Source: Ministry of Commerce Website, PRC

Laws and Regulations

Chinese Law

Law on Enterprises Bankruptcy (Trial Implementation)

(Adopted at the 18th Meeting of the Standing Committee of the Sixth National People’s Congress and promulgated by Order No. 45 of the President of the People’s Republic of China on December 2, 1986 for Trial Implementation)

TABLE OF CONTENTS

  • CHAPTER I GENERAL PRINCIPLES
  • CHAPTER II SUBMISSION AND HEARING OF A BANKRUPTCY APPLICATION
  • CHAPTER III CREDITOR’S MEETINGS
  • CHAPTER IV CONCILIATION AND REORGANIZATION
  • CHAPTER V DECLARATION OF BANKRUPTCY AND BANKRUPTCY LIQUIDATION
  • CHAPTER VI SUPPLEMENTARY PRINCIPLES
  • APPENDIX

CHAPTER I
GENERAL PRINCIPLES

Article 1
This Law has been formulated to suit the needs of socialism’s planned development of the commodity economy and reform of the economic system, to promote enterprises owned and operated by the State, to strengthen the economic responsibility system and democratic administration, to improve economic conditions, to increase economic benefits and to protect the legal rights and interests of creditors and debtors.

Article 2
This Law is applicable to State enterprises.

Article 3
Enterprises which have incurred serious losses due to poor management and administration and are unable to discharge matured liabilities will declare bankruptcy in accordance with the provisions of this Law.

Should one of the following situations exist when a creditor lodges a bankruptcy application against an enterprise, declaration of bankruptcy shall not be granted:

(1) where the enterprise concerned is a public enterprise or an enterprise with an important bearing on the national economy and the people’s livelihood, in which case the relevant government departments will provide economic assistance or take other measures to assist in the discharge of liabilities
(2) where a guarantee is obtained and liabilities are discharged within six months of a bankruptcy application being lodged

Upon a bankruptcy application being lodged by a creditor against an enterprise, should the higher level department in charge request reorganization to be carried out and in addition if the enterprise and the creditor meet and reach a conciliated agreement, the bankruptcy procedures will be suspended.

Article 4
The State will use various channels to make appropriate arrangements for the re-employment of the staff and workers of the bankrupt enterprise and will guarantee their basic living requirements in the period prior to their obtaining new employment. Detailed measures will be determined elsewhere by the State Council.

Article 5
Bankruptcy cases will come within the jurisdiction of the local People’s Court where the debtor is located.

Article 6
This Law has no provisions for criminal proceedings for bankruptcy cases. In lieu, the legal provisions for civil proceedings will be applicable.

CHAPTER II
SUBMISSIONS AND HEARINGS OF A BANKRUPTCY APPLICATION

Article 7
Where a debtor is unable to discharge a matured liability, a creditor may apply for the debtor to be declared bankruptcy.

When a creditor submits a bankruptcy application, relevant testimonial evidence of the amount of the claim, of whether or not it is secured by property and of the fact that the debtor is unable to discharge the matured liability shall be provided.

Article 8
A debtor, following the approval of the higher level department in charge, may lodge an application to be declared bankrupt.

When a debtor submits a bankruptcy application it shall explain the circumstances of the enterprise’s losses and submit relevant accounting statements and detailed lists of debts and claims.

Article 9
A creditor shall be notified within ten days of the hearing of a bankruptcy case in the People’s Court and a public announcement shall be issued. Creditors already known to the Court shall be notified again within ten days of the receipt by the People’s Court of the detailed list of liabilities submitted by the debtor. The public announcement and the notice shall each stipulate the date on which the first creditors’ meeting will be convened.

Creditors shall, within one month of receiving notification or within three months of the public announcement being issues for those who have not received notification, apply to the People’s Court for recognition of their creditor’s rights and state the amount of their claim, whether or not it is secured by property, as well as submit relevant testimonials. Failure to lodge a claim within the time limit will be regarded as voluntary renunciation of the claim.

The People’s Court shall separately register those claims secured by property and those unsecured by property.

Article 10
Where a bankruptcy application has been lodged by a creditor, the debtor shall submit to the People’s Court the relevant materials stipulated in the second paragraph of Article 8 of this Law within 15 days of receiving notification from the People’s Court.

Where the debtor is a guarantor for another unit, news of the bankruptcy application shall be passed on to the relevant parties concerned within five days of the principal receiving notification from the People’s Court.

Article 11
Following the hearing of a bankruptcy case in the People’s Court, other civil implementing procedures concerning the debtor’s property must be suspended.

Article 12
Following the hearing of a bankruptcy application in the People Court, the discharge of creditors’ claims by the debtor will be invalid unless the repayment is part of the debtor’s necessary, normal production operations.

CHAPTER III
CREDITOR’S MEETINGS

Article 13
All creditors, without exception, are members of creditors’ meeting. Members of creditors’ meeting will enjoy voting rights with the exception of creditors with property security that have yet to renounce their preferential repayment rights. After the debtor’s guarantor has discharged the liability on the debtor’s behalf, the guarantor may become a creditor and enjoy voting rights.

The Chairman of the creditors’ meeting will be appointed by the People’s Court from among the creditors with voting rights.

The debtor’s legal representative must attend the creditors’ meeting and answer questions from the creditors.

Article 14
The first creditors’ meeting, which will be convened by the People’s Court, shall be convened within 15 days of the expiry of the claim declaration period. Later meetings will be convened when considered necessary by the People’s Court or the Chairman of the meeting, or may also be convened at the request of the liquidation group or by creditors whose combined holdings equal one-quarter or more of the total non-property guarantee claims.

Article 15
The functions and powers of creditors’ meeting are:

(1) examination of relevant testimonials for claims, determination of whether or not the claims involve property security and their amount
(2) discussion and adoption of the draft conciliation agreement
(3) discussion and adoption of the plan for the handling and distribution of bankruptcy property

Article 16
Resolutions of a creditors’ meeting will have the approval of the majority of creditors with voting rights present at the meeting and moreover the combined amount of claims they represent must equal one-half or more of the total amount of claims unsecured by property.

Resolutions concerning adoption of draft conciliation agreements must be approved by creditors whose combined holdings equal two-thirds or more of non-property guarantee claims.

Resolutions passed at creditors’ meetings will be binding on all creditors.

Should a creditor consider a resolution of creditors’ meeting to be in violation of legal provisions, a request for a ruling may be made to the People’s Court within seven days of the resolution being passed.

CHAPTER IV
CONCILIATION AND REORGANISATION

Article 17
Where a creditor lodges a bankruptcy application against an enterprise the higher level department in charge of the enterprise may, within three months of the hearing of the case in the People’s Court, apply for reorganization of the enterprise to be carried out. The reorganization term should not exceed two years.

Article 18
Following the submission of an application for reorganization the enterprise shall submit a draft conciliation agreement to the creditors’ meeting.

The conciliation agreement shall stipulate the time limit for the enterprise’s discharge of liabilities.

Article 19
Where a conciliation agreement is reached between the enterprise and the creditor’s meeting, following its approval by the People’s Court the said Court will issue a public announcement and bankruptcy proceedings will be suspended. The conciliation agreement will be legally effective from the date of the announcement.

Article 20
Management of the reorganization of an enterprise will be responsibility of its higher level department in charge.

Plans for the enterprise’s reorganization shall be discussed at a representative meeting of the enterprise’s employees. A report on the state of the enterprise reorganization shall be made at a representative meeting of the enterprise’s employees and their opinions will be heard.

Reports on the state of the enterprise’s reorganization shall be made to the creditors’ meeting at regular intervals.

Article 21
Should one of the following situations occur within the enterprise during the reorganization period, following a ruling by the People’s Court, the reorganization of the enterprise will be ended and it will be declared bankrupt:

(1) non-implementation of the conciliation agreement
(2) continual worsening of the financial state of affairs resulting in a creditors’ meeting requesting the end of reorganization
(3) the occurrence of one of the actions listed in Article 35 of this Law which seriously harms creditors’ interests

Article 22
If, following reorganization, the enterprise is able to discharge its liabilities in accordance with the conciliation agreement, the People’s Court shall end bankruptcy proceedings against the enterprise and issue a public announcement.

If at the end of the term for reorganization the enterprise is unable to discharge its liabilities in accordance with the conciliation agreement, the People’s Court shall declare the enterprise bankrupt. Moreover, in accordance with the provisions of Article 7 of this Law, claims will be registered anew.

CHAPTER VI
DECLARATION OF BANKRUPTCY AND BANKRUPTCY LIQUIDATION

Article 23
Should one of the following situations occur the People’s Court makes a ruling and declare the enterprise bankrupt:

(1) where in accordance with the provisions of Article 3 of this Law a bankruptcy declaration shall have been made
(2) where in accordance with the provisions of Article 21 of this Law reorganization is to be ended
(3) where the term for reorganization has expired and the enterprise is unable to discharge liabilities in accordance with the conciliation agreement

Article 24
The People’s Court shall establish a liquidation group within 15 days of the enterprise being declared bankrupt to take over control of the bankrupt enterprise.

The liquidation group will be responsible for the care, stocktaking, valuation, handling and distribution of the bankruptcy property. The liquidation group may carry out necessary civil matters in accordance with the law.

Members of the liquidation group will be appointed by the People’s Court from among persons within the higher level department in charge of the enterprise, government finance departments, other relevant departments and professional personnel. The liquidation group may engage any necessary work personnel.

The liquidation group will be responsible to the People’s Court and moreover will present the Court with reports on the state of their work.

Article 25
No unit or individual shall unlawfully handle a bankrupt enterprise property, account books, documents, materials, seals, etc.

A bankrupt enterprise’s debtors and property holders can only discharge liabilities or hand over property to the liquidation group.

Article 26
Where a bankrupt enterprise has yet to fulfil a contract the liquidation group may decide whether to terminate or to continue to fulfil the contract.

Where a decision by the liquidation group to terminate the contract causes another party concerned to suffer losses, the amount of loss compensation will be regarded as a bankruptcy claim.

Article 27
In the period before the liquidation group carries out transfer procedures the legal representative of a bankrupt enterprise will be responsible for taking care of the enterprise’s property, account books, documents, materials, seals, etc.

In the period before bankruptcy proceedings are completed the legal representative of a bankrupt enterprise will work according to the requirements of the People’s Court or the liquidation group and may not leave his post without authorization.

Article 28
Bankruptcy property is made up of the following property:

(1) all property managed and administered by the bankrupt enterprise at the time of the bankruptcy declaration
(2) property obtained by the bankrupt enterprise between the time of the bankruptcy declaration and the end of bankruptcy proceedings
(3) other property rights over which the bankrupt enterprise exercises authority

Property already classed as a security is not part of the bankruptcy property. Should the value of the security be in excess of the amount of the claim for which it is a security, the amount in excess will be taken as part of the bankruptcy property.

Article 29
Should another’s property be intermingled with that of the bankrupt enterprise it will be recovered through the liquidation group by the person with rights to the said property.

Article 30
Non-secured property claims and secured property claims with renounced preference repayment rights established before the bankruptcy declaration are bankruptcy claims.

Expenses incurred by a creditor during bankruptcy proceeding may not be taken as bankruptcy claims.

Article 31
Immature claims at the time of the declaration of bankruptcy will be taken as matured claims, but the immature interest shall be deducted.

Article 32
A creditor with claims secured by property which were established before the bankruptcy declaration will enjoy preferential repayment rights on the said security.

Where the amount of claim secured by property is in excess of the value of the security, the yet to be discharged portion will become a bankruptcy claim and be repaid in accordance with bankruptcy proceedings.

Article 33
Claims held by a creditor against a bankrupt enterprise may be offset before the commencement of bankruptcy liquidation.

Article 34
The appropriation of the following bankruptcy expenses from the bankrupt property will take precedence:

(1) expenses incurred in the supervision, selling and distribution of the bankruptcy property, including expenses for the hiring of work personnel
(2) legal expenses for the bankruptcy case
(3) other expenses paid out during bankruptcy proceedings for the common benefit of creditors

Where the bankruptcy property is insufficient to pay the bankruptcy expenses the People Court shall declare the termination of bankruptcy proceedings.

Article 35
The following actions will be invalid if carried out by a bankrupt enterprise in the period beginning six months before the hearing of its bankruptcy case by the People’s Court and ending on the date of the bankruptcy declaration:

(1) concealment, private distribution or gratuitous assignment of property
(2) irregular underselling of property
(3) supply for property security to creditors originally without property security
(4) advance discharge of immature liabilities
(5) renunciation of its own claims

Should any of the above-mentioned actions have been carried out by the bankrupt enterprise the liquidation group has the right to apply to the People’s Court for the recovery of the property. Recovered property will become bankruptcy property.

Article 36
Where a complete set of equipment is included in the bankruptcy property it shall be sold as a whole. If unable to be sold in its entirely it may be sold by the piece.

Article 37
The bankruptcy property distribution plan prepared by the liquidation group will be implemented following its discussion and adoption at creditor’s meeting and further submission to the People’s Court for a ruling.

After the priority appropriation of bankruptcy expenses from the bankruptcy property, discharge of liabilities will take the following order:

(1) wages owed to employees by the bankrupt enterprise and labor insurance fees
(2) taxes owed by the bankrupt enterprise
(3) bankruptcy claims

Where the bankruptcy property is insufficient to fully discharge liabilities in the order stipulated above, it will be distributed proportionally.

Article 38
On the completion of the distribution of bankruptcy property the liquidation group will request the People’s Court to conclude bankruptcy proceedings.

After the conclusion of bankruptcy proceedings outstanding claims will no longer be discharged.

Article 39
After the conclusion of bankruptcy proceedings the liquidation group will cancel registration with the bankrupt enterprise’s original registration organ.

Article 40
Where a bankrupt enterprise has carried out one of the actions stated in Article 35 of this Law and this is discovered within a year of the conclusion of bankruptcy proceedings, the People’s Court will recover the property and a further discharge of liabilities will be carried out in accordance with the provisions of Article 37.

Article 41
Where a bankrupt enterprise has carried out one of the actions stated in Article 35 of this Law, disciplinary sanctions will be brought on the legal representative of the enterprise and the persons directly responsible. Should the actions of the legal representative of the enterprise and the persons directly responsible constitute a criminal offence, criminal liability will be investigated in accordance with the law.

Article 42
After an enterprise has been declared bankrupt, government inspection departments and auditing departments will be responsible for ascertaining the enterprise’s responsibility for the bankruptcy.

Where the legal representative of a bankrupt enterprise bears the main responsibility for the bankruptcy, disciplinary sanctions will be brought against him.

Where the higher level department in charge of a bankrupt enterprise bears the main responsibility for the bankruptcy, disciplinary sanctions will be brought against the leaders of the higher level department in charge.

Should the legal representative of a bankrupt enterprise and the leaders of the higher level department in charge of the said enterprise cause, through neglect of their duties, the bankruptcy of an enterprise which results in serious losses to State property, criminal liability will be investigated in accordance with the provisions of Article 187 of the Criminal Code of the People’s Republic of China.

CHAPTER VI
SUPPLEMENTARY PRINCIPLES

Article 43
This Law will be effective for trial implementation three months after the implementation of the Law on State Industrial Enterprises. Detailed plans and measures for the trial implementation will be determined by the State Council.

APPENDIX

Article 187 of the Criminal Code
State employees who through neglect of their duties have caused serious loss to public property, State and citizens’ right will be sentenced to a specified prison sentence or forced labor for a period of five years or less.