CHINAS NEW BANKRUPTCY LAW

							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 wkohn@bfca.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.