Vol 5 (2008) - Issue 1

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A ‘Great Leap Forward’? Or a ‘Leap in the Dark’? What Happens

I. Introduction – a new law for a new century
China’s economic ‘Great Leap Forward’ of the late 1950s has been eclipsed by exploding, market-oriented growth over the last 25 years. That growth has, in turn, given rise to a new and potentially far more significant ‘great leap’: a new, radically transformed insolvency law.

The new ‘Enterprise Insolvency Law of the People’s Republic of China’ (EIL) represents 12 years’ effort to address growing concerns for the long-term vitality of China’s economy – including a voracious demand for foreign capital inflows, economic and political commitments stemming from China’s accession to the World Trade Organisation, and lenders nervous over a previously ‘broken’ method of resolving business insolvencies and protecting creditors’ rights.

China’s expanding economy has steadily integrated with the sophisticated market economies and capital markets of North America and Europe. Today, Chinese, European, and American firms are frequently bound together in a complex web of business assets, contractual relationships, and obligations spanning multiple jurisdictions. The prospective failure of Chinese firms is therefore a matter of international concern.

When Chinese firms fail, what effect will China’s new EIL have upon the cross-border administration of assets, claims, and litigation likely to arise out of PRC insolvency proceedings? This article is a brief, preliminary effort to address that question, with particular emphasis on the EIL’s potential effect in the US legal system.

A. Overview of the new PRC Enterprise Insolvency Law
The EIL represents – literally – a new chapter in Chinese legislative reform. Viewed as a process, the new law provides two ‘tracks’, where – once an application is filed and accepted by the People’s Court – the debtor’s case proceeds through (i) liquidation (the ‘default’ track); or (ii) reorganisation or composition (see Fig. 1).

The new EIL’s substantive provisions suggest a number of preliminary observations:
– True to its policy objectives, the new EIL appears to emulate insolvency schemes already in place in jurisdictions with sophisticated credit economies (viz., England and the US).
– The new EIL appears designed to attract foreign investment
– particularly secured credit.
– Under the perceived operation of the new EIL, Creditors’ Meeting attendees appear to hold significant influence.
– Officers, Directors, and managers of debtor firms face potentially significant strictures and liabilities.
– All parties have – at least theoretically
– greater access to insolvency proceedings than under prior law, which required specific government permission and was administered provincially.
– The new EIL appears to contemplate and facilitate US-style ‘corporate rescue’ procedures.