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What effect will the New 2006 Enterprise Bankruptcy Law bring?

On August 27, 2006, with the adoption of a new Enterprise Bankruptcy Law in China, the attempt by the government to carefully shift bankruptcy towards a more market-oriented policy seems promising. The new law, which will take effect on June 1, 2007, has an expanded scope and includes legal corporate persons, encompassing not only State-owned enterprises, but also private and public companies, whether foreign or Chinese, and to a certain extent is applicable to financial institutions as well. The new law also seeks to protect creditors’ rights as well as workers’ rights. The legislation not only allows creditors to take actions against debtors and companies that are unwilling to file for bankruptcy, it also limits State intervention in bankruptcies of State-owned companies. Another improvement is the ability of companies or enterprises in financial difficulty to reorganize, restructure and rectify their financial problems prior to filing for bankruptcy (Art. 73). Previously, bankruptcy administrators were comprised of State-appointed personnel, leading to government interference in the bankruptcy process. The new law gives creditors the ability to participate in the selection of bankruptcy administrators. For instance, the role of bankruptcy administrator may be assumed by a liquidation group comprised of the relevant departments and organs or by intermediary agencies, and creditors may nominate a law firm, accounting firm, manager or receiver in accordance with law (Art. 24). The 2006 Enterprise Bankruptcy Law will certainly boost investor confidence, particularly for foreign investors.

The general perception of the new law is positive and welcoming. The relevant authorities are more than open to feedback to further enhance and improve the 2006 Enterprise Bankruptcy Law. The true test will come upon pronouncement of a series of implementation guidelines and bylaws under the new law. It is everyone’s hope that these pronouncements do not render the new law a “toothless tiger”. Only time will tell. Experts and experienced professionals in handling liquidation processes must be engaged. The fee arrangement by creditors in appointing a bankruptcy administrator, private manager or receiver must be made independently and transparently, without interference by the courts except for verification of the qualification of such appointment. To discourage noncompliance by debtors with the instructions of a bankruptcy administrator, effective judicial recourse must be available in an expedited manner. Lastly, this author respectively submits that the creation of a specialized court, or division within the People’s Courts, to deal specifically with Enterprise Bankruptcy cases would vastly enhance the competency and transparency of the bankruptcy process.

(01/01/07)

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