Law of the People’s Republic of China on Bankruptcy (17/04/2007)
1. When was it promulgated?
The Law of the People's Republic of China on Bankruptcy (the “Bankruptcy Law”), which was adopted at the 23rd meeting of the Standing Committee of the 10th National People's Congress of the People's Republic of China on August 27, 2006 and announced by the Order of the Chairman (No. 54), will come into force on June 1, 2007.
2. Who does the law apply to?
The Bankruptcy Law will apply to bankruptcies of state-owned enterprises, collectively owned enterprises, foreign invested enterprises, companies (namely limited liability companies and companies limited by shares established in accordance with the Company Law), and private enterprise companies.
3. What does that administrator system refer to?
It involves an administration system of bankruptcy in which persons with professional qualifications will be appointed to be responsible for the management of debtors’ property and bankruptcy matters. In addition to the focus on the new administrator system, the new regime introduced by the Bankruptcy Law emphasizes the autonomy of creditors, sets out the powers of creditors’ meetings, and revises provisions on creditors’ committees, the declaration of creditor’s rights, and the creditors’ meeting.
The aim is to ensure that creditors may participate in the whole process of the
bankruptcy of enterprises, and the new laws therefore attach great importance to the protection of the creditors’ interests in the liquidation and rectification procedures.
4. What else does the bankruptcy law entail?
The Bankruptcy Law introduces the restructuring procedures, which are commonly used in the western countries. The Bankruptcy Law has an emphasis on fighting frauds committed prior to bankruptcy. The Chapter on Debtors’ Property specifies certain circumstances under which transactions prior to the bankruptcy may be revoked and also specifies certain acts, which will be deemed to be ineffective. The Chapter also contains stricter provisions on the prevention of fraudulently declared bankruptcies. In addition, the new law clarifies the priorities of creditor’s rights, including those of secured creditors and employees. The law also covers the bankruptcy of financial institutions, indicating a more open attitude from China towards capital markets and financial markets for the first time. The law stipulates that there will be a preliminary procedure of governmental approval prior to any declaration of bankruptcy of a financial institution, which grants the right to evaluate the risks arising from the bankruptcy of financial institutions to the government. When the government considers the effect of the bankruptcy of a financial institution is likely to be significant, it is empowered to use measures such as take-over, receivership and restructuring.
5. What about liabilities?
Strict liabilities for bankruptcy stipulated by the Bankruptcy Law include a duty of loyalty, a duty of care, and other obligations in bankruptcy procedures that will be performed by the debtors, the directors, supervisors, senior management personnel and administrators of the bankrupt, and also the corresponding civil liabilities and criminal liabilities of such persons. The new Bankruptcy Law incorporates provisions on cross-border bankruptcy for the first time, which should provide a solid foundation for further integration with international cross-border bankruptcy regimes in the future.