Vol 8 (2011) - Issue 2

Article preview

An Analysis of Cross-Border Insolvency in China’s New Bankruptcy Law: A Big Step Forward

I. Introduction

The new China was founded in October 1949 and then a highly centralised planned economy was formulated by referring to the previous Soviet Union.1 The assets of private firms were nationalised through a significant movement called ‘socialist transformation’ from 1952 and 1956. Enterprises were owned by the state and business transactions between them were carried out under government instruction rather than commercial rules. There was no need for insolvency legislation because creditors did not have incentives to enforce their claims against their debtor. In addition, each state-owned enterprise (‘SOE’) carried the serious financial burden of making social security payments for their employees. In light of this burden, struggling SOEs could not be wound up simply because their liquidation may cause unpredictable social unrest. The turning point of the Chinese economy was the establishment of the Reform and Opening up Policy which was launched at the end of 1978 and put China onto the track from a planned economy to a market economy. The legal reforms borrowed from foreign advanced legal institutions and formulated into a series of laws serving the economic transition, with the Enterprise Bankruptcy Law promulgated in 1986 on a trial basis being one of them.2 In the two decades which followed, the development of economic and social security reforms of SOEs and the banking community promoted the reestablishment of a new bankruptcy law replacing the outdated 1986 Law. Domestic need and external pressure from the US and EU, who were lobbying for a new bankruptcy law, led to a need for reforms in accordance with both the Chinese peculiar situations and international standards. Under this background, the high profile Enterprise Bankruptcy Law was eventually promulgated in August 2006 and came into force in June 2007.3 Compared with the 1986 Law, there are many notable features in the new bankruptcy legislation, such as special provisions for the bankruptcy of financial institutions, the establishment of the office of bankruptcy administrator, a focus on reorganisation procedures and the provision of cross-border insolvency measures.4 This article will fully describe the cross-border insolvency related issues, exploring potential problems and coming up with some suggestions.