Several Issues Concerning the Trial of Civil Dispute Cases Relating to Enterprise Restructuring Provisions

(Promulgated by the Supreme People's Court on January 3 2003 and effective as of February 1 2003.)

These Provisions are formulated based on practical adjudication experience and in accordance with such laws and regulations as the PRC Civil Law General Principles, the PRC Company Law, the PRC State Industrial Enterprise Law, the PRC Contract Law and the PRC Civil Procedure Law (2nd Revision) in order to correctly try civil disputes relating to enterprise restructuring.

1. ACCEPTANCE OF CASES

Article 1: People's courts shall accept the following civil disputes between civil subjects of equal legal status occurring in the transformation of enterprise equity structures:

(1) civil disputes arising during restructuring of enterprises as companies;

(2) civil disputes arising during restructuring of enterprises as cooperative share system enterprises;

(3) civil disputes arising during division of companies;

(4) disputes in connection with debt-equity swaps of enterprises;

(5) disputes in connection with contracts for the sale of enterprises;

(6) disputes in connection with contracts for the merger of enterprises;

(7) other disputes in connection with enterprise restructuring.

Article 2: People's courts shall accept cases where the suit filed by a party conforms with Article 1 of these Provisions and the conditions for the institution of legal proceedings set forth in Article 108 of the Civil Procedure Law.

Article 3: People's courts shall not accept disputes where a party institutes civil proceedings with a people's court regarding a dispute occurring in the course of administrative adjustment or re-allocation of an enterprise's State-owned assets by the competent government department.

2. RESTRUCTURING OF ENTERPRISES AS COMPANIES

Article 4: If a State-owned enterprise undergoes complete restructuring as a wholly State-owned limited liability company in accordance with the Company Law, the debts of the original enterprise shall be borne by the limited liability company formed by the restructuring.

Article 5: If an enterprise achieves third-party participation in the enterprise by means of capital and share increase or by partial assignment of equity, and is thereby completely restructured as a limited liability company or company limited by shares, the debts of the original enterprise shall be borne by the new company formed by the restructuring.

Article 6: If an enterprise uses part of its assets and related debts to establish a new company with another party, and the creditor of the debt being assigned approves the same, the civil liability therefor shall be borne by the newly established company. If the assignment of the debt was not notified to, or was notified to but not agreed to by, the creditor, the civil liability for the assigned debt shall be borne by the original enterprise. If the original enterprise is incapable of discharging the debt and the creditor asserts its claim thereon against the newly established enterprise, the newly established company shall assume joint and several liability with the original enterprise to the extent of the assets received by the new enterprise.

Article 7: If an enterprise uses its gilt-edged assets to establish a new company with another party and retains debt in the original enterprise, and the creditor asserts its claim by instituting proceedings naming the newly established company and the original enterprise as codefendants, the newly established company shall assume joint and several liability with the original enterprise to the extent of the assets received by the new company.

3. RESTRUCTURING OF ENTERPRISES
AS COOPERATIVE SHARE SYSTEM ENTERPRISES

Article 8: If the staff and workers of an enterprise buy outright all of the property rights in the enterprise and restructure the enterprise as a cooperative share system enterprise, the debts of the original enterprise shall be borne by the cooperative share system enterprise formed by the restructuring.

Article 9: If an enterprise assigns part of its property rights to and jointly forms a cooperative share system enterprise with its staff and workers, the debts of the original enterprise shall be borne by the cooperative share system enterprise formed by the restructuring.

Article 10: If an enterprise increases its capital and shares through investment by its staff and workers and is thereby restructured as a cooperative share system enterprise, the debts of the original enterprise shall be borne by the cooperative share system enterprise formed by the restructuring.

Article 11: When being restructured as a cooperative share system enterprise, the enterprise shall notify all creditors by public announcement with reference to the relevant provisions of the Company Law. If, after the enterprise is restructured as a cooperative share system enterprise, a creditor institutes proceedings against the cooperative share system enterprise for a debt concealed or omitted by the manager (contributor) of the original enterprise's assets and the creditor declared the corresponding claim during the public announcement period, the cooperative share system enterprise may, after bearing civil liability for the debt, seek compensation from the manager (contributor) of the original enterprise's assets. If the creditor did not declare the corresponding claim during the public announcement period, the cooperative share system enterprise shall not bear civil liability for the debt and the people's court may advise the creditor to institute a separate action against the manager (contributor) of the original enterprise's assets.

4. DIVISION OF ENTERPRISES

Article 12: If a creditor asserts his claim against an enterprise after division thereof, and an agreement regarding the original enterprise's debts was reached at the time of the division and approved by the creditor, then the matter shall be handled in accordance with the agreement between the parties; if at the time of the division of the enterprise, no agreement was reached regarding the original enterprise's debts, or the agreement reached is unclear, or although there was an agreement, the creditor did not approve the same, then the enterprises formed by the division shall assume joint and several liability for the debt.

Article 13: After assuming joint and several liability, if the enterprises formed by the division have an agreement regarding the assumption of the debts of the original enterprise, matters shall be handled in accordance with the agreement; if there is no agreement or the agreement is unclear, the debt shall be shared according to the asset ratio at the time of the division.

5. DEBT-EQUITY SWAPS

Article 14: If a creditor voluntarily enters into a debt-equity swap agreement with his debtor and such agreement is not in violation of any mandatory provisions of laws or administrative regulations, the people's court, when trying a related civil dispute, shall confirm the validity of the debt-equity swap.

Debt-equity swaps based on government policy shall be handled in accordance with the provisions of the relevant departments of the State Council.

Article 15: If an enterprise tricks a creditor into signing a debt-equity swap by means of concealing, or producing a sham list of, enterprise assets, the people's court shall support the creditor if he exercises his right of annulment within the statutory time limit.

After rescission of the debt-equity swap agreement, the creditor shall have the right to demand that the debtor discharge the debt.

Article 16: The engagement in debt-equity swaps by a portion of the creditors shall not affect the other creditors' assertion of claims against the debtor.

6. SALE OF SMALL-SCALE STATE-OWNED ENTERPRISES

Article 17: If an enterprise is sold through assignment by agreement and the sales contract has not been approved by the local people's government with the power of examination and approval or an authorized functional department thereof, the people's court, when trying a related civil dispute, shall confirm that the sales contract is void.

Article 18: During the sale of an enterprise, if the two parties collaborate maliciously and harm State interests, the people's court, when trying a related civil dispute, shall confirm that the sale of the enterprise is void.

Article 19: During the sale of an enterprise, if the seller engages in either of the activities described in Article 54 of the Contract Law, the people's court shall support the buyer if he exercises his right of annulment within the statutory time limit.

Article 20: If upon the expiration of the term for performance stipulated in a contract for the sale of an enterprise, one party refuses to perform the contract or has failed to completely perform his contractual obligations, making it impossible to realize the purpose of the contract, the people's court shall support the other party if the latter demands the rescission of the contract and claims damages.

Article 21: If upon the expiration of the term for performance stipulated in a contract for the sale of an enterprise, one party has failed to completely perform his contractual obligations, the people's court shall support the other party if he demands continued performance of the contract and claims damages. If both parties have failed to fully perform their contractual obligations, the civil liability to be borne by each party shall be determined based on the extent to which it is at fault.

Article 22: During the sale of an enterprise, if the seller fails to perform its obligation to truthfully disclose major matters such as the enterprise's asset and liability situation, profit and loss situation, etc., thereby affecting the sales price of the enterprise, the people's court shall support the buyer if he institutes proceedings for damages with the people's court.

Article 23: If a contract for the sale of an enterprise is confirmed to be invalid or is rescinded, the operational profits or losses earned or incurred during the time that the buyer operated the enterprise following the sale shall be enjoyed or borne by the buyer.

Article 24: After the sale of an enterprise, if the buyer injects the enterprise assets purchased into his own enterprise or changes the purchased enterprise into a subsidiary of his own enterprise, the debts of the purchased enterprise shall be borne by the buyer.

Article 25: After the sale of an enterprise, if the buyer organizes a new company with another party by injecting the assets of the purchased enterprise as equity of a certain value and the purchased enterprise legal person is deregistered, the civil liability for the debts of the enterprise incurred before the sale shall be borne by the buyer to the extent of all of his assets, including his equity in the newly organized company.

Article 26: After the sale of an enterprise, if the buyer re-registers the purchased enterprise as a new legal person and the purchased enterprise legal person is deregistered, the debts of the enterprise incurred before the purchase shall be borne by the newly registered enterprise, unless the buyer and the seller have agreed otherwise and the creditor has approved the agreement.

Article 27: After the sale of an enterprise, if procedures for deregistration of the enterprise legal person should have been, but were not, carried out and a creditor institutes proceedings against the enterprise, the people's court shall, based on the specific circumstances after the transfer of the enterprise's assets, advise the creditor to join other responsible parties in the proceedings and shall order the responsible parties in the proceedings to bear civil liability.

Article 28: When an enterprise is being sold, all creditors shall be notified by public announcement with reference to the relevant provisions of the Company Law. If, after the enterprise is sold, a creditor institutes proceedings against the seller for a debt of the original enterprise concealed or omitted by the seller and the creditor declared the corresponding claim during the public announcement period, the buyer may, after bearing civil liability for the debt, seek compensation from the seller. If the creditor did not declare the corresponding claim during the public announcement period, the buyer shall not bear civil liability for the debt and the people's court may advise the creditor to institute a separate action against the seller.

Article 29: If the sale of an enterprise is characterized by any of the activities described in Article 74 of the Contract Law, the people's court shall support the buyer if he exercises his right of annulment within the statutory time limit.

7. MERGER OF ENTERPRISES

Article 30: Enterprise merger agreements shall be effective from the date signed and sealed by the parties. Enterprise merger agreements subject to approval by the competent government department shall be effective from the date of approval and shall not enter into effect unless approved. However, if a party belatedly carries out the submission and approval procedures before the conclusion of pleadings in the court of first instance, the people's court shall confirm the validity of the merger agreement.

Article 31: After an enterprise has been merged by absorption, its debts shall be borne by the surviving party.

Article 32: When carrying out merger by absorption, an enterprise shall notify all creditors by public announcement with reference to the relevant provisions of the Company Law. If, after the enterprise has been merged by absorption, a creditor institutes proceedings against the surviving party for a debt concealed or omitted by the manager (contributor) of the merged enterprise's assets and the creditor declared the corresponding claim during the public announcement period, the surviving party may, after bearing civil liability for the debt, seek compensation from the manager (contributor) of the merged enterprise's assets. If the creditor did not declare the corresponding claim during the public announcement period, the surviving party shall not bear civil liability for the debt and the people's court may advise the creditor to institute a separate action against the manager (contributor) of the merged enterprise's assets.

Article 33: After enterprises are merged by new establishment, the merged enterprises' debts shall be borne by the new enterprise formed as a result of the merger.

Article 34: After merger by absorption/new establishment, if the/a merged enterprise should have cancelled its business registration but failed to do so and a creditor institutes proceedings against the enterprise, the people's court shall, based on the specific circumstances after the enterprise merger, advise the creditor to join other responsible parties in the proceedings and shall order the responsible parties in the proceedings to bear civil liability.

Article 35: In cases where control of an enterprise is achieved by means of a takeover, the debts of the controlled enterprise shall continue to be borne by the enterprise itself. However, if the spiriting away of capital and debt evasion by the controlling enterprise causes the controlled enterprise to become unable to repay the debt, then the debts of the controlled enterprise shall be borne by the controlling enterprise.

8. SUPPLEMENTARY PROVISIONS

Article 36: These Provisions shall be implemented as of February 1 2003. Those of our judicial interpretations formulated before the implementation hereof that deal with enterprise restructuring and are in conflict herewith shall no longer apply.