China's Enterprise Bankruptcy Reorganization Study

With the establishment of the market economy and deepen reform of StateOwned Enterprises, the 1986 Enterprise Bankruptcy Law (Trial Implementation)has been exposed to a number of new challenges. Having taken twelve years ofdrafting, the Standing Committee of National People's Congress was finallypassed on 27 August 2006, which will come into effect on June 1, 2007. The NewBankruptcy Law is formulated in order to standardize the enterprise bankruptcyactivities, fairly dispose creditors and debts, protect the rights and lawful interestsof creditors and debtors, and safeguard the economic order of socialist marketeconomy. Most notably, the new law incorporates the reorganization procedure inits eighth chapter. Its introduction means a new era for the nation's market reforms.For companies in China, either domestic or foreign, it establishes a new order forthe discharge of creditors' interest. Although the new law complies better withinternational conventions and better protects investors' and lenders' interests. Itremains far from perfect.There began the search for alternatives to the pure liquidation of companiesas it was realized that liquidation could no longer be seen as a desirable result for acompany, More and more jurisdictions now feature their bankruptcy mechanismswith rescue-oriented measures. Reorganization is predicated on the idea that anenterprise is more valuable as a going concern than if it is liquidated. It is inconsidering what interests are to be protected and which to be preferred. Thisapproach also reflects other objectives, such as preserving jobs and encouragesentrepreneurialism.The structure of this thesis is summarized as follow:The first part begins with characteristics and theories of CorporationReorganization, A bankruptcy law should provide both for efficient liquidation ofnonviable businesses and for effective reorganization and rescue of viablebusinesses. Where circumstances justify it, the system should allow for easyconversion of proceedings from one procedure to another. In its strict traditionalsense, liquidation refers to immediate or early cessation of a business, the sale ofthe business or its productive units or the piecemeal sale of its assets. In contrast, a strict view of corporate rescue refers to the restructuring of a corporation that canbe restored to productivity and become competitive.In the second part, a chronological approach is taken in order to reveal thephilosophy change of insolvency law from punishing the fraud acts of debtor'sinability to pay to progressively widening their eligibility and enhancing thepossibility for them to discharge, as well as investigate the origin, evolution, legaland economic foundations for corporate regeneration. The author reexamined thetraditional approach to operate corporate rescue measures and the compare thedifferent procedures designed for the insolvent companies and their effectiveness.The third part investigates the structure of the organization procedure. Basedon a comparative study with the United States and England, the author investigatesthe specific design features of the reorganization system. Special attention will begiven to the problems that will potentially hinder the effectiveness of ourreorganization procedure. The new Bankruptcy Law allows either the debtor orthe creditor to petition to the court for a reorganization proceeding. Duringreorganization, the debtor may manage its assets and conduct business under thesupervision of the administrator, and any security held by secured creditors cannotbe enforced against the debtor. The new law also introduces a new role of"administrator" which takes over the function previously discharged by theliquidation committee under the 1986 Bankruptcy Law. In addition to officialsfrom government departments, professionals such as lawyers and accountants maynow be appointed as administrators.The last part discusses the internal key elements in the regeneration systemessential for the effectiveness of rescue measures. Based on the forgoing analyzing,this section makes some suggestions and implication on how to enhance thedynamics of reorganization procedure within our new Bankruptcy Law. Theessential issue may not be simple whether we have a modernized bankruptcy lawwith corporate rescue character, it is how to construct a sophisticated monitoringdevise to check and eliminate potential abuses of this instrument, as well asprovide creditors and other stakeholders with effective protection.