The Reorganisation Process Under China's Corporate Bankruptcy System

Abstract

The number of enterprises plunging into bankruptcy starting in 2008,1 during which time China was affected by the global financial crisis, tested the efficacy of the Enterprise Bankruptcy Law (EBL), which established a statutory-based reorganization process to be followed and which was seemingly designed for the resurrection of corporate entities caught in financial malaises. During the global financial crisis, the EBL served its intended purpose-the prevention of a greater number of small-and medium-sized enterprises in temporary financial difficulties from premature corporate bankruptcy; but the implementation of the EBL and, by extension, China's corporate bankruptcy system was less than ideal. One of the main tenets of the EBL is the requirement for any reorganization plan to be approved dually-i.e., sanctioned by both the creditors and the court; but the EBL fails to prescribe clearly the circumstances under which the court's discretionary power in granting its approval should be exercised and, if so done, to what extent those powers should be kept in check. The deficiencies of the EBL might impact adversely China's securities markets because there is a strong linkage between an effective corporate bankruptcy reorganization system and increased securities trading. A listed company facing bankruptcy but whose shares remain tradable in China's securities market would normally be labeled as an *ST corporation2 first, before being delisted eventually. While reorganization can theoretically, if not practically, provide reprieve for a bankrupt company by saving it from premature corporate bankruptcy, recent research has indicated that the number of successful reorganization cases are few and far between. The paucity of successful bankruptcy reorganization cases in China suggests the EBL, as it was implemented, may have inadvertently put restraints in its own application, in contrast to the more efficacious corporate bankruptcy laws in jurisdictions such as Australia, the United Kingdom,, and the United States, each of which provided a model for reorganization legislation. There are both internal and external factors attributive to such lackluster results following the EBL's implementation. The internal factors consist of some judges' preference in applying the old law (which contains no reorganization provisions whatsoever) over the newer EBL, as the new law is less familiar to them. The external factors comprise local protectionism of preferred enterprises and a lack of qualified bankruptcy professionals in China. This article aims to examine the implementation and practice of China's corporate reorganization process, formed and shaped by Chapter 8 of the EBL, immediately before and throughout, the global financial crisis. Relevant issues in regards to the administrator system and the expenses associated with the reorganization process will also be addressed. It is hoped that this article, if construed properly , may inform of future amendments to China's EBL.