ABSTRACT
The implementation of bankruptcy and consumer protection regimes in China has lagged behind developments in commercial and trade law, highlighting the focus of the Chinese government on economic development rather than individual protection. The encouragement and rapid growth of foreign investment and private companies in China, however, necessitated the drafting and implementation of a bankruptcy regime that was capable of dealing with the issues of accumulating bank loans and other debts and the increasingly sophisticated and complex fi nancing structures utilized by Chinese companies. If there are to be companies, there must be a system which is able to conduct, and if necessary to compel, a systemic winding up of those companies (including wholly or partly state-owned companies) which are not able to pay their creditors, and provide for an equitable distribution of corporate assets between rival claimants, including trade creditors, employees, banks and other creditors, both large and small. At the same time, the rapid and virtually uncontrolled growth in the domestic consumer market resulted in numerous well-publicized cases of the distribution of unsafe products to both foreign buyers and Chinese consumers. The well-publicized tainted milk scandal of 2008 clearly demonstrated that the current system of regulation was unable to ensure the safe and responsible operation of Chinese companies and provided a strong impetus for the introduction of a new regulatory regime. In both of these areas the Chinese government’s solution has been to adopt and implement new laws and to create a new administrative and regulatory regime. The approach taken by the legislature was to take away power from the ‘responsible departments’ and give it to the courts and to the new position of administrator in the case of bankruptcy and to provide a higher degree of regulation under a new regulatory framework in the case of food safety. Whether the reforms have succeeded (or are likely to succeed) in changing the centres of power and disrupting the vested interests of government, SOEs and private companies with close connections to local government – while providing pro-
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The Enterprise Bankruptcy Law of the People’s Republic of China (Enterprise Bankruptcy Law) was promulgated by the National People’s Congress on 27 August 2006, and came into effect on 1 June 2007. The extended period of time taken to produce the fi nal version of the law highlights the diffi culty for the framers of the law in fi nding a compromise that would satisfy the different interest groups involved: SOEs, private (including foreign-owned) companies, employees, creditors, both secured and unsecured, investors, local government interests, the international constituency, and so on. As a result, the Enterprise Bankruptcy Law represents a compromise. The fi nal version of the law does not cover personal bankruptcies, although a strong argument can be made that Chinese consumers are subject to credit card and mortgage debt and need the protection of a personal bankruptcy regime (Li Shuguang, quoted in Chung 2007). Financial institutions will be covered by a separate regime.1 The issue of cross-border insolvencies is dealt with briefl y and inadequately in Article 6. There can be no doubt that a comprehensive law on enterprise bankruptcy has been needed in China for some time. The previous legislation – the Law of the People’s Republic of China on Enterprise Bankruptcy (for trial implementation) (the Old Law) and the succession of notices, decrees and other legislative instruments which were required in order to implement the Old Law – only dealt with SOEs. The bankruptcy of foreign investment enterprises and other private enterprises was dealt with, briefl y and inadequately, under Chapter 19 of the Civil Procedure Law. Under the Old Law, although the court nominally controlled the bankruptcy process, in practice, the higher-level authorities of the relevant enterprise played a defi nitive role. Their consent was required before an enterprise could submit an application for bankruptcy (Old Law: Article 8; Supreme People’s Court Regulations: Article 5) and the liquidation committee which worked to liquidate the company was appointed largely from the responsible government department (Old Law: Article 24). The fact that the responsible government department was also considered to be responsible for the circumstances leading to the bankruptcy was made clear by the requirement that an internal investigation be conducted in order to determine responsibility for the bankruptcy and to ensure that the appropriate disciplinary sanctions against the legal representative of the enterprise or the responsible persons in the government department in charge were imposed (Old Law: Article 42). The bankruptcy of SOEs raised major policy and political questions: the disposition and re-employment of the workers; the transfer or sale of stateowned assets held by the enterprise; the possibility of disciplinary action against responsible offi cers and offi cials and the political damage to local government resulting from the bankruptcy of a fl agship enterprise. As a result, decisions relating to bankruptcies were made at a governmental rather than a court level and commercial issues relating to the fi nancial viability of
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the enterprise or the repayment of creditors took second place. Indeed, the decision to allow enterprises to go bankrupt was taken in the mid-1980s only after fi ery political debate (Li 2001). As a result, the number of bankruptcy fi lings each year under this regime ranged from a minimum of 32 in 1990 to a maximum of 8,939 in 2001 – a total of only 70,587 bankruptcy cases in 19 years (Cao 2007: 61). An estimated RMB1.05 trillion non-performing loans of SOEs was transferred to the Asset Management Companies set up by the government to handle these loans from the banks from 1999 (Xu 2005: 3), which gives some indication of the quantity of unpaid and unpayable debts which these enterprises had been permitted to accumulate while still continuing to operate. These historical debts continue to present problems for the government, as demonstrated by the recent decision by the Ministry of Finance to allow Cinda Asset Management Corp to roll over RMB247 billion of bonds sold to the China Construction Bank 10 years ago in return for non-performing loans and assets (Yu 2009b). Both the minimal content of the Old Law and the selective way in which its provisions were implemented attracted considerable adverse commentary in the case of several well-publicized bankruptcies of major Chinese government-owned companies. When the political decision was made to allow the Guangdong International Trust and Investment Corporation (GITIC) to go into bankruptcy in 1998, the process, which was largely supervised and coordinated by government agencies (including entities which were themselves major creditors of GITIC) was the source of considerable dissatisfaction among the foreign lenders which had committed large sums to the GITIC group (Chang 1999). Similarly, the collapse of the Zhu Kuan Development Company Limited, an enterprise which effectively represented the commercial interests of the Zhuhai Special Economic Zone Government, demonstrated that neither the Old Law nor the courts were able to deal with a complex large-scale bankruptcy or stop local government from interfering with the liquidation process (Pace 2006). The fundamental issue in establishing an equitable and functional bankruptcy regime is the balance to be struck between the confl icting interests of the various interested parties: the creditors (including the secured creditors); the employees (who in China expected to enjoy lifetime employment and who often have few prospects of secure employment once an enterprise is closed down); and the state (which has an overall interest in preserving social order and full employment and a direct interest in the ownership and control of state-owned assets). The state, however, showed that in practice it was not prepared to accept even the balance struck in the Old Law. Thus, despite the provision in the Old Law (Article 32) that a secured creditor should receive priority in respect of claims secured by the property, the employees came to enjoy a higher priority than the secured creditors (Tomasic and Wang 2006: 18; State Council Supplementary Notice 1997: Article 5). Another major issue for secured creditors was the lack of a coherent and
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security. The Guarantee Law was not enacted until 1995, and did not completely resolve questions relating to the grant of security interests over stateowned assets such as land (see Supreme People’s Court 2003). Indeed, the ability of local government to revoke the grant of land use rights and thus reduce the value of the assets available for distribution was a major issue for the creditors in the Zhu Kuan winding-up (Pace 2006). The result was that the Old Law was strongly weighted against the creditors, both domestic and foreign. The secured creditors were subordinated to the employee claims. The unsecured creditors, ranking as they did behind the employees and the various tax administrations (Old Law: Article 37), had very little chance of recovering all, or indeed any, of their claims. The debtors, through their ability to resist bankruptcy by the application of political infl uence, were in a much stronger position. It might be expected that the considerations which cause governments to protect SOEs would not apply where enterprises are privately owned and run. Nonetheless, particularly in times of fi nancial crisis, the various levels of the Chinese government continue to have a strong interest in bankruptcies. In the case of all enterprises, both private and state-owned, local and higher level governments have a stake in the employment opportunities created by the enterprise, the payment of taxes and the prestige and benefi ts for civil servants and agencies in being seen to encourage investment and create a good environment for development. They may also, of course, suffer a major loss of face where an investment which has garnered the support of local government fails. In addition, local government, or members of the government, may have a fi nancial interest in particular enterprises, and there may be personal relationships between investors and government offi cials. In contrast to the Old Law, the Enterprise Bankruptcy Law aimed to establish a new and equitable legally based regime. Considerable power is given to the courts to run the bankruptcy process; an independent administrator conducts the liquidation; options are given to the parties to seek reorganization of the company or a composition with creditors if one of these options is preferable to liquidation and the manner of administration and liquidation is clearly set out. There is, at least theoretically, little space in this structure for interference from the political, economic and social interests of government or Party.
