New Bankruptcy Law Puts Power in the Hands of Creditors
June 02, 2007 | BY
clpstaff &clp articles &China's long-awaited bankruptcy law finally came into effect on June 1 2007. Secured creditors no longer take a back seat to a failing company's employees…
China's long-awaited bankruptcy law finally came into effect on June 1 2007. Secured creditors no longer take a back seat to a failing company's employees under the new PRC Enterprise Bankruptcy Law(中华人民共和国企业破产法). (See China Law & Practice's analysis and full-text translation of the legislation in the October 2006 issue.)
The law, promulgated on August 27 2006 and effective June 1 2007, applies to all companies, including state-owned enterprises, but not to individuals, partnerships, representative offices or branch offices. However, PricewaterhouseCoopers partner Rainier Lam says future legislation is expected to cover those areas. The law unifies what was a confusing collection of different bankruptcy laws for different types of enterprises, and is seen as the latest step in China's transition to a socialist market economy.
"Under the old law, employees enjoyed priority over all other creditors, including secured creditors," Lam tells China Law & Practice. "For a lot of jurisdictions, that's almost unthinkable, but that was the system in China."
Lam says that the conflict over workers' rights held up promulgation of the new law for more than two years, since the draft law was submitted to the National People's Congress in June 2004. "Under the old law, if you wanted to liquidate an insolvent company or put it into bankruptcy, you had to figure out a way to deal with your employees. It was almost like a prerequisite to pay them off. One of the main reasons it took so long to come up with the new law was this controversy over who should have priority over assets, employees or secured creditors," he says. "Eventually, they struck a balance: for any employee's entitlement up to promulgation of the new law, the employees will still enjoy priority over all other creditors. But for anything after that time, employees will still enjoy priority among unsecured creditors, but they can no longer touch secured assets."
The law establishes an order for the debtor's estate to be settled, starting with bankruptcy fees and joint interest debts, followed by unpaid wages, medical benefits and pension contributions, social insurance premiums and ordinary bankruptcy claims. Claims over specific secured property will be repaid from the secured property, with excess amounts falling into the category of ordinary claims. While employee priority only extends to claims arising from obligations incurred prior to the law's August 2006 promulgation, such a claim could reduce the value of a secured claim.
Lam says the new law also gives creditors more control over the bankruptcy process. "Under the old law, almost invariably, there were government officials involved, especially if you're talking about a large organization," he says. "Local governments are always concerned about social stability and the well-being of workers, and they could make it very difficult to go bankrupt."
To put a company into liquidation, Lam says, a company had to go to court, but only after first obtaining consent from local government officials. "Even if you were able to put the company into liquidation, the court then formed a liquidation committee, which might be comprised mainly of local government officials to oversee the whole process. Creditors really had little say, or no say at all. The new law gives creditors, through a creditors committee or creditors meeting, much more influence in the bankruptcy process."
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