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Even though China enacted the “PRC Act of Enterprise Bankruptcy,” in 1986, the Act was not applied to all state-owned enterprises for a variety of reasons, and China’s “Administrative legislation” generally prevailed over such bankruptcy proceedings. Therefore, the need for a unified act applicable to all corporate entities not limited to state-owned enterprises has
become increasingly evident. Accordingly, a new act of “Enterprise Bankruptcy” was enacted which took effect on June 1, 2006. Under the existing Bankruptcy Act, while “liquidation” was one means of settlement available to the parties at hand, “composition” and “restructuring” were
combined into one joint proceeding. Government agencies were also authorized to intervene in such composition and restructuring proceedings at their discretion, a practice unique to China. The new act, however, introduces separate proceedings for liquidation, composition and
reorganization.
The new act expands the scope of eligibility for applicants, stipulates the appointment of a bankruptcy administrator, strengthens creditors’ rights, and changes rights relationships between secured creditors and workers. The new act also contains provisions to prevent fraudulent transfer of assets and to strengthen creditors’ responsibilities during bankruptcy proceedings, as well as special provisions on bankruptcy for financial institutions, policy-based bankruptcy, and international bankruptcy regulations.
Although the new act still maintains a role for significant government involvement, it is nevertheless a cornerstone of China’s effort to transition to a market-based economy. This act will be both China’s new economic act, as well as the first market economy-based bankruptcy act that regulates the liquidation and/or rehabilitation of all legal entities. As a supplement to
the existing act, this new act on enterprise bankruptcy is expected to have profound effects on China’s creation of a legal framework for its “socialist market economy.”