China: New Law Ushers In Sweeping Changes To Bankruptcy Regime In China

Last Updated: 21 September 2006

The new Enterprise Bankruptcy Law of the People’s Republic of China ("PRC") (the "Bankruptcy Law") was adopted on August 27, 2006 and will take effect on June 1, 2007, superseding the 1986-enacted Enterprise Bankruptcy Law (Trial) (the "1986 Law"), governing the bankruptcy of State-owned Enterprises ("SOEs"). The Bankruptcy Law offers for the first time a unified regime applicable to all types of enterprises in China and also provides a more robust and detailed regime for enforcement of creditors’ claims. We discuss below some highlights of the Bankruptcy Law:

Scope Of The New Law

The 1986 Law only applies to the bankruptcy of SOEs, while the Bankruptcy Law provides a unified bankruptcy system for all "enterprises with legal person status," covering both SOEs and privately-owed companies, including foreign investment enterprises ("FIEs"). Individual or partnership bankruptcy, however, is not covered by the Bankruptcy Law.

Cross-Border Insolvency

The Bankruptcy Law for the first time incorporates specific provisions governing the administration of cross-border bankruptcies.

In relation to "outbound" insolvency cases involving the overseas assets of a PRC debtor, Article 5 states: "The validity of any bankruptcy proceedings commenced in accordance with this Law shall extend to the properties of the debtor outside of the PRC." China has not adopted the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency ("UNCITRAL Model Law"), which provides a framework for cooperation with foreign courts on cross-border insolvency proceedings. The U.S., the U.K., and other countries that have adopted the UNCITRAL Model Law will nonetheless accept "foreign representatives" from China operating under Article 5 and pursuing assets in those countries as part of China bankruptcy proceedings where they can establish that China is the "center of main interests" of the debtor. Because the UNCITRAL Model Law does not condition any benefits on reciprocity, the U.S. and other Model Law countries will confer substantial "recognition" and cooperation for China representatives, even though there is less reciprocal benefit to the U.S. or other foreign players in China. The new U.S. Chapter 15 is a powerful tool for China "foreign representatives" to arrange for the transfer of U.S. assets and creditors to the China insolvency proceedings. U.S. creditors, on the other hand, worry that their recoveries from U.S. assets of China debtors will decrease once those assets become administered and redistributed in China under China proceedings governed by the Bankruptcy Law.

Article 5 also permits "inbound" cases, where a foreign representative from another country seeks recognition of a foreign court ruling in China, provided that the following conditions are satisfied:

There are relevant treaties or reciprocal relations between such country and the PRC;

The bankruptcy proceedings outside the PRC do not violate the State sovereignty, national security and social public interest of the PRC; and

The bankruptcy proceedings outside the PRC do not harm the lawful rights and interests of the creditors in the PRC.

These conditions are quite onerous, and the court has substantial discretion to interpret the conditions and decide whether they have been satisfied before permitting the recognition of a foreign court ruling. Nonetheless, the Bankruptcy Law is a step forward moving towards the adoption of international standards in the area of cross-border insolvency. Moreover, at least in countries adopting the UNCITRAL Model Law (e.g., the U.S. Chapter 15), China now can credibly seek to resolve the assets and liabilities of Chinese entities wherever located.

Grounds For Bankruptcy Petitions

The 1986 Law allows a creditor to file a bankruptcy petition only when the debtor is unable generally to pay its debts as they fall due. Under the Bankruptcy Law, both the debtor and its creditors are allowed to file reorganization or bankruptcy petitions to the People’s Court in the following circumstances (subject to special rules for financial institutions):

  • A creditor may apply to the court for reorganization or bankruptcy of a debtor, if the debtor is unable to pay its debts as they fall due (cash-flow insolvency).
  • A debtor may apply to the court for reorganization, conciliation or bankruptcy, if it is unable to pay its debts as they fall due, or if its assets are insufficient to pay off all debts (balance-sheet insolvency), or if it is obviously insolvent.

The Bankruptcy Law has expanded the grounds for bankruptcy petitions and has also introduced corporate reorganization and conciliation as mechanisms to revive an insolvent company.

Corporate Reorganization

Under the 1986 Law, a corporate reorganization can only be petitioned for and carried out by the government authorities. The Bankruptcy Law, however, allows either the debtor or the creditor to apply to the People’s Court for reorganization of the debtor. When a creditor petitions to bankrupt a debtor, the debtor, or its investors holding more than one third of the debtor’s registered capital, may apply to the court for reorganization after the court has accepted the bankruptcy petition, but before the debtor is declared bankrupt.

The debtor or administrator must submit a draft reorganization plan to the court within six months (or nine months with court approval) of the court’s ruling for reorganization. The draft reorganization plan must be approved by a majority of the number of creditors in each voting group, representing at least two-thirds of the total amount of confirmed claims in a class and a majority of the creditors in a class present at the creditor’s meeting. All creditors who have declared a claim are allowed to vote on a draft plan, except that secured creditors may not vote on a plan to sell the business or distribute assets, unless they give up their security interests.

The creditors approving the draft reorganization plan are classified into the following groups: (i) creditors with secured claim over specific properties of the debtor, (ii) employees with claims on salaries and social insurance premium, (iii) agencies with claims on outstanding taxes, and (iv) ordinary creditors. When the draft reorganization plan is not approved by all of the voting groups, the debtor or the administrator can still apply to court for approval, if the reorganization plan satisfies certain conditions. If reorganization plan is not approved or the debtor does not implement the reorganization plan, the court may declare the debtor bankrupt.


A debtor may apply to the People’s Court for conciliation of its debt after the court accepts the bankruptcy application. If the court approves the conciliation application, it will make a public announcement and convene a creditors’ meeting to discuss the draft conciliation plan. Once the reconciliation is approved by the creditors’ meeting and the court, the administrator shall transfer the business and assets to the debtor. To become effective, the plan must be approved by more than half of creditors present at the meeting holding more than two-thirds of the total amount of confirmed claims (excluding secured claims). If the conciliation plan is rejected, the court will declare the debtor bankrupt.


The 1986 Law authorizes a "liquidation committee" (consisting of government officials and debtor’s management) to take control of the assets of the debtor. To address creditors’ concerns about transparency and independence of the liquidation committee, the Bankruptcy Law has introduced the role of an administrator to manage the assets and operations of the debtor as well as other legal proceedings. The administrator, who is appointed by the People’s Court, must meet the qualifications stipulated in the Bankruptcy Law. Law firms, accounting firms and bankruptcy liquidation firms or professionals from such firms are among those eligible to serve.

Administrators are required to exercise duties of loyalty and of diligence and are liable for any losses caused to the debtor’s properties that result from a breach of those duties. Professional liability insurance is required for individual administrators.

Priorities Of Claims

After the debtor is declared bankrupt, all of its assets must be sold by auction, unless otherwise determined by the creditor’s meeting. The bankrupt assets can be sold as a whole or in part. This assumes that any reorganization or conciliation has failed.

The Bankruptcy Law stipulates a scheme for claim payment priority. Unlike the 1986 Law, the Bankruptcy Law no longer gives higher priority to unpaid employee wages and social insurance premiums. Under Article 109, secured creditors have payment priority to the extent of the value of the secured properties, while the undersecured portion is treated as a common claim. Payment of claims in a liquidation must be made according to the following order:

  1. bankruptcy expenses and joint interest debts;
  2. unpaid employees’ salaries and basic social insurance premiums;
  3. outstanding tax; and
  4. ordinary unsecured credits.


Until the enactment of the Bankruptcy Law, China did not have a unified bankruptcy law applicable to all enterprises. Historically bankruptcies of SOEs have often been driven by public policy concerns more than the interests of creditors out of concerns for large unemployment and social instability. Bankruptcies of other types of entities have been subject to relatively vague and general bankruptcy provisions of the Law of Civil Procedure and of Supreme Court interpretations. The Bankruptcy Law, with its detailed provisions governing a broad range of enterprise debtors, will bring sweeping changes to the administration of creditrs’ claims in the PRC. More streamlined procedures will help enhance the transparency of bankruptcy proceedings. New rules, including those providing for bankruptcy petitions, role of administrators, corporate reorganization, conciliation, role of creditors and priorities of claims, will bring China’s enterprise bankruptcies closer to international standards.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions