The new rules will unfortunately only apply to State Owned Enterprises (SOEs) in a Pilot City Group (PCG) to work with their bankers and advisors to decide whether they should be declared bankrupt. The PCG must report the amount of bad debts that must be covered by the central fund (30 billion yuan in 1997) before bankruptcy can proceed.
value of bankrupt SOE's assets will be assessed by an accredited asset appraisal body. The assets will then be sold, primarily through auction, to settle the employees' claims.Again the priority of the legislation is to protect and re-employ the employees.
Employers of bankrupted SOEs will be properly settled via a re-employment service. The cost for settling the workers of bankrupted SOEs, being a sum equivalent to three times the average annual salary of each worker, will be paid from the proceeds of the bankrupted SOEs' land use rights. Local government will also provide funds if the assets of the bankrupted SOEs are insufficient.
PCGs will investigate the cause of bankruptcy. Management and government officials held responsible for the bankruptcy of the SOEs will be subject to disciplinary action. The evasion of payment of debts through false declarations of debt is prevented by detailed rules regulating bankruptcy and specified circumstances for bankruptcy.
Any losses in the principal and interest of bankrupt SOEs bank loans shall be written off according to relevant provisions, only if the SOEs have ceased operations and their land-use rights and property auctioned off, and proper arrangements made for their workers.
If the insolvent SOEs are taken over by another SOE ("mergeror"), the mergeror must take responsibility for all the insolvent SOEs' ("mergeree") debts and workers. There are some concessions available for the mergeror. For example, if the mergeree records losses for the past three years, mergeror can repay bank's loans in installments over five years without interest. By giving concessions to the mergeror, the government is encouraging the merger of successful SOEs with insolvent SOEs which are on the verge of bankruptcy, to protect state-owned assets and prevent unemployment and possible social unrest.