Vol 4 (2007) - Issue 1

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A New Insolvency Law in China

The long-awaited amendment to China’s Enterprise Insolvency Law was finally completed when the new Enterprise Insolvency Law (‘Insolvency Law 2006’) was officially promulgated on 27 August 2006. The new law, which will enter into force on 1 June 2007, has 136 articles in 12 chapters, almost tripling the number of articles of Enterprise Insolvency Law for Trial Implementation (‘Insolvency Law 1986’), which has only 43 articles in 6 chapters. A product of 12 years of deliberation, Insolvency Law 2006 is widely believed to have significantly improved the current legal regime for insolvency in China, which is composed of Insolvency Law 1986, Civil Procedure Law 1991 and other regulations and judicial interpretations. In this article, we will try to summarise some of the important features of Insolvency Law 2006.

1. New definition of bankruptcy

Insolvency Law 1986 defined bankruptcy as caused by ‘failure to repay debts due as a result of serious losses caused by poor operation and management’.1 In practice, this vague definition has caused many problems for the People’s Courts in determining the application of insolvency procedures, This is to be contrasted with the new law which stipulates that when an enterprise legal person2 fails to pay off its debts when they fall due, and its assets are insufficient to pay off all the debts or it is obviously incapable of paying off its debts, its debts shall be dealt with pursuant to the provisions of this law, namely by restructuring, settlement or liquidation.
When the debtor applies for bankruptcy, it is required to submit financial documents with regard to its assets, debts and credits as well as supporting evidence. At the same time, creditors may also apply to the Court for restructuring or liquidating the debtor if the debtor cannot pay off the debts as they fall due.

2. Application to all enterprises

Insolvency Law 1986 applies only to state-owned enterprises
(‘SOEs’), while the bankruptcy proceedings for non-SOEs are stipulated in Civil Law 1991. Insolvency Law 2006 enlarges the application of insolvency law by including all kinds of enterprise legal persons in its application scope, whether they are SOEs, private-owned domestic enterprises or foreign-invested enterprises, and whether they are limited liability companies or joint stock companies. This means that the ownership and organisation of an enterprise will not be as relevant when the enterprise goes bankrupt after Insolvency Law 2006 becomes effective.
If organisations other than enterprise legal persons, are liquidated because of insolvency or bankruptcy, the proceedings in Insolvency Law 2006 also apply by reference.