Cross-Border Insolvency in China

Cross-border insolvency in China is governed by the Enterprise Bankruptcy Law (Qiye Pochan Fa, 企业破产法, 2006), which contains provisions on the recognition and enforcement of foreign insolvency proceedings. China has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, but has developed a framework for cross-border cooperation through judicial interpretations, bilateral arrangements, and case law.

The Enterprise Bankruptcy Law

The Enterprise Bankruptcy Law, which replaced the 1986 Bankruptcy Law, provides the legal framework for corporate insolvency in China. The law applies to all types of enterprises, including state-owned enterprises, private companies, and foreign-invested enterprises. The law establishes procedures for: bankruptcy reorganization (chongzhu), bankruptcy reconciliation (hejie), and bankruptcy liquidation (pochan qingsuan).

The law applies to insolvency proceedings with cross-border elements — where the debtor has assets in multiple jurisdictions, creditors are located in different countries, or the insolvency proceeding is commenced in a foreign jurisdiction. The law’s provisions on cross-border insolvency are limited but have been developed through judicial practice and the SPC’s guidance.

Recognition of Foreign Proceedings

The Enterprise Bankruptcy Law (Article 5) provides the statutory basis for recognition of foreign insolvency proceedings. The law provides that a judgment or order of a foreign court may be recognized and enforced by a Chinese court if: the foreign court has jurisdiction over the debtor under Chinese law; the recognition and enforcement do not violate fundamental principles of Chinese law, national sovereignty, security, or public interest; and there is reciprocity between China and the foreign jurisdiction.

The reciprocity requirement has been the most significant barrier to recognition. Chinese courts have historically adopted a narrow approach to reciprocity, requiring evidence that the foreign jurisdiction would recognize Chinese bankruptcy proceedings. However, the SPC has recently encouraged a more liberal approach, and Chinese courts have recognized bankruptcy proceedings from jurisdictions including the United States, the United Kingdom, Singapore, and the British Virgin Islands.

Cooperation with Courts

The SPC has issued guidance encouraging cooperation between Chinese courts and foreign courts in cross-border insolvency cases. The guidance addresses: communication between courts (including direct communication through designated judges); coordination of asset administration; sharing of information about creditors and claims; and avoidance of conflicting orders.

Chinese courts have demonstrated capacity for international cooperation. In In re Shenzhen Yian Digital Technology Co. (2021), the Shenzhen court issued a letter of request to the Hong Kong High Court seeking assistance in administering assets located in Hong Kong. In In re Xinjiang Goldwind, the Beijing court recognized the role of foreign administrators and coordinated asset administration with courts in Australia. These cases demonstrate that Chinese courts can cooperate effectively in cross-border insolvency.

UNCITRAL Model Law Adoption

China has not adopted the UNCITRAL Model Law on Cross-Border Insolvency (1997). However, there has been increasing discussion among Chinese legal scholars and practitioners about the benefits of Model Law adoption. The Model Law would provide: a more predictable framework for recognition of foreign proceedings; clearer criteria for granting relief; streamlined procedures for cooperation between courts; and enhanced access for foreign representatives to Chinese courts.

The SPC has studied the Model Law and has incorporated some of its principles into judicial interpretations. However, formal adoption would require legislative action by the NPC Standing Committee to amend the Enterprise Bankruptcy Law. The timing of any such adoption is uncertain, but the trend in Chinese practice is toward increasing openness to cross-border insolvency cooperation.

The SAMR v Overseas Cases

The SAMR v Overseas series of cases involved the State Administration for Market Regulation’s attempts to collect penalties from companies that had transferred assets offshore before entering insolvency proceedings in China. In these cases, SAMR sought recognition of Chinese bankruptcy orders in foreign courts and cooperation from foreign insolvency administrators in tracing and recovering assets.

The cases highlighted the challenges of cross-border asset recovery in insolvency. Chinese courts issued letters of request to courts in Hong Kong, Singapore, and the Cayman Islands, seeking assistance in identifying and freezing assets. The outcomes of these cases have been mixed, depending on the willingness of foreign courts to cooperate and the effectiveness of asset tracing mechanisms.

Developments

Recent developments in Chinese cross-border insolvency include: the SPC’s 2021 guidance on the recognition of foreign bankruptcy proceedings, which liberalized the reciprocity requirement; the establishment of the Shenzhen Bankruptcy Court, which has specialized jurisdiction over cross-border insolvency cases; the signing of the Memorandum of Understanding on Cooperation in Bankruptcy Matters between mainland China and Hong Kong (2021), which established a framework for mutual recognition of insolvency proceedings; and increasing judicial expertise in cross-border insolvency through training programs and international exchange. These developments suggest a gradual but steady movement toward a more open and cooperative cross-border insolvency regime in China.