Vol 6 (2009) - Issue 6

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Transaction Avoidance in China’s New Bankruptcy Law: Perspectives and Problems

Introduction

There may be a period of time from when a debtor realises that it is insolvent or is facing impending insolvency to the time when formal insolvency proceedings are initiated. During this period, a debtor may enter into certain transactions with other parties such as transferring property at an value below market value or making donations. Or, the position of certain creditors may be improved by granting them security subject to collateral by the debtor, or the claims of certain creditors may be satisfied by the debtor during this period. In contrast to those creditors who obtain an advantage from these transactions, other unsecured creditors in the same rank remain unsecured and/or unpaid. Transaction avoidance laws can provide an effective legal framework to prevent the illegitimate reduction of a debtor’s property and ensure the equitable treatment of all creditors in the same rank. Transaction avoidance may be more effective in realising the collective approach of insolvency laws enabling the maximum realisation of the debtor’s assets than a system where creditors pursue their claims by initiating civil litigation individually.

The first bankruptcy law since China was founded in 1949, the Enterprise Bankruptcy Law 1986 (for Trial Implementation) (the ‘EBL 1986’), established a number of provisions relating to voidable transactions. However, this simple legislation was not sufficient nor adequate to deal with fraudulent or preferential transactions which harmed the common interests of creditors. A more efficient legal framework in relation to transaction avoidance has been established by the coming into force of the Enterprise Bankruptcy Law 2006 (‘EBL 2006’).

This article provides an overview of the Chinese transaction avoidance legislation under the old regime, an analysis of the new provisions of the EBL 2006 and a critique of the new legislation identifying the potential weaknesses.

Conceptual factors

The term ‘transaction’ refers to a wide range of conduct which may result in the reduction of a debtor’s assets or the incurrence of liabilities including by transferring property, the making of a payment, providing security, making a gift, advancing a loan or giving up credits.