This paper studies the litigation systems of Chinese (PRC) bankruptcy laws such as ‘policy-based bankruptcy’. The politicization and legalization of the Chinese enterprise litigation laws has not been required and/or unprecedented for along time under the centralized socialist economy, where most of enterprises were state-owned. Nonetheless, China’s economy has moved rapidly toward an open market economy since 1979. Ever since this transition, there has been a growing interest to move more progressively toward bankruptcy issues of the state-owned enterprises. China finally enacted the <PRC Law of Enterprise Bankruptcy> in 1986. Everything but the litigation of bankruptcy chapters is close to the imposition of administrative edicts. For example, during the settlement process, the administrative arbitration is formulated as a mandatory process, and the related obligatory right of the labor wage is superior to that of a mortgagee. Interestingly enough, however, the important value of this law has been underscored to date due to several factors: 1) People of the social system mistakenly believing that under socialism, the state-owned enterprises would never become bankrupt; 2) People trusting that the nation would and should provide security for the laborer's wages and social welfare; 3) The government would not allow the SOEs to file a bankruptcy litigation because of asset deficiency, as the SOE contributed most of its profit to the central government. That is, the SOEs are protected like people of the government; 4) Local protectionism as well as bureaucratic red-tapism; and finally, 5) Lack of legal thresholds. Furthermore, the Chinese government puts ‘policy-based bankruptcy’ into operation, related with SOE bankruptcy. Some elements of this process are similar to that of Korea’s economic restructuring after the 1998 IMF crisis. Especially in the area of the litigation of the enterprise bankruptcy, the Chinese ‘policy-based bankruptcy’ is more emblematic of socialism in the context of state-guided interest. For instance, the protection of the labor workers, their security, and the benefits of their labor are considered to be the most primary goals of the law. In addition, the law encourages blue chip companies to merge and acquire the bankruptcy companies. Presently, in China, bankruptcy is widely recognized as a ‘policy-based bankruptcy’. That is, the bankruptcy process is a government-led administrative litigation process rather than a jurisdictional one. Meanwile, M&A markets become more attractive. Even though Western companies have a growing interest in M&As with Chinese enterprises, and although a lot of state-owned enterprises were merged and acquired by them in the process of ‘policy-based bankruptcy’, without a complete understanding of the systems of the litigation - which is mostly formed on the basis of Chinese interest - their bids become ineffective or erroneous. The main body, the principles as well as the primary texts of the process are almost completely different from those of the market economy. Without a doubt, therefore, the complete understanding of the whole mechanism of the litigation process is important as a template in formulating effective M&A policies with China. A new law of ‘enterprise bankruptcy’ will be effective from June 1. 2007. There are a lot added elements, clauses, and provisions of international trends for the litigation systems of the bankruptcy. Although we can debate how long the old ‘policy-based bankruptcy’ would remain effective in M&A markets, its impact on the M&A markets would diminish effectively, eroding public interest and therefore it will come to rely on the new law of ‘enterprise bankruptcy’ in near future.

This paper studies the litigation systems of Chinese (PRC) bankruptcy laws such as ‘policy-based bankruptcy’. The politicization and legalization of the Chinese enterprise litigation laws has not been required and/or unprecedented for along time under the centralized socialist economy, where most of enterprises were state-owned. Nonetheless, China’s economy has moved rapidly toward an open market economy since 1979. Ever since this transition, there has been a growing interest to move more progressively toward bankruptcy issues of the state-owned enterprises. China finally enacted the <PRC Law of Enterprise Bankruptcy> in 1986. Everything but the litigation of bankruptcy chapters is close to the imposition of administrative edicts. For example, during the settlement process, the administrative arbitration is formulated as a mandatory process, and the related obligatory right of the labor wage is superior to that of a mortgagee. Interestingly enough, however, the important value of this law has been underscored to date due to several factors: 1) People of the social system mistakenly believing that under socialism, the state-owned enterprises would never become bankrupt; 2) People trusting that the nation would and should provide security for the laborer's wages and social welfare; 3) The government would not allow the SOEs to file a bankruptcy litigation because of asset deficiency, as the SOE contributed most of its profit to the central government. That is, the SOEs are protected like people of the government; 4) Local protectionism as well as bureaucratic red-tapism; and finally, 5) Lack of legal thresholds. Furthermore, the Chinese government puts ‘policy-based bankruptcy’ into operation, related with SOE bankruptcy. Some elements of this process are similar to that of Korea’s economic restructuring after the 1998 IMF crisis. Especially in the area of the litigation of the enterprise bankruptcy, the Chinese ‘policy-based bankruptcy’ is more emblematic of socialism in the context of state-guided interest. For instance, the protection of the labor workers, their security, and the benefits of their labor are considered to be the most primary goals of the law. In addition, the law encourages blue chip companies to merge and acquire the bankruptcy companies. Presently, in China, bankruptcy is widely recognized as a ‘policy-based bankruptcy’. That is, the bankruptcy process is a government-led administrative litigation process rather than a jurisdictional one. Meanwile, M&A markets become more attractive. Even though Western companies have a growing interest in M&As with Chinese enterprises, and although a lot of state-owned enterprises were merged and acquired by them in the process of ‘policy-based bankruptcy’, without a complete understanding of the systems of the litigation - which is mostly formed on the basis of Chinese interest - their bids become ineffective or erroneous. The main body, the principles as well as the primary texts of the process are almost completely different from those of the market economy. Without a doubt, therefore, the complete understanding of the whole mechanism of the litigation process is important as a template in formulating effective M&A policies with China. A new law of ‘enterprise bankruptcy’ will be effective from June 1. 2007. There are a lot added elements, clauses, and provisions of international trends for the litigation systems of the bankruptcy. Although we can debate how long the old ‘policy-based bankruptcy’ would remain effective in M&A markets, its impact on the M&A markets would diminish effectively, eroding public interest and therefore it will come to rely on the new law of ‘enterprise bankruptcy’ in near future.

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China, the litigation systems of PRC bankruptcy, state-owned enterprise bankruptcy, policy-based bankruptcy