Restructuring and Insolvency in China 2024

Restructuring and Insolvency in China 2024 – Supreme Court of the Republic of China

RESTRUCTURING AND INSOLVENCY 2024

CHINA

Xiuchao Yin

(Dacheng Law Offices LLP)

GENERAL

Legislation

1. What main legislation is applicable to insolvencies and reorganizations?

The Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL) governs insolvency and reorganizations in China. Alongside this, the Supreme People’s Court has issued three significant judicial interpretations:

• provisions on several issues concerning the law of China on enterprise bankruptcy, promulgated on 9 September 2011;
• provisions on several issues relating to the application of the EBL II (amended in 2020), promulgated on 29 December 2020; and
• provisions on several issues relating to the application of the EBL III (amended in 2020), promulgated on 29 December 2020, all of which may apply to insolvencies and reorganizations.

The high courts of some provinces and municipalities in China also establish specific rules for the implementation of the EBL within their local areas.

Excluded entities and excluded assets

2. What entities are excluded from customary insolvency or reorganization proceedings and what legislation applies to them? What assets are excluded or exempt from claims of creditors?

At present, special social organizations such as non-governmental organizations are not eligible to be included in China’s bankruptcy system.

Article 30 of the EBL

The assets belonging to a debtor are governed by article 30 of the EBL, which includes the assets of a debtor at the time the court accepts the bankruptcy application and assets acquired by a debtor from the time after the acceptance of the bankruptcy application to the termination of the bankruptcy process.

The debtor’s assets include both the currency and physical items belonging to a debtor and the properties and proprietary rights, such as claims, equity interests and intellectual property, which may be valued by money and transferred pursuant to the laws.

Although a range of properties and proprietary rights are recognized as the property of a debtor, certain properties are excluded from the scope and may therefore be exempt from the insolvency proceedings, including:

• properties in the possession of the debtor based on a contract of storage, lease, consignment, deposit or other legal relationship;
• properties in a retention of title transaction of which the debtor has not acquired ownership;
• properties that are not permitted to be transferred and belong exclusively to the state; and
• properties that are not owned by debtors based on laws and administrative regulations.

Public enterprises

3. What procedures are followed in the insolvency of a government-owned enterprise? What remedies do creditors of insolvent public enterprises have?

Article 31 of the Law of the People’s Republic of China on State-owned Assets in Enterprises

In general, there are no differences in the insolvency procedures and creditors’ remedies between government-owned enterprises and civilian-run enterprises; however, the bankruptcy of government-owned enterprises funded by the State-owned Assets Supervision and Administration Commission is required to be approved by the department of operation and management.

Article 34 of the Law of the People’s Republic of China on State-owned Assets in Enterprises

The bankruptcy applications of wholly state-owned enterprises will be decided by entities performing the duties of the investor. With respect to the bankruptcy application of significant state-owned enterprises, the entities mentioned above must report to the government at the same level for approval before making any decision or issuing any instructions to designate shareholder representatives to attend the general meeting and certain meetings of shareholders of the state-controlled company. Whether the state-owned enterprise is significant will be decided by the regulations of the State Council.

In insolvency proceedings related to public enterprises, there are no special remedies for creditors compared to non-public enterprises.

Protection for large financial institutions

4. Has your country enacted legislation to deal with the financial difficulties of institutions that are considered ‘too big to fail’?

Article 134 of the EBL

Where a commercial bank, securities company, insurance company or any other financial institution is unable to repay its debts as they become due, and its assets are insufficient for the settlement of all debts or where it is clearly insolvent, the financial supervision and administration authorities of the State Council adopt takeover or trust measures pursuant to the law against a financial institution that is experiencing significant business risk.

An application may be made to the court for the suspension of civil proceedings or enforcement procedures in which the financial institution is the defendant or the subject of enforcement measures. Certain takeover or trust measures may be adopted by the authority and their implementation is specified by the State Council.

Courts and appeals

5. What courts are involved? What are the rights of appeal from court orders? Does an appellant have an automatic right of appeal or must it obtain permission? Is there a requirement to post security to proceed with an appeal?

Article 3 of the EBL

Generally, bankruptcy cases will be under the administration of the court with jurisdiction where the relevant debtor is domiciled, which means the place where the main office of the relevant debtors is located. If the debtor has no office, it must be under the jurisdiction of the court in the place where it is registered.

Article 12 of the EBL

Where a bankruptcy application is not accepted by the court, the applicant who is not satisfied with this ruling may appeal to the higher-level court within 10 days of the date of delivery of the rule.

The requirement for security depends on whether the appellant applies for property preservation. The security will be posted if the appellant applies for property preservation. The amount of security will be determined by the amount of property preservation the appellant applies for. In general, while applying for bankruptcy reorganization proceedings, property preservation is not involved.

TYPES OF LIQUIDATION AND REORGANIZATION PROCESSES

Voluntary liquidations

6. What are the requirements for a debtor commencing a voluntary liquidation case and what are the effects?

Article 2 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

The Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL) provides the following circumstances for a debtor to commence bankruptcy liquidation:

• the debtor is unable to clear its debt as it has become due and there are no sufficient assets to repay all the debts; and
• the debtor is unable to clear its debt as it becomes due and obviously lacks the ability to settle.

Article 8 of the EBL

Where the debtor applies to the court for liquidation, the debtor must submit the required materials to the court, which covers a form of bankruptcy application, relevant evidence, a statement of asset status, a list of debt, a list of creditors’ rights, the financial and accounting report, a scheme of staff settlement and the payment statement of social security and staff salaries.

Articles 13, 18, 19, 20, 25 and 35 of the EBL

Once the court accepts the bankruptcy application, it will result in the following effects:

• pending civil litigation and arbitration relating to debtors will be suspended (article 20);
• preservation measures adopted for the debtor’s assets shall be terminated and enforcement procedures shall be suspended (article 19); and
• the court will appoint an administrator at the acceptance of the bankruptcy application who principally displaces the company’s management (article 13).

Voluntary reorganizations

7. What are the requirements for a debtor commencing a voluntary reorganization and what are the effects?

Article 2 of the EBL

A debtor may file an application of reorganization in the following circumstances:

• the debtor cannot pay off the debt as it becomes due and the debtor’s assets are insufficient to clear all debts;
• the debtor cannot pay off the debt as it becomes due and it clearly lacks the ability to settle; or
• there is a possibility that the debtor is obviously insolvent.

Article 70 of the EBL

Generally, the debtor or the creditor may directly file an application for reorganization to the court. However, if a creditor applies for a bankruptcy liquidation against the debtor, the debtor or its shareholders who hold 10 per cent or more of the registered capital of the debtor may petition for reorganization after the acceptance of the bankruptcy application, but before the declaration of the debtor’s bankruptcy.

Article 73 of the EBL

The debtor may dispose of its debts and operate a business under the administrator’s supervision according to the debtor’s application and the approval of the application by the court in the reorganization procedure.

Articles 74 and 80 of the EBL

Where a debtor manages the business and assets mentioned above, the debtor must formulate a draft reorganization plan. Once the draft is approved, it will place a restriction applicable to all creditors and debtors (article 80). While the administrator is responsible for disposing of the debtor’s business and assets, the administrator should make a draft plan for reorganization (article 80) and may hire management personnel of the debtor to take charge of the business and assets (article 74).

Article 74 of the EBL

Security interests over specific assets of the debtor will be suspended during the restructuring period. Unless there is a possibility of damage or an obvious reduction in the value of the security that is detrimental to the interests of the security holder, the security interest holder may apply to the court for a resumption of the security interest.

Where the debtor or the administrator takes a loan for the purpose of continuing business during the restructuring period, the debtor or the administrator may create a security interest over the loan.

Article 77 of the EBL

In the reorganization procedure, the shareholder is not entitled to distribute investment gains. The directors, supervisors or senior managers of the debtor are not permitted to transfer any equity interest of the debtor to any third party.

Successful reorganizations

8. How are creditors classified for purposes of a reorganization plan and how is the plan approved? Can a reorganization plan release non-debtor parties from liability and, if so, in what circumstances?

Articles 82 and 86 of the EBL

The creditors are divided into different groups to discuss a reorganization plan according to different categories of creditor rights, which includes secured creditors’ rights, employees, tax owed by debtors and unsecured creditors’ rights (article 82). These groups vote on the plan separately and the plan will be approved if all the groups pass the plan (article 86).

The reorganization plan is not permitted to arbitrarily release the liability of any third party, unless the third party provides compensation for the creditor or the creditor obtains corresponding consideration.

Involuntary liquidations

9. What are the requirements for creditors placing a debtor into involuntary liquidation and what are the effects? Once the proceeding is opened, are there material differences to proceedings opened voluntarily?

Article 7 of the EBL

A creditor may file a bankruptcy application against a debtor that is unable to repay its debts as they become due (article 7).

Article 8 of the EBL

The creditor, for the purpose of commencing a liquidation procedure, is required to submit an application form, supporting evidence, a statement of the creditor–debtor relationship, a statement of unpaid debts by the debtor and the relevant application documents required in the liquidation proceedings.

The court carries out an investigation of the debtor after the submission of a bankruptcy application. If the application is accepted by the court, the involuntary liquidation has the same effect as voluntary liquidation.

Involuntary reorganizations

10. What are the requirements for creditors commencing an involuntary reorganization and what are the effects? Once the proceeding is opened, are there any material differences to proceedings opened voluntarily?

Article 6 of the EBL

A creditor may file an application of reorganization if the debtor cannot clear its debts as they become due. Involuntary reorganization has the same effects as voluntary reorganization.

Expedited reorganizations

11. Do procedures exist for expedited reorganizations (e.g, ‘prepackaged’ reorganizations)?

Although there is no expedited reorganization under the provisions of the EBL, it exists in certain cities and provinces in practice, such as the Zhejiang province and Shenzhen city.

Unsuccessful reorganizations

12. How is a proposed reorganization defeated and what is the effect of a reorganization plan not being approved? What if the debtor fails to perform a plan?

Article 84 of the EBL

The proposed reorganization is defeated if:

• less than half of the creditors who attend the meeting approve the reorganization plan within the same voting group;
• the creditors’ rights of creditors who approve the plan represent no more than two-thirds of the total creditors’ rights in the same group; and
• the court does not approve the reorganization

Article 87 of the EBL

The administrator or the debtor may negotiate with the voting groups that do not approve the reorganization plan, and these groups may vote again after the negotiation. If these groups refuse to vote or the plan is not approved again, the administrator or debtor may file an application to the court to approve the reorganization plan. Otherwise, the court will rule on the termination of the reorganization process and declare the debtor bankrupt.

Article 93 of the EBL

If the debtor fails to conform to the reorganization plan, the court should make a ruling to terminate the plan and declare the debtor bankrupt, which results in the commitment of adjustment to creditors’ rights becoming invalid, though the settlement to creditors would remain valid. The creditors’ unpaid rights would be recognized as bankruptcy creditor rights.

Corporate procedures

13. Are there corporate procedures for the dissolution of a corporation? How do such processes contrast with bankruptcy proceedings?

Article 180 of the Company Law of the People’s Republic of China 2013 (including subsequent revisions)

The circumstances of non-bankruptcy liquidation regulated under the Company Law of the People’s Republic of China 2013 (the Company Law) include:

• the business term of a corporation provided in the articles of association has expired or other circumstances leading to the dissolution regulated in the articles of association has occurred;
• the general meeting of shareholders or the board of shareholders passes the dissolution resolution;
• the business license is revoked or the corporation is closed down or dissolved; and
• the dissolution of the corporation is because of a merger or division.

Article 182 of the Company Law

If the company suffers serious difficulties that may not be solved by other means, and its continued operation would cause significant loss of interest to shareholders, the shareholder who represents 10 per cent or more of the company’s shares may request the court to dissolve the company.

Article 183 of the Company Law

Under the Company Law, the company is required to establish a liquidation group within 15 days of the occurrence of dissolution. Otherwise, the creditor may request that the court appoint a liquidation group, which shall be accepted by the court. However, the bankruptcy procedure must strictly abide by the bankruptcy law, and the court creates the bankruptcy liquidation group.

Article 185 of the Company Law

The liquidation group must notify the creditors within 10 days of the date of its establishment and publish an announcement in newspapers within 60 days. The creditors may, within 30 days of receipt of the notice (or within 45 days for those creditors who did not receive the notice), declare their creditors’ rights to the liquidation group.

Creditors declaring their creditors’ rights must provide details of the creditors’ rights and the relevant proof. The liquidation group must register the creditors’ rights.

During the declaration period, the liquidation group must not settle any creditors’ rights.

Article 187 of the Company Law

Where the liquidation group discovers upon the disposal of company assets and preparation of the balance sheet and list of assets that the company assets are insufficient to settle the debts, an application must be made to a court to declare the company bankrupt.

Where a company has been declared bankrupt by a court, the liquidation group must transfer the liquidation task to the court.

The compulsory liquidation stipulated by the Company Law is different from the bankruptcy liquidation stipulated by the Bankruptcy Law in terms of applicable laws, prerequisites for liquidation, subjects applying for liquidation, liquidation organization and measures taken on corporate property.

Conclusion of case

14. How are liquidation and reorganization cases formally concluded?

Articles 78 and 93 of the EBL

Under the EBL, during the reorganization procedure, based on a request by the administrator or interested parties, the court may terminate the reorganization process in the following circumstances:

• the continued deterioration of business conditions and asset status, in the absence of any possibility of recovery;
• the debtor has committed fraud, maliciously decreased the debtors’ assets or committed other actions that are a significant detriment to the creditors;
• the debtor’s act makes the administrator unable to perform duties (article 78); and
• the debtor does not implement or is unable to implement a reorganization plan (article 93).

Articles 79 and 87 of the EBL

Moreover, if the debtor or administrator does not submit a reorganization plan within the specified time period (article 79) or the court does not approve the plan, the court will make a rule to terminate the reorganization procedure and declare the debtor bankrupt (article 87).

Article 108 of the EBL

During the liquidation procedure, the court rules on the termination of the bankruptcy procedure in the following circumstances, before the public announcement of the termination of bankruptcy procedures:

• the third party has repaid all the debtor’s debts as they became due or has provided full security; and

Also, if the debtor has no assets to distribute, the administrator requests the court to rule on the termination of a bankruptcy procedure.

Articles 104 and 105 of the EBL

In the settlement procedure, after the court accepts the bankruptcy application, the debtor may reach an agreement with all of its creditors on the disposal of debts and creditors’ claims, and request the court to rule on approval and terminate the bankruptcy procedure. However, if the debtor is unable to implement or does not implement such a settlement agreement, based on the request of a creditor, the court makes a rule to terminate the settlement agreement and declare the debtor bankrupt.

INSOLVENCY TESTS AND FILING REQUIREMENTS

Conditions for insolvency

15. What is the test to determine if a debtor is insolvent?

Article 2 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

If the enterprise or legal person is unable to clear debts as they become due, and there are no sufficient assets to pay off all the debts or it clearly lacks the ability to repay, this may be recognized as insolvency.

Mandatory filing

16. Must companies commence insolvency proceedings in particular circumstances?

Where an enterprise as the legal person has been dissolved before dissolution or completion of dissolution, or its assets are insufficient to settle the debts, the person who is responsible for liquidation pursuant to the law must apply to a court for bankruptcy liquidation.

DIRECTORS AND OFFICERS

Directors’ liability – failure to commence proceedings and trading while insolvent

17. If proceedings are not commenced, what liability can result for directors and officers? What are the consequences for directors and officers if a company carries on business while insolvent?

Article 125 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

Directors, supervisors and senior officers in China have no legal obligations to file an application for bankruptcy under the Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL); however, if they do not perform loyalty and diligence duties that lead to the company insolvency, they will bear civil liabilities. Also, they are forbidden to serve as a director, a supervisor or a senior manager within three years of the termination of insolvency proceedings.

Upon the acceptance of a bankruptcy application by a court, an administrator must decide on the continuation or suspension of business of the debtor before the first creditors’ meeting is convened. The directors and officers cannot carry on business.

Directors’ liability – other sources of liability

18. Apart from failure to file for proceedings, are corporate officers and directors personally liable for their corporation’s obligations? Are they liable for corporate pre-insolvency or pre-reorganization actions? Can they be subject to sanctions for other reasons?

The laws of China impose no obligations on officers and directors to file an application.

Article 36 of the EBL

Where any director, supervisor or senior management personnel of the debtor exploits its position of authority for any improper acquisition of income and occupation of enterprise assets from the enterprise, the administrator will recover the said income and enterprise assets.

Article 127 of the EBL

If a debtor refuses to turn over properties, seals, accounts and documents, or they fabricate or destroy certain materials that serve as evidence, rendering the status of its assets unclear, the court may impose fines on the persons who bear direct responsibility.

Article 128 of the EBL

If the debtor commits revocable or void actions that are detrimental to the creditors’ interests, the legal representative and other directly responsible persons assume compensation liability.

If the debtor commits the actions listed in the following paragraphs (articles 31, 32 and 33 of the EBL), which are detrimental to the creditor’s interests, the legal representative or another person directly responsible assumes the compensation liability.

Article 31 of the EBL

The actions outlined below involving the debtor’s assets may be annulled if they occurred within one year before the acceptance of the bankruptcy application:

• transactions conducted at an obvious unreasonable price;
• the settlement of undue debt;
• the waiver of creditors’ claims;
• the transfer of property without compensation; or
• security provision for debts without security.

Article 32 of the EBL

If a debtor who is insolvent pays off any of the individual creditors within the six months of the acceptance of the bankruptcy application, the administrator may apply to the court to annul the action unless the individual payment benefits the debtor’s assets.

Article 33 of the EBL

If a debtor conceals or transfers assets to evade debts, fabricate debts or admit to debts that do not exist, such actions relating to debtors’ assets are invalid.

Generally, the administrator may annul such transactions during the liquidation or reorganization procedures; if the administrator does not exercise the duty or delay doing so, the creditor may exercise the duties belonging to the administrator.

Article 129 of the EBL

If the legal representative and the person who bears direct obligations breach the provisions to leave the place where they are domiciled without approval, the court may impose a fine or detain such persons based on provisions of the law.

Directors’ liability – defenses

19. What defenses are available to directors and officers in the context of an insolvency or reorganization?

There are no special laws and regulations on the available defenses to directors and officers in the context of an insolvency or reorganization. But according to the Company Law of the People’s Republic of China 2013 (the Company Law), directors are liable for resolutions of the board of directors. Where a resolution of the board of directors violates the provisions of laws and administrative regulations or the articles of association of the company or a resolution of the shareholders’ general meeting and causes the company to suffer serious damage, directors who participated in the resolution bear compensation liability towards the company.

Liability may be waived for directors who can prove that they had objected to the resolution and the objection is recorded in the minutes of the meeting. In general, the defenses stipulated in the Company Law related to directors are also applicable to the directors or officers, or both, whose company goes into bankruptcy or bankruptcy reorganization.

According to the EBL, when a company goes into bankruptcy or bankruptcy reorganization, except for the legal representative of the company and other persons determined by the court, the directors and officers of the company must not conduct business on behalf of the company. Directors and officers only bear their responsibilities for the duty-performing behavior incurred before the bankruptcy or bankruptcy reorganization of the company. If the company continues to operate during the course of the bankruptcy reorganization, the director and officers bear fiduciary duties towards the company according to the Company Law.

Shift in directors’ duties

20. Do the duties that directors owe to the corporation shift to the creditors when an insolvency or reorganization proceeding is likely? When?

Article 36 of the EBL

Any abnormal income obtained and company assets embezzled by the directors, supervisors and senior officers are deemed to be insolvency properties, and the creditor is entitled to acquire assets from such properties.

Article 20 of the Company Law

Generally, directors do not bear duties to creditors. However, if the directors abuse the independent status of the company and limited the liability of shareholders to escape debts, resulting in the loss of the company’s assets and further affecting creditors’ interests, the directors should assume joint duties as regards the company’s debt to the creditors.

Directors’ powers after proceedings commence

21. What powers can directors and officers exercise after liquidation or reorganization proceedings are commenced by, or against, their corporation?

Article 73 of the EBL

In liquidation procedures, the director and senior managers have no right against their corporation, while in reorganization procedures, if the application is approved by the court, the debtor may manage its assets under the supervision of the administrator.

MATTERS ARISING IN A LIQUIDATION OR REORGANIZATION

Stays of proceedings and moratoria

22. What prohibitions against the continuation of legal proceedings or the enforcement of claims by creditors apply in liquidations and reorganizations? In what circumstances may creditors obtain relief from such prohibitions?

Article 20 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

Under the Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL), once the court accepts the bankruptcy application, all of the arbitration and civil procedures involving the debtor will be suspended until the administrator takes over the assets of the debtor.

Article 19 of the EBL

After the acceptance of the bankruptcy application, the preservation measures of the debtor’s assets are terminated and enforcement proceedings are suspended.

Article 38 of the EBL

As for the assets seized by the debtor that do not belong to the debtor, the relevant owner of the assets may recover the assets through the administrator.

Article 39 of the EBL

If the goods are shipped when the court accepts the bankruptcy application, and the debtor has neither received the goods nor paid the full price, the seller may recover such goods in transit. However, the administrator may request the seller deliver the goods through paying the full price.

Articles 109 and 110 of the EBL

Creditors who have security interests on certain bankruptcy assets have priority to receive repayment from the assets (article 109). If the creditor exercises such priority but fails to receive repayment in the full amount, the unpaid claims are deemed as ordinary claims. The claims of the creditor who waives priority are deemed as ordinary claims (article 110).

Article 75 of the EBL

During the reorganization period, the security interests of certain assets are required to be suspended. However, if the suspension is likely to damage the creditor’s rights, the creditor may ask the court to revive the exercise of security interests.

Doing business

23. When can the debtor carry on business during a liquidation or reorganization? Is any special treatment given to creditors who supply goods or services after the filing? What are the roles of the creditors and the court in supervising the debtor’s business activities?

During the reorganization, the debtor may operate the business under the administrator’s supervision after an application filed by the debtor and approved by the court. The debtor is not permitted to damage collateral. Claims arising from the supply of goods and services after the filing are regarded as priority claims, which means creditors have priority over the assets of debtors.

Creditors and the court have regulatory powers over debtors under the provisions of the EBL; they exercise this power subject to the decision of the creditors’ meeting and the reorganization plan. The sale or use of assets are required to be approved by the creditors’ meeting, and the creditor is entitled to require the debtor to provide guarantees or recover the debtor’s possession. However, in practice, the power of creditors is limited and the process of reorganization is principally under the supervision of the court.

Post-filing credit

24. May a debtor in a liquidation or reorganization obtain secured or unsecured loans or credit? What priority is or can be given to such loans or credit?

Article 75 of the EBL

In bankruptcy liquidation, the debtor or administrator may not take secured or unsecured loans during the period of reorganization. The debtor or administrator may raise a loan and create a security interest on the loan for the purpose of the continuation of the business.

Sale of assets

25. In reorganizations and liquidations, what provisions apply to the sale of specific assets out of the ordinary course of business and to the sale of the entire business of the debtor? Does the purchaser acquire the assets ‘free and clear’ of claims or do some liabilities pass with the assets?

Article 112 of the EBL

The disposal of specific assets or the entire business of the debtor is required to be agreed upon by the creditors’ meeting and approved by the court, and the disposal of assets must be conducted through auction, unless other resolutions are adopted by the creditors’ meeting. The purchaser will obtain the assets ‘free and clear’ of claims in this process.

Negotiating sale of assets

26. Does your system allow for ‘stalking horse’ bids in sale procedures and does your system permit credit bidding in sales?

‘Stalking horse’ bids and credit bidding in sale processes are not prohibited by the provisions under the EBL, and the stalking horse bid has been applied to some cases in practice.

Rejection and disclaimer of contracts

27. Can a debtor undergoing a liquidation or reorganization reject or disclaim an unfavorable contract? Are there contracts that may not be rejected? What procedure is followed to reject a contract and what is the effect of rejection on the other party? What happens if a debtor breaches the contract after the insolvency case is opened?

Article 18 of the EBL

The debtor is not entitled to reject or disclaim an unfavorable contract. However, after the acceptance of the bankruptcy application, the administrator has the right to terminate any pending contract before the acceptance of the application. If the administrator fails to inform the opposite party or fails to reply within 30 days of the administrator receiving the opposite party’s reminder, the contract is deemed rescinded.

Intellectual property assets

28. May an IP licensor or owner terminate the debtor’s right to use the IP when a liquidation or reorganization is opened? To what extent may IP rights granted under an agreement with the debtor continue to be used?

Article 18 of the EBL

The issue of whether the intellectual property (IP) licensor may exercise rights on the termination of the debtor’s right to use it depends on stipulations of the license agreement. If there is no agreement, the administrator is entitled to decide on the continuation or termination of the agreement that has been concluded before acceptance of the bankruptcy application but has not been completed.

The IP licensor has the right to decide whether to continue or terminate the agreement between a debtor and a licensor or owner. If the administrator decides to continue to use the IP for the purpose of common benefit of creditors, the licensor or owner may require the administrator to provide a security deposit. If the administrator refuses to provide security, the agreement will be terminated.

Personal data

29. Where personal information or customer data collected by a company in liquidation or reorganization is valuable, are there any restrictions in your country on the use of that information or its transfer to a purchaser?

The individual credit reporting system has been in the process of construction under the supervision of the People’s Bank of China. At present, the collection of individual information must be agreed upon by the person, or the certificate letter must be obtained from the judicial authority.

Arbitration processes

30. How frequently is arbitration used in liquidation or reorganization proceedings? Are there certain types of disputes that may not be arbitrated? Can disputes that arise after the liquidation or reorganization case is opened be arbitrated with the consent of the parties?

Article 20 of the EBL

Upon the acceptance of a bankruptcy application by a court, all commenced arbitration proceedings that are related to the debtor will be suspended; arbitration will continue after the administrator has taken over the administration of the assets. There are no certain types of disputes that may not be arbitrated.

CREDITOR REMEDIES

Creditors’ enforcement

31. Are there processes by which some or all of the assets of a business may be seized outside of court proceedings? How are these processes carried out?

Articles 109 and 110 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

Under the Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL), in a liquidation procedure, creditors that have security interests on specific bankruptcy assets have priority to receive repayment from the assets (article 109). If the creditor exercises priority but fails to receive repayment in the full amount, the unpaid claims are deemed ordinary claims. The claims of creditors that waive priority are deemed as ordinary claims (article 110).

Article 75 of the EBL

During a reorganization procedure, the security interests of certain assets are required to be suspended. However, if the suspension is likely to damage or reduce the value of the collateral, and further harm the interests of the secured party, the secured party may ask the court to revive the security interest.

Article 96 of the EBL

In the settlement procedure, the creditor who has security interests on specific assets of the debtor may exercise their rights from the date that the court makes a rule on the settlement.

Unsecured credit

32. What remedies are available to unsecured creditors? Are the processes difficult or time-consuming? Are pre-judgment attachments available?

There are no special remedies for unsecured creditors. The remedies typically taken by creditors are litigation and arbitration. In general, the procedures are difficult and time-consuming.

There are no pre-judgment attachments available in China.

CREDITOR INVOLVEMENT AND PROVING CLAIMS

Creditor participation

33. During the liquidation or reorganization, what notices are given to creditors? What meetings are held and how are they called? What information regarding the administration of the estate, its assets and the claims against it is available to creditors or creditors’ committees? What are the liquidator’s reporting obligations?

Article 14 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

Under the Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL), the court gives notice to known creditors within 25 days of the date of the ruling to accept a bankruptcy application and the public announcement of this ruling. The matters included in the notice and announcement are as follows:

• the name of the applicant and respondent;
• the time of the court’s acceptance of the bankruptcy application;
• the time limit of the declaration of creditors’ rights, the place and other notes;
• the name and address of the administrator;
• the requirement that the person holding the assets or the debtor pays off the debts or delivery of assets to the administrator; and
• the time and place of holding the first creditors’ committee.

Article 62 of the EBL

The first creditors’ meeting is convened by the court at least 15 days before the expiry date of the time limit for the declaration of creditors’ claims. Subsequent creditors’ meetings are held if the court deems them necessary, or the administrator, the creditors’ committee or creditors holding at least one-quarter of total claims request it of the chairman of the creditor’s meeting.

Article 23 of the EBL

The administrator must report to the court and accept supervision by the creditors’ committee and creditors’ meeting.

Creditor representation

34. What committees can be formed (or representative counsel appointed) and what powers or responsibilities do they have? How are they selected and appointed? May they retain advisers and how are their expenses funded?

Article 67 of the EBL

The establishment of a creditors’ committee is determined by the creditors’ meeting, composed of representatives from the creditors and the labor union or the employees of the debtors. However, the creditors’ committee is not permitted to exceed nine members, and the membership should be approved in writing by the court.

The committee of creditors has the following powers:

• to supervise the disposal of the assets of debtors;
• to supervise the distribution of bankruptcy assets;
• to propose to hold a creditors’ meeting; and
• other duties that are entrusted by a creditors’ meeting.

Retaining advisers is not forbidden by the creditors’ committee. However, the source of the expenses in practice is a problem.

Enforcement of estate’s rights

35. If the liquidator has no assets to pursue a claim, may the creditors pursue the estate’s remedies? If so, to whom do the fruits of the remedies belong? Can they be assigned to a third party?

The creditor may require the debtor to implement duties; the fruits are recognized as the assets of bankruptcy. The disposal of these specific assets is required to be agreed upon by the creditors’ meeting and approved by the court.

Claims

36. How is a creditor’s claim submitted and what are the time limits? How are claims disallowed and how does a creditor appeal? Can claims for contingent or unliquidated amounts be recognized? Are there provisions on the transfer of claims and must transfers be disclosed? How are the amounts of such claims determined?

Article 45 of the EBL

The creditor must submit its creditor’s claim within the time limit for declaration of creditor right determined by the court, which is not less than 30 days or not more than three months from the court publicly announcing that it accepts the bankruptcy application.

Article 49 of the EBL

The creditor must submit a written statement that illustrates the number of creditors’ rights, its secured situation and evidence materials. A statement should be submitted for joint and several claims.

Article 56 of the EBL

If the declaration of creditor rights is not made within the time limit for declaration, a supplementary declaration may be submitted by the debtor before the final distribution of bankruptcy assets. However, there is no supplementary distribution made to a creditor’s claim that has been previously distributed. The creditor should bear the expenses for determination and examination of subsequent declaration.

Article 12 of the EBL

Based on the examination, if the court discovers that the debtor does not meet the conditions of bankruptcy, after the acceptance of bankruptcy application but before the bankruptcy declaration, the court may rule on the rejection of the application.

If the guarantor of the debtor or other joint debtors do not clear off the debt on behalf of the debtor, they may declare the claim with future right of recourse against the debtor.

Article 117 of the EBL

Administrators may hold claims for contingent or unliquidated amounts.

The claims may be transferred under the EBL and they must be disclosed. A claim obtained at a discount must be enforced in its full value.

Article 46 of the EBL

The interest of creditors’ rights ceases to accrue after the acceptance of the bankruptcy application.

Set-off and netting

37. To what extent may creditors exercise rights of set-off or netting in a liquidation or in a reorganization? Can creditors be deprived of the right of set-off either temporarily or permanently?

Article 40 of the EBL

Where a debt is owed by the creditor to the debtor prior to the acceptance of the bankruptcy application, the creditor may propose to the administrator to set off the debt. There will be no set off in any of the following circumstances:

• where a debtor of the debtor under consideration has obtained creditor rights to debts against the debtor under consideration from another party after the acceptance of the bankruptcy application of the debtor;
• where a creditor creates a debt owing to the debtor while aware that the debtor is insolvent or is aware of the bankruptcy application, except where the debt was created due to provisions under the law or under circumstances that have occurred one year before the bankruptcy application; or
• where a debtor of the debtor under consideration obtains creditor rights to debts against the debtor under consideration while aware that the debtor is insolvent or of the bankruptcy application, except where the creditor rights to debts were created due to provisions under the law or under circumstances that occurred one year before the bankruptcy application.

Modifying creditors’ rights

38. May the court change the rank (priority) of a creditor’s claim? If so, what are the grounds for doing so and how frequently does this occur?

Article 59 of the EBL

If the creditor’s claim is not determined, the court may determine the rank of a creditor’s right provisionally, to obtain votes from creditors. However, this rarely occurs in practice.

Priority claims

39. Apart from employee-related claims, what are the major privileged and priority claims in liquidations and reorganizations? Which have priority over secured creditors?

The priority claims over secured creditors mainly include:

• the expenses for bankruptcy proceedings;
• the common benefits debts;
• employee-related claims;
• social security expenditure;
• tax owed by the debtor;
• the priority of the individual house buyer;
• the priority of construction projects; and
• personal injury caused by debtors.

The debtor’s assets are used to settle bankruptcy expenses and common benefits debts at any time.

Upon settlement of bankruptcy expenses and collective debts using the debtor’s assets, the following expenses are repaid in priority: wages, medical subsidies, disability subsidies and compensation expenses owed to workers by the debtor, which are to be included in the basic pension insurance and basic medical insurance expenses of the individual accounts of the workers, and any compensation required to be paid to workers pursuant to provisions in laws and administrative regulations.

Employment-related liabilities

40. What employee claims arise where employees’ contracts are terminated during a restructuring or liquidation? What are the procedures for termination? (Are employee claims as a whole increased where large numbers of employees’ contracts are terminated or where the business ceases operations?)

Article 113 of the EBL

If a labor contract is terminated during the period of reorganization or liquidation, the employee must be compensated for wages, disability subsidies and compensation expenses, basic pension insurance, basic medical insurance expenses and other compensation required under the provisions of laws and administrative regulations. These must be paid following the settlement of bankruptcy expenses and common benefit debt.

Article 41 of the Labor Contract Law of the People’s Republic of China

The Labor Contract Law of the People’s Republic of China governs the procedures of the termination of employees’ contracts. If a corporation is declared bankrupt, employees’ contracts will be terminated; if a corporation undergoing reorganization terminates more than 20 employees’ contracts, the corporation must report this to the labour union 30 days in advance and take advice from the union and employees, and then submit the plan for the termination of contracts to the labor administrative authority.

Pension claims

41. What remedies exist for pension-related claims against employers in insolvency or reorganization proceedings and what priorities attach to such claims?

Article 82 of the EBL

Pension-related claims do not need to be declared; they are ranked as a preferential sequence to compensation, which must be paid after the bankruptcy expenses and common benefit debt, and followed by tax and normal claims.

Article 12 of the Enterprise Annuity Measure

The Enterprise Annuity Scheme must not be implemented where the enterprise is dissolved, revoked or declared bankrupt according to the law.

Article 16 of the Enterprise Annuity Measure

Where the enterprise suspends the contribution to pensions as a result of restructuring and merger or losses incurred from the operation, the enterprise may discuss with employees the suspension of the contribution. The contribution, according to the enterprise’s actual condition, will be resumed if the situation above occurs, and the enterprise may make retrospective contributions to the pension scheme for contributions that were suspended. The amount of retrospective contributions must not be allowed to exceed the actual amount for contributions that were suspended.

Environmental problems and liabilities

42. Where there are environmental problems, who is responsible for controlling the environmental problem and for remediating the damage caused? Are any of these liabilities imposed on the insolvency administrator personally, secured or unsecured creditors, the debtor’s officers and directors, or on third parties?

The relevant regulations on environmental issues are included under the EBL.

Liabilities that survive insolvency or reorganization proceedings

43. Do any liabilities of a debtor survive an insolvency or a reorganization?

Generally, the liabilities of a debtor do not survive the insolvency procedures. As to reorganization, the liabilities of a debtor are disposed of pursuant to the reorganization plan.

Distributions

44. How and when are distributions made to creditors in liquidations and reorganizations?

Articles 112 and 114 of the EBL

During the liquidation procedure, the distribution plan will be passed by the creditors’ meeting and then approved by the court. The disposal of assets is required to be implemented through auction, unless other provisions are made under state laws (article 112). In reorganization procedures, the distribution is based on the reorganization plan, which is restricted to all of the creditors. The bankruptcy assets shall be distributed in cash form, unless otherwise determined by the creditors’ meeting (article 114). However, in practice, the assets may also be distributed in the form of physical objects of the debtors.

SECURITY

Secured lending and credit (immovables)

45. What principal types of security are taken on immovable (real) property?

According to the Civil Code of the People’s Republic of China, security over immovable property is usually a mortgage.

Secured lending and credit (movables)

46. What principal types of security are taken on movable (personal) property?

According to the Civil Code of the People’s Republic of China, securities over movable property usually include mortgages, pledges and liens.

CLAWBACK AND RELATED-PARTY TRANSACTIONS

Transactions that may be annulled

47. What transactions can be annulled or set aside in liquidations and reorganizations and what are the grounds? Who can attack such transactions?

Article 31 of the Enterprise Bankruptcy Law of the People’s Republic of China 2006

Under the Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL), the following actions involving the debtor’s assets may be annulled if they occurred within one year before the acceptance of the bankruptcy application:

• the transfer of property without compensation;
• transactions conducted at an obviously unreasonable price;
• security provision for debts without security;
• the settlement of undue debt; or
• the waiver of creditor’s claims.

Article 32 of the EBL

If a debtor who is insolvent pays off any of the individual creditors within the six months before the acceptance of the bankruptcy application, the administrator may apply to the court to annul the action unless the individual payment benefits the debtor’s assets.

Article 33 of the EBL

If a debtor conceals or transfers assets to evade debts, or fabricates debts or admits unreal debts, such actions relating to the debtor’s assets are invalid.

Generally, the administrator may annul these transactions during liquidation or reorganization procedures; if the administrator does not exercise the duties, or delays doing so, the creditor may exercise the duties belonging to the administrator.

Equitable subordination

48. Are there any restrictions on claims by related parties or non-arm’s length creditors (including shareholders) against corporations in insolvency or reorganization proceedings?

Point 39 of the Notice of the Supreme People’s Court on the Promulgation of the Minutes of the National Court Work Meeting on Bankruptcy Trials

The creditor’s rights formed because of the abuse of affiliated relationships between related parties must be paid off after common creditor’s rights and have no priority on specific assets provided by other related parties.

Article 113 of the EBL

The relevant employees’ claims are in the priority sequence of claims that are repaid after the settlement of bankruptcy expenses and common benefit debts. However, the wages of directors, supervisors and senior managers are calculated on the basis of the average wages of employees in the company.

Article 77 of the EBL

Within the reorganization period, the shareholders of debtors are not permitted to request distribution of investment incomes; the directors, supervisors and senior managers may not transfer debtors’ equity to any third party, except if approval is given by the court.

Article 36 of the EBL

The administrator recovers income obtained in improper ways, or assets embezzled by directors, supervisors and senior managers.

Lender liability

49. Are there any circumstances where lenders could be held liable for the insolvency of a debtor?

If directors, supervisors or senior management personnel of an enterprise, who are also lenders, violate the duties of loyalty and diligence and causes the bankruptcy of the enterprise, they will bear civil liability.

GROUPS OF COMPANIES

Groups of companies

50. In which circumstances can a parent or affiliated corporation be responsible for the liabilities of subsidiaries or affiliates?

There are no circumstances in which a parent or affiliated corporation assumes the responsibility for the liabilities of subsidiaries or affiliates under the Enterprise Bankruptcy Law of the People’s Republic of China 2006. In practice, the parent corporation or affiliated corporation should bear the responsibility for its subsidiary if that subsidiary is not an independent entity, or it has conducted an abnormal transaction.

Combining parent and subsidiary proceedings

51. In proceedings involving a corporate group, are the proceedings by the parent and its subsidiaries combined for administrative purposes? May the assets and liabilities of the companies be pooled for distribution purposes?

The combination of bankruptcy procedures of the parent company and its subsidiaries is permitted in practice. Under such circumstances, the assets and liabilities belonging to the companies may be pooled for the purpose of distribution.

INTERNATIONAL CASES

Recognition of foreign judgments

52. Are foreign judgments or orders recognized, and in what circumstances? Is your country a signatory to a treaty on international insolvency or on the recognition of foreign judgments?

Where a foreign court’s judgment or ruling on a bankruptcy case that has taken effect involves assets in the territories of China held by a debtor, and an application or request for judicial recognition and enforcement of the judgment is made to the court, the court will, pursuant to the international treaty that China has concluded or is a member of, or pursuant to the principle of reciprocity, examine the application or request.

Where the court deems that the application or request does not violate the basic principles of the laws of China, threaten national sovereignty, security and public interest, and does not impair the lawful rights and interests of the creditors within the territory of China, the court will make a ruling on recognition and enforcement.

China is not a signatory to any treaties on international insolvency or the recognition of foreign judgments.

UNCITRAL Model Laws

53. Have any of the UNCITRAL Model Laws on Cross-Border Insolvency been adopted or is adoption under consideration in your country?

The UNCITRAL Model Law on Cross-Border Insolvency has been adopted in China. Upon the court recognizing the bankruptcy rule made by a foreign court, the domestic assets of debtors are required to clear employees’ claims and taxes; the assets left may be distributed pursuant to the regulations of the foreign court.

Foreign creditors

54. How are foreign creditors dealt with in liquidations and reorganizations?

There are no special provisions relating to reorganization and liquidation under the Enterprise Bankruptcy Law of the People’s Republic of China 2006 (EBL) for foreign creditors; they have the same right as domestic creditors to declare claims.

Cross-border transfers of assets under administration

55. May assets be transferred from an administration in your country to an administration of the same company or another group company in another country?

In practice, the assets are permitted to be transferred under the administration in different countries. Nevertheless, it is required that domestic employees’ claims and taxes should be settled in full before assets are transferred to another country.

COMI

56. What test is used in your jurisdiction to determine the COMI (center of main interests) of a debtor company or group of companies? Is there a test for, or any experience with, determining the COMI of a corporate group of companies in your jurisdiction?

In general, the center of main interests (COMI) of a debtor company or a group of companies is typically determined by the position where the debtor is domiciled, the principal business office, the location of the main property or the place of registration.

Point 35 of the Minutes of the National Court Work Meeting on Bankruptcy Trials

If the court hears the bankruptcy case of companies through substantive consolidation, this should be under the jurisdiction of the court where the core controlling companies are located. If there are no such companies, it would be under the jurisdiction of the court where the affiliates’ main assets are located. If disputes on jurisdiction exist among multiple courts, this should be submitted to the common superior court for the designated jurisdiction.

Cross-border cooperation

57. Does your country’s system provide for recognition of foreign insolvency proceedings and for cooperation between domestic and foreign courts and domestic and foreign insolvency administrators in cross-border insolvencies and restructurings? Have courts in your country refused to recognize foreign proceedings or to cooperate with foreign courts and, if so, on what grounds?

Article 5 of the EBL

If the foreign bankruptcy proceedings neither violate the basic principles of China’s laws nor harm national sovereignty, security and public interest, and do not harm the legal rights and interests of creditors within the territory of China, the court will recognize and enforce the foreign proceeding.

After recognition of a foreign ruling or judgment of a bankruptcy case by the court, the debtor must first clear off the secured creditor, the creditors’ rights of employees, social insurance and tax with its assets within China, and then distribute the remaining assets based on the regulation of the foreign court.

Cross-border insolvency protocols and joint court hearings

58. In cross-border cases, have the courts in your country entered into cross-border insolvency protocols or other arrangements to coordinate proceedings with courts in other countries? Have courts in your country communicated or held joint hearings with courts in other countries in cross-border cases? If so, with which other countries?

The courts in China have neither entered into any insolvency protocols or arrangements to coordinate procedures with other countries’ courts, nor held a joint hearing with courts in any foreign countries.

Winding-up of foreign companies

59. What is the extent of your courts’ powers to order the winding-up of foreign companies doing business in your jurisdiction?

According to the EBL, any bankruptcy proceeding that originates under the EBL is binding on all assets that are held outside the territory of China by the debtor. However, the court as no jurisdiction over foreign companies doing business in China, but incorporated according to foreign laws according to the EBL, the Company Law of the People’s Republic of China 2013 or other laws.

UPDATE AND TRENDS IN RESTRUCTURING AND INSOLVENCY IN CHINA

Trends and reforms

60. Are there any emerging trends or hot topics in the law of insolvency and restructuring? Is there any new or pending legislation affecting domestic bankruptcy procedures, international bankruptcy cooperation or recognition of foreign judgments and orders?

On 30 May 2023, the Standing Committee of the National People’s Congress issued the 2023 legislative work plan, and the amendment of the Enterprise Bankruptcy Law was included in the preparatory review item. Relevant parties will promptly carry out research and drafting work, and arrange review according to the situation. This means that the bankruptcy law will play a more important role in China’s market economy system, which will help to further establish a market-oriented and legalized exit mechanism and an efficient and fair bankruptcy law system.

* The information in this chapter was accurate as at September 2023.

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