Another advantage of the bankruptcy to the shareholders is that costs will be restricted to:

1) engaging an experienced bankruptcy agent who will draft a court petition; and
2) retaining an auditor to issue a financial report.

Such costs, generally speaking, are limited and cost-efficient compared to those spent on a liquidation. However, a company is recommended to eliminate all amounts owed to employees before filing a bankruptcy petition, otherwise, the company will get much more pressures from all parties involved due to current social environments.


Zhao Min, Partner (left)
Wu Jun, Associate
Jun He Law Offices





The international perspective

There are a few available options in this situation, but the strategic determinant will be what your long term ambitions in China are. Does the group have other business operations in China that it wishes to keep? Or is this an exit from the China market altogether with no intention to do business in China again? If the former, then broadly speaking an immediate recourse to the available statutory insolvency regime might be too blunt an instrument as you will need to preserve existing connections and relationships as best
you can.

China's Enterprise Bankruptcy Law (EBL) came into effect on June 1 2007, and it provides a modern, flexible and comparatively comprehensive mechanism by which to liquidate insolvent entities. However, it is our experience that results can vary widely in different jurisdictions depending on factors such as case complexity and the experience of the local judiciary. Other consequences of a proceeding under the EBL need to be considered; such as that control of the entity passes to a court-appointed administrator, that there may be restrictions on the ability of directors and the legal representatives to travel during the liquidation, and the future ability of the director or legal representatives to take up similar roles in other companies will be affected. Keep in mind as well that the court has complete discretion over whether or not to accept the bankruptcy filing, so the EBL may not end up being an available option.

Therefore, the optimal way to proceed in the first instance is through the informal route of winding down your operations, entering negotiations with stakeholders as to an exit and trying to reach a compromise with creditors to reduce the company's debts. This would be followed by a solvent liquidation, final audit and deregistration. It is not impossible to get creditors to agree to haircuts and compromises on their debts, and in some circumstances even employees will agree to such proposals if it presents the only realistic way of getting paid early. All this would be done without invoking the EBL, though if the informal route fails, that would be the next option.

You will need to approach and engage the relevant stakeholders and authorities early on to inform them of your intentions. This will include business partners, employees or union representatives, the labour bureau, local and provincial governments (including the village committees if you have one as your landlord), the State Administration of Foreign Exchange, the State Administration of Industry and Commerce, customs administration and tax bureaus. Even if it is the case that you were intending to use the EBL, you would be well advised to engage these parties early on as they may not respond sportingly to being presented with your bankruptcy petition after it has been lodged, even though there is no legal requirement to inform them beforehand.

In China, people and relationships are paramount to the outcome and it will be no different in this situation.


Davyd Wong
Senior associate
Herbert Smith