Throughout the global economic meltdown, the number of bankruptcy cases in China has risen considerably. To shed light on bankruptcy proceedings and stabilize the domestic economy, the Supreme People’s Court of the PRC issued Opinions on Several Issues Regarding the Proper Adjudication of Enterprise Bankruptcy Cases to Provide a Judicial Safeguard for Maintaining Order in the Market Economy on June 12, 2009. The Opinions direct courts at all levels to properly apply the Enterprise Bankruptcy Law (EBL) to assist insolvent enterprises, maintain market order, and stabilize the economy.
While affirming creditors’ rights to fair and orderly payment, the Opinions advise lower courts to utilize bankruptcy procedures to optimize social resources and rehabilitate insolvent enterprises. The Opinions also provide that, to further implementation of the state’s industry adjustment policies, courts will accept legitimate bankruptcy petitions so failing enterprises can exit the market in an orderly fashion. For enterprises with a botched credit history, as long as their bankruptcy petitions meet certain standards, the courts will allow them to enter the liquidation process even if they intend to use bankruptcy to unlawfully obstruct their creditors’ interests. According to the Opinions, however, the courts will thwart such enterprises’ illegal objectives by prohibiting or annulling any improper dispositions of their properties and imposing liabilities on the responsible parties.
The Opinions emphasize that courts should use bankruptcy reorganizations and settlements as tools to rescue enterprises that are near bankruptcy but still have a prospect of surviving and fit into the state’s industry adjustment policies. For enterprises that have started showing signs of insolvency but have some hope for revival, the Opinions state that courts should attempt to rescue them through reorganization or settlement mechanisms in order to avoid the negative impact of liquidations.
The Opinions specifically underline the importance of coordination among courts, communist party committees, and local governments. When bankruptcy cases involve serious back-pay, employment or other sensitive issues, the courts should inform the relevant local communist party committee and coordinate with the local government to prevent social upheaval. In addition, the Opinions grant the courts the authority to make payments for employee compensation with an advance fund established by the local government or a third party. When disbursing the fund, the courts should adhere to the same principle of priority with regard to employee-creditors as in bankruptcy proceedings.
At the same time, the Opinions stress that the fundamental protections for creditors under the EBL must be respected. When a court reviews an involuntary bankruptcy petition filed by creditors against a debtor, for example, the court will focus on whether the debtor is unable to pay a debt, and may not reject the creditors’ petition even if the creditors are unable to provide information on the debtor’s financial condition. In addition, if a judge approves a reorganization plan that fails to meet the approval of all of the creditor voting groups, then the judge must ensure that those who object to the plan receive fair and equitable payments as they would in a bankruptcy proceeding. The Opinions ask, though, that if courts must approve such a plan over the objections of the creditors, they do so discreetly.
The Opinions also address the need to protect the interests of a debtor’s employees. For example, employee representatives have the right to participate in creditors’ meetings. In the process of reviewing a reorganization plan, creditors with employee compensation claims will be classified as a single voting group (i.e., the employee-creditor group). If the employeecreditor group rejects a plan and the court overrules their objections, the court must ensure that the employee-creditors are the first to be paid in full under the plan it approves. If a debtor decides to maintain its original business, the Opinions ask courts to direct the debtor or bankruptcy administrator to formulate a reorganization plan under which the employees’ original positions are preserved.
A bankruptcy administrator is essential to the execution of a reorganization plan. The Opinions require courts to appoint competent administrators, who may be selected through a competitive process in complex cases, to govern the bankruptcy estate, as well as supervise the debtor in cases involving substantial asset reorganization or other major business operations. In addition, the Opinions ask administrators to do their best to prevent fraudulent transfers of the debtor’s assets in order to protect the creditors’ interests to the fullest extent possible.
Moreover, when creditors disappear or their assets are hidden, the courts may address relevant issues as they arise with the debtor’s representatives, officers and equity holders, and admonish, fine or detain such persons as necessary. If the debtor fails to produce complete documentation to the courts and thereby hinder the liquidation process, the courts will, after the liquidation is completed, inform the creditors of their right to sue the debtor’s equity holders, directors and controlling persons.
The courts should, according to the Opinions, play an active role in bankruptcy proceedings. Courts should use their authority and discretion to direct the negotiations among all of the interested parties and mediate a workable solution. The courts are also responsible for giving the interested parties timely instructions with respect to the liquidation process.
Given the complexity of bankruptcy cases, the Opinions encourage lower courts to establish specialized bankruptcy tribunals and provide supplementary training if they have the resources to do so.