Tuesday, August 3, 2021

Zhang Xianchu on Bankruptcy Law in China (new book chapter)

"Bankruptcy Law in China"
Zhang Xianchu
in Company Law in Hong Kong: Insolvency 2021 ed. by Stefan Lo (Bloomsbury, December 2020), Chapter 14
Company Law in Hong Kong: Insolvency by Stefan Lo.
Annual update to the application of particular areas under the Companies Ordinance (Cap.622) and Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap.32)
New General Editor – Stefan HC Lo, member of the Company Law Re-write Team
2021 edition examines important changes under the following chapters:

Chapter 1 – Directors
Chapter 2 – Role and Status of Liquidators
Chapter 3 – Provisional Liquidation
Chapter 4 – Winding Up by the Court
Chapter 5 – Members’ Voluntary Winding Up
Chapter 6 – Investigations, Assets, Claims, and Realizations
Chapter 7 – Creditors in Winding Up
Chapter 8 – Schemes of Arrangement
Chapter 9 – Setting Aside of preferences and Trading Issues
Chapter 10 – Liquidation Costs
Chapter 11 – Receivership
Chapter 12 – Cross Border Issues
Chapter 13 – Corporate Rescue
Chapter 14 – Bankruptcy Law in China

Introduction of Chapter 14 - Bankruptcy Law in China:
Unlike Hong Kong, Mainland China as a socialist country practiced the so-called planned economy for three decades in which all economic activities of the country were controlled by the government with state-owned enterprises (SOEs) as the dominant business entities. Such condition was not changed until the historical economic reform and the open-door policy were implemented in 1978. Since 1978 China has been transformed into a "socialist market economy” with the 1993 Constitutional Amendment to codify the reorientation and accession to the World Trade Organization (WTO) in 2001 as two primary milestones. For 40 years, China has been a hot place to attract foreign investments and in 2012 China surpassed Japan to become the second largest economy in the world. Although the Communist Party and the political ideology still play a crucial role and cause uncertainties, the market force is increasingly taking the course of the national development. After the new leadership took their office in 2012, an explicit pledge was made in the Decision of the Central Committee of the Communist Party of China (CPC) on Certain Major Issues Concerning Comprehensively Deepening Reforms to let the market to play a decisive role in resource allocation, including further improvement of enterprise bankruptcy regime. 

In the course of dynamic market growth, the legal infrastructure has also developed rapidly. Although the short period of development has not allowed its legal framework to reach a very comprehensive and sophisticated stage, to a large extent China has made significant progress in modernising its entire legal system. In October 2011, the Chinese Government declared that a new socialist legal system with Chinese characteristics had been established, which then included the Constitution, 240 laws, 706 administrative regulations and 8,600 local provisions at that time. 

Against this background it may be useful to briefly highlight the legal sources and their main feature before embark to examine bankruptcy laws and regulations in detail. Legislative activities in China are governed by the People’s Republic of China Constitution (PRC Constitution), as amended in 2004 and the People’s Republic of China Legislation Law of 2000 (PRC Legislation Law), as amended in 2015, which classifies the legal resources into four categories with the Constitution as the supreme law of the country.  Under the Constitution, the National People’s Congress (NPC) acts as the primary legislative organ of the country. It has the power to enact and amend basic laws (基本法律) such as the Criminal Law and the General Principles of Civil Law as well as the Hong Kong Basic Law.  Its Standing Committee as the executive organ of the NPC also possesses law-making powers to pass and amend laws, provided that those matters are not reserved to the NPC.  When the NPC is not in session, the Standing Committee also has power to pass supplements and amendments to laws enacted by the NPC provided that such legislation is consistent with the basic principles of the relevant laws.

The Constitution and the Legislation Law also empower the State Council as the central government to enact administrative regulations (行政法規) in accordance with the Constitution and the national laws.  Where the NPC or its Standing Committee has not enacted any laws, the State Council may be delegated the power to enact administrative regulations on such matters first.  In practice, administrative regulations may be issued in different forms, such as measures, notices and provisions. Given the nature of the so-called socialist market economy, the central government may also from time to time issue its policies, which may have significant impacts in the market.

Below the central legislative bodies noted above, the Constitution also empowers the people’s congresses and governments of the provinces, major cities and the special economic zones to enact local regulations (地方性法規), provided that such regulations do not contravene the Constitution and the national laws and administrative regulations promulgated by the NPC, its Standing Committee and the State Council.  The Constitution also delegates to the people’s congresses of national autonomous regions the power to enact autonomy regulations (自治條例) and specific provisions (單行條例).  Moreover, all the ministries, state commissions, the People’s Bank and other state administrations directly under the State Council may also have powers to promulgate administrative provisions for matters within their own jurisdiction. 

In order to prevent, and deal with, conflict of legal rules adopted by different central and local authorities, the Legislation Law sets out some governing principles and procedures. For example, all the enactments should be filed with the Standing Committee of the NPC for record  rules with a higher legal status shall prevail over lower level rules in cases of conflict; and the Standing Committee of the NPC and the State Council may have the authority to make ruling on legal conflicts concerned  and even annual the lower level provisions. 

Unlike common law systems, the judiciary in China does not have power to interpret the law except the Supreme People’s Court (SPC). As such, the SPC has developed a practice to issue judicial circulars as binding legal authority to guide case handlings of the lower courts. The SPC promulgated the Provisions Concerning Judicial Interpretations (司法解釋) on 23 March 2007 (2007 SPC Provisions). Article 5 of these 2007 SPC Provisions Concerning Judicial Interpretations explicitly stipulates that judicial interpretations adopted by the SPC shall have the effect of the law, which may be in forms of interpretations, provisions, replies and decisions of the SPC. In addition, the SPC in recent years has promoted guiding cases practice as part of its efforts to streamline the local practice and deal to with issues and concerns newly raised. According to the Provisions Concerning Case Guidance (案例指導) of the SPC dated 26 November 2010 (2010 SPC Provisions), the local People’s Courts are required to make reference to the guiding cases selected by the SPC from the judicial decisions when dealing with the similar cases. By July 2018, the SPC had issued 96 guiding cases (指導性案例) in 18 batches. Although thus far no guiding case on bankruptcy as such has been issued, some may have implications on liquidation and bankruptcy practice. For instance, in the Guiding Case No 9 where shareholders failed to carry out liquidation in a timely manner after the company’s business license was revoked by the state administration, the First Intermediate People’s Court of Shanghai by affirming the lower court decision held the two individual shareholders liable jointly with the company for the unpaid debts due to loss of the account books and assets of the company, although they argued that they were not in a position to control the company affairs. The court pointed out that regardless of the percentage of their equity holdings and involvement in the company’s affairs, it is shareholders’ legal duty to liquidate their company within the statutory period after the business license of their company was revoked.  The SPC also published the 10 illustrative cases of enterprise bankruptcy and liquidation in 2016 and 2018, respectively, as a new practice to promote judicial practice in this area. Some local People’s Court has begun to follow this practice by publishing leading bankruptcy and reorganisation cases of their own jurisdictions.

Besides various enactments as legal resources, the judicial policy has also played an important role in legal practice. For instance, during the worldwide financial crisis, the SPC promulgated a series of policies in order to stabilise the economic conditions of the country and avoid massive bankruptcy of enterprises, such as the SPC’s Opinions on Certain Issues Concerning Correctly Handling Enterprises Bankruptcy Cases to Provide Market Economic Order with Judicial Protection on 12 June 2009 (2009 Opinions). According to the 2009 Opinions, the People’s Courts should actively coordinate with the government and the Communist Party to deal with various problems in the crisis period for maintaining social stability and to sensibly apply the bankruptcy rules. Even some enterprises were already insolvent and apparently lack of capacity of repaying their debts, the People’s Courts were required to take active rescue measures to avoid bankruptcy as long as these firms were in line with the national industrial policy with prospects. 

The latest policy in this regard was promulgated in the Principal Notes of the National Judicial Conference on Bankruptcy Trials of the SPC on 4 March 2018 (Principal Notes of 2018), which set out the direction for professional development, improvement of the administrator system, streamlining bankruptcy and reorganisation practice, enhancement of judicial enforcement and transparency and better cross-border insolvency handling. 

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