China’s bankruptcy law system moves toward maturity

It took 12 years to bring China’s Enterprise Bankruptcy Law into existence, with it finally being enacted on 1 June 2007. On 16 April 2024, during the 23rd Chairman’s Meeting of the Standing Committee of the 14th National People’s Congress, the first revisions to the Enterprise Bankruptcy Law, agreed over a full six years, will be incorporated into the annual legislative work plan.

Bankruptcy trial work

Amid the cyclical economic adjustments and structural transformations affecting various industries, Chinese courts persist in their active response to both domestic and international risks and challenges. This concerted effort aims to refine the business environment and foster the development of novel productive forces.

In March 2024, the Supreme People’s Court revealed that in 2023, courts at all levels nationwide concluded an impressive total of 29,000 bankruptcy cases, involving claims amounting to RMB2.3 trillion (USD316.7 billion). Among these, 1,485 cases of reorganisation and settlement were finalised enabling 762 distressed companies to successfully restructure and ensuring stable employment for 118,000 workers. Numerous cases were resolved through the execution-to-bankruptcy procedure, charting a course for the future handling and processing of execution cases.

Across the country, 2,445 primary people’s courts have adjudicated bankruptcy cases, 356 intermediate people’s courts have handled such cases, and 23 high people’s courts have overseen bankruptcy proceedings. There are 17 specialised bankruptcy courts nationwide. Correlating with economic development levels, bankruptcy cases are predominantly concentrated in Jiangsu, Zhejiang and Guangdong provinces.

The administrator, being the pivotal and central figure in managing bankruptcy cases, has an indispensable role. In China, 230 bankruptcy administrator associations have been established, comprising 6,289 registered administrators and 3,728 active administrators who have engaged in handling bankruptcy cases. The administrator’s responsibilities extend beyond mere asset liquidation and debt repayment; they also encompass the co-ordination of all parties’ interests to ensure both fairness and efficiency in the bankruptcy process.

Bankruptcy trends

China’s central government embarked on addressing and resolving the challenges faced by state-owned enterprises in 2015. By 2016, the focus had shifted towards optimising the business environment to stimulate economic development and foster innovation. In 2018, the government initiated supply-side structural reforms aimed at optimising resource allocation, promoting economic restructuring and enhancing sustainable economic growth.

By 2023, the government proposed the concept of “establishing the new before abolishing the old”, concentrating on balancing institutional innovation and enterprise development, and promoting more flexible and innovative approaches to bankruptcy case management. These policy shifts have provided companies with a more supportive environment and policy backing, influencing the volume and direction of bankruptcy cases adjudicated by Chinese courts.

The advent of the internet economy and new online shopping paradigms have profoundly impacted physical stores, culminating in the bankruptcy of 25,290 companies in the wholesale and retail sector. The year 2023 witnessed numerous bankruptcy cases within financial institutions, including trust companies and insurance firms, with 11 financial companies seeking dissolution or bankruptcy.

Additionally, 15 listed companies applied for reorganisation in 2023, with 13 successfully navigating the prepackaged reorganisation process, underscoring its efficacy. China’s first government financial restructuring, in the city of Hegang, Heilongjiang province, was also completed in 2023.

Since 2021, the central government has adopted various policies for the real estate industry, including purchase restrictions, loan restrictions, land supply restrictions and strengthened financial supervision. Affected by the cyclical adjustment of the industry and these policies, 18,883 real estate companies went bankrupt. Evergrande Group, China Aoyuan, Sunac Group and other large real estate companies have since applied to the US Court of the Southern District of New York for recognition of overseas debt restructuring procedures.

The supply and demand dynamics of China’s real estate market have changed significantly. The government has established a special team to make comprehensive plans to support the sector, including a whitelist system and financing support.

Commercial banks are involved in reviewing and approving project lists, establishing green channels for compliant projects, optimising the loan approval and issuance processes, allowing separate authorisation quotas, treating projects of different ownership housing enterprises equally, and providing financing support through new loans, extended existing loans, and merger and acquisition loans.

Additionally, separate accounts for projects were created to ensure closed operations and management. The government also retains the option to purchase commercial buildings for conversion into affordable housing.

Cross-border bankruptcy

Chinese courts have recognised several international bankruptcy rulings and procedures, including those from Germany, Japan and Hong Kong. The Beijing Bankruptcy Court applied the principle of legal reciprocity to recognise a bankruptcy ruling of the Aachen District Court in Germany; the Shanghai No. 3 Intermediate People’s Court recognised the compulsory liquidation proceedings of Hong Kong Haoze International Group and the identity of the liquidator, and recognised Japanese civil rehabilitation proceedings made by the Tokyo District Court.

The Xiamen Court in Fujian province accepted the request for judicial assistance in the voluntary liquidation case of the creditors of Shell Environmental Technology Group; the bankruptcy liquidation case of Guangdong Overseas Construction Corporation heard by the Guangzhou Intermediate People’s Court was recognised and assisted in execution
by the Hong Kong High Court. The High Court of Hong Kong also ruled on the execution of the keepwell agreement in Nuoxi Capital Co Ltd v Peking University Founder Group, clarifying that the keepwell obligations are binding and enforceable.

As China continues to open up to the outside world, cross-border bankruptcy cases have gradually increased. This requires Chinese courts to be familiar with domestic bankruptcy laws, understand and follow international bankruptcy laws, and actively co-operate with international judicial institutions to ensure the smooth resolution of cross-border bankruptcy cases.

The implementation of amendments to the Company Law and its implications for the Enterprise Bankruptcy Law. China will implement the Company Law amendment on 1 July 2024. The new law stipulates that when a company considers applying for bankruptcy, it should listen to the opinions of the company’s labour union and seek the opinions and suggestions of employees through the workers’ congress, or other forms.

Based on the principle of social responsibility, more entities can become priority creditors or be recognised as common benefit debts in bankruptcy proceedings and receive priority in repayment.

If the company cannot pay its due debts, the company or creditors have the right to require shareholders to pay capital contributions in advance, and the company’s board of directors is stipulated to have payment and liquidation obligations.

If a shareholder uses two or more companies under their control to abuse the company’s independent status as a legal person and the limited liability of shareholders, evade debts and seriously damage the interests of the company’s creditors, they shall bear joint and several liability for the company’s debts. This provides clear rules for de facto merger bankruptcy and lifting the corporate veil.

The new company law enhances shareholders’ right to information. Should a company refuse inspection, shareholders are entitled to file a lawsuit in the People’s Court. Entities or registration authorities responsible for revoking, closing or cancelling a company can request the court to appoint personnel to form a liquidation team. These amendments provide a solid legal foundation for applying for and processing bankruptcy cases.

Looking ahead

Looking forward to the bankruptcy legislation in China in 2024, attention can be drawn to the following aspects:

1. The precise amendments to the Corporate Bankruptcy Law;
2. The specific impact of the new Company Law on corporate bankruptcy;
3. The effects of implementing bankruptcy proceedings for real estate companies, including cross-border US-dollar debt restructuring;
4. Strategies for managing the bankruptcy of financial institutions; and
5. The standardisation, regulation and refinement of bankruptcy management work.

As the legal system continues to improve and enforcement becomes stronger, China’s bankruptcy law system will become more mature, providing a strong guarantee for optimising the business environment, protecting the rights and interests of creditors and debtors, and promoting high-quality economic development.