New bankruptcy rules clarify burden of proof
October 12, 2011 | BY
clpstaff &clp articles &Further definition on the legal causes of bankruptcy
A new judicial interpretation from China's highest court is viewed by market participants as facilitating bankruptcy proceedings by creditors.
The Supreme People's Court recently issued a new Interpretation on the PRC Enterprise Bankruptcy Law (中华人民共和国企业破产法), clarifying the factors on which a court may decide whether a company should go through bankruptcy proceedings. The Provisions on Several Issues Concerning the Application of the (1) (关于适用《中华人民共和国企业破产法》若干问题的规定（一）) (the Interpretation) took effect on September 26.
Article 2 of the Enterprise Bankruptcy Law sets out legal requirements on how a court decides whether an enterprise could initiate bankruptcy proceedings. The Interpretation further defines the legal causes of bankruptcy as to when a company “fails to pay off its debt due” and is “obviously incapable of paying off its debts”.
Beijing-based partner Lawrence Guo of Jade & Fountain PRC Lawyers notes that Article 5 of the judicial Interpretation clearly lays the burden of proof of the causes of bankruptcy on the debtor when the application is filed by the creditor.
“It appears that this interpretation would facilitate a creditor's application for a bankruptcy proceeding against a defaulting debtor, since some burden of proof will be clearly on the debtor,” said Guo.
“Accordingly, a company that may default on its debts should be aware of the higher possibility that a bankruptcy proceeding may be lodged against it by a creditor, and should be well-prepared in advance,” he said.
Guo says the Interpretation is in line with the Enterprise Bankruptcy Law, of which Article 7 stipulated that the creditor does not bear the burden to prove whether the debtor has reached the bankruptcy thresholds. Furthermore, under Article 10, the debtor shall make prompt legal arguments otherwise the court shall accept the creditor's application.
Article 4 of the Interpretation lists out five situations on which court may rule that a company is “obviously incapable of clearing off its debts”. These include when the whereabouts of the company's legal representatives are unknown and there is no other person responsible for managing the assets, and when the company has suffered losses for a long period of time and shows great difficulties in being profitable in the future.
In addition, the Interpretation sets out conditions for determining whether an enterprise “fails to pay off its debts due”. The balance sheet, audit report or assets evaluation of a debtor are important indications.
Some market commentators expect that more ST[special treatment]-listed companies will be able to go through bankruptcy to achieve restructuring. By definition, an ST-listed company is one that has suffered losses for two consecutive fiscal years. The Interpretation would apply if an ST-listed company becomes insolvent.
“However, it does not necessarily mean that it [an ST-listed company] lacks the obvious capacity to pay off all of its debts,” said Guo. “It is too early to predict whether more ST-listed companies would go through the restructuring proceedings as a result of the Interpretation.”
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