Chinese Insolvency Law

Overview of Chinese Insolvency Law

The Enterprise Bankruptcy Law of the People’s Republic of China (the EBL) was adopted on 27 August 2006 and took effect on 1 June 2007, replacing the experimental Bankruptcy Law of 1986 (which applied only to state-owned enterprises). The EBL applies to all legal persons — including companies limited by shares, limited liability companies, and state-owned enterprises (SOEs) — but does not extend to individuals (natural persons) or to partnerships and sole proprietorships, which are subject to separate liquidation procedures. The EBL is supplemented by a series of judicial interpretations issued by the Supreme People’s Court (SPC), which provide detailed procedural guidance and have been essential in shaping the law’s practical application.

Reorganization (Chongzheng)

Reorganization (Chapter VIII, Articles 70–94 of the EBL) is the preferred procedure for corporate rescue and is explicitly intended to preserve the debtor’s business as a going concern. The debtor, its creditors, or — in limited circumstances — its capital contributors may apply for reorganization before or during bankruptcy proceedings. The EBL provides for a debtor-in-possession model: the debtor’s management typically retains control under the supervision of a bankruptcy administrator.

During reorganization, a stay of individual enforcement (Article 75) prevents secured and unsecured creditors from pursuing claims. The debtor, under the administrator’s supervision, drafts a reorganization plan within six months (extendable to nine months with court approval). The plan classifies creditors into four groups: secured creditors, employees, tax authorities, and ordinary unsecured creditors. Each class votes separately; approval requires a majority in number and two-thirds in value of claims represented in each class. The court may confirm the plan even where a class dissents (cram-down) under Article 87, provided the plan is fair and equitable, does not discriminate unfairly, and satisfies the absolute priority rule — senior classes must be paid in full before junior classes receive anything.

The SPC has published model reorganization plans for small and medium-sized enterprises, and reorganization has been successfully completed in numerous high-profile cases, including the restructuring of the China Aviation Industry Corporation and the Baoshan Iron and Steel Group.

Composition (Hejie)

Composition (Chapter IX, Articles 95–106) is a simpler procedure under which the debtor proposes a composition agreement to creditors for the satisfaction of claims by way of a moratorium, a partial payment, or a combination. Unlike reorganization, composition involves no structural change to the debtor’s management or capital structure. The composition agreement must be approved by a majority of creditors representing at least two-thirds of total unsecured claims (Article 97). Once approved by the creditors’ meeting and confirmed by the court, the agreement binds all unsecured creditors. If the debtor defaults on the agreement, the court may terminate it and convert the case into liquidation (Article 104). Composition is less commonly used than reorganization, largely because it does not permit discharge of secured claims without the secured creditor’s consent.

Liquidation (Qingsuan)

Liquidation (Chapter X, Articles 107–128) is the terminal procedure. The court declares the debtor bankrupt and appoints a bankruptcy administrator to take control of the estate, collect and realize assets, and distribute proceeds. The statutory priority of claims under Article 113 is as follows:

1. First priority — expenses of the bankruptcy proceedings (court costs, administrator’s fees, preservation and disposition costs);
2. Second priority — wages, social insurance premiums, and other employee-related claims;
3. Third priority — taxes and other social insurance premiums not covered by the second priority;
4. Fourth priority — ordinary unsecured claims.

Secured creditors are not part of the Article 113 hierarchy: they enjoy a right of separate satisfaction (bieren changhuan) from the proceeds of encumbered assets under Article 109. Only after secured claims are fully satisfied may any surplus from the encumbered asset be applied to costs and other priorities. Bankruptcy administrators are required to prepare a property distribution plan for court approval before making distributions to unsecured creditors.

The Bankruptcy Administrator

The bankruptcy administrator (Articles 13, 22–29) is the central procedural actor in Chinese insolvency law. Administrators are selected from a roster maintained by the SPC and the Ministry of Justice, comprising law firms, accounting firms, and bankruptcy liquidation firms. The administrator takes custody of the debtor’s property, investigates the financial affairs, manages the business during proceedings, and represents the debtor in litigation. The administrator may also exercise avoidance powers under Articles 31–34, challenging fraudulent transfers (within one year of acceptance of the case), preferential payments (within six months), and transactions at undervalue, as well as recovering assets concealed or improperly dissipated.

The Creditors’ Meeting

The creditors’ meeting (Articles 59–69) comprises all creditors whose claims have been confirmed by the court. The meeting elects a creditors’ committee (zhaiquanren weiyuanhui) — typically comprising between one and seven members — to exercise oversight between meetings. The creditors’ meeting’s powers include: reviewing the administrator’s reports; supervising the administrator’s performance; and voting on the reorganization plan and the composition agreement. Voting rights are allocated by claim amount, with unsecured creditors voting on all matters and secured creditors voting only on matters that affect their rights (such as approval of reorganization plans).

Voidable Transactions and Avoidance Actions

Articles 31–34 of the EBL empower the administrator to apply to the court for the avoidance of certain pre-bankruptcy transactions. Article 31 covers transfers of property at an obviously unreasonable price, the provision of security for previously unsecured debts, and the waiver of claims, all within one year of the court’s acceptance of the case. Article 32 addresses preferential payments to individual creditors within six months, provided the debtor was already insolvent at the time. Article 33 renders void any transaction involving concealment or illegal distribution of property by the debtor. The avoidance regime has become increasingly active in practice, particularly in cases involving fraud or mismanagement by SOE controllers.

Cross-Border Insolvency

Article 5 of the EBL addresses cross-border insolvency in a single, cautiously worded provision. It provides that foreign insolvency judgments or rulings may be recognized by a Chinese court on the basis of international treaties or the principle of reciprocity, provided the judgment does not violate PRC law, sovereignty, security, or public interest, and does not prejudice the legitimate rights and interests of creditors within China. In practice, recognition of foreign proceedings has been rare. China has not adopted the UNCITRAL Model Law on Cross-Border Insolvency, though the SPC has expressed interest. The Beijing Jingneng Clean Energy case (2019) and the Shenzhen Hualian Energy case are among the few instances where Chinese courts have shown openness to cross-border cooperation. The Enterprise Bankruptcy Law (amended 2020) introduced minor modifications to cross-border provisions, but full integration into the international framework remains a work in progress.

The Role of the Supreme People’s Court

The Supreme People’s Court plays a quasi-legislative role in Chinese insolvency law through its judicial interpretations, which fill gaps in the EBL and resolve inconsistencies. Key interpretations include: the Provisions on the Application of the Enterprise Bankruptcy Law (Interpretation I and Interpretation II), which clarify issues such as the standard for insolvency (the debtor is deemed unable to pay debts when it ceases to meet due obligations and the cessation is not attributable to a lack of cash flow alone) and the treatment of secured claims. The SPC has also issued guidelines for the establishment of bankruptcy tribunals in intermediate people’s courts, which have significantly improved the quality and consistency of adjudication.

Conclusion

China’s Enterprise Bankruptcy Law of 2006 represents a significant advance over its predecessor, providing a modern framework for reorganization, composition, and liquidation. The EBL’s emphasis on reorganization aligns with global best practices, and its administrator-based system reflects careful consideration of the need for professional administration. The limited scope — excluding individuals, partnerships, and sole proprietorships — and the restrictive cross-border provisions constrain the law’s reach, but ongoing judicial development and SPC guidance continue to expand its effectiveness. As China’s economy matures and corporate distress becomes more common, the EBL is likely to remain an area of active legislative and judicial development.