Vol 8 (2011) - Issue 1

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The Balance of Power in Insolvency Proceedings: The Case of China

Introduction

The purpose of this paper is to examine the implementation of the new Chinese Enterprise Bankruptcy Law 2006 with a particular eye to the roles and functions of the China’s judiciary in the legal framework, and to identify possible operational weaknesses arising from role of the Chinese courts in this area. The 2006 Law was a significant milestone, replacing a law that had been introduced in 1986 for trial implementation, since it was the culmination of a reform process that was decades long. The new law, for the first time, introduces a unified system of insolvency laws, applying to both SOEs, who were previously been dealt with under the 1986 law, and private enterprises, which had been the subject of a limited range of bankruptcy provisions under Chapter XIX of the Civil Procedure Law 1991. Another significant aspect of the 2006 law is that it removes elements of state control which were present in the 1986 law, although it is arguable that state control may still be exerted through other means.

Several factors lay behind the introduction of the new law. The economy has changed significantly since 1986 with private enterprises playing an increasingly important role and state owned enterprises having been reformed and no longer dominating the market. In addition, the absence of effective insolvency laws was noted by the European Union in refusing to recognise China as having market economy status. The provision of bankruptcy laws is regarded as a necessary feature of a market economy, since, under such a system, the future of a company is decided by market forces, rather than by state intervention.