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1. Insolvency and restructuring procedures
1.1 – What are the main insolvency and restructuring procedures applicable to companies?
The Enterprise Bankruptcy Law of the People’s Republic of China1 ("Bankruptcy Law") is the main legislation governing corporate bankruptcy proceedings in China. The term "bankruptcy" herein is a collective term referring to liquidation, reorganization and compromise. All three bankruptcy proceedings aim to fairly settle the creditor-debtor relationship, safeguard the legitimate rights and interests of creditors and debtors, and maintain the market order of the socialist economy. The three proceedings differ mainly in their respective ultimate ends. Reorganization and compromise are means to relieve a debtor of financial distress by maintaining the debtor’s legal personality and achieving sustainable profitability through debt settlement and business restructuring, while a creditor secured by the specific property of the debtor who has not given up his priority right does not enjoy the right to vote on agreements for compromise, unless he is willingly bond by the agreements. On the other hand, the purpose of liquidation is to achieve an equal distribution of a debtor’s remaining assets among all creditors, following which the debtor will cease to exist as a legal person.
Where an enterprise legal person cannot pay off its debts due and its assets are not enough for paying off all the debts, or it apparently lacks the ability to pay off its debts,2 the debtor can file for its own reorganization, compromise or liquidation, while the creditor can only file for the reorganization or liquidation of the debtor.3 Besides, where an enterprise legal person is under the aforesaid circumstance or has apparently forfeited the ability to pay off its debts, it can undergo reorganization.4 There is no compulsory priority among liquidation, reorganization and compromise, with the commencement of any proceeding solely at the discretion of the petitioning debtor or creditor presumably after considering all relevant circumstances, though three bankruptcy proceedings differ in factors e.g. applicants, stakeholders, application review, legal force and objective and etc. Conversion of proceedings will happen upon the occurrence of certain trigger factors, and reorganization or compromise is not the compulsory pre-procedure for liquidation.
1 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007). 2 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 2. 3 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 7. 4 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 2.
1.2 – Can a company obtain a moratorium whilst it prepares a restructuring plan? If so, what is the effect of the moratorium?
An automatic stay will commence after a bankruptcy application is accepted by the court. The stay mainly functions in the following aspects:
- (a) Lifting property preservation measures and suspending enforcement actions. Preservation measures concerning the debtor’s assets shall be lifted, and enforcement procedures shall be suspended. The stay on enforcement procedures will remain throughout the bankruptcy proceedings.5
- (b) Suspending other legal proceedings. All pending civil lawsuits (regardless of which people’s courts are hearing them) and arbitration involving the debtor shall be suspended but will continue after the administrator takes over the debtor’s assets.6
- (c) Suspending enforcement of security interests in the period of reorganization. During reorganization, enforcement of security interests over the debtor’s specific assets is suspended, provided that the secured creditor may request the people’s court to restore the enforcement of security interests where the collateral may be damaged or its value may be significantly impaired to the point of endangering the interests of the security holder.7
5 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 19. 6 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 20. 7 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 75.
1.3 – How long will it generally take for a creditor to achieve the liquidation of an insolvent company, assuming an undisputed claim and no opposition from the company?
Provisions regarding time limits on application review by court, registration of creditor claims, and the convention of the first creditors' meeting in a proceeding of liquidation, reorganization, and compromise are the same.
- (a) Application review by court. Where a creditor makes an application for bankruptcy, the competent court shall, within 5 days from the date it receives the application, notify the debtor concerned. The debtor shall submit objection, if any, to the court within 7 days from the notification served. The court shall decide whether or not to accept the case within 10 days at the expiration of the period for raising objections. Except for the aforesaid circumstances, the court shall decide whether or not to accept an application for bankruptcy within 15 days from the date it receives the application. Under special circumstances where the time limit for deciding whether to accept a case needs to be extended, it may be extended for another 15 days upon approval by the people’s court at the next higher level.8 To sum up, if the court receives an application for bankruptcy and the debtor does not submit objection, it shall accept the application within 20 days at the latest; while the debtor submit objection to the application, the court shall accept the application within 22 days at the latest.
- (b) Creditors’ claims declaration. The time limit for a creditor to declare claims calculated from the date when the people’s court announces its acceptance of the application for bankruptcy, shall be not less than 30 days at least but not more than three months at the most.9
- (c) Convention of the first creditors’ meeting. The first creditors’ meeting shall be convened by the people’s court within 15 days before the expiration date of the time limit for declaration of claims.10
There is no provision regarding the time limit for procedure termination in the case of a liquidation. The exact time of a liquidation is related to the degree of difficulty which the property can be realized. In practice, simple cases e.g. zero-asset bankruptcy where debtors have no asset left normally take 6 months to terminate the procedure, while the complicated cases might take 1 year or 2 or even longer.
In the case of a reorganization, the debtor (if it remains in possession) or the administrator must submit a reorganization plan to the court and the creditors’ meeting within six months from the commencement of reorganization. The six-month period can be extended to extra three months by the people’s court upon request by the debtor or the administrator if justifiable grounds are presented. A reorganization plan adopted by creditors and sanctioned by the court binds all creditors and the debtor. If a debtor or administrator fails to submit a draft plan for reorganization on schedule, the court shall rule that the procedure for reorganization should be terminated and declare the debtor bankrupt 11, which means the debtor will be liquidated and wound up.
8 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 10. 9 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 45. 10 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 62. 11 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 79.
1.4 – Does your jurisdiction make use of a distressed sale process by which the business/assets of the company can be sold?
There is no specific process for distressed sale under PRC law. In a bankruptcy proceeding, the administrator or the debtor (in a DIP mode) performs the duty of managing and disposing of the debtor’s property under the supervision by creditors and the court.
2. Insolvency office-holders and courts
2.1 – Who can act as an insolvency office-holder?
Pursuant to Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases,12 a high people’s court must prepare its qualified administrators pool and the pool shall contain a number of law firms, accounting firms, bankruptcy liquidation firms and professionals within its region.13 Except for the appointment of a liquidation group to be the administrator, the administrator shall be appointed by the people's court from the register as a general rule.14 In practice, a liquidation group will normally be appointed by the court in the case of bankruptcy of large corporate groups and financial institutions.
12 Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007). 13 Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007) Art 2. 14 Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007) Art 1.
2.2 – Who decides the identity of the insolvency office-holder, and what restrictions apply?
Pursuant to Bankruptcy Law and Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases, the administrator shall be designated by the people’s court.15 For simple cases, the people's court may appoint an administrator from the administrators of other regions stated in the administrators pool prepared by the local higher peoples' court by random means. For complicated cases, the people's court may appoint a liquidation group as administrator, or invite the social intermediary agencies, which are included in the administrators pool to participate in the competition, and appoint an administrator out of the social intermediary agencies participating in the competition. To appoint an administrator by way of competition, the people's court shall form a special reviewing committee.16
Where the creditors’ meeting believes that the administrator cannot perform his duties according to law or impartially or is incompetent to fulfill his duties, the meeting may apply with the people’s court for replacement. If the people's court believes that the grounds for applying for changing the administrator stand, it shall decide to change the administrator.17
A person shall not serve as an administrator, if: (1) he has been subjected to criminal punishment for intentional offense; (2) his qualification certificate for the relevant practice has been revoked; (3) he has an interest in the case; or (4) the people’s court deems it improper to have him serve as an administrator.18 Where a social intermediary agency or a member of the liquidation group is under any of the following circumstances, if the faithful performance of the administrator's duties may be affected, it may be determined that there is an interest relationship: (1) there is any unsettled credit-debt relationship between it (him) and the debtor or any creditor; (2) during the three years before the people's court accepts the bankruptcy application, it (he) has ever provided relatively fixed intermediary services for the debtor; (3) it (he) is a controlling shareholder or actual controller of the debtor or any creditor at present, or it (he) has ever been a controlling shareholder or actual controller of the debtor or any creditor during the three years before the people's court accepts the bankruptcy application; (4)now it (he) is acting as the financial consultant or legal consultant of the debtor or of any creditor, or it (he) has ever acted as the financial consultant or legal consultant of the debtor or of any creditor during the three years before the people's court accepts the bankruptcy application; or (5)other circumstances under which the people's court deems that its (his) faithful performance of the administrative duties may be affected.19
15 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 22; Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007) Art 1. 16 Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007) Art 21. 17 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 22; Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007) Art 31. 18 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 24. 19 Provisions of the Supreme People’s Court on Appointing Administrators for Enterprise Bankruptcy Cases (issued 12 April 2007; enacted 1 June 2007) Art 23.
2.3 – Are insolvency cases heard by specialist judges, or in the general commercial courts?
In general, a bankruptcy case shall be under the jurisdiction of the people’s court at the place where the debtor resides.20 The cases relating to the bankruptcy reorganization of listed companies shall be under the jurisdiction of the intermediate people's court at the place where the listed company is domiciled, that is, the location of its main office. If the location of the main office of the listed company cannot be determined, the case shall be under the jurisdiction of the intermediate people's court at the place where the listed company is registered. When submitting a (pre)reorganization application to the people's court, the domicile of the listed company shall have continuously existed within the jurisdiction of the court for one year or more.21
In August 2016, the Supreme People’s Court instructed that specialized bankruptcy chambers be established within at least one intermediate people’s court in every provincial capital and municipality directly under the Central Government. By December 2024, 18 specialized bankruptcy chambers have been established in Beijing, Shanghai, Shenzhen, Tianjin, Guangzhou, Wenzhou, Chongqing, Hangzhou, Jinan, Qingdao, Nanjing, Suzhou, Xiamen, Chengdu, Haikou, Changchun, Wuhan and Hefei.
20 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 3. 21 Minutes of the Symposium on the Effective Trial of Cases concerning the Bankruptcy Reorganization of Listed Companies (issued 31 December 2024) Art 5.
3. Position of directors
3.1 – To what extent do the directors of the company remain in control of its affairs during any of the procedures described above?
During the period of reorganization, the debtor may, through his application and upon approval granted by the people’s court, manage his property and business operations on his own under the supervision of an administrator, and the administrator that has taken over the property and business operations from the debtor shall hand over the property and business operations to the debtor, and the functions and powers to be exercised by the administrator as specified by the Bankruptcy Law shall be exercised by the debtor. Director, supervisor and senior manager of a debtor shall takes charge of the property and business operations pursuant to Company Law of the People's Republic of China22 ("Company Law") and the company bylaws.23
The administrator that takes charge of the property and business operations may appoint a business manager of the debtor to take care of the business operations.24 Under this circumstance, the appointed directors and business mangers shall perform their duties within the scope of the authorization of the administrator.
22 Company Law of the People's Republic of China (issued 29 December 2023; enacted 1 July 2024; last revised 29 December 2023). 23 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 73. 24 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 74.
3.2 – Are there circumstances in which directors are obliged to file for insolvency proceedings? If so, when do those circumstances arise?
There is no such compulsive provision of circumstances in which directors are obliged to file for insolvency proceedings in the Bankruptcy Law and the Company Law in China.
3.3 – What are the risks facing the directors of an insolvent company?
In general, the directors have fiduciary duties under PRC Corporate Law. The failure to the fiduciary duties by a director, supervisor or senior manager, which can be proved as a reason for bankruptcy, might cause civil liability. Furthermore, such person shall not serve as a director, supervisor or senior manager of any other enterprise within three years from the date when the procedure for bankruptcy is terminated.25
During the period from the date when the decision made by the people’s court to accept an application for bankruptcy is served on the debtor to the date when the procedure for bankruptcy is concluded, legal representative of an enterprise, the financial managers and business managers of the enterprise shall fulfill the following obligations:(1) properly preserving the property, seals, account books, documents, etc. which are in their possession and under their management; (2) proceeding with the work according to the requirements of the people’s court and the administrator, and truthfully answering their inquiries; (3) attending the creditors’ meetings as non-voting participants and truthfully answering the creditors’ inquiries; (4) remaining at their domiciles, unless otherwise permitted by the people’s court; and (5) not taking up any post as director, supervisor or senior manager in any other enterprise.26
If there are debts between the debtor and its directors, supervisors and senior managers, on the one hand, the directors, supervisors and senior managers are obliged to return the abnormal income obtained from the debtor by abusing their authority and the appropriated property of the debtor.27 On the other hand, the salaries of the directors, supervisors, and senior managers of a bankrupt enterprise shall be calculated based on the average wages of the employees of the enterprise.28
25 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 125. 26 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 15. 27 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 36. 28 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 113.
4. Position of creditors
4.1 – What are the main forms of security over movable and immovable property?
Pursuant to the Civil Code of the People’s Republic of China ("Civil Code") and Interpretation of the Supreme People's Court of the Application of the Relevant Guarantee System of the Civil Code of the People's Republic of China, main forms of security over movable and immovable property include mortgage, pledge, lien and earnest money. Besides, there are retention of ownership, a finance lease, transfer guarantee and other statutory non-property-based forms of security.29
In China, mortgage on property and pledge shall be created upon registration. And mortgage on movable property shall be created at the time when the mortgage contract enters into effect, without registration, such a mortgage may not be asserted against a bona fide third person.30
Movable property such as production equipment, receivables and financial leases can be registered and searched through the Unified Registration Publication System for Movable Asset Financing of the People's Bank of China Credit Center, while registration for vehicles, aircraft and immovable property is only available online in few areas.
29 Civil Code of the People’s Republic of China (issued 28 May 2020; enacted 1 January 2021); Interpretation of the Supreme People's Court of the Application of the Relevant Guarantee System of the Civil Code of the People's Republic of China (issued 31 December 2020; enacted 1 January 2021). 30 Civil Code of the People’s Republic of China (issued 28 May 2020; enacted 1 January 2021) Art 402, Art 403, Art 441.
4.2 – How does the opening of insolvency proceedings affect the rights of secured creditors?
A bankruptcy proceeding does not affect the priority of creditors with security with respect to a particular property. During the period of reorganization, the exercise of the security right over the specific property of a debtor shall be suspended, while a creditor secured by the specific property of the bankrupt still enjoy the priority in being repaid with the specific property. During the period of liquidation and compromise, a creditor enjoying security right in the particular property of the debtor may claim to the administrator to exercise the priority of compensation with respect to the realization of the particular property, in which case the administrator shall realize the property in a timely manner and may not refuse the claim on the ground that a resolution of the creditors' meeting is required, among others, unless the separate disposition of the secured property will diminish the value of other bankruptcy property and thus their disposition as an entirety is required.31
31 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 75, Art 96, Art 100; Minutes of the National Court Work Conference on Bankruptcy Trials ( issued 4 March 2018) Art 25; Minutes of the National Courts' Civil and Commercial Trial Work Conference ( issued 8 November 2019) Art 112.
4.3 – Where a debt owed to a secured creditor exceeds the value of the security, is the secured creditor entitled to claim for the shortfall?
A creditor secured by the specific property of the bankrupt shall enjoy the priority in being repaid with the specific property.32
Where when a creditor enjoying the priority as specified aforesaid exercises the priority to repayment but is not repaid in full, the unrepaid amount shall be taken as common claims.
32 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 109.
4.4 – Which classes of creditor are given preferential status? Are any classes subordinated?
The bankruptcy property shall, after the expenses for bankruptcy proceedings are defrayed and the debts incurred for the common good of creditors are repaid first, be liquidated according to the following order: (1) the wages, subsidies for medical treatment, injuries and disability and the pensions for the disabled and the families of the deceased which the bankrupt owes, the basic old-age insurance premiums and the basic medical insurance premiums which he owes and fails to enter in the employees’ personal accounts, and the compensations which should be paid to the employees as prescribed by relevant laws and administrative regulations; (2) the social insurance premiums which the bankrupt fails to pay, other than the ones which are specified in the preceding subparagraph, and the taxes which the bankrupt fails to pay; and (3) the common bankruptcy claims. Where the bankruptcy property is not sufficient to satisfy the demands for repayment that are arranged in the same group, it shall be distributed on a pro rata basis.33
The Bankruptcy Law does not regulate claims rank behind ordinary claims, while Minutes of the National Court Work Conference on Bankruptcy Trials further specify that a claim arising by improper use of the related relationship among related enterprises, civil punitive damages, administrative fine, criminal fine, and other punitive claims incurred before the acceptance of bankruptcy shall rank behind other ordinary claims in repayment.34 Therefore, the common claims shall further divide into common claims and the later ranking claims.
Besides, there are a few provisions that differ from the provisions of the Bankruptcy Law with respect to the subordination of liquidation. For example, in the case of specialized farmer cooperatives in bankruptcy, after the expenses for bankruptcy proceedings are defrayed and the debts incurred for the common good of creditors are repaid, priority should be given to payments for the unpaid transactions with farmer members occurring before bankruptcy.35 For insurance companies, after the expenses for bankruptcy proceedings are defrayed and the debts incurred for the common good of creditors and employees' claims are repaid, priority should be given to insurance indemnities or insurance benefits.36 In the bankruptcy liquidation of a commercial bank, the bank shall, after paying the liquidation expenses, the wages of the employees, and labor insurance fees, pay in priority the principals and interests of individual savings deposits.37
33 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 113. 34 Minutes of the National Court Work Conference on Bankruptcy Trials ( issued 4 March 2018) Art 39. 35 Specialized Farmer Cooperatives Law of the People's Republic of China (issued 27 December 2017; enacted 1 July 2018) Art 55. 36 Insurance Law of the People's Republic of China (issued 24 April 2015; enacted 24 April 2015) Art 91. 37 Law of the People's Republic of China on Commercial Banks (issued 29 August 2015; enacted 1 October 2015) Art 71.
4.5 – Is there a date by which creditors must make claims in the insolvency proceedings? If so, what are the consequences of failing to claim by that date?
After accepting an application for bankruptcy, the people’s court shall specify the time limit for a creditor to declare claims. Such time limit, calculated from the date when the people’s court announces its acceptance of the application for bankruptcy, shall be not less than 30 days at least but not more than three months at the most.38
During the period of liquidation, where a creditor fails to declare his claims within the time limit for declaration of claims as specified by the people’s court, he may declare such claims afterwards before distribution of the bankruptcy property in the final installment. However, if the property has been distributed earlier, no more distribution shall be made to him. The expenses for examining and confirming the claims declared afterwards shall be borne by the party that makes such declaration.39
In the case of reorganization, where a creditor fails to declare his claims according to the provisions of this Law, he shall not exercise his right when the reorganization plan is being implemented; however, when the implementation of the plan is concluded, the creditor may exercise his right in compliance with the conditions for payment of claims of the same category as specified in the reorganization plan.40
38 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 45. 39 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 56. 40 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 92.
4.6 – Are contractual rights of set-off and/or netting effective in insolvency?
Civil Code establishes a fundamental set-off mechanism. Where the parties mutually owe obligations to each other, and the subject matter of the obligations are of the same kind and quality, any party may offset its obligation against the obligation of the other party that becomes due, unless the obligations cannot be offset by virtue of their nature, or in accordance with the agreements by the parties or the provisions of law.41 The set-off mechanism is still applicable in bankruptcy proceedings, but conditions for its application have been restructured, where a creditor is in debt to the debtor before the application for bankruptcy is accepted, the former may lodge a claim with the administrator for offsetting the debts, which no longer restricts the object of the debt. However, since the set-off system will enable creditors to be paid individually, the Bankruptcy Law has set a series of restrictive provisions on set-off, for example, only creditors can apply for set-off, and claims should be acquired before the bankruptcy application is accepted.42
There are no provision of netting effectiveness for bankruptcy proceedings. Futures and Derivative Law of the People's Republic of China regulates that netting according to derivative trading shall not be suspended, invalidated, or revoked in the event that either party to the transaction enters bankruptcy proceedings in accordance with the law.43
41 Civil Code of the People’s Republic of China (issued 28 May 2020; enacted 1 January 2021) Art 568. 42 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 40. 43 Futures and Derivative Law of the People's Republic of China (issued 20 April 2022; enacted 1 August 2022) Art 35.
4.7 – Are contract terms permitting termination of a contract by reason of insolvency (“ipso facto clauses”) effective?
After the people’s court accepts a bankruptcy application, contracts of the debtors shall be terminated under two circumstances. On one hand, the parties of contracts may agree upon ipso facto clauses if they reach a consensus through consultation, either party may rescind the contract upon the cause of bankruptcy occurs.44 When a contract is rescinded, the rights and obligations under the contract shall be terminated.45 On the other hand, when ipso facto clauses have not been agreed by parties of contracts, the administrator shall have the right to decide to rescind or continue to perform a contract that is concluded before the acceptance yet remains to be fulfilled by both the debtor and the other party and shall notify the other party of his decision. Where the administrator fails to notify the other party within two months from the date when the bankruptcy application is accepted or to give any reply to the exhortation made by the other party with 30 days from the date the exhortation is made, the contract shall be deemed to be rescinded.46 Where an administrator or debtor rescinds a contract according to the provisions of this Law, the other party may declare his claims on the basis of his right to compensation for the damages caused by the revocation.47
44 Civil Code of the People’s Republic of China (issued 28 May 2020; enacted 1 January 2021) Art 562. 45 Civil Code of the People’s Republic of China (issued 28 May 2020; enacted 1 January 2021) Art 557. 46 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 18. 47 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 53.
4.8 – Are retention of title clauses enforceable and (if applicable) what are the main requirements for enforceability?
Pursuant to The Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China(II),48 where both parties to a sales contract agree, in the contract, on the reversed ownership of the subject matter, if one party goes bankrupt before the ownership of the subject matter is legally transferred to the buyer, the sales contract shall be a contract that has not been completely performed by both parties, and the administrator shall be entitled to decide to rescind or continue to perform the contract in accordance with Article 18 of the Bankruptcy Law.
Where the buyer goes bankrupt, if its administrator decides to continue to perform the ownership-reserved sales contract, the time limit for the buyer to pay the price or perform other obligations as originally agreed upon in the sales contract shall be deemed to expire when the bankruptcy petition is accepted, and the administrator of the buyer shall pay the price to the seller or perform other obligations in a timely manner. If its administrator decides to rescind the ownership-reserved sales contract, if the seller raises the reclamation of the subject matter thereof in accordance with Article 38 of the Bankruptcy Law, the people's court shall support the reclamation.
Where the seller goes bankrupt, if its administrator decides to continue to fulfill the ownership-reserved sales contract, the buyer shall pay the price or perform other obligations as originally agreed upon in the sales contract. If its administrator decides to rescind the ownership-reserved sales contract and requires the buyer to deliver the subject matter thereof to it in accordance with Article 17 of the Enterprise Bankruptcy Law, the people's court shall support such delivery.
Civil Code and Interpretation of the Supreme People's Court of the Application of the Relevant Guarantee System of the Civil Code of the People's Republic of China regulated that, retention of ownership is as an atypical guarantee,49 and as a result, in practice, the claims under the retention of ownership are recognized as property-secured claims in some cases when the buyer enters bankruptcy.
48 The Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II) (issued 29 December 2020; enacted 1 January 2021) Art 34, Art 35, Art 36, Art 37. 49 Civil Code of the People’s Republic of China (issued 28 May 2020; enacted 1 January 2021) Art 641; Interpretation of the Supreme People's Court of the Application of the Relevant Guarantee System of the Civil Code of the People's Republic of China (issued 31 December 2020; enacted 1 January 2021) Art 64.
4.9 – Are foreign creditors treated equally to domestic creditors?
Yes. The rights of domestic and foreign creditors are equally protected under the Bankruptcy Law. Foreign creditors enjoy exactly the same creditor rights as domestic creditors in terms of the classification of claims, the subordination of repayment and etc. When filing claims, foreign creditors are required to notarize and certify the identity documents they submit to the administrator and evidentiary materials generated abroad.
5. Setting aside transactions
5.1 – What are the main transaction avoidance provisions applicable to the proceedings referred to above?
The Bankruptcy Law stipulates the antecedent transactions. The purpose of exercising the antecedent transactions is to protect the debtor’s property and ensure that creditors are fairly compensated; the objects of antecedent transactions are acts that damage the debtor’s property and individual repayment acts. The details are as follows:
- A）Revocation of acts that damage the debtor’s property An administrator shall have the right to request the people’s court to nullify any of the following actions taken within one year before the people’s court accepts the application for bankruptcy in respect of the debtor’s property:(1) transferring the property gratis;(2) trading at an obviously unreasonable price;(3) providing property guaranty to unsecured debts;(4) paying off debts not due; or (5) abandoning claims.50
- B）Revocation of individual repayment acts Within six months before the people’s court accepts the application for bankruptcy, if a debtor cannot pay off its debts due and its assets are not enough for paying off all the debts, or it apparently lacks the ability to pay off its debts, but chooses to make repayment to individual creditors, the administrator shall have the right to request the people’s court to revoke it, except where such individual repayment is beneficial to the debtor’s property.51 For example, a debtor has repaid any individual debt with a security interest created in the debtor’s own property, unless the value of the property provided as security is lower than the amount of the debt at the time of repayment of the debt; a debtor has repaid any individual debt to a creditor in litigation, arbitration, or enforcement procedures, unless the debtor and the creditor maliciously collude to damage the interests of other creditors; a debtor pays water, electricity, and other bills as needed to maintain basic production, labor remunerations or compensation for bodily injuries.52
There is no limit for the administrator to exercise the antecedent transactions in the insolvency proceeding. Within two years after the insolvency proceeding ends, if the revocable or invalid acts are found, creditors can request the people's court to recover the property and distribute it among them.53
Besides, any of the following acts involving the debtor’s assets shall be deemed as invalid: concealing or transferring the assets in order to avoid the debts; fabricating any debt or acknowledging any unreal debt.54
The general provisions of the Civil Code on the invalidity, revocability of contracts and creditor’s right of revocation also apply in insolvency proceeding.
50 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 31. 51 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 32. 52 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 14, Art 15, Art 16. 53 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 123. 54 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 33.
5.2 – Who is entitled to challenge transactions under these provisions?
In general, the antecedent transaction is exercised by the administrator. However, if the administrator does not request the revocation of the transferring the property gratis, trading at an obviously unreasonable price and abandoning claims, the creditors have the right to sue to request the revocation of the debtor’s aforesaid acts and inclusion of the so recovered assets in the debtor’s property.55 Where the debtor’s property is impaired improperly because the administrator fails to exercise the antecedent transactions for the fault of the administrator, the creditors have the right to sue to request the administrator should assume corresponding compensatory liability for their losses.56
55 The Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II) (issued 29 December 2020; enacted 1 January 2021) Art 13. 56 The Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II) (issued 29 December 2020; enacted 1 January 2021) Art 9.
6. Cross-border insolvency
6.1 – Do your courts recognize insolvency proceedings commenced in the courts of other jurisdictions?
The Bankruptcy Law provides principle framework for cross-border insolvency, where a legally effective judgement or ruling made on a bankruptcy case by a court of another country involves a debtor’s property within the territory of China and the said court applies with recognition and enforcement, the people’s court shall decide to recognize and enforce the judgement in accordance with applicable international treaties. A pilot program of mutual recognition has been achieved in practice between the Supreme People’s Court and the Government of Hong Kong Special Administrative Region (Hong Kong SAR), supported by a legal document which regulates the recognition of and assistance to insolvency proceedings.57 To thoroughly implement the aforesaid document, the Supreme People's Court further formulated a judicial interpretation58 designating the people's courts in Shanghai, Xiamen (Fujian Province) and Shenzhen (Guangdong Province) as the pilot jurisdictions, and several bankruptcy cases in Hong Kong SAR have been recognized under this program. Additionally, bankruptcy cases accepted by courts in Japan, Germany and Singapore have been recognized by the people’s courts in recent years. It’s foreseeable that more bankruptcy cases of other jurisdictions will be recognized by the people’s courts in the future.
57 Record of Meeting of the Supreme People's Court and the Government of the Hong Kong Special Administrative Region on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (issued May 2021; enacted May 2021). 58 Opinions of the Supreme People's Court on Launching the Pilot Program of Recognition of and Assistance to Bankruptcy Proceedings in the Hong Kong Special Administrative Region (issued 11 May 2021; enacted 11 May 2021).
6.2 – If so, what assistance can your courts provide, following recognition?
As mentioned in Question 6.1, there is a pilot program of mutual recognition between the Supreme People’s Court and the Hong Kong SAR. Courts designated by the program may, upon application, rule on the provision of assistance with respect to the realization and the distribution of property of the debtor, the arrangement of debt restructuring, the termination of the insolvency proceedings, etc.59 Although the pilot program has not been extended to other jurisdiction, it is formulated based on judicial practice which makes it representative and potentially referable. With regard to bankruptcy proceedings from other jurisdictions, in practice, after recognizing bankruptcy proceedings by the people’s court, the administrator may perform duties in China, subject to laws of both the foreign jurisdiction and China, particularly in the management and disposal of the debtor’s property. It is worth noting that the acts for disposing of the property that has a vital bearing on the creditor’s interests requires approval from the people's court.
59 Opinions of the Supreme People's Court on Launching the Pilot Program of Recognition of and Assistance to Bankruptcy Proceedings in the Hong Kong Special Administrative Region (issued 11 May 2021) Art 1, Art 16.
6.3 – Is it possible to commence insolvency proceedings in relation to a foreign company?
In principle, no. Only the debtor resides in China shall be filed for insolvency proceedings, the people’s court has jurisdiction over its bankruptcy case.60 However, if the debtor resided overseas maintains branch offices within China, the people’s court will have jurisdiction over its bankruptcy filing.
60 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 3.
7. Other matters
7.1 – Please consider whether there is any other feature of your country’s insolvency regime of which a lender, investor or purchasers of distressed debts or businesses should be aware? For example, are there any mistakes that foreign creditors often make?
Compromise: Where a debtor is under the circumstances of bankruptcy, he may directly apply with the people’s court for compromise; and he may do so after the people’s court accepts the application for bankruptcy and before it declares the debtor bankrupt. To apply for compromise, the debtor shall present the draft of a conciliation agreement.61 Generally, a conciliation agreement is expected to include: (a) how debts should be settled; (b) time limit for such settlement; and (c) sources of assets for such settlement.
Pre-reorganization: While the Bankruptcy Law contains no specific provision on pre-reorganization, few local people’s courts have established pre-reorganization rules for their jurisdictions. Core of pre-reorganization is same as out-of-court restructuring. For example, negotiations between the debtor and its creditors and equity holders can be launched before the commencement of formal reorganization and a framework plan can be reached at this pre-reorganization stage to lay the foundation for a reorganization plan to be agreed in reorganization proceeding. During the reorganization proceeding, a draft reorganization plan, based on the framework plan, can be formulated and submitted to the people's court for approval in accordance with the law. However, the Bankruptcy Law contains no specific provision on pre-reorganization, automatic stay does not apply to this proceeding as aforesaid.
Loans incurred for the common good of creditors: debts incurred for the common good of creditors are regulated in the Bankruptcy Law as prior claims. In practice, to ensure the continuation of the construction of incomplete buildings, maintain normal business during bankruptcy proceedings, the administrators and the debtors may, in accordance with the Bankruptcy Law and the relevant provisions, borrow money for the debtor to continue its business, and the resulting debt is deemed as debt incurred for the common good of creditors, and security may be provided for such loan.62
Priority of claims: In the case of immovable property held by the debtor, Construction Priority Rights and Rights of Commercial Housing Consumers may take priority over the mortgage, which in turn may lead to a lower expected rate of repayment by the secured creditor.63
Approval of the mandatory ruling on the draft plan for reorganization: Where a draft plan for reorganization is not adopted by some of the voting groups, the debtor or administrator may consult with those groups. The said groups may take another vote after consultation. Where a voting group that does not adopt a draft plan for reorganization refuses to take another vote on it or the draft plan is not adopted even by a re-vote but it meets the conditions of Article 87 of the Bankruptcy Law, the debtor or administrator may directly apply to the people’s court for approval of the draft plan.64
Calculation of the interest shall be stopped after the guarantor enters the insolvency proceeding: After the people's court has accepted a debtor’s bankruptcy case, the creditor may request that the guarantor assume liability, and the calculation of the interest on the guarantor’s claims shall be stopped when the people’s court accepts the bankruptcy petition of the guarantor.
Applicable conditions and legal results of substantive merger bankruptcy: Minutes of the National Court Work Conference on Bankruptcy Trials stipulates the affiliated companies may undergo a merger in the event of bankruptcy, which includes both procedural and substantive mergers. When there is a high degree of confusion between corporate personality of the members of a related company, the cost of distinguishing each affiliate’s property is too high, and the creditor’s fair settlement of benefits is seriously impaired, the related companies’ substantive merger bankruptcy can be used in exceptional cases.65
When the people’s court rules that the bankruptcy case is to be examined by a substantive merger, the creditor's rights and debts among the members of the related company shall be extinguished, and the property of each member shall be the unified bankruptcy property after the merger. The creditors of each member shall be fairly subject to the compensation in accordance with the legal order in the same procedure. In the case of reorganization through substantive consolidation, a unified classification of claims, adjustments to claims, and claims for compensation should be formulated in the draft of the reorganization plan.66
61 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 95. 62 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 69, 75. 63 Interpretation of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects (I) (issued 29 December 2020; enacted 1 January 2021) Art. 36; Official Reply of the Supreme People's Court on Issues Concerning the Protection of the Rights of Commercial Housing Consumers (issued 20 April 2023; enacted 20 April 2023) Art. 2. 64 Enterprise Bankruptcy Law of the People's Republic of China (issued 27 August 2006; enacted 1 June 2007) Art 87. 65 Minutes of the National Court Work Conference on Bankruptcy Trials ( issued 4 March 2018) Art 32. 66 Minutes of the National Court Work Conference on Bankruptcy Trials ( issued 4 March 2018) Art 36.
7.2 – Are there any other stakeholders or entities (eg governmental or regulatory) which may influence the outcome of any restructuring?
Governmental and regulatory entities impose influence on the aspect of policy-coordination and special industry supervision. Governmental entities provide policy support in terms of streamlining the registration and deregistration process, supervising employee resettlement, protecting labor rights, facilitating credit restoration of debtors. Regulatory entities impose supervision on special debtors such as financial institutions and listed companies which are subject to both the Bankruptcy Law and industry regulations, securities regulations.
7.3 – Are there currently any proposals for significant reform of your insolvency laws?
The amendment of the Bankruptcy Law has been under active discussion among academics and legal practitioners for over five years, while the exact time for releasing the amendment has not yet been announced. It’s anticipated that the Bankruptcy Law with more systematicness, integrity, coordination, and timeliness will be released in the near future.
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