Vol 7 (2010) - Issue 6

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China’s Bankruptcy Law after Three Years: The Gaps Between Legislation Expectancy and Practice and the Future Road – Part Two

In the last issue, we talked about the general bankruptcy regime and its implementation in China and specifically discussed the regime of reorganisation. We will discuss the regime of arrangement and liquidation of the Law as well as the implementation of them. Then we will provide further discussion about the causes of the gap between the legislation and the implementation of the Law and suggest possible solutions.

III. The regime of arrangement and its implementation
A. The regime of arrangement
Chapter nine of the Law stipulates bankruptcy arrangement. The Law stipulates that only the debtor has the qualification to file with the court for arrangement. The debtor should submit an agreement of arrangement to the court upon filing for arrangement. The condition for the court to approve the agreement is that more than half of the unsecured creditors attending the meeting of unsecured creditors, whose claims represent more than two thirds of the total amount of unsecured claims, approve the agreement. The agreement of arrangement does not bind the secured creditors.
B. The implementation of arrangement As of the date of publication of this article, we have found no arrangement cases in a real sense.
C. The explanation of the gap between the expectation of legislation of arrangement and its implementation
From the perspective of reducing risk, the secured creditors must select good assets in the target enterprise as security for their loans. The troubled business entity generally needs to retain secured good assets in order to sustain a business operation. One of the effects of the reorganisation system is to use such rules as an automatic stay and cram down to force the secured creditors to join in the rescue of the troubled business. So the rescue of the troubled business will rarely succeed without an effective bind on secured assets.
The Law expects arrangement to be an alternate rescue method for the troubled business to reorganisation. That is to say, the arrangement system is also aimed at protecting going concern value. Since good assets are generally secured in practice, it is impossible to protect going concern value by arrangement if the agreement of arrangement cannot bind secured assets. So it is no wonder that what the Law expects fails in reality.