CHINAS NEW BANKRUPTCY LAW
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March 2, 2007 China Bulletin CHINA’S NEW BANKRUPTCY LAW The standing Committee of the determination accepting the application. China. Perhaps the most significant National People’s Congress passed into Upon acceptance of the application, the change is the creation of an independent law the statute known as the “new” People’s Court appoints an administrator administrator who has the duties to Enterprise Bankruptcy Law on August that takes over control of the bankrupt manage the debtor’s affairs. The 27, 2006. The law becomes effective on company’s affairs and oversees the administrator has the ultimate June 1, 2007, replacing the 1986 administration of the assets, similar to a responsibility for controlling the assets of Enterprise Bankruptcy Law. trustee under the United States the debtor and determining how best to The new Enterprises Bankruptcy Law is Bankruptcy Code. dispose of the assets while managing the comprised of 12 chapters with 136 The order accepting the bankruptcy case daily business affairs of the debtor, subchapters. The scope of the law is to is made public by published notice reviewing claims and ultimately making encompass all types of Chinese legal which also specifies the period of time in distributions. The administrator will also entities, whether privately owned, state which creditors can submit their claims. work with the creditors to determine a owned or foreign invested companies, Creditors must submit their claims to final list of accepted claims to be and is intended to provide new the court-appointed administrator prior submitted to the People’s Court and, alternative procedures for insolvent to the deadline in order to participate in where deemed appropriate, investigate companies to either restructure or the bankruptcy process including the prior activities of the debtor. It is liquidate. participation at the first creditors’ anticipated that independent private meeting. The law specifies that the organizations such as accounting firms Under the new Enterprise Bankruptcy will develop an expertise to be Law, bankruptcy administration period to be set for filing of claims should not be less than 30 days or more appointed as administrators. The current commences when a financially troubled practice in China is to have the People’s company files a bankruptcy application than three months from the date following the public announcement of Court appoint a liquidation committee in the People’s Court. Creditors may also comprised of representatives of various make such an application if the debtor is the acceptance of the bankruptcy filing. government agencies. unable to pay its debts as they fall due Within 15 days after the filing deadline, and has insufficient assets to pay off all the People’s Court is to convene the first Another anticipated benefit of the new debts or clearly lacks the ability to do so. creditors’ meeting at which the debtor, law is the broader powers granted to For proceedings involving commercial the court-appointed administrator and creditors. In addition to being authorized banks, securities firms and insurance attending creditors will determine which to commence a bankruptcy proceeding, companies, an application for claims should be accepted, leading to the creditors are to be actively involved bankruptcy can be made to the People’s the filing of an agreed list of claims with in determining the approved creditor list Court by the governmental financial the People’s Court. Upon the People’s and, once a creditor’s claim has been supervisory institutions. Court confirming the list of claims, that approved, that party will then be able to list will determine the parties entitled to fully participate in the first creditors’ Within 15 days of the filing of an meeting, including: voting for a application, the People’s Court must share in subsequent distributions. replacement administrator, determining issue its order accepting or rejecting the While details of the new Enterprise if a creditors’ committee would be application. If accepted, the People’s Bankruptcy Law are not generally appropriate, and providing input on how Court will notify the debtor, the available in English, the statute is the debtor’s assets are to be liquidated applicant (if a party other than the viewed as providing significant benefits and the proceeds distributed. debtor) and all known creditors of the over the current bankruptcy law in March 2, 2007 China Bulletin Additional Information The new law also recognizes the priority of secured creditors with regard to For more information, contact Will pledged assets. Article 109 of the new Kohn at email@example.com or Enterprise Bankruptcy Law states that 216.363.4182. Biographical secured creditors shall have first priority information is available at over the pledged assets over not only www.bfca.com. other creditors, but also claims of employees. There is a transition rule, however, in Article 132 which states As a reminder, this Advisory is being sent that after the new law becomes effective to draw your attention to issues and is (June 1, 2007) any claims of employees not to replace legal counseling. that pre date the effective date shall UNITED STATES TREASURY maintain their priority to pledged assets DEPARTMENT CIRCULAR 230 even over secured creditors, but that any DISCLOSURE: TO ENSURE employee claims accruing on or after COMPLIANCE WITH REQUIREMENTS June 1, 2007 would be subordinated with IMPOSED BY THE IRS, WE INFORM regard to pledged assets to the claims of , YOU THAT UNLESS EXPRESSLY the secured creditor. STATED OTHERWISE, ANY U.S. FEDERAL TAX ADVICE CONTAINED IN In addition to the formal procedures THIS COMMUNICATION (INCLUDING with regard to bankruptcy proceedings, ANY ATTACHMENTS) IS NOT the new Enterprise Bankruptcy Law also INTENDED OR WRITTEN TO BE provides statutorial alternatives to the USED, AND CANNOT BE USED, FOR bankruptcy process. A “restructuring” THE PURPOSE OF (i) AVOIDING procedure is available which permits the PENALTIES UNDER THE INTERNAL REVENUE CODE, OR (ii) PROMOTING, debtor, with the approval of its creditors, MARKETING OR RECOMMENDING TO to have time to submit a plan for the ANOTHER PARTY ANY TRANSACTION reorganization of its business, but this OR MATTER ADDRESSED HEREIN. alternative requires an agreement between the debtor and its creditors by the end of the first meeting of creditors. Another alternative process is “conciliation” whereby the debtor can propose a compromise and payment program of its debts with its creditors which also must be agreed to by the creditors by the end of the first meeting of creditors. While it is clear that China has been in need of a more modern approach to bankruptcy for its financially troubled companies, it remains to be seen how efficient the new process will be. Certainly many of the provisions of the new Enterprise Bankruptcy Law (e.g., independence of case administrators, contractual liens given their appropriate priority, and some degree of flexibility to avoid a liquidation process) are significant enhancements over the existing law.