bankruptcy Law puts into effect measures to protect the assets and business of debtors particularly by the appointment of an administrator.  The debtor must comply with some welcome, but quite onerous, obligations to hand over assets, seals, and books to the administrator.  Additionally, a debtor is required to be present or cause its representative to be present at all creditors' meetings and to truthfully answer all questions from administrators, creditors, and the People's Court.  The debtor's representative may not move from his or her residence or hold any director or senior management positions in any other enterprise once bankruptcy proceedings have begun.

Treatment of Contractual Obligations

The administrator has discretion to perform or terminate contracts entered into by a debtor prior to the acceptance of the bankruptcy petition.  The administrator must provide notice to the other contracting parties of its  decision.  Failure to do so within two months of the acceptance of the bankruptcy petition by the People's Court results in the deemed termination of the contract. 

This requirement means that the administrator will need to make some very quick decisions, often based upon very limited information.  This could potentially result in the deemed termination of valuable contracts of which the administrator is unaware.

Treatment of Fraudulent or Preferential Transactions

Administrators upon petitioning the People's Court have the power to undo certain transactions involving property of the debtor taken within one year before the Court accepts the bankruptcy petition.  These include gifts, transfers at an undervalue, security given for unsecured debts, early repayment of debts that have not fallen due, and abandonment of rights to repayment. 

Similar provisions exist to void transactions that occurred within six months of the acceptance of the bankruptcy petition when the debtor was insolvent and continued to pay creditors.  In these circumstances, the administrator may petition the court to revoke these transactions. 

Certain acts involving the debtor's property are simply invalid.  Those acts are the concealing or transferring of property to avoid debts and the fabrication of debts or acknowledgment of debts that are not genuine.  The New Bankruptcy Law empowers administrators to recover property obtained as a result of such transactions.

Other related provisions include the ability to require shareholders to fully pay their shares, the barring of debtors from making distributions to their shareholders during restructuring unless approved by the People's Court, and the recovery of irregular income and corporate property improperly acquired by directors, supervisors, and senior managers of the debtor.

Director and Officer Liability

The New Bankruptcy Law does not expressly address director and officer liability for insolvent trading (i.e., engaging in business when an enterprise is already insolvent).  It imposes civil liability on directors, supervisors, and senior managers who commit a breach of their obligation of loyalty or due diligence, causing the enterprise to go bankrupt.  This punishment includes being prohibited from acting as a director, supervisor, or senior manager of any enterprise for three years from the day of the conclusion of bankruptcy procedure. 

We would like to have seen an express provision that specifically addressed insolvent trading whether done knowingly or with a reckless disregard.  Nonetheless, the new provision should, if vigorously enforced, improve the standard of corporate governance in China. 

Stakeholder Rights, Priorities, and Recourses

A much debated provision of the New Bankruptcy Law relates to the priority of employee claims.  Under the 1986 Bankruptcy Law, employee claims are paid first before those of all creditors.  The New Bankruptcy Law, however, preserves the priority of secured creditors in relation to their secured assets, generally.   

By way of a compromise, the New Bankruptcy Law provides that employee claims that were incurred prior to August 27, 2006 are to be paid from the secured assets in priority to secured creditor claims to the extent they cannot be satisfied out of the debtor's unsecured assets.  Clearly, a potential or actual secured creditor should perform due diligence to determine to what extent employee claims have been incurred prior to August 27, 2006, before taking security. 

Additionally, a special type of bankruptcy called "policy bankruptcy" is no longer available.  Policy bankruptcy was introduced in 1994 specifically for SOEs and was meant to give the highest priority to the welfare of workers during bankruptcy proceedings.  Workers had to be paid first with the proceeds from the sale of assets, with secured creditors coming second.  If there were insufficient assets to pay off workers, the government would then assist with paying off the workers.  Policy bankruptcy will still, however, be available for about 2,100 SOEs if they close down prior to June 1, 2007.  After that date, policy bankruptcy will no longer exist, even for SOEs. 

The New Bankruptcy Law provides additional recourse for creditors in bankruptcy proceedings within two years of the conclusion of the bankruptcy procedure.  During that period, if it is discovered that additional property exists-for instance, property that has been transferred to the directors, concealed, or sold at an undervalue-the creditors may petition the People's Court to effect an additional distribution.

It is expressly provided that, after the conclusion of a bankruptcy procedure, creditors may still pursue guarantors of the debtor and other joint debtors for amounts owed under the guarantees, as one would expect.  However, amounts paid under the guarantee will not be recoverable by guarantors against the debtor after the bankruptcy has concluded.

International Considerations

Bankruptcy proceedings initiated under the New Bankruptcy Law are stated to be binding on the debtor's property and assets worldwide.  Of course, foreign courts must be willing to enforce such judgments and are likely to do so only if their countries have entered into treaties with China or if there exist principles of reciprocity in bankruptcy proceedings between China and the other country and other cross-border insolvency approaches. 

The People's Court may also adjudicate, recognize, and enforce legally valid, foreign bankruptcy court judgments and rulings involving a debtors' property and assets located within the People's Republic of China.  This is a welcome amendment to prior drafts of the New Bankruptcy Law and the 1986 Bankruptcy Law.  However, its effect may be limited, since it requires that a treaty or principle of reciprocity in bankruptcy proceedings (or judgments in them) exists and that the petition does not contravene basic principles of Chinese law, prejudice the sovereignty, security, and public and social interest of the country, or hurt the legitimate rights and interests of creditors in China. 

Unfortunately, the New Bankruptcy Legislation does not clearly specify how the People's Court is to treat insolvency proceedings in Hong Kong and Taiwan.  Hong Kong and the PRC have arrived at a new arrangement to recognize and enforce each other's judgments in certain circumstances, but that arrangement specifically excludes bankruptcy proceedings.

Restructuring

Commencement and Period of Restructuring 

A creditor or a debtor may directly petition the People's Court to restructure the debtor.  The basis upon which an application is made is that the debtor is insolvent and its assets are insufficient to discharge all its debts or it clearly lacks or there is a marked likelihood that it lacks, the capacity to discharge them.  When a creditor has already petitioned for the bankruptcy of a debtor, the debtor or a shareholder holding one-tenth or more of the registered capital may also file an application to restructure the debtor.  This process may well lend itself to long delays and strategic applications by the debtor or shareholders in an attempt to prevent a creditor from bankrupting the debtor.  The restructuring period lasts from the day which the People's Court approves the restructuring until the termination of the proceedings and would appear to be unrestricted, subject to the stipulations in the restructuring plan. 

Formulation, Approval, and Implementation of a Restructuring Plan

The New Bankruptcy Law places the responsibility for preparing the restructuring plan on either the debtor or administrator, depending upon which the Court has decided should manage the business and property of the debtor when restructuring is applied for.  As previously stated, the New Bankruptcy Law does not provide guidance or criteria for the People's Courts to use in deciding whether the debtor should remain in possession or whether an independent administrator should be in control of the restructuring.  Recent comments suggest that relevant criteria might consider whether the debtor has acted honestly in the pre-restructuring period.  However, it is acknowledged that there is no true guidance whatsoever in the New Bankruptcy Law.  We hope that, prior to June 1, 2007, some clarification will be provided.  While the flexibility between a debtor-in-possession style regime and an independent administrator regime is welcomed, but the lack of criteria to guide a People's Court in deciding which regime to select on a particular petition will leave debtors and creditors reluctant to petition to commence restructuring proceedings, because the most fundamental factor-who will prepare the plan-is uncertain.   

Once the People's Court orders the restructuring of the debtor, a restructuring plan must be submitted to both the Court and the creditors' meeting within six months.  A three-month extension is available on legitimate grounds.  The People's Court is then obliged to convene a creditors' meeting to vote on the plan within 30 days of receiving it.

The New Bankruptcy Law requires specific matters to be included in the proposed restructuring plan.  These include:

• debtor's business plan;
• classification of debts;
• debt adjustment scheme;
• debt repayment scheme;
• time limit for execution of the plan; 
• time limit for monitoring and supervising the execution of the reorganization plan (supervision period); and
• other schemes beneficial to the debtor's restructuring. 

It is a welcome addition that the plan is not limited to two years, as it was under the 1986 Bankruptcy Law.  In large restructurings of SOEs, the restructuring period would frequently exceed two years.

The New Bankruptcy Law categorizes creditors into different classes. While the People's Court has the ultimate authority to approve a restructuring plan, subject to some quite detailed guidelines, the main aim is to obtain the approval of the restructuring plan by all classes of creditors.  Shareholders can only vote in respect of the restructuring plan if their rights will be adjusted in the restructuring plan.

The New Bankruptcy Law recognizes distinct classes of creditors and requires that creditors cast their votes by on the draft restructuring plan.  A resolution is passed when a simple majority of the creditors attending the meeting of a particular agree to the proposed plan and when the amount of the debt they hold exceeds two-thirds of the total of the debts in the same class.  The classes are:

• secured creditors;
• such work entitlements as wages, medical and disability subsidies, and old-age insurance;
  taxes; and
• unsecured creditors.

There is an option for the People's Court to establish a sub-class of small claims within the of unsecured creditors.

The restructuring plan may be approved by the Court even if some classes refuse to vote or vote against it, provided that secured creditors, workers, and the tax authority are fully paid, unsecured creditors are no worse off than if the debtor went to liquidation, and the plan is practicable.  The administrator is given the power to lobby members of a that has voted against the plan to try and get them to change their minds.  Once a plan is approved, it becomes binding on the debtor and all creditors.

The debtor is responsible for the implementation of the plan, once it has been approved by the Court.  At this point, if the administrator is in control of the debtor's affairs, it must hand over all property to the debtor.  The administrator's role is to then supervise the implementation of the plan.  The debtor is required to report to the administrator on implementation throughout this supervision period.  Finally, when the supervision period has expired, the administrator submits a supervision report to the People's Court and its duties terminate on that date.

Termination of the Restructuring Plan

During the restructuring period, the People's Court may declare the debtor bankrupt upon an application made by the administrator or a materially interested party if:

1. the debtor's business position and the status of its property continue to deteriorate and there is little prospect of a turnaround;

2. the debtor engages in fraud, reduces its property in bad faith, or commits other acts that are clearly adverse to the creditors; or

3. the administrator is unable to perform his/her duties due to acts by the debtor.

The People's Court may also declare a debtor bankrupt when no restructuring plan is submitted to the Court and the creditors' committee within the six-month period referred to above or during the additional three-month extension period.  Equally, the debtor will be declared bankrupt when the restructuring plan is not approved by the Court, following the holding of creditors' meetings.  Obviously, if the debtor is unable to implement the restructuring plan or fails to implement it, the administrator or a materially interested party may apply to the People's Court, which is required to terminate the implementation of a restructuring plan and declare the debtor bankrupt.

The New Bankruptcy Law does not include any express provisions allowing for the amendment of an approved plan.  It would be preferable if the People's Court could make some allowances when implementing the New Bankruptcy Law to allow for reasonable amendments to an approved plan. 

Moratorium for Secured Creditors

Under the New Bankruptcy Law, secured creditors are expressly precluded from exercising their security rights during a restructuring.  They may, however, exercise their rights if they can show that their security may be damaged or its value greatly diminished. 

Subject to this exception, the New Bankruptcy Law appears to represent a severe erosion into secured creditors' rights.   Secured creditors appear to have no greater voting rights than unsecured creditors and can be locked out of their security even if they vote against the plan but the Court still approves it.  It is significant that in the New Bankruptcy Law secured creditors are not permitted to stand outside the restructuring process as they are in a liquidation (unless they agree otherwise).  This is an important departure from the usual position of secured creditors.  Notably, other jurisdictions (except, of course, the US) are reluctant to bind secured creditors to restructuring plans without their consent. 

Stabilizing and Sustaining Business Operations

The New Bankruptcy Law does not explicitly recognize priority funding for the ongoing and urgent business needs of a debtor during the rescue process.  However, it does permit an administrator to borrow on the security of the debtor's assets.

Discharge of a Plan

When the People's Court terminates a restructuring, promises made by creditors to forgive debt as part of the plan are no longer binding on the creditor. Any repayments made to the creditors as a result of the restructuring plan remain valid and the unpaid amount is treated as debt in bankruptcy.  Creditors may continue to receive distributions only when other creditors of the same rank as theirs have been repaid the same proportion/percentage of their debt.  Also, any security given for the restructuring plan shall remain valid. 

Settlement Agreements

While the New Bankruptcy Law makes no explicit mention of informal workouts or other alternative procedures such as debt write-offs, rescheduling, and debt-equity conversions, settlement provisions do exist that make these possible.  Once the debtor and creditors have arrived at a settlement agreement, only the debtor may apply to the People's Court to accept jurisdiction over the matter.  The debtor may also apply for settlement after the Court has accepted jurisdiction over the matter but before a declaration of bankruptcy.  Once the requisite approvals have been obtained from the People's Court, the creditors' meeting must vote on the settlement.  A resolution adopting the settlement must be agreed to by a majority of the creditors attending a creditors' meeting, and the amount of the debt they represent must exceed two-thirds of the total debts unsecured by property.  Once the creditors' meeting and Court have approved a settlement agreement, it becomes  binding on all parties. 

Settlement agreements, however, are not without some risks.  Secured creditors must abandon their priority repayment right in order to vote on settlement agreements.  Once the Court allows the settlement, however, the rights of secured creditors with regard to their security is restored.  If a debtor is unable to implement the settlement agreement, the People's Court may, upon the request of the creditors, order the termination of the settlement agreement and declare the debtor bankrupt.  That is, once an informal workout arrangement becomes formalized into a settlement agreement, a debtor would expose itself to possible liquidation. 

Discharge of a Settlement

When the People's Court terminates a settlement, promises made by creditors to adjust debt as part of the settlement become invalid. Any repayments made to the creditors as a result of the settlement remain valid and the unpaid part is treated as debt in bankruptcy.  The creditors may continue to receive distribution only when other creditors of the same ranking as theirs have been repaid up to the same ratio.  Also, any security given for the settlement shall remain valid. 

Unlike restructuring plans, the New Bankruptcy Law does allow for settlement agreements to be set aside if the agreements were arrived at as a result of the debtor's fraud or other unlawful acts.  The penalty is to declare the settlement discharged and the debtor bankrupt. 

Institutional and Regulatory Framework

Role of Courts

Under the New Bankruptcy Law, the People's Court retains original jurisdiction on all bankruptcy matters.  There is no specialized bankruptcy court or specialized division within the People's Court qualified to adjudicate specifically on insolvency matters. 

Performance Standards of Courts 

The New Bankruptcy Law does not establish performance standards to measure the competence, performance, and services of the People's Court with regard to bankruptcy proceedings.  Such standards would be helpful in evaluating and improving the People's Court. 

Qualifications and Training of Judges

The judges of the People's Court do not have special qualifications or training to handle bankruptcy proceedings.  Bankruptcy proceedings, especially those dealing with financial institutions, present a plethora of complicated issues that are often thought to require specific judicial training for the cases to be handled effectively. 

Court Procedures

The New Bankruptcy Law prescribes trial procedures for bankruptcy cases.  Unless otherwise specified, China's civil procedure law applies to bankruptcy cases.          

Transparency and Accountability

The New Bankruptcy Law does not include provisions to allow for the ready access to Court records or hearings.  There are provisions, however, that require the disclosure of information on the debtor. 

Judicial Decision-making and Enforcement

The New Bankruptcy Law gives the People's Court authority to adjudicate on issues, as well as setting forth predictable trial procedures and establishing clear authority for enforcing awards by the different branches of the People's Court. 

Integrity of the Court

The New Bankruptcy Law is silent on rules and regulations intended to avoid corruption and undue influence on members of the People's Court.  Administrators are expected to be diligent, fully responsible, truthful, and honest in the performance of their duties; they may be fined by the People's Court and may have to compensate creditors, debtors, or any third parties for causing loss and damage. 

Integrity of the Participants 

Penalties exist for those failing to comply with the New Bankruptcy Law.  The People's Courts now have the power to penalize senior executives for mismanagement of insolvent enterprises.  Members of senior management also can be held civilly liable for the failure to carry out their duties, and they may be forbidden from holding director or senior management positions in any future enterprise for a period of time.  Furthermore, related personnel of debtor enterprises may be held personally liable for failing to attend creditors' meetings, for refusing to submit or submitting untrue statements, or for concealing assets or engaging in other activities that prejudice the creditor's right to receive payment from its debtors if the debts occurred within a year of bankruptcy.  Similar penalties exist for administrators that are not diligent, responsible, truthful, and honest.  Notably, however, there are no provisions to ensure the integrity of creditors. 

While the New Bankruptcy Law does help prevent dishonest practices by executives and managers, debtors, shareholders, and creditors, we would like to see explicit summary procedures developed for determining the validity of creditor claims, addressing bogus claims made by unscrupulous creditors and delay tactics by debtors. 

Administrators

We note, however, that the administrator plays various roles during the course of bankruptcy proceedings including a provisional role prior to the creditors' meeting, a different role after the meeting, a different role after approval of a restructuring plan, a different role in a settlement plan, and a different role in liquidation.  In each of these phases, the role of the administrator changes, and it is necessary to clarify how these powers and duties change during each stage as well as the appropriate qualifications for each phase, to ensure appropriately qualified administrators are performing these roles.

Role of Regulatory or Supervisory Bodies

While the New Bankruptcy Law  outlines some basic qualifications for a administrator, there are no other laws or government bodies governing the licensing, appointment, supervision, and regulation of administrators to which the People's Court may refer when appointing administrators.  It is recommended that measures be passed addressing these deficiencies. 

________________

DLA Piper's Asia Restructuring team is one of the leading financial sector, nonperforming loan, and corporate restructuring groups in Asia.

About the authors:

Prue Mitchell, DLA Piper, Hong Kong, prue.mitchell@dlapiper.com
Prue Mitchell, a DLA Piper Restructuring partner, authored the chapter in Asian Development Bank's Guide to Restructuring for China.

Louis Meng, DLA Piper, Shanghai, louis.meng@dlapiper.com
Louis Meng, a consultant with DLA Piper, is based in the Shanghai office of the firm and is focused on bankruptcy-related work in the PRC.

Lampros Vassiliou, DLA Piper, Asia Regional, lampros.vassiliou@dlapiper.com
Lampros Vassiliou, a DLA Piper Restructuring partner, was appointed by the Financial and Economic Committee of the NPC together with Professor Li Shuguang, widely regarded as China's foremost expert on bankruptcy, to assist in drafting the New Bankruptcy Law.  Their consultations and report were key factors in the considerations of the draft law before its third reading in the NPC. 

This summary offers a broad overview of the New Bankruptcy Law.  It does not constitute legal advice and should not be relied on as such. 

¹  When a debtor is unable to pay its debts as they fall due.  Also known as "cash-flow insolvency." 
²  When a debtor's liabilities as stated on a balance sheet exceed its assets.