Insolvency Law at China
In China, insolvency law is primarily governed by the Enterprise Bankruptcy Law of the People's Republic of China (2007), which provides the legal framework for both corporate and individual insolvency cases. This law was enacted to improve the financial market and ensure fair treatment of creditors while encouraging the restructuring and rehabilitation of financially troubled businesses.
Key Features of China's Insolvency Law:
Governing Legislation:
Enterprise Bankruptcy Law of the People's Republic of China (2007) is the main law governing insolvency for enterprises.
Individual bankruptcy is not fully regulated, although individuals can enter bankruptcy procedures under certain conditions.
Types of Insolvency:
Corporate Insolvency – Applies to companies and other legal entities.
Individual Bankruptcy – While there is no specific law for individual bankruptcy, some individual cases can go through bankruptcy procedures under the enterprise law if the individual is a sole proprietor or involved in business activities.
Objectives of the Law:
To protect the rights of creditors, shareholders, and other stakeholders.
To promote the rehabilitation and restructuring of distressed enterprises.
To facilitate liquidation and equitable asset distribution when restructuring is not feasible.
Insolvency Proceedings:
Reorganization (Restructuring) – This is the preferred method for dealing with distressed enterprises. A company is allowed to reorganize its debts and operations under the supervision of a court-appointed administrator.
Liquidation – If restructuring is not possible, the company may be liquidated, with its assets distributed to creditors according to a strict priority order.
Settlement – This is less commonly used but can be an alternative, where the debtor proposes a settlement agreement with creditors.
Court’s Role:
The People's Courts oversee insolvency proceedings in China. Insolvency cases are handled by the courts and are typically managed by bankruptcy administrators appointed by the court.
The court plays an active role in approving or rejecting restructuring plans, overseeing liquidation processes, and resolving disputes between creditors and debtors.
Creditors’ Rights and Claims:
Creditors must submit their claims to the court-appointed administrator during the insolvency process.
Claims are ranked in order of priority, with secured creditors (those with collateral) having priority over unsecured creditors.
Insolvency Practitioners:
A bankruptcy administrator (usually a licensed professional) is appointed by the court to manage the insolvency process. They supervise the restructuring, manage liquidation, or facilitate settlements.
The administrator is responsible for gathering and evaluating the debtor’s assets, communicating with creditors, and proposing solutions (reorganization or liquidation).
Cross-Border Insolvency:
China recognizes cross-border insolvency issues, especially for foreign creditors or businesses with international interests. However, the approach to cross-border insolvency in China is still developing.
There is no formal recognition of foreign insolvency proceedings, but Chinese courts may cooperate with foreign courts under certain circumstances, based on international conventions or mutual agreements.
Individual Bankruptcy Law:
There is no dedicated law governing individual bankruptcy in China. However, individuals engaged in business can use the corporate insolvency law for personal bankruptcy procedures, especially if they have significant debt tied to business operations.
Recent Developments:
The law has been evolving to address the complexities of the modern Chinese economy. There have been proposals to strengthen the individual bankruptcy framework and increase the efficiency of restructuring proceedings.
Key Steps in the Insolvency Process in China:
Filing for Bankruptcy – The debtor or creditors can file for bankruptcy with the court.
Court Review – The court evaluates the financial condition of the debtor and either approves or rejects the bankruptcy request.
Appointment of Bankruptcy Administrator – The court appoints an administrator to manage the case.
Reorganization or Liquidation – The court will either allow reorganization (if viable) or proceed with liquidation.
Distribution to Creditors – The assets of the debtor are distributed to creditors according to the priority order.
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