GENERAL

Legislation

What main legislation is applicable to insolvencies and reorganisations?

The Enterprise Bankruptcy Law of the People’s Republic of China [2006] (the EBL) governs insolvency and reorganisations in China. Alongside this, the Supreme People’s Court issued two significant judicial interpretations that include provisions about several issues concerning the law of the People’s Republic of China (PRC) on enterprise bankruptcy promulgated on 9 September 2011 and the provisions on several issues relating to the application of the enterprise bankruptcy law of the PRC promulgated on 5 September 2013, both of which may apply to insolvencies and reorganisations. The High Courts of the provinces and municipalities in the PRC also establish specific rules for the implementation of the EBL within their local areas.

Excluded entities and excluded assets

What entities are excluded from customary insolvency or reorganisation proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

EBL 2006, article 135

The natural person and organisations are not eligible to be included in China’s bankruptcy system. Article 135 provides that the liquidation of any organisation that is not an enterprise legal person under other laws, is bankruptcy liquidation, which shall refer to bankruptcy procedures under the EBL.

EBL 2006, article 30

The assets belonging to a debtor are governed by article 30 EBL, which includes assets of a debtor at the time when the court accepts the bankruptcy application and assets acquired by a debtor from the time after acceptance of the bankruptcy application to the termination of the bankruptcy process.

The debtor’s assets include both the currency and physical items belonging to a debtor and the properties and proprietary rights, such as claims, equity interests and intellectual property, which may be valued by money and transferred pursuant to the laws.

Although a range of properties and proprietary rights are recognised as property of a debtor, certain properties shall be excluded from the scope and may therefore be exempt from the insolvency proceedings, including:

  • properties in the possession of the debtor based on contract of storage, lease, consignment, deposit or other legal relationship;
  • properties in a retention of title transaction of which the debtor has not acquired ownership;
  • properties that are not permitted to be transferred and belong exclusively to the state; and
  • properties that are not owned by debtors based on laws and administrative regulations.
Public enterprises

What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

Law of the People’s Republic of China on State-owned Assets in Enterprises, article 31

In general, there are no differences in the insolvency procedures and creditors’ remedies between government-owned enterprises and civilian-run enterprises; however, the bankruptcy of government-owned enterprises funded by the State-owned Assets Supervision and Administration Commission is required to be approved by the department of operation and management.

EBL 2006, article 34

In addition, the bankruptcy applications of wholly state-owned enterprises shall be decided by organs performing duties of the investor. With respect to the bankruptcy application of significant state-owned enterprises, the organs mentioned above shall report to the government at the same level for approval before making any decision or issuing any instructions to designate shareholder representatives to attend the general meeting and certain meetings of shareholders of the state-controlled company. Whether the state-owned enterprise is significant shall be decided by the regulations of the State Council.

Protection for large financial institutions

Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

EBL 2006, article 134

Financial institutions are not entitled to file a bankruptcy application, while the financial supervision and administration authorities of the State Council may file an application for financial institutions’ reorganisation or liquidation to the court. Certain measures of takeover or trust may be adopted by the authority and the implementation is specified by the State Council.

Courts and appeals

What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

EBL 2006, article 3

Generally, bankruptcy cases will be under the administration of the court with jurisdiction where the relevant debtor is domiciled, which means the place where the main office of the relevant debtors is located. If the debtor has no office, it shall be under the jurisdiction of the court in the place where it is registered.

EBL 2006, article 12

Where a bankruptcy application is not accepted by the People’s Court, the applicant who is not satisfied with this ruling may appeal to the higher-level court within 10 days from the date of delivery of the rule.

The requirement for security depends on whether the appellant applies for property preservation. The security shall be post if the appellant applies for property preservation. The amount of security shall be determined by the amount of property preservation that the appellant applies for.

TYPES OF LIQUIDATION AND REORGANISATION PROCESSES

Voluntary liquidations

What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

EBL 2006, article 2

The EBL provides the following circumstances for a debtor to commence bankruptcy liquidation:

  • the debtor is unable to clear off its debt as it has become due and there are no sufficient assets to repay all of the debts; and
  • the debtor is unable to clear off debt as it becomes due and obviously lacks the ability to settle.
EBL 2006, article 8

Where the debtor applies to the court for liquidation, the debtor shall submit the required materials to the court, which covers a form of bankruptcy application, relevant evidence, a statement of asset status, a list of debt, a list of creditors’ rights, the financial and accounting report, a scheme of staff settlement as well as the payment statement of social security and staff salaries.

EBL 2006, articles 13, 18, 19, 20, 25 and 35

Once the court accepts the bankruptcy application, it shall result in the following effects:

  • pending civil litigation and arbitration relating to debtors shall be suspended (article 20);
  • preservation measures adopted for the debtor’s assets shall be terminated and enforcement procedures shall be suspended (article 19); and
  • the court shall appoint an administrator at the acceptance of bankruptcy application who principally displaces the company’s management (article 13).
Voluntary reorganisations

What are the requirements for a debtor commencing a voluntary reorganisation and what are the effects?

EBL 2006, article 2

A debtor may file an application of reorganisation in the following circumstances:

  • the debtor cannot pay off the debt as it becomes due and the debtor’s assets are insufficient to clear all of debts;
  • the debtor cannot pay off the debt as it becomes due and it clearly lacks the ability for settlement; or
  • there is a possibility that the debtor is obviously insolvent.
EBL 2006, article 70

Generally, the debtor or the creditor may directly file an application for reorganisation to the court. However, if a creditor applies for a bankruptcy liquidation against the debtor, the debtor or its shareholders who hold 10 per cent or more of the registered capital of the debtor may petition for reorganisation after the acceptance of bankruptcy application, but before the declaration of debtors’ bankruptcy.

EBL 2006, article 73

The debtor may dispose of its debts and operate business under the administrator’s supervision according to the debtor’s application and the approval of the application by the court in the reorganisation procedure.

EBL 2006, articles 74 and 80

Where a debtor manages the business and assets mentioned above, the debtor shall formulate a draft reorganisation plan. Once the draft is approved, it will place a restriction applicable to all creditors and debtors (article 80). While the administrator is responsible for disposing of the debtor’s business and assets, the administrator should make a draft plan for reorganisation (article 80), and may hire management personnel of the debtor to take charge of the business and assets (article 74).

EBL 2006, article 75

During the reorganisation procedure, no security holder is permitted to exercise the security interest on the debtor’s assets unless the security interests are likely to be clearly reduced in value or even be damaged.

EBL 2006, article 77

Moreover, in the reorganisation procedure, the shareholder is not entitled to distribute investment gains. The directors, supervisors or senior managers of the debtors are not permitted to transfer any equity interest of the debtor to any third party.

Successful reorganisations

How are creditors classified for purposes of a reorganisation plan and how is the plan approved? Can a reorganisation plan release non-debtor parties from liability, and, if so, in what circumstances?

EBL 2006, articles 82 and 86

The creditors are divided into different groups to discuss a reorganisation plan according to different categories of creditor rights, which includes secured creditors’ rights, employees, tax owed by debtors and unsecured creditors’ rights (article 82). These groups shall vote on the plan separately and the plan would be approved if all of the groups pass the plan (article 86).

The reorganisation plan is not permitted to arbitrarily release the liability of any third party, unless the third party provides compensation for the creditor or the creditor obtains corresponding consideration.

Involuntary liquidations

What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

EBL 2006, article 7

A creditor may file a bankruptcy application against a debtor that is unable to repay its debts as they become due (article 7).

EBL 2006, article 8

The creditor, for the purpose of commencing a liquidation procedure, is required to submit an application form, supporting evidence, a statement of creditor-debtor relationship, a statement of unpaid debts by the debtor and relevant application documents required in the liquidation proceedings.

The court carries out an investigation of the debtor after the submission of a bankruptcy application. If the application is accepted by the court, the involuntary liquidation has the same effect as voluntary liquidation. However, in voluntary liquidation the debtor may apply to the court to appoint a liquidation group as the administrator. The debtor may make a reorganisation plan (article 80) and an asset distribution plan on their own, which give the debtor easier access to manage its business.

Involuntary reorganisations

What are the requirements for creditors commencing an involuntary reorganisation and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

EBL 2006, article 6

A creditor may file an application of reorganisation if the debtor cannot clear off its debts as they become due. The involuntary reorganisation has the same effects as voluntary reorganisation.

Expedited reorganisations

Do procedures exist for expedited reorganisations (eg, ‘prepackaged’ reorganisations)?

Although there is no expedited reorganisation under provisions of the EBL, it exists in certain cities and provinces in practice, such as Zhejiang and Shenzhen.

Unsuccessful reorganisations

How is a proposed reorganisation defeated and what is the effect of a reorganisation plan not being approved? What if the debtor fails to perform a plan?

EBL 2006, article 84

The proposed reorganisation is defeated if:

  • less than half of the creditors who attend the meeting approve the reorganisation plan within the same voting group;
  • the creditors’ rights of creditors who approve the plan represent no more than two-thirds of the total creditors’ rights in the same group; and
  • the court does not approve the reorganisation plan.
EBL 2006, article 88

The administrator or the debtor may negotiate with the voting groups that do not approve the reorganisation plan, and these groups may vote again after the negotiation. If such groups refuse to vote or the plan is not approved again, the administrator or debtor may file an application to the court to approve the reorganisation plan - otherwise, the court shall rule on the termination of the reorganisation process and declare the debtor bankrupt.

EBL 2006, article 93

If the debtor fails to conform to the reorganisation plan, the court should make a ruling to terminate the plan and declare the debtor bankrupt, which results in the commitment of adjustment to creditors’ rights becoming invalid, though the settlement to creditors would remain valid. The creditors’ unpaid rights would be recognised as bankruptcy creditor rights.

Corporate procedures

Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Company Law of the PRC 2013, article 180

The circumstances of non-bankruptcy liquidation regulated under the Company Law of the PRC 2013 include:

  • the business term of a corporation provided in the articles of association has expired or other circumstances leading to the dissolution regulated in the articles of association has occurred;
  • the general meeting of shareholders or the board of shareholders passes the dissolution resolution;
  • the business licence is revoked or the corporation is closed down or dissolved; and
  • the dissolution of the corporation is because of merger or division.
Company Law 2013, article 182

In addition, if the company suffers serious difficulties that may not be solved by other means, and its continued operation would cause significant loss of interest to shareholders, the shareholder who represents 10 per cent or more of the company’s shares may request the court to dissolve the company. The reasons for bankruptcy procedures are listed in question 15.

Company Law 2013, article 183

Under the Company Law 2013, the company is required to establish a liquidation group within 15 days from the occurrence of dissolution. Otherwise, the creditor may request that the court appoint a liquidation group, which shall be accepted by the court. However, the bankruptcy procedure shall strictly abide by the bankruptcy law, and the court creates the bankruptcy liquidation group.

EBL 2006, article 185

The liquidation group shall notify creditors within 10 days and make an announcement in the newspaper within 60 days from its establishment. A creditor that has received the notice shall declare claims within 30 days and creditors who have not received notice shall conduct the claims’ declaration within 45 days from the receipt of notice.

Conclusion of case

How are liquidation and reorganisation cases formally concluded?

EBL 2006, articles 78 and 93

Under EBL 2006, during the reorganisation procedure, based on a request by the administrator or interested parties, the court may terminate the reorganisation process in the following circumstances:

  • the continued deterioration of business conditions and asset status, in the absence of any possibility of recovery;
  • the debtor has committed fraud, maliciously decreased the debtors’ assets, or committed other actions that are a significant detriment to the creditors;
  • the debtor’s act makes the administrator unable to perform duties (article 78); and
  • the debtor does not implement or is unable to implement a reorganisation plan (article 93).
EBL 2006, articles 79 and 87

Moreover, if the debtor or administrator does not submit a reorganisation plan within the specified time period (article 79) or the court does not approve the plan, the court shall make a rule to terminate the reorganisation procedure and declare the debtor bankrupt (article 87).

EBL 2006, article 108

During the liquidation procedure, the court should rule on the termination of the bankruptcy procedure and in the following circumstances, prior to the public announcement of the termination of bankruptcy procedures:

  • the third party has repaid all of the debtor’s debts as they become due or has provided full security; and
  • the debtor has cleared off all debts as they become due.

In addition, if the debtor has no assets to distribute, the administrator should request the court to rule on the termination of a bankruptcy procedure.

EBL 2006, articles 104 and 105

In the settlement procedure, after the court accepts the bankruptcy application, the debtor may reach an agreement with all of its creditors on the disposal of debts and creditors’ claims, and request the court to rule on approval and terminate the bankruptcy procedure. However, if the debtor is unable to implement or does not implement such a settlement agreement, based on the request of creditor, the court should make a rule to terminate the settlement agreement and declare the debtor bankrupt.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

What is the test to determine if a debtor is insolvent?

EBL 2006, article 2

If the enterprise or legal person is unable to clear off debts as they become due, and there are no sufficient assets to pay off all of the debts or it clearly lacks the ability of repayment, this may be recognised as insolvency.

Mandatory filing

Must companies commence insolvency proceedings in particular circumstances?

Provisions of the Supreme People’s Court on Issues Relating to Application of Company Law of the PRC, article 17

In the involuntary liquidation procedure of a corporation, the court is responsible for appointing a liquidation group. The group is liable to make a liquidation plan if the assets of the corporation are not sufficient to repay debts, and then it should apply to the court for bankruptcy if the liquidation is not confirmed by the creditor.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

EBL 2006, article 125

Directors, supervisors and senior officers in China have no legal obligations if they do not file an application for bankruptcy; however, if they do not perform loyalty and diligence duties that lead to the company insolvency, they shall bear civil liabilities. Also, they are forbidden to serve as a director, a supervisor or a senior manager within three years of the termination of insolvency proceedings.

Directors’ liability – other sources of liability

Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganisation actions? Can they be subject to sanctions for other reasons?

Laws of the PRC impose no obligations on officers and directors to file an application.

EBL 2006, article 127

If a debtor refuses to turn over properties, seals, accounts and documents, or they fabricate or destroy certain materials that serve as evidence, which renders the status of its assets unclear, the court may impose fines on the persons who bear direct responsibility.

EBL 2006, article 128

If the debtor commits revocable or void actions that are detrimental to the creditors’ interests, the legal representative and other directly responsible persons shall assume the compensation liability.

If the debtor commits the actions listed in the following paragraphs (for more information see question 46), which are detrimental to the creditor’s interests, the legal representative or other person directly responsible should assume the compensation liability.

EBL 2006, article 31

The actions outlined below involving the debtor’s assets may be annulled if they occurred within one year prior to the acceptance of the bankruptcy application:

  • transactions conducted at an obvious unreasonable price;
  • the settlement of undue debt;
  • the waiver of creditors’ claims;
  • the transfer of property without compensation; or
  • security provision for debts without security.
EBL 2006, article 32

If a debtor who is insolvent pays off any of the individual creditors within the six months before the acceptance of the bankruptcy application, the administrator may apply to the court to annul the action unless the individual payment benefits the debtor’s assets.

EBL 2006, article 33

In addition, if a debtor conceals or transfers assets to evade debts, fabricate debts or admit to debts that do not exist, such actions relating to debtors’ assets are invalid.

Generally, the administrator may annul such transactions during the liquidation or reorganisation procedures; if the administrator does not exercise the duty or delay doing so, the creditor may exercise the duties belonging to the administrator.

EBL 2006, article 129

If the legal representative and the person who bears direct obligations breach the provisions to leave the place where they are domiciled without approval, the court may impose a fine or detain such persons based on provisions of the law.

Directors’ liability – defences

What defences are available to directors and officers in the context of an insolvency or reorganisation?

There are no special laws and regulations on the available defences to directors and officers in the context of an insolvency or reorganisation. But according to Company Law of the PRC, the directors shall be liable for resolutions of the board of directors. Where a resolution of the board of directors violates the provisions of laws and administrative regulations or the articles of association of the company or a resolution of the shareholders’ general meeting and causes the company to suffer serious damages, directors who participated in the resolution shall bear compensation liability towards the company. For a director who can prove that he or she has objected to the resolution and this objection is recorded in the minutes of meeting, the liability of the director may be waived. In general, the defences stipulated in the Company Law of the PRC related to the directors are also applicable to the directors or the officers, or both, whose company goes into bankruptcy or bankruptcy reorganisation.

According to the EBL, when a company goes into bankruptcy or bankruptcy reorganisation, except for the legal representative of the company and other persons determined by the People’s Court, in general, the directors and officers of the company shall not conduct business on behalf of the company. The directors and officers shall only bear their responsibilities for the duty-performing behaviour incurred before bankruptcy or bankruptcy reorganisation of the company. If the company continues to operate during the course of bankruptcy reorganisation, the director and officers shall bear fiduciary duties towards the company according to the Company Law of the PRC.

Shift in directors’ duties

Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganisation proceeding is likely? When?

EBL 2006, article 36

The abnormal income obtained and company assets embezzled by the directors, supervisors and senior officers shall be deemed to be insolvency properties - the creditor is entitled to acquire assets from such properties.

Company Law 2013, article 20

Generally, directors do not bear duties to creditors. However, if the directors abuse the independent status of the company and limited liability of shareholders to escape debts, which results in the loss of the company’s assets and further affect creditors’ interests, the directors should assume joint duties as regards the company’s debt to the creditors.

Directors’ powers after proceedings commence

What powers can directors and officers exercise after liquidation or reorganisation proceedings are commenced by, or against, their corporation?

EBL 2006, article 73

In liquidation procedures, the director and senior managers have no right against their corporation, while in reorganisation procedures, if the application is approved by the court, the debtor may manage its assets under the supervision of the administrator.

MATTERS ARISING IN A LIQUIDATION OR REORGANISATION

Stays of proceedings and moratoria

What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganisations? In what circumstances may creditors obtain relief from such prohibitions?

EBL 2006, article 20

After the court accepts the bankruptcy application, all of the arbitration procedures and civil procedures involving the debtor shall be suspended until the administrator takes over the assets of the debtor.

EBL 2006, article 19

Moreover, after the acceptance, the preservation measures of the debtor’s assets shall be terminated and the enforcement proceedings shall be suspended.

EBL 2006, article 38

As for the assets seized by the debtor but that do not belong to the debtor, the relevant owner of such assets may recover the assets through the administrator.

EBL 2006, article 39

If the goods are shipped when the court accepts the bankruptcy application, and the debtor has neither received the goods nor paid the full price, the seller may recover such goods in transit. However, the administrator may request the seller deliver the goods through paying the full price.

EBL 2006, articles 109 and 110

Creditors who have security interests on certain bankruptcy assets have priority to receive repayment from the assets (article 109). If the creditor exercises such priority but fails to receive repayment in the full amount, the unpaid claims shall be deemed as ordinary claims. The claims of the creditor who waives priority shall be deemed as ordinary claims (article 110).

EBL 2006, article 75

During the reorganisation period, security interests of certain assets are required to be suspended. However, if the suspension is likely to damage the creditor’s rights, the creditor may ask the court to revive the exercise of security interests.

Doing business

When can the debtor carry on business during a liquidation or reorganisation? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

During the reorganisation, a debtor may operate business under the administrator’s supervision after an application filed by the debtor and approved by the court. The debtor is not permitted to damage collateral. Claims arising from the supply of goods and services after the filing are regarded as priority claims, which means creditors have priority over the assets of debtors.

Creditors and the court have regulatory powers over debtors under the provisions of EBL 2006; they exercise this power subject to the decision of the creditors’ meeting and the reorganisation plan. The sale or use of assets are required to be approved by the creditors’ meeting, and the creditor is entitled to require the debtor to provide guarantees or recover the debtor’s possession. However, in practice, the power of creditors is limited and the process of reorganisation is principally under the supervision of the court.

Post-filing credit

May a debtor in a liquidation or reorganisation obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

EBL 2006, article 75

In bankruptcy liquidation, the debtor or administrator may not take secured or unsecured loans during the period of reorganisation. The debtor or administrator may raise a loan and create a security interest on the loan for the purpose of the continuation of business.

Sale of assets

In reorganisations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

EBL 2006, article 112

The disposal of specific assets or the entire business of the debtor is required to be agreed by the creditors’ meeting and approved by the court, and the disposal of assets must be conducted through auction, unless other resolutions are adopted by the creditors’ meeting. The purchaser will obtain the assets ‘free and clear’ of claims in this process.

Negotiating sale of assets

Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

‘Stalking-horse’ bids and credit bidding in sale processes are not prohibited by the provisions under EBL 2006, but the ‘stalking horse’ bid has been applied to some cases in practice.

Rejection and disclaimer of contracts

Can a debtor undergoing a liquidation or reorganisation reject or disclaim an unfavourable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

EBL 2006, article 18

The debtor is not entitled to reject or disclaim an unfavourable contract. However, after the acceptance of the bankruptcy application, the administrator has the right to terminate any pending contract before the acceptance of application. If the administrator fails to inform the opposite party or fails to reply within 30 days of the administrator receiving the opposite party’s reminder, the contract is deemed dissolved.

Intellectual property assets

May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganisation is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

EBL 2006, article 18

The issue of whether the IP licensor may exercise rights on the termination of the debtor’s right to use it depend on stipulations of the licence agreement. If there is no agreement, the administrator is entitled to decide on the continuation or termination of the agreement that has been concluded before acceptance of the bankruptcy application but has not been completed.

EBL 2006, article 18

The IP licensor has the right to decide whether to continue or terminate the agreement between a debtor and a licensor or owner. If the administrator decides to continue to use the IP for the purpose of common benefit of creditors, the licensor or owner may require the administrator to provide a security deposit. If the administrator refuses to provide security, the agreement shall be recognised as terminated.

Personal data

Where personal information or customer data collected by a company in liquidation or reorganisation is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The individual credit reporting system has been in the process of construction under the supervision of the People’s Bank of China. At present, the collection of individual information must be agreed by the person, or the certificate letter must be obtained from the judicial authority.

Arbitration processes

How frequently is arbitration used in liquidation or reorganisation proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganisation case is opened be arbitrated with the consent of the parties?

EBL 2006, article 20

Arbitration is not permitted in a bankruptcy procedure. After the acceptance of the bankruptcy application, the arbitration that is commenced but still not completed by the parties should be suspended until the administrator takes over the debtor’s assets.

The court is not permitted to direct or require any of the parties to submit disputes to arbitration.

CREDITOR REMEDIES

Creditors’ enforcement

Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

EBL 2006, articles 109 and 110

In a liquidation procedure, creditors that have security interests on specific bankruptcy assets have priority to receive repayment from the assets (article 109). If the creditor exercises such priority but fails to receive repayment in the full amount, the unpaid claims shall be deemed ordinary claims. The claims of creditors that waive priority shall be deemed as ordinary claims (article 110).

EBL 2006, article 75

During a reorganisation procedure, security interests of certain assets are required to be suspended. However, if the suspension is likely to damage or reduce the value of the collateral, and further harm the interests of secured party, the secured party may ask the court to revive the security interest.

EBL 2006, article 96

In the settlement procedure, the creditor who has security interests on specific assets of the debtor may exercise their rights from the date that the court makes a rule on the settlement.

Unsecured credit

What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

There are no special remedies for unsecured creditors. The remedies typically taken by creditors are litigation and arbitration. In general, the procedures are difficult and time-consuming.

There are no pre-judgment attachments available in the PRC.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

During the liquidation or reorganisation, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

EBL 2006, article 14

The court gives notice to known creditors within 25 days of the date of the ruling to accept a bankruptcy application and the public announcement of this ruling. The matters included in the notice and announcement are as follows:

  • the name of the applicant and respondent;
  • the time of the court’s acceptance of the bankruptcy application;
  • the time limit of the declaration of creditors’ rights, the place and other notes;
  • the name and address of the administrator;
  • the requirement that the person holding the assets or the debtor pays off the debts or delivery of assets to the administrator; and
  • the time and place of holding the first creditors’ committee.
EBL 2006, article 62

The first creditors’ meeting is convened by the court at least 15 days before the expiry date of the time limit for the declaration of creditors’ claims. Subsequent creditors’ meetings are held if the court deems them necessary, or the administrator, the creditors’ committee or creditors holding at least one-quarter of total claims request it of the chairman of the creditor’s meeting.

EBL 2006, article 23

The administrator shall report to the court and accept supervision by the creditors’ committee and creditors’ meeting.

Creditor representation

What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

EBL 2006, article 67

The establishment of a creditors’ committee is determined by the creditors’ meeting - it is composed of representatives from the creditors and the labour union or the employees of the debtors. However, the creditors’ committee is not permitted to exceed nine members and the membership should be approved in writing by the court.

The committee of creditors has the following powers:

  • to supervise the disposal of the assets of debtors;
  • to supervise the distribution of bankruptcy assets;
  • to propose to hold a creditors’ meeting; and
  • other duties that are entrusted by a creditors’ meeting.

Retaining advisers is not forbidden by the creditors’ committee. However, the source of the expenses in practice is a problem.

Enforcement of estate’s rights

If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The creditor may require the debtor to implement duties - the fruits are recognised as the assets of bankruptcy and shall be assigned to the third party.

Claims

How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognised? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

EBL 2006, article 48

The creditor shall declare its creditor rights to the administrator within the time limit for the declaration of claims specified by the People’s Court.

EBL 2006, article 49

The creditor shall submit a written statement that illustrates the amount of creditors’ rights, its secured situation and evidence materials. A statement should be submitted for joint and several claims.

EBL 2006, article 45

The creditor should submit its creditor’s claim within the time limit for declaration of creditor right determined by the court, which is not less than 30 days or not more than three months from the court publicly announcing that it accepts the bankruptcy application.

EBL 2006, article 56

If the declaration of creditor rights is not made within the time limit for declaration, a supplementary declaration may be submitted by the debtor before the final distribution of bankruptcy assets. However, there is no supplementary distribution made to a creditor’s claim that has been previously distributed. The creditor should bear the expenses for determination and examination of subsequent declaration.

EBL 2006, article 12

Based on the examination, if the court discovers that the debtor does not meet the conditions of bankruptcy, after the acceptance of bankruptcy application but before the bankruptcy declaration, the court may rule on rejection of the application.

If the guarantor of the debtor or other joint debtors do not clear off the debt on behalf of the debtor, they may declare the claim with future right of recourse against the debtor.

EBL 2006, article 117

Administrators may hold claims for contingent or unliquidated amounts.

The claims may be transferred under the EBL and it shall be disclosed. A claim obtained at a discount shall be enforced in its full value.

EBL 2006, article 46

The interest of creditors’ rights shall cease to accrue after the acceptance of the bankruptcy application.

Set-off and netting

To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganisation? Can creditors be deprived of the right of set-off either temporarily or permanently?

EBL 2006, article 40Article 44 of the provisions on several issues relating to application of the enterprise bankruptcy law of the PRC (II)

A creditor may exercise the right of set-off if the creditor is indebted to a debtor before the acceptance of the bankruptcy application, except in the following circumstances:

  • the debtor of the debtor acquires creditors’ rights to the debtor from another party, after the acceptance of the bankruptcy application;
  • the creditor is indebted to the debtor and the creditor is aware of the bankruptcy application or the fact that the debtor is unable to repay a debt as it is due, except if the debt has arisen from the legal provision, or the debt was created within one year prior to the bankruptcy application; or
  • the debtor of the debtor acquires creditors’ rights against the debtors because of awareness of the bankruptcy application and the circumstance of the debtor’s insolvency, unless the debtor of the debtor obtained the creditors’ rights pursuant to legal provisions or this occurred within one year prior to the application of bankruptcy.
Modifying creditors’ rights

May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

EBL 2006, article 59

If the creditor’s claim is not determined, the court may determine the rank of a creditor’s right provisionally, to obtain votes from creditors. However, this rarely occurs in practice.

Priority claims

Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganisations? Which have priority over secured creditors?

The priority claims over secured creditors mainly include the expenses for bankruptcy proceedings, the common benefits debts, employee-related claims, social security expenditure, tax owed by the debtor, the priority of the individual house buyer and the priority of construction projects, as well as personal injury caused by debtors.

Employment-related liabilities

What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

EBL 2006, article 113

If jobs are terminated during the period of reorganisation or liquidation, the employees shall be compensated, including wages, disability subsidies and compensation expenses, basic pension insurance, basic medical insurance expenses and other compensation required under the provisions of laws and administrative regulations. These shall be paid following the settlement of bankruptcy expenses and common benefit debt.

Labour Contract Law of the PRC, article 41

The Labour Contract Law of the PRC governs the procedures of termination of employees’ contracts. If a corporation is declared bankrupt, employees’ contracts will be terminated; if a corporation undergoing reorganisation terminates more than 20 employees’ contracts, the corporation should report this to the labour union 30 days in advance and take advice from the union and employees, and then submit the plan for termination of contracts to the labour administrative authority.

Pension claims

What remedies exist for pension-related claims against employers in insolvency or reorganisation proceedings and what priorities attach to such claims?

EBL 2006, article 82

The pension-related claim does not need to be declared, it is ranked as a preferential sequence to compensation, which shall be paid after the bankruptcy expenses and common benefit debt, and followed by tax and normal claims.

Enterprise Annuity Measure, article 12

The Enterprise Annuity Scheme shall not be implemented where the enterprise is dissolved, revoked or declared bankrupt according to the law.

Enterprise Annuity Measure, article 16

Where the enterprise suspends the contribution to pensions as a result of restructuring and merger or losses incurred from operation, the enterprise may discuss with employees the suspension of the contribution. The contribution, according to the enterprise’s actual condition, shall be resumed if the situation above occurs, and the enterprise may make retrospective contributions to the pension scheme for contributions that were suspended. The amount of retrospective contributions shall not be allowed to exceed the actual amount for contributions that were suspended.

Environmental problems and liabilities

Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The relevant regulations on environmental issues are included under the EBL.

Liabilities that survive insolvency or reorganisation proceedings

Do any liabilities of a debtor survive an insolvency or a reorganisation?

Generally, the liabilities of a debtor do not survive the insolvency procedures. As to reorganisation, the liabilities of a debtor shall be disposed pursuant to the reorganisation plan.

Distributions

How and when are distributions made to creditors in liquidations and reorganisations?

EBL 2006, articles 112 and 114

During the liquidation procedure, the distribution plan shall be passed by the creditors’ meeting and then approved by the court. The disposal of assets is required to be implemented through auction, unless other provisions are made under state laws (article 112). In reorganisation procedures, the distribution is based on the reorganisation plan, which is restricted to all of the creditors. The bankruptcy assets shall be distributed in cash form, unless otherwise determined by the creditors’ meeting (article 114). However, in practice, the assets may also be distributed in the form of physical objects of the debtors.

SECURITY

Secured lending and credit (immovables)

What principal types of security are taken on immovable (real) property?

Security of real property is principally in the form of a mortgage. Finance lease is the other form of security taken on real estate property under PRC state laws.

Secured lending and credit (movables)

What principal types of security are taken on movable (personal) property?

The securities over movable property usually include mortgages, pledges and liens.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

What transactions can be annulled or set aside in liquidations and reorganisations and what are the grounds? Who can attack such transactions?

EBL 2006, article 31

The following actions involving the debtor’s assets may be annulled if they occurred within one year prior to the acceptance of the bankruptcy application:

  • the transfer of property without compensation;
  • transactions conducted at an obviously unreasonable price;
  • security provision for debts without security;
  • the settlement of undue debt; or
  • the waiver of creditor’s claims.
EBL 2006, article 32

If a debtor who is insolvent pays off any of the individual creditors within the six months before the acceptance of the bankruptcy application, the administrator may apply to the court to annul the action unless the individual payment benefits the debtor’s assets.

EBL 2006, article 33

In addition, if a debtor conceals or transfers assets to evade debts, or fabricates debts or admits unreal debts, such actions relating to the debtor’s assets are invalid.

Generally, the administrator may annul such transactions during liquidation or reorganisation procedures; if the administrator does not exercise the duties, or delays doing so, the creditor may exercise the duties belonging to the administrator.

Equitable subordination

Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganisation proceedings?

Notice of the Supreme People’s Court on the Promulgation of the Minutes of the National Court Work Meeting on Bankruptcy Trials, Point 39

The creditor’s right formed because of the abuse of affiliated relationships between related parties shall be paid off after common creditor’s rights and have no priority on specific assets provided by other related parties.

EBL 2006, article 113

The relevant employees’ claims are in the priority sequence of claims that are repaid after the settlement of bankruptcy expenses and common benefit debts. However, the wages of directors, supervisors and senior managers are calculated on the basis of the average wages of employees in the company.

EBL 2006, article 77

Within the reorganisation period, the shareholders of debtors are not permitted to request distribution of investment incomes; the directors, supervisors and senior managers may not transfer debtors’ equity to any third party, except if approval is given by the court.

EBL 2006, article 36

Additionally, the administrator shall recover income obtained in improper ways, or assets embezzled by directors, supervisors and senior managers.

GROUPS OF COMPANIES

Groups of companies

In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

There are no circumstances in which a parent or affiliated corporation assumes the responsibility for the liabilities of subsidiaries or affiliates under the EBL. In practice, the parent corporation should bear the responsibility for its subsidiary if that subsidiary is not an independent entity, or it has conducted an abnormal transaction.

Combining parent and subsidiary proceedings

In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

The combination of bankruptcy procedures of the parent company and its subsidiaries is permitted in practice. Under such circumstances, the assets and liabilities belonging to the companies may be pooled for the purpose of distribution.

INTERNATIONAL CASES

Recognition of foreign judgments

Are foreign judgments or orders recognised and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

With respect to the effective judgment or rule made by a foreign court on a bankruptcy case that involves the debtor’s assets within territories of the PRC, upon an application for recognition or enforcement of the judgment or rule, the court shall examine the application based on the international treaty that the PRC concluded or acceded, or based on the principle of reciprocity; if the application does not violate the basic principles of the PRC’s laws and harms national sovereignty, security and public interest, and does not harm legal rights and interests of creditors within the territory of the PRC, the court will recognise and enforce the foreign rule or judgment.

The PRC is not a signatory to a treaty on international insolvency or on the recognition of foreign judgments.

UNCITRAL Model Law

Has the UNCITRAL Model Law on Cross-Border Insolvency been adopted or is it under consideration in your country?

The UNCITRAL Model Law on Cross-Border Insolvency has been adopted in the PRC. Upon the court recognising the bankruptcy rule made by a foreign court, the domestic assets of debtors are required to clear employees’ claims and taxes; the assets left may be distributed pursuant to the regulations of the foreign court.

Foreign creditors

How are foreign creditors dealt with in liquidations and reorganisations?

There are no special provisions relating to reorganisation and liquidation under the EBL for foreign creditors; they have the same right as domestic creditors to declare claims.

Cross-border transfers of assets under administration

May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

In practice, the assets are permitted to be transferred under the administration in different countries. Nevertheless, it is required that domestic employees’ claims and taxes should be settled in full before assets are transferred to another country.

COMI

What test is used in your jurisdiction to determine the COMI (centre of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

In general, the COMI of a debtor company or a group of companies is typically determined by the position where the debtor is domiciled, the principal business office, the location of the main property or the place of registration.

Minutes of the National Court Work Meeting on Bankruptcy Trials, point 35

If the court hears the bankruptcy case of companies through substantive consolidation, this should be under the jurisdiction of the court where the core controlling companies are located. If there are no such companies, it would be under the jurisdiction of the court in the location where the affiliates’ main assets are located. If disputes on jurisdiction exist among multiple courts, this should be submitted to the common superior court for the designated jurisdiction.

Cross-border cooperation

Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognise foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

EBL 2006, article 5

If the foreign bankruptcy proceedings neither violate the basic principles of the PRC’s laws nor harm national sovereignty, security and public interest, and it does not harm legal rights and interests of creditors within the territory of the PRC, the court will recognise and enforce the foreign proceeding.

After recognition of a foreign ruling or judgment of a bankruptcy case by the People’s Court, the debtor shall first clear off the secured creditor, the creditors’ rights of employees, social insurance and tax with its assets within China, and then distribute the remaining assets based on the regulation of the foreign court.

Cross-border insolvency protocols and joint court hearings

In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

The courts in the PRC have neither entered into any insolvency protocols or arrangements to coordinate procedures with other countries’ courts, nor held a joint hearing with courts in any foreign countries.

Winding-up of foreign companies

What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

According to the EBL, any bankruptcy proceeding that originates under the EBL shall be binding on all assets that are held outside the territory of the PRC by the debtor. However, the People’s Court has no jurisdiction on foreign companies doing business in China, but incorporated according to foreign laws according to the EBL, the Company Law of the People’s Republic of China or other laws.

Update and trends

Trends and reforms

Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

Trends and reforms59 Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

The PRC bankruptcy law was officially implemented on 1 June 2007. It only applies for enterprises, and excludes personal bankruptcy, because the establishment of the personal bankruptcy law was not yet mature then. However, the increase in the number of small and micro-sized companies that are groups with unstable credit, the common phenomenon of individual joint guarantees provided by shareholders and the defect of a substitute for a personal bankruptcy system mean that the establishment of a personal bankruptcy law is receiving increasing attention.

Thirteen departments including the National Development and Reform Commission jointly issued the Reform Plan for Accelerating the Improvement of the Withdraw System of Market Entity on 16 July 2019, which proposes to establish a bankruptcy system for an individual and focuses on solving the problem of joint liability of natural persons arising from bankruptcy of an enterprise. The Head of the Financial Department of the National Development and Reform Commission asserted on 26 July that the establishment of a bankruptcy system for an individual mentioned in the Reform Plan need to emphasise two points. First, the system is to provide debt restructuring opportunities for an honest and trustworthy individual who is in serious financial distress, to encourage and support innovation and entrepreneurship, and maintain social stability. Second, the establishment of the personal bankruptcy system is a systematic and complex work; the point being to promote legislation of personal bankruptcy law based on the full establishment of social consensus.

On 9 October the Wenzhou Intermediate Court announced that a lower court had settled a personal bankruptcy case for Cai Mou, a shareholder of a bankrupt Wenzhou company, which is the first debt settlement case with personal bankruptcy function and equivalent procedures. It provides a basis for judicial practice for the establishment of a personal bankruptcy system in China.