Proposals to Establish a Partnership Bankruptcy Regime in China: With Lessons from the UK and USA

• Published date: 01 June 2014
• Author: Wei Chuyi
• DOI: http://doi.org/10.1002/iir.1223
• Date: 01 June 2014

Proposals to Establish a Partnership

Bankruptcy Regime in China: With Lessons

from the UK and USA

Wei Chuyi*

School of Law, University of Glasgow, Glasgow, UK

Abstract

Following in the steps of the USA and UK, China introduced partnerships with limited

liability in 2006, the same year that a market-oriented bankruptcy statute was enacted.

Although the bankruptcy statute enshrines basic elements of modern bankruptcy law, it

fails to stipulate specific rules for partnership bankruptcy. As partnership with limited

liability acquires increasing importance, especially limited partnerships as a popular

form of private equity firms, a partnership bankruptcy regime becomes indispensable.

ThisarticleconsiderstheexperienceoftheUKandUSAinordertomakeproposalsto

establish a partnership bankruptcy regime in China. Although partnership bankruptcy

law can be formulated by analogy to corporate bankruptcy law, special considerations

must be given to the characteristics of partnership such as unlimited liability and lack of

separation of management from ownership. Further, as partnership bankruptcy may

lead to partner bankruptcy and vice versa, conflicts between partnership creditors

and partners’personal creditors must also be considered. Copyright © 2014 INSOL

International and John Wiley & Sons, Ltd

I. Introduction

Under the EnterpriseBankruptcy Law (EBL) promulgatedin 2006, Chinese partner-

ships are permitted to use the bankruptcy liquidation procedure. However, current

rules regarding partnership bankruptcy are largely vague, and detailed rules of

applying bankruptcy law to partnerships have not beenformulated. Besides the bank-

ruptcy statue,another significant change in the Chinese legallandscape in 2006 is the

introductionof partnerships with limited liability into the Partnership Enterprise Law

(PEL),

1

particularly limited partnership, which now have become the main form of

*E-mail: weichuyi@gmail.com

1. The English translation of the EBL, PEL and other

Chinese statutes discussed in this article is taken from

the website of the National People’s Congress with

some alterations made by the author: http://www.

npc.gov.cn/englishnpc/Law/Frameset-page2.html.

Copyright © 2014 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 23: 122–143 (2014)

Published online 10 June 2014 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1223

private equity firms. As private equity firms organised as partnerships are looking at

increasing risk of failure, a sound bankruptcy regime for partnerships becomes more

important than ever. The purpose of this article is to propose to establish a partner-

ship bankruptcy regime in China within the current framework of bankruptcy law,

on the basis of the experienceof the UK and USA. In Section II, expansion of limited

liability into partnerships from the USA and UK to China will be accounted,and the

need for a partnership bankruptcy regime will be demonstrated. Section III will first

briefly introduce the current bankruptcy regime in China both in terms of its basic

structures and operation in reality. As Chinese bankruptcy law is similar to the UK

and US bankruptcy law in principle, it is possible to establish a partnership bank-

ruptcy regime on the basis of the experience of the UK and USA, and this will be

the focus of Section III. Section IV will look at the conflicts between partnership

creditors and personal creditors of the partnership both when a partnership and its

partners go bankrupt simultaneously and when only partners are insolvent and the

partnership is economically viable. Rules on these issues in China are vague and

flawed; therefore,the experience of the UK and USA will again be a source of inspi-

ration for future reform.The final part, Section V, is a conclusion of the whole thesis.

Before any discussion on bankruptcy starts, a clarification of the meaning of ‘insol-

vency’and ‘bankruptcy’needs to be made. When insolvency refers to a financial state,

it usually has two connotations. First, it refers to the inability to pay debts as they fall

due (equity or cash flow insolvency). Second, it refers to the situation where a debtor’s

liabilities exceed its assets (balance sheet insolvency).

2

In the UK, the formal procedure

of being declared insolvent is also referred to as insolvency for ent erprises, whereas such

procedure is defined as bankruptcy for individuals. It is worth noticing that in Scotland,

the insolvency procedure is referred to as sequestration. As the UK bankrup tcy regime

discussed here mostly refers to the English bankruptcy regime and Scots law will only

be tangentially considered, no further discussion will be made on sequestration, which

in most part resembles the English insolvency. In the US context, ‘insolvency’is usually

only used to describe a financial state, whereas ‘bankruptcy’is a generic term for the

legal procedure of being declared insolvent for both enterprises and individuals.

3

China has followed the USA in using bankruptcy ( pochan)asthegenericterm

for the legal procedure to declare insolvency. However, as currently the application

of Chinese bankruptcy law is confined to enterprises, ‘bankruptcy’per se in fact only

refers to enterprise bankruptcy.

II. Expansion of Limited Liability into Partnerships and the Need for a

Partnership Bankruptcy Regime in China

Limited liability has usually been regarded as an essential feature of corporation.

4

With limited liability, shareholders and directors are shielded from debts of the

2. Bryan A Garner (ed), Black’s Law Dictionary (8 edn,

Thomson West 2004), 2331.

3. Roy M. Goode, Principles of Corporate Insolvency Law

(4 edn, Sweet & Maxwell 2011), 1.

4. John Armour and others, ‘The Essential Elements

on Corporate Law: What is Corporate Law?’(2009)

(law.harvard.edu, 2009)<http://www.law.harvard.edu/

programs/olin_center/papers/pdf/Kraakman_643.

pdf>accessed 10 January 2014.

Partnership Bankruptcy Regime in China 123

Copyright © 2014 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 23: 122–143 (2014)

DOI: 10.1002/iir