Vol 10 (2013) - Issue 6

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An Analysis of Chinese Corporate Rescue Laws: From the Perspective of the Reorganisation of Listed Companies

1. Introduction
In 1986, the first bankruptcy law (the '1986 Law') since the Chinese Communist Party ('CCP') took control of the government in October 1949 was enacted in China. Under the highly centralised planned economy bankruptcy, as a creature of Western countries, could not be accepted by the traditional mindset of Chinese people. The 1986 Law failed to provide an effective route for enterprises, which were insolvent and could not be rescued, to exit from the market. The successful economic transition from a planned economy to a market economy in China, and the reforms of stateowned enterprises, the banking community and social security, resulted in the emerging socialist market economy lobbying for reforms of bankruptcy legislation which could be effectively used to liquidate insolvent enterprises or rescue the financially ailing but still economically viable businesses. The swift changes to the Chinese economy and the relevant reforms promoted the enactment of a brand new bankruptcy law which was promulgated in August 2006 and came into force in June 2007. One remarkable achievement of the new bankruptcy legislation is the establishment of a corporate rescue legal framework outside of liquidation proceedings. When a petition for the reorganisation procedure is accepted by the court, the court is empowered to appoint an administrator to take over all of the company’s assets and business affairs. There will be an automatic stay on the debt enforcement of individual creditors, and in this period of protection the administrator is required to draft a reorganisation plan and negotiate with creditors. The plan, which has been approved by the creditors’ meeting and granted by the court, has a binding effect on the company and its creditors. In addition, the debtor is allowed to apply for continuing control in the reorganisation. If the application is sanctioned by the court, the directors of the company remain in full control of the affairs under the supervision of an administrator.

The Chinese corporate rescue law was formulated by referring to the US debtor-in-possession ('DIP') model and the English practitioner-in-possession ('PIP') model. In judicial practice, there were 35 listed companies which were placed into the corporate rescue proceedings between June 2007 and August 20126 and the majority of the reorganisation cases were successful.