|
The PRC Enterprise Bankruptcy Law (for Trial Implementation)
After more than a decade of drafting, the Law of the PRC on Enterprise Bankruptcy comes into effect today, 1st June 2007. With over 130 Articles, this law covers a wide range of insolvency and restructuring issues and here we summarise what we consider to be ten of the most important changes it introduces.
White & Case has also prepared a more comprehensive review of the New PRC Bankruptcy Law and this is available to our clients on request.
"TOP TEN"
1. Unified insolvency regime applicable to wide range of entities
Previously in the PRC, separate insolvency regimes applied to different types of enterprises. For example, State-Owned Enterprises (SOEs) were dealt with under a different regime to non-SOEs. This caused confusion and uncertainty. The New PRC Bankruptcy Law replaces these separate systems with a single, unified insolvency regime applicable to any "enterprise legal person", a term which includes SOEs (although the State Council stipulated that SOEs that announced their bankruptcy before today (i.e. before 1st June 2007) would be closed down under the 1986 Bankruptcy Law. ) and foreign investment vehicles (such as FIEs and WOFEs). The new law does not apply to individuals, representative offices or branch offices and no mention is made of partnerships. Nor is it intended to apply to companies incorporated outside of the PRC, although do note the cross-border provisions which are discussed below.
2. Sets out grounds for insolvency
Article 2 states that any enterprise legal person must settle its debts in accordance with the new law if:
It is unable to settle its due debts and
Its assets are insufficient to settle all of its debts or
It is obviously insolvent.
Although this is an improvement (the grounds for insolvency were not as clearly defined in previous laws) it still leaves some uncertainty (for example, what does "obviously insolvent" mean?).
3. Restructuring and composition procedures
The new law introduces procedures for the restructuring and composition of debt (composition being an arrangement whereby a debt is restructured and/or rescheduled), giving debtors flexibility in the way in which they approach their debt servicing burdens. Interestingly, it may be that pre-packaged bankruptcies will be possible under the new law.
4. Debtor-in-possession
Once the People's Court has approved a debtor's reorganization, the debtor can apply to retain management of its assets and business affairs. The development of this "debtor-in-possession" process in the PRC is something investors will watch with interest.
5. Cross-border issues
As China's economy expands, addressing cross-border issues will prove critical. Article 5 of the New PRC Bankruptcy Law seeks to address both (i) the applicability of PRC proceedings in other jurisdictions, stating that PRC proceedings are binding on the debtor's property outside of the PRC; and (ii) the applicability of foreign rulings in the PRC, stating that, in certain circumstances, foreign proceedings will be recognised by the People's Court.
6. Role of the Court
Under the new law, a bankruptcy application is made directly to the People's Court and only the People's Court will have the power to accept or reject it. By contrast, the 1986 Bankruptcy Law (which previously governed many aspects of the bankruptcy process) required approval from the relevant government department before proceedings could be initiated. There is no dedicated bankruptcy court.
7. Independent administrator
Under previous arrangements, assets of a debtor were subject to the control of a Court-appointed liquidation committee which typically consisted of government officials and the former management of the debtor itself. Creditors were rarely appointed or represented and concerns were raised about transparency and the adequate protection of creditors' interests. The new law introduces the role of an independent administrator (which can be a law firm, accounting firm, bankruptcy liquidation firm, relevant government official or similar) appointed by, and accountable to, the People's Court. This administrator will manage the debtors' assets during bankruptcy and report back to the Court on the status of the company.
8. Creditor clout
Creditors will now receive information through the independent administrator. They can also expect to have more direct involvement via (1) creditors' meetings (which will have several functions, including verifying claims, supervising the administrator, choosing members of the creditors' committee and deciding whether or not to adopt proposals) and (2) a creditors' committee (which will perform several tasks, including supervising the management and disposal of the debtor's property and convening creditors' meetings). The administrator will regularly report back to the creditors' committee.
9. Revocation of prior transactions
The administrator can ask the People's Court to revoke transactions made at an undervalue or otherwise preferentially one year prior to the acceptance of the application.
10. Order of payment
Under the new law, the debtor's estate shall be settled in the following order:
(a) bankruptcy fees and joint interest debts (which are obligations incurred during the bankruptcy);
(b) unpaid wages, medical, disabled pensions etc;
(c) social insurance premium other than that prescribed in (b) above and other unpaid taxes; and
(d) "ordinary" bankruptcy claims.
Secured claims: Secured claims over specific property will be repaid out of the secured property. If the value of the security is insufficient to replay the entire obligation due, the creditor can claim for the shortfall as an "ordinary", unsecured claim.
Article 132 gives a "super priority" to certain limited payments to employees allowing them to be paid in priority to secured creditors. Although these are limited to claims arising before the new law was promulgated (on 27th August 2006), investors and financiers need to be aware that this could reduce the value of a secured claim.
11. Set-off rights
With certain exceptions, a creditor may assert a claim for set-off. Interestingly, although the set-off right applies to obligations against the debtor, it shall be asserted against the administrator.
12. Clear procedures — with role for regulator
The law provides clear procedures for a bankruptcy, restructuring or composition. It is worth noting that if a financial institution becomes insolvent, the relevant financial regulator can make the bankruptcy application.
Editor's note: Yes, we listed 12 key issues in our "top ten", but we didn't want to leave one out…
FOOD FOR THOUGHT
The new law is far broader in scope and detail than its predecessors, representing a major sea-change in approach. It is a clear indication of China's transition to a modern-day market economy. As with most (all?) new laws, there are still some outstanding points (both procedural and substantive) that will need to be addressed. We have prepared a comprehensive review of the New PRC Bankruptcy Law which examines the new provisions and the outstanding issues in more depth — please contact any of the White & Case lawyers below for your copy.
White & Case LLP is licensed as a foreign law firm by the Ministry of Justice of the People’s Republic of China. Under current Chinese regulations, foreign law firms are permitted to provide information based on published Chinese statutes, discussions with Chinese officials and general knowledge of how similar matters have been dealt with by the relevant Chinese authorities in the past, but are not permitted to render formal Chinese legal opinions. We coordinate with Chinese legal counsel in respect of formal Chinese legal opinions. The material in this publication is designed to provide general information only. It is not offered as legal advice and should not be taken as such. Specific advice should be sought on the particular facts and circumstances at issue. We expressly disclaim responsibility for any use to which any contents of the publication may be put or for any loss, damage or liability whatsoever arising from such use.
|