Chambers China Restructuring & Insolvency: Amendment and Improvement of China's Bankruptcy System
Chambers China Restructuring & Insolvency ——Amendment and Improvement of China's Bankruptcy System
As a legal system for rescuing distressed enterprises and regulating exit of market entities, the bankruptcy system not only provides a set of uniform, equitable and predictable rules but also plays an irreplaceable role in ensuring fair market competition, optimising business environment, promoting supply-side structural reform and facilitating economic growth.
It has been over 16 years since the promulgation, enforcement and development of the Enterprise Bankruptcy Law of the People's Republic of China. Bankruptcy under this law is a collective term referring to reorganisation, liquidation and conciliation. Compared to other laws, the relatively small volume of 136 articles in the Enterprise Bankruptcy Law limits its function in practice. With the economy growing, new issues and challenges have presented themselves in the insolvency sector. The judicial interpretations and other supporting systems are no longer in full competence to cope with complex practical issues.
China’s legislature put amendment of the Enterprise Bankruptcy Law into the 2021 legislation work plan, which aroused public attention. Some newly-introduced regimes, such as pre-reorganisation, substantive joint administration and cross-border insolvency, became the focus. The final amendment after further legislative research and deliberation is worth looking forward to.
With the improvement of the bankruptcy system as a core theme, China’s legislators accomplished several fruitful projects in 2021. One of the landmark projects is the Enterprise Bankruptcy Law enforcement inspection report published on August 18, 2021, offering a comprehensive enforcement review of the implementation of the law. Meanwhile, other laws related to bankruptcy issues, such as the Civil Procedure Law and the Company Law, were also included in the amendment work plan in 2021. Therefore an interconnected insolvency regime is expected.
While the Enterprise Bankruptcy Law amendment is on the agenda, local legislatures have been also exploring bankruptcy-related legislations within their delegated legislative authority. In December 2021, the Hainan provincial legislature voted on and approved the Regulation on the Bankruptcy Procedures for Enterprises in Hainan Free Trade Port, an innovative step forward from the existing bankruptcy system.
In addition, the personal bankruptcy system, which had sparked a national debate, was also formulated in 2021 as a local legislation. On 1st March, 2021, the Regulation of Shenzhen Special Economic Zone on Personal Bankruptcy came into effect. The regional implementation of the personal bankruptcy system has made progress and a few precedents of personal reorganisation, conciliation and liquidation so far have been considered attempts and exploration for future national personal bankruptcy legislation.
Besides legislative progress, the judicial practice has been active in the insolvency sector. The courts in China made efforts towards the development of a sophisticated bankruptcy regime, including the attempt worth noting to establish a mechanism for cross-border insolvency issues. In May 2021, the Supreme People's Court and the HKSAR government signed the minutes on mutual recognition and assistance in bankruptcy proceedings by courts, and formulated relevant supporting documents. Based on the arrangement, the courts in Shanghai, Xiamen and Shenzhen are designated as pilot courts on recognising and assisting bankruptcy proceedings in Hong Kong. Moreover, there have been other positive judicial explorations and innovations in practice, for instance those regarding pre-reorganisation, cooperation between government and court, and bankruptcy of financial institutions.
There have been a number of typical cases with significant influence. The Supreme People's Court released the Typical Cases of the People's Courts Implementing the Bankruptcy Legal System in Building the Doing Business Environment and the Model Civil and Commercial Cases of People's Courts Promoting the High-quality Development of the Private Economy in 2021. For the latter, the first three of the ten typical civil and commercial cases are bankruptcy trial cases, showcasing the wider attention to the insolvency practice and the cases' influence. There has been a trend that the debt and asset amount of bankruptcy cases have been mounting and the complexity of cases increasing: the restructurings of Hainan Airlines Group and the Yurun family of companies are two examples, with both having a huge number of debt claims and a lot of affiliates under joint administration. Other examples include the liquidation of Baoshang Bank, the first commercial bank bankruptcy case in China, and the successful reorganisation of Peking University Founder Group Corporation and Tsinghua Unisplendour Corporation, two unique companies incubated by two prestigious Chinese universities respectively.
在进行制度建设和探索的同时，司法实践中也涌现了一批具有重大影响力的案例。最高人民法院在2021年发布了《人民法院实施破产法律制度 优化营商环境典型案例》与《人民法院助推民营经济高质量发展典型民商事案例》中，其中十大典型民商事案例的前三个都是破产审判案例，显示对破产案件业务的广泛关注以及这些案件的影响力。实务中破产案件的体量、规模和复杂程度也在不断刷新记录: 例如，海航集团重整案、雨润系企业重整案等债权债务规模巨大、实质合并企业数量众多的案例，引发了各界广泛关注和讨论；包商银行破产清算案成为第一起经由司法程序完成市场退出的商业银行案例；北大方正与清华紫光这两大中国最知名的校企也先后重整成功。
Bankruptcy judges and administrators with considerable expertise and experience are the cornerstones of smooth and effective performance of the bankruptcy regime. By the end of 2021, there were 15 bankruptcy courts and 28 provincial administrators' associations in China. The growing team of bankruptcy judges and administrators has been serving as a think tank for the amendment of China's bankruptcy law and a talent pool for the future implementation and development of China's bankruptcy law.
The effort to review and amend China's bankruptcy system lasted throughout the whole 2021. It is predicted that some companies will still face debt default crisis and distress risks under the impact of the COVID-19 epidemic and the new normal economy, and more market-oriented law-complaint insolvency restructurings are needed to resolve such crisis. Therefore, the amendment of Enterprise Bankruptcy Law will be necessary and provide a best answer in response to the need of the market and this practice.
Bankruptcy is a fundamental legal system of the market economy. The implementation and improvement of China's bankruptcy system is in line with the economic development and the theme of economic reform. We expect a bankruptcy law amendment, which is forward-thinking and practical, applicable to all kinds of market players, covering cross-border proceedings, helpful in building a better doing business environment, and contributing to the high-quality economic development in China.