The Future Direction of China's Cross‐border Insolvency Laws, Related Issues and Potential Problems

• Published date: 01 March 2018
• Author: Rebecca Parry,Nan Gao
• Date: 01 March 2018
• DOI: http://doi.org/10.1002/iir.1294

The Future Direction of China’s

Cross-border Insolvency Laws, Related

Issues and Potential Problems

Rebecca Parry*and Nan Gao, PhD*

Nottingham Law School, Nottingham Trent University, Nottingham, UK

Abstract

The enactment of bankruptcy laws by the People’s Republic of China (PRC or

China) in 2006 was a necessary step in the development of its economy. This

law represented a significant modernisation of the insolvency framework,

supporting the transforming economy, but it was also a law of political expediency,

for the enhancement of external relations. One aspect of the enhancement of ex-

ternal relations was the provision of cross-border insolvency rules. However, this

complex area of law was addressed in only one article, which was only a starting

point, leaving many details unaddressed, and further reforms are required. In par-

ticular, it is desirable that the law provides a greater level of predictability as to the

likely outcomes of cross-border insolvencies, to encourage inward trade and invest-

ment, as well as encourage external trade. Both inbound and outbound business

dealings are important to China’s continued economic development. It is clear

also, however, that insolvency law and practice is still a developing area for

China. The establishment of a modern and unified system of insolvency laws

was a big step for China, representing a sacrifice of tight controls on insolvencies,

but the impact of this law in practice is only recently developing, with a loosening

of state controls, after a very slow start.

1

The establishment of a cross-border insol-

vency framework represents a further challenge; one that is likely to beset with con-

siderable difficulties, as any further development of this law would potentially

entail some further loss of control over proceedings, not least in outbound cases,

and resistance may be anticipated. In keeping with China’s historical approach

to lawmaking in the area of bankruptcy law, it is likely that the cross-border

*E-mail: rebecca.parry@ntu.ac.uk; jessepool1@hotmail.

com

1

Numbers of bankruptcies remain low, because of a

government preference for mergers and restructurings

and deregistrations as alternatives to liquidation and

some courts placing restrictions on the acceptances of

cases. However, the Supreme People’s Court reported an

increase of 54% in bankruptcy cases in 2016, attributed

in part to efforts to eliminate zombie companies, and

an upward trend was reported in the first half of 2017.

Copyright © 2018 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 27: 5–31 (2018)

Published online in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1294

insolvency framework will develop gradually and with caution. This article assesses

the way forward in respect of cross-border insolvency laws, contending that an in-

cremental approach over a period of years, in three broad stages, is required, with

more developed and country-specific approaches providing a link, or interim

stage, between the clarification of the Article 5 and the formal adoption of the

United Nations Commission on International Trade Law Model Law on Cross-

Border Insolvency Proceedings 1997 (Model Law) in China. Copyright © 2018

INSOL International and John Wiley & Sons, Ltd.

I. Introduction

The enactment of the Chinese Enterprise Bankruptcy Law in 2006 (EBL 2006) was

a notable milestone, representing the culmination of 12 years of legislative wran-

gling. The process of economic development, as well as the pressures of its external

relations, meant that China could no longer forestall the introduction of a re-

formed, market driven, insolvency law to regulate its socialist market economy.

2

The formal publication of this new Chinese insolvency legislation was a notable de-

velopment in a number of respects. The presence of an insolvency law would have,

at one time, been thought of as alien to the planned economy,

3

as it would not

have been thought that state-owned enterprises could be bankrupt, and their af-

fairs did not tend to be conducted on credit and debit lines.

4

The 2006 Law, on

the face of it, provided a modern insolvency system, simple in details, along the

lines of established systems elsewhere, with new innovations including administra-

tors and creditors’committees. The new law also introduced a unified system, ap-

plying to both private enterprises and state-owned enterprises (although not

individuals), replacing a fragmented approach to insolvencies, which had also been

necessitated by the vastly differing levels of economic development in the country.

Numbers of bankruptcies were initially remarkably low, arguably because of the

high level of discretion accorded to the courts as to whether to accept bankruptcy

cases, creditor reluctance to pursue proceedings and the involvement of govern-

ment agencies through bailouts.

5

However, more recently, there has been a scal-

ing-back of government support, and there have been some significant cases,

such as the 2009 bankruptcy of FerroChina, which had significant numbers of for-

eign creditors and foreign bond holders, although concerns have been expressed as

to possible inequality of treatment and distortions owing to political factors.

6

More

2

Rebecca Parry and Haizheng Zhang, ‘China’s New

Corporate Rescue Laws: Perspectives and Principles’

(2008) 8 JCLS 113.

3

Alan Tang, Insolvency in China and Hong Kong, A Practi-

tioner’s Perspective (Sweet and Maxwell Asia, 2005),

3.04; Rebecca Parry and Haizheng Zhang, ‘Introduc-

tion’in Rebecca Parry, Yongqian Xu and Haizheng

Zhang (eds), China’s New Enterprise Bankruptcy Law

(Ashgate, 2009), 9.

4

Wang Weiguo notes that transfers of funds and mate-

rials between SOEs were regarded as ‘adjustments in

accordance with state plans’, rather than as credits

and debits: Wang Weiguo and Roman Tomasic (eds),

Reform of PRC Securities and Insolvency Laws (China Uni-

versity of Political Science and Law Press, 1999), 9.

5

Yujia Jiang, ‘The Curious Case of Inactive Bank-

ruptcy Practice in China: A Comparative Study of U.

S. and Chinese Bankruptcy Law’(2014) 34 Nw. J. Int’l

L. & Bus. 559.

6

Umesh Desai and Michelle Price, ‘Amid China slow-

down, foreign creditors face bankruptcy riddle’(30 No-

vember 2015, Reuters).

International Insolvency Review6

Copyright © 2018 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 27: 5–31 (2018)

DOI: 10.1002/iir