Interpretation and Application of the New Enterprise Bankruptcy Law

Author: Tang Weijian
Publisher:
Publish Date: 2006-10-01
Features: Bankruptcy is an inevitable economic phenomenon under a market economy system and a natural outcome of market competition. A sound and comprehensive legal system for a market economy should have an organic legal mechanism for market entities, market operation, and market exit. The bankruptcy legal norms that regulate the inability of debtors to repay debts on time, thereby initiating bankruptcy mediation, bankruptcy reorganization, or bankruptcy liquidation procedures to handle creditor-debtor relationships, constitute the core and key of the market exit legal mechanism. Bankruptcy legal norms include substantive norms and procedural norms. The former include aspects such as the causes of bankruptcy (or reorganization), the scope of bankruptcy assets, the powers of the bankruptcy trustee, the powers of the creditors' meeting and creditors' committee, and the distribution of bankruptcy assets. The latter include the submission and acceptance of bankruptcy applications, bankruptcy declarations, claims for bankruptcy, the suspension and termination of bankruptcy proceedings, etc. China passed the Pilot Enterprise Bankruptcy Law as early as 1986, but due to the limitations of the socio-economic conditions at the time, this law was only applicable to state-owned enterprises. To address its shortcomings, the 19th chapter of the Civil Procedure Law promulgated in 1991 stipulated bankruptcy repayment procedures for enterprises other than state-owned enterprises. The Supreme People's Court also promulgated two judicial interpretations—the Supreme People's Court Opinions on Several Issues Concerning the Implementation of the Pilot Enterprise Bankruptcy Law of the People's Republic of China and the Supreme People's Court Provisions on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases—in 1991 and 2002, respectively. These two laws and the relevant provisions of the Supreme People's Court's judicial interpretations played a significant role in regulating the bankruptcy behavior of Chinese enterprises and adjudicating bankruptcy cases. However, with the gradual establishment of the socialist market economy system and the further deepening of state-owned enterprise reforms in China, there has been an increase in corporate restructuring, mergers, and acquisitions, leading to more bankruptcy cases. The bankruptcy of enterprises, especially large state-owned enterprises, has a broad impact, making it urgent to have a comprehensive law to regulate it. However, the old bankruptcy law has long been "outdated," primarily in two aspects: First, some provisions of the original bankruptcy legislation (such as those on the causes of bankruptcy) do not promote equal protection for all bankruptcy entities and are contrary to the requirements of an increasingly market economy. Second, the original bankruptcy legislation provided only general provisions for bankruptcy proceedings, making it difficult to implement and lacking corporate rescue procedures such as reorganization, as well as other relevant systems to effectively protect debtor assets, safeguard the legitimate rights and interests of employees, and ensure the normal progress of procedures. Additionally, the courts have accumulated extensive practical experience in adjudicating bankruptcy cases, some of which need to be elevated to the level of law. Therefore, formulating a unified and comprehensive enterprise bankruptcy law has become inevitable. The new enterprise bankruptcy law emerged in this context. On August 27, 2006, the 23rd session of the Standing Committee of the 10th National People's Congress passed the new enterprise bankruptcy law by a high vote. This draft, which took 10 years to develop, was finally enacted after three reviews and revisions by the Standing Committee of the National People's Congress over two years. The Pilot Enterprise Bankruptcy Law, which was enacted in 1986 and only applicable to state-owned enterprises, will be repealed on June 1, 2007, when the new law takes effect. After the passage of the new law, Chairman Wu Bangguo delivered an important speech, stating: "A socialist market economy is a rule-of-law economy, and survival of the fittest is a market principle. The bankruptcy law passed by this session establishes a legal system for the orderly exit of enterprises, regulates bankruptcy procedures, and is of great significance for fairly settling creditor-debtor relationships, protecting the legitimate rights and interests of both creditors and debtors, and maintaining the order of the socialist market economy." It is evident that the introduction of the new enterprise bankruptcy law marks the gradual maturation of China's market economy and is essential for deepening reforms of enterprises, especially state-owned enterprises, and aligning with the economies of developed countries.