China passes new bankruptcy law

The National People's Congress Standing Committee passed the PRC Enterprise Bankruptcy Law(中华人民共和国企业破产法), after 12 years of drafting and deliberation, on 27 August 2006. The new law, effective on June 1 2007, applies to state-owned and private companies (excluding personal bankruptcies) and requires failed companies to pay guarantees to creditors first, instead of workers, who previously had priority.

The old bankruptcy rules promulgated in 1986 are widely outdated as they failed to sufficiently protect creditors and apply only to state-owned companies. Xinhua reports that the new law has 12 chapters with 136 articles and far more comprehensive than the 1986 law which has just six chapters and 43 articles.

In an effort to relieve social ramifications such as unemployment arising from insolvency, the new law introduces a mechanism for corporate reorganizations that could allow companies to avoid bankruptcy. Financial regulators will also be allowed to intervene in the bankruptcy or reorganization of banks, brokerages and insurance firms.