The Bankruptcy Law, applicable to FIEs and most other companies in China, will come into effect on 1 June 2007.

The Bankruptcy Law sets out a dual test of insolvency: inability to pay debts as they fall due ("cash flow insolvency") and insufficient assets to pay off all debts ("balance sheet insolvency"). Either a debtor or a creditor may apply to the court for reorganization or liquidation of the debtor. Court assistance may also be sought to conciliate.

The court will appoint an administrator upon acceptance of an insolvency application. An administrator may be an individual or a professional service organization. Property will be distributed in the following priority:

  • Secured debts
  • Bankruptcy expenses
  • Debts incurred for the creditor's benefit after the court's acceptance of the insolvency application
  • Outstanding employee wages and compensation
  • Social security premiums and outstanding tax liabilities
  • Unsecured claims

The Bankruptcy Law also sets out various rules relating to the submission of claims, creditors' meetings, the creditors' committee, voidable transactions and reorganization.