Vol 2 (2005) - Issue 4

Article preview

Chinese Insolvency Law: A Précis of Recent Changes

James Flint, our man in China

In the mid-1770s a group of English merchants in Canton, in southeast China, were undertaking exploratory trading activities on the banks of Pearl River. Unfortunately, they had the misfortune of trading with Chinese merchants who subsequently defaulted. In order to recover the debts owed from these Hongist merchants the English merchants were forced to ask the English government to intervene on their behalf. Fortuitously, The Company of Merchants of London trading into the East Indies (or the East India Company as it is more commonly known) stepped into the breach and secured a partial recovery for the English traders that totalled about twenty-five percent of the sums claimed. This early incident in Anglo-Chinese insolvency relations highlights why familiarity with Chinese insolvency was then, and hopefully remains now, a topical concern for merchants and practitioners alike. The purpose of this article is not however to provide an exposition of Anglo-Chinese cross-border insolvency issues, but to provide a synopsis of current domestic Chinese insolvency law.

The Chinese Legal System in context

The greatest hindrance in examining the Chinese legal system is the multi-layered institutions it houses. The fact that there is no system of standardization throughout the PRC is problematic and well documented, creating a general reluctance among foreign traders to deal on Chinese soil for fear of what they may encounter at the hands of unpredictable justice. This intricate and invariably inconsistent legal network is well highlighted by looking at the current legislative framework making up China’s insolvency laws today. Primarily thought of as the PRC’s bankruptcy law, the Law of the People’s Republic of China on Enterprise Insolvency (Trial Implementation) adopted on February 2nd, 1986 is actually one of five layers to the bankruptcy laws in the PRC. Since this law deals only with State-owned Enterprises (SOEs) the Procedure of Repayment for Insolvency of Enterprises As Legal Entities partially fills the void concerning non-SOEs. The third ‘layer’ comes in the form of a series of Judicial Interpretations which the Supreme Court, in handling cases of bankruptcy, has released in order to provide further regulations due to the lack of detail provided by the original legislation in 1986. There have also been several policy documents issued by the State Council concerning the insolvency of SOEs released since 1994. In principle there are three main documents which were originally applied to 18 pilot cities before being gradually implemented throughout all Chinese cities. Finally there is a legal minefield of local rules and regulations regarding the insolvency of both SOEs and non-SOEs alike enacted by both rural provinces and larger cities. Couple this with the fact that both Hong Kong and Macao are Special Administrative Regions and you have a very complex and at times conflicting set of laws to govern an area of growing importance considering the current economic climate. With this in mind, it is the major legislation of 1986 in relation to SOEs that will be examined.