The Role of the Administrator under the PRC Enterprise Bankruptcy Law

The Appointment Provisions set the procedures and criteria for the appointment of administrators. These comprehensive provisions consist of 40 articles dealing with the registration of administrators, their appointment, and their replacement.

Who Can Serve as an Administrator

The post of a bankruptcy administrator may be assumed by one of the following three categories of persons/organizations:

1. A non-governmental intermediary agency such as a law firm, an accounting firm, or bankruptcy liquidation firm [Article 15];

2. In cases of minor complexity and relatively centralized debtor¡¯s properties, an individual from the applicable register of individuals to serve as administrator [Article 17];

3. Where justified, a liquidation committee formed by members of the government, registered intermediary agencies, financial asset management companies, the People¡¯s Bank, and financial regulatory institutions [Article 18];

As a matter of principle, only those intermediary institutions and individuals who have been admitted to the register of administrators may be appointed by the Peoples¡¯ Court. In addition, only those intermediaries admitted to the respective local register may thereby be appointed. However, in a complex bankruptcy case involving a financial institution or any other enterprise of national significance, the Peoples¡¯ Court may also appoint an administrator from another court¡¯s register.⁴

While the administrator usually must be appointed by the People's Court openly through random methods such as rotation, drawing of lots or numbers from the listings in a register of administrators, in such a complex case of bankruptcy, the administrator may be selected through a competitive process by the People¡¯s Court⁵.

To ensure the administrator¡¯s impartiality, the choice of an administrator is reserved by the People¡¯s Court. Neither debtors nor creditors can thereby affect the court¡¯s decision or propose an administrator. For bankruptcy cases involving financial institutions such as commercial banks, securities companies, or insurance companies, the People¡¯s Court may appoint a liquidation team as administrator or appoint a social intermediary listed in the register of administrators on a recommendation by the financial regulatory authorities.

There are certain circumstances under which an intermediary will be prohibited from assuming the post of the administrator, such as having a criminal record, lacking the relevant practice qualification, or existing conflicts of interest.⁶ Such conflicts are specified in the Appointment Provisions. Also, an intermediary is deemed unsuitable if it has an unsettled credit-debt relationship with the debtor, has provided intermediary services to the debtor during the three years before the case, or in the last three years before the case has been a controlling shareholder of the debtor or any creditor, or has been the financial or legal adviser to the debtor or any creditor in the three years before the case.⁷

The Register of Administrators

According to the Appointment Provisions, there are two separate registers of administrators for professional intermediaries and individuals to be established by the Higher People¡¯s Courts or an intermediate People¡¯s Court in different localities. Any non-governmental intermediary institution satisfying the conditions specified by the New Law may apply to the relevant People¡¯s Court to be included in its locality¡¯s register; its members and individuals with the relevant professional knowledge and practicing qualifications may apply to be included in the respective register for individuals.⁸ An application for a different locality¡¯s register is only permitted if it has a branch in that locality.

The final decision about the application to the register will be made by the courts¡¯ reviewing committees and announced publicly. According to the administrators¡¯ performance and acceptance of cases, the People¡¯s Court may adjust the register at any time.

Resignation, Failure and Change of Administrator

No registered intermediary may refuse the appointment of the People¡¯s Court without a justifiable reason. Once appointed, the administrator can only resign with good reason⁹ and the court¡¯s approval. Furthermore, the administrator may not transfer any of its duties to other parties.

In the case of willful wrongdoing, the creditors may pass a resolution in the creditors' meeting and apply in writing for the administrator¡¯s replacement to the People¡¯s Court.¹⁰ In addition, the administrator may face a monetary fine in case of any failure or misconduct in the performance of his duties, and be held liable for any losses incurred to creditors.¹¹

Administrator¡¯s Remuneration

The administrator¡¯s remuneration is paid directly out of the debtor¡¯s properties. It belongs to the bankruptcy expenses, and has priority over other community and general liabilities.¹² If the administrator realizes that the debtor¡¯s properties are not sufficient to pay the administrator, it is entitled to file for a termination of proceedings unless any party involved is willing to make an advance payment.¹³

The administrator is paid according to the total property value of unsecured assets in the final repayment by the debtor. According to the Supreme People¡¯s Court¡¯s Remuneration Provisions issued in April 2007, the administrator¡¯s pay determined by the respective People¡¯s Court may not exceed the following benchmarks:

According to the above limits, the People¡¯s Court has a right after the acceptance of the bankruptcy case to set a preliminary remuneration plan depending on the expected amount of recoverable assets. However, if the administrator and the creditors¡¯ meeting have different opinions on the administrator¡¯s remuneration plan, both parties must agree on the contents of the administrator¡¯s remuneration plan through negotiations. The administrator must then file with the People¡¯s Court a concrete request for adjusting the original remuneration plan, explaining the reasons for the adjustment in writing, together with the resolution of the corresponding creditors¡¯ meeting. If the People¡¯s Court determines that the requests and the reasons for adjusting the plan are not contrary to the mandatory provisions of any law or administrative regulation, and the adjustment will not impair the legitimate rights and interests of others, it is required to adjust the administrator¡¯s remuneration plan according to the negotiation result of both parties¹⁴.

As basis for the preliminary plan, the People's Court will take into consideration the complexity, risks and workload of the bankruptcy case as well as the value of the debtors¡¯ properties available to settle the debts¹⁵. The preliminary plan on the administrator¡¯s remunerations must include the administrator¡¯s remuneration rates as well as when and how (by installments or in a lump sum) to charge the remunerations.

The Supreme People's Court may diverge from the above limits within a range of 30 percent in order to account for the locality. The administrator may charge additional remuneration from secured creditors if he has made reasonable efforts with regard to their secured assets. However, if a law firm, an accounting firm, or a bankruptcy liquidation firm, acting as administrator, incurs additional expenses by hiring another intermediary, such cost must be born out of its regular remuneration.

FINAL REMARKS

Although the law is very similar to bankruptcy regulations found in Western nations, the biggest challenge remains in its implementation and enforcement, as those in charge of interpreting and enforcing the law have little experience in doing so. The success of the new bankruptcy regime for enterprises will ultimately depend on its enforcement by the courts, and the availability of qualified practitioners. In particular, the qualifications and competency of the administrator will be decisive. The provisions issued by the Supreme People¡¯s Court provide clear guidelines as to who can serve as an administrator and how one should be appointed. Hopefully, the number of qualified practitioners will increase fast enough to avoid a shortage of administrators.

The equal treatment of privately owned and state owned enterprises as it is contemplated in the New Law is also important, as it can assure foreign investors that there will be no disadvantages in doing business with or investing in state-owned enterprises. Additionally, the application of the New Law on state-owned enterprises without any negative influence from the government would also encourage foreign investors to restructure state-owned enterprises, which are often in less-than-ideal financial condition.

The new bankruptcy regime of the PRC is encouraging for those considering investment in China or doing business with Chinese partners. It is in the best interests of foreign investors who desire a reliable framework for their enterprises in China, and it represents a significant step towards a legal framework reflecting internationally accepted standards.

About the authors

Dan Roules is a partner in the Shanghai office of Squire, Sanders & Dempsey LLP. Dan Roules has more than 20 years of experience in international transactions in Asia, Europe and the United States. He is also a member of the Squire, Sanders' insolvency practice group. Mr. Roules may be contacted at +86.21.6103.6309 or [email protected].

Stefan Peters is an associate in the Frankfurt and Shanghai office of Squire, Sanders & Dempsey LLP. His practice is focused on financial services and China-related business. He is experienced in banking and finance in both Germany and China, and in general corporate law in China. He may be reached at +49.69.17392.425 or [email protected]

Endnotes

1 Provisions of the Supreme People¡¯s Court on Designating the Administrator during the Trial of Enterprise Bankruptcy Cases, promulgated on April 12 2007 (the Appointment Provisions)

2 Provisions of the Supreme Peoples¡¯ Court for Determining the Remuneration of Administrators for Trials of Enterprise Bankruptcies, promulgated on April 12 2007.

3 Provisions of the Supreme Peoples¡¯ Court on Several Issues Concerning the Application of Law in Corporate Bankruptcy Cases, which had not been issued at the Effective Date of the Corporate Bankruptcy Law of the People¡¯s Republic of China, promulgated on April 23 2007.

4 See Article 15 Paragraph 2 of the Appointment Provisions.

5 See Article 20 and Article 21 of the Appointment Provisions

6 See Article 24 Paragraph 3 Item 3 New Law

7 See Article 23 of the Appointment Provisions.

8 See Articles 6 to 8 of the Appointment Provisions for a detailed list of application requirements, also Article 9 of the Appointment Provisions for a clarification of Article 24 Paragraph 3 item 4 of the New Law containing reasons for not being included in the register.

9 See Articles 33 and 34 of the Appointment Provisions for circumstances that may justify a resignation.

10 See Articles 31 to 34 of the Appointment Provisions for the proceedings in that case. As for all resolution to be passed by the creditors' meeting a resolution of the creditors' meeting for the replacement of the administrator shall be adopted by a majority of the attending creditors who have voting rights and who represent more than one half of the total amount of the unsecured claims. (See Article 64 of the New Law)

11 See Article 130 of the New Law

12 See Article 41 and 43 of the New Law.

13 See Article 12 of the Remuneration Provisions

14 See Article 7 of the Remuneration Provisions

15 See Article 4 of the Remuneration Provisions