Vol 7 (2010) - Issue 2

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The Chinese Modified Reorganisation Procedure in the New Bankruptcy Law: Perspectives and Problems – Part One

Introduction

At the end of 1978, the Chinese government launched the Reform and Opening Up policy which placed China on the track from the previous centralised planned economy to the socialist market economy. The economic transition needed a modern legal system to maintain the order which encouraged market competition and capital flow from international investors. An effective bankruptcy and corporate reorganisation legal framework, as a crucial component of an advanced legal system, could effectively serve the development of a market economy. The Chinese government resolved the ideological debate between capitalism and socialism in a timely manner at the beginning of the 1980s, and started borrowing legal concepts and institutions from the Western jurisdictions. On 27 February 1984, an article entitled 'A discussion on the bankruptcy of long-term loss-making enterprises' was published in an official journal, which for the first time at the national level discussed the legal concept of bankruptcy, of which most of citizens never heard before. Significant efforts had been made towards the enactment of a bankruptcy law which was eventually adopted by the Chinese legislature in December 1986. There was a joint corporate rescue regime with reorganisation and reconciliation proceedings in the 1986 law which was only applicable to state-owned enterprises (SOEs). Because of a series of reasons, for example state intervention, a weak social security system and cumbersome procedures, this joint rescue regime was rarely used. In 1994, an insolvency review committee was organised by the Financial and Economic Commission under the National People's Congress for the purpose of making an entirely new bankruptcy law with an effective reorganisation procedure to rescue the financially ailing but still economically viable enterprises. The new Enterprise Bankruptcy Law (hereinafter 'Bankruptcy Law 2006') was finally promulgated in August 2006 after twelve years of effort and a new reorganisation regime was established by referring to the US Bankruptcy Code, Chapter 11 and German insolvency law.
This article is the first of a two-part series which is intended to analyse the detailed procedures of the Chinese modified reorganisation regime from the initiation of proceedings to the implementation of approved reorganisation proposal. All its notable features will be described. In addition, it will examine the balance of power and control of each interested group, identify the potential problems within each step of the procedure, and provide relevant solutions. Most importantly, it will highlight the reorganisation of insolvent listed companies, which has become a hot topic of the Chinese judiciary. This first part will fully analyse the substantive rights and detailed procedures of China's new corporate rescue regime and identify potential weaknesses.