By Xiao Ma (Reorg | Harvard Law School)
Coupled with continued efforts in financial deleveraging and industrial reorganization, China delivered a number of changes to its bankruptcy law in 2019 in an effort to further accommodate smooth market exits for non-profitable businesses and to provide greater opportunities for viable businesses that experience temporary liquidity issues to be restructured as going concerns.
Currently, a lack of detailed rules and practical solutions to issues arising out of bankruptcies often deters parties from initiating such proceedings in China. The new rules will provide further clarification on extensively litigated/disputed issues and enhance transparency and consistency in the bankruptcy courts’ handling of cases. The developments encourage more usage of restructuring and compromise proceedings to find market solutions to address insolvency of Chinese companies.
“China’s bankruptcy laws and practices will be more and more market-driven,” said Xu Shengfeng, a Shenzhen-based bankruptcy and restructuring partner of Zhong Lun Law Firm, notwithstanding perceptions among foreign investors that “China’s bankruptcy regime is rather bureaucratic and administrative, with a certain level of involvement by local governments.”
“The goal is to build an institution in which the government’s role can be minimized, until its complete exit,” Xu said. “It cannot be done within a year or two, but this is certainly where things are headed.”
Market players, in particular financial institutions and asset management companies, are becoming more active and playing a greater role in leading restructuring and compromise proceedings. “Right now, many of the restructuring cases need capital injection from outside investors, and it is a great time for asset management companies,” Xu said. The recent U.S.-China Trade Deal promises to open doors for U.S. firms to obtain asset management licenses to acquire Chinese NPLs – see Article 4.5 of the US-China Economic and Trade Agreement.
Key changes to China’s restructuring regime in 2019 included:
- establishment of specialized bankruptcy courts in Beijing, Shanghai, Shenzhen, Tianjin, Guangzhou, Wenzhou and Hangzhou;
- Supreme People’s Court’s Judicial Interpretation III on the Enterprise Bankruptcy Law (EBL);
- joint announcement of the Plan for Accelerating Improvement of the System for Market Entity Exits by 13 major state departments;
- further establishment of regional bankruptcy administrator associations, including those in Beijing and Shanghai;
- comment solicitation and final issuance of the Minutes of Conference on National Courts’ Civil and Commercial Trial Work, which devoted a section specifically for amendment of bankruptcy rules and restructuring regimes; and
- launch of National Enterprise Bankruptcy Information Disclosure Platform, a platform for the public to access information related to bankruptcy cases and facilitate bankruptcy proceedings in terms of claim registration, notices for creditors’ meeting, publication of announcements, etc.
“It was definitely a year of highlights,” said Xu. “The professionalism of bankruptcy trial teams, the establishment of online bankruptcy information disclosure platform, the promotion of pre-packaged restructurings and so on. The Supreme People’s Court is also making headways in the areas of personal bankruptcy and cross-border bankruptcy.”
The full article is available here.