|
Oct 2007
On 27 August 2006, the Standing Committee of the National People's Congress (NPC) adopted a new enterprise bankruptcy law (the New Law). Twelve years in the making, the New Law comprises 12 Chapters and 136 Articles, and came into effect on 1 June 2007.
The New Law covers all kinds of insolvent entities including private and state owned enterprises (SOEs) and foreign investment enterprises and is clearly one of the cornerstones of China's efforts to expand its use of market forces to bring efficiency to its economy. Prior to the implementation of the New Law, China did not have a unified bankruptcy law covering all types of enterprises, and the bankruptcy of debtor enterprises (including SOEs) was governed by an amalgamation of laws, rules and procedures which tended to make things complicated and confusing.
After years of preparation and discussions, the first draft of the New Law was submitted to the NPC for approval in June 2004. One of the main reasons why it took more than two years for the New Law to gain approval was the debate over how the rights of workers should be ranked versus those of secured creditors. While the financial sector and its supporters demanded absolute priority for secured creditors, workers' unions were equally vocal in demanding first priority protection of workers' rights in a bankruptcy. As maintaining social stability is a key government priority, the New Law attempts to strike a balance between these opposing views, and here's how:
Article 109 of the New Law provides that secured creditors will have priority over the assets pledged to them by the bankrupt entity. Article 113 ranks workers ahead of all other (unsecured) creditors, stipulating that after settlement of bankruptcy expenses and debts for the common benefit of creditors (such as debts incurred to continue operations), the bankrupt entity's unsecured assets will first be applied to settle employees' entitlements (e.g., outstanding wages, medical expenses, physical disability subsidies, general pension funds, etc.).
But an interesting and important twist to Articles 109 and 113 can be found in Article 132, which stipulates that any employees' entitlements accrued before the New Law's promulgation on 27 August 2006 which remain outstanding will, after implementation of the New Law, have a priority claim over the debtor's assets, including those pledged to secured creditors. Employees' entitlements accrued after 27 August 2006 will lose this preferential treatment.
In many aspects, the New Law is substantively similar to the first draft which we discussed in our December 2004 Industry Watch ("China's proposed new bankruptcy law: The practical implications"). In this publication, we outline some of the New Law's major provisions and changes made since the first draft, and highlight some of the practical issues and problems we envisage may arise during implementation.
Get Your Copy Here
Read more by downloading our China's new Enterprise Bankruptcy Law (pdf file, 605KB) for your reference. |
 |
