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China's New Bankruptcy Law: Slow Train Coming

By Dan Harris and Steve Dickinson

By Brad Luo and Steve Dickinson On June 1, 2007, China enacted a new bankruptcy law. One year on, our report from the field indicates it is only very slowly having an influence on debtor-creditor relations. Like so many of China's newly enacted business laws, it has been slow to take hold because so much of it remains unclear due to the lack of comprehensive implementing regulations. In comparison with its predecessor, the current Enterprise Bankruptcy Law is a major step towards establishing a comprehensive and modern bankruptcy system that is up to international standards. For example, it: -- pays secured creditors ahead of employee claims; -- allows all business entities, other than partnerships and sole proprietorships, to file for bankruptcy protection; -- allows both voluntary and involuntary filings; -- allows all debtors to undertake a Chapter 11-like reorganization process; -- establishes a brand new bankruptcy functionary, the bankruptcy administrator, who is to be appointed by the bankruptcy judge, and to be monitored by the creditors? committee; -- empowers creditors to be more actively involved in the bankruptcy process; and -- protects creditors by allowing them to vote in the reorganization plan, even though they cannot submit a plan themselves. China is not one of the fifteen countries that has adopted legislation based on the UNCITRAL Model Law on Cross-Border Insolvency. Based on information provided by the Bankruptcy and Restructuring Research Center of China University of Politics and Law [Chinese] (which appears to be a think tank), only three Chinese companies have elected to go through reorganization under the new Enterprise Bankruptcy Law. Curiously, the Chinese State Council has not issued comprehensive implementing regulations, more than a year after promulgation of the new law, leaving serious issues unresolved. For instance, even though the bankruptcy code provides for lifting the automatic stay under Article 75, it does not explain the circumstances under which the bankruptcy judge should lift the stay. The Supreme People?s Court has issued a couple of interpretative opinions regarding the new bankruptcy code. On April 4, 2007, it issued the Rules on Appointing Bankruptcy Administrators [Chinese] and Rules on Compensating Bankruptcy Administrators [Chinese], both of which became effective on the same date as the bankruptcy code. On April 16, 2008, the China Securities Commission promulgated the Measures on the Reorganization of Listed Companies [Chinese], primarily dealing with the standards for reorganization and the responsibilities of parties involved in a reorganization. The lack of regulations and the relatively low number of bankruptcy cases filed illustrates the current problem with legislation in China. Over the last several years, China has rushed to implement a whole slew of major laws required for a modern market economy. Many of these laws were adopted in the midst of a great deal of controversy and to get these laws passed, decisions on controversial issues were often deferred to subsequent promulgations of regulations. The delay in issuing regulation is not simply a result of a lack of time or technical difficulty. It is a symptom of the fact that many of the controversial issues have not been resolved at the top levels of government. Until this happens, we should not expect to see much clarity on this or any number of other recent laws. For more on China's new bankruptcy law, check out the following previous posts: -- "China's New Bankruptcy Laws: Good For Business" -- "China's New Bankruptcy Laws: Not Quite So Good For Business" -- "China's New Bankruptcy Law" -- "China's New Bankruptcy Law -- First Report From The Ground"

Full post as published by China Law Blog on June 05, 2008 (boomark / email).