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Judicial Interpretation of Enterprise Bankruptcy Cases
With the growing number of insolvencies (both of
local Chinese companies and international companies who have Chinese
assets), LehmanBrown has been approached by many firms requesting
information about the detaild of the latest bankruptcy legislation
and judicial interpretations.
Although the revised bankruptcy law is still in
the process of being drafted, and is not anticipated to be ratified
for at least another 18 months, the latest ruling and interpretation
of The Supreme People's Court has certainly provided some direction
on the issue.
In light of this, we have provided a summary of
the interpretation of the key articles.
A Summary of Regulations On Issues Involving
The Judgment Of Enterprise Bankruptcy Cases (Issued By The Supreme
People's Court On July 18, 2002)
In China, there are two laws that specifically govern the bankruptcy
of enterprises. One is the Bankruptcy Law of the People's Republic
of China (1986), which regulates the bankruptcy of state-owned enterprises.
The other is the Civil Procedure Law of the People's Republic of
China (1986), which provides regulations in regard to the bankruptcy
of all enterprises with legal person status.
This new judicial interpretation, adopted for the purpose of better
applying the two laws, consists of 14 articles. Following are some
of the major points or points that are new as compared with provisions
in the two Laws as referred to above.
Article 1 Jurisdiction
Bankruptcy cases shall be under the jurisdiction of the people's
courts in the location of the debtor.
Article 2 The submission and acceptance of bankruptcy applications
The debtor applying or applied to go bankrupt must have legal person
status. A state-owned enterprise applying for bankruptcy must submit
to the court the approval documents of its superior department in
charge for its own bankruptcy, while other enterprises must provide
with the decision of the meeting of shareholders which decide to
have the enterprise go bankrupt. Enterprises without legal person
status are not qualified for bankruptcy.
If the debtor raises an objection against the application by the
creditor for the debtor's bankruptcy, the court shall cease to handle
the case and tell the creditor to launch a civil litigation first,
provided that the court finds the objection reasonable.
The court shall turn down a bankruptcy application if it finds:
1. the debtor conceals or transfers its assets and then applies
bankruptcy in order to escape its debts;
2. the creditor tries to make use of the bankruptcy application
to make damages to the business reputation of the debtor, with
the intention to negatively affect fair competition.
The court shall turn down the bankruptcy application if the court
finds that large amount of the debtor's assets is missing without
reasonable explanation by the debtor as to where it has gone.
In case the management organ of the enterprise is not able to operate
in the normal manner after the court has accepted the bankruptcy
application, a supervision team may be set up to perform part of
the duties of a liquidation team before a liquidation team is formally
set up.
Article 3 Creditor's claims
Article 4 Settlement and reorganization
Article 5 Bankruptcy declaration
The creditor or debtor who has objection to the bankruptcy declaration
may, within 10 days after the bankruptcy declaration is made, appeal
to the people's court of higher level, which shall make a judgment
within 30 days.
Article 6 Creditors' meetings
Article 7 Liquidation team
Article 8 Bankruptcy claims
Altogether 12 types of claim are deemed as bankruptcy claims.
Special attention should be paid to the claims due to the termination
of a contract which has been terminated by the liquidation team.
Such claims shall be determined in accordance with the actual losses.
Claims against breach of the contract shall not be deemed as bankruptcy
claims. Fine rules of down payment shall no longer apply.
Article 9 Bankruptcy property
If the amount of registered capital contributed by the investor
of the bankrupt enterprise did not conform with the required amount
by law, the investor should pay off the unpaid part which shall
then be deemed as bankruptcy property.
Property or land use rights transferred to the bankrupt enterprise
by a third party before the bankruptcy takes place shall be deemed
as bankruptcy property even if the bankrupt enterprise has not paid
or fully paid for such property or land use rights.
Article 10 Recovery of bankruptcy property
Overseas-located property of the bankrupt enterprise shall be recovered
by the liquidation team.
Property of branches or institutions, which have no legal person
status and are solely-owned by the bankrupt enterprise, shall be
put into the bankruptcy property.
Stocks as well as the profits arising from them held by the bankrupt
enterprise shall be recovered. The stocks shall be sold or transferred.
The income arising from the sale or transfer of the stocks shall
be deemed as part of the bankruptcy property for allocation.
Kindergartens, schools, hospitals and other facilities for public
welfare owned by the bankrupt enterprise shall not be deemed as
bankruptcy property for allocation. Instead, they shall be disposed
of in accordance with the relative rules of the China.
Bankruptcy property shall be transformed into currency through
auction carried out by licensed auctioneers.
Article 11 Bankruptcy expenses
During the liquidation, priority shall be given to paying the workers
and staff of the bankrupt enterprise for the cost of their living
and medical services from the bankruptcy property.
The people's court shall decide to terminate the bankruptcy procedure
upon receiving the application of the liquidation team for the termination
of such bankruptcy in case the bankruptcy property cannot cover
the bankruptcy expenses.
Article 12 The allocation of the bankruptcy property
The allocation plan, when approved at the meeting of creditors,
shall be carried out by the liquidation team.
In case the creditor does not accept the allocated bankruptcy property
on time, such allocated property shall be deposited. The liquidation
team shall issue a notice urging the creditor to accept it. If the
creditor fails again to accept the property within two months after
the notice is issued, the liquidation team shall reallocate such
part of the bankruptcy property.
Article 13 Termination of the bankruptcy procedure
After the bankruptcy property is allocated, the bankruptcy procedure
is terminated. If more property for allocation is found after the
termination of the bankruptcy procedure, such property shall be
further allocated. If more bankruptcy property needs to be recovered
and reallocated after the termination of the bankruptcy procedure,
the liquidation team or some members of the team shall not be dismissed
temporarily.
Article 14 Miscellaneous
----- THE END (Summarized by LehmanBrown)
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