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In
Part I, we discussed the milestones of the development of bankruptcy
law in the PRC and the major differences between the 1986 Law and
the 2006 Law. Here, we will look at the remaining key provisions in
the 2006 Law.
| 5. |
Creditors’
committee |
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The
appointment, constitution and powers of a creditors’
committee are now formalised in the 2006 Law. A creditors’
committee of no more than nine creditors’ representatives
may be appointed at a meeting of creditors; the appointment of
which must be endorsed by the court in writing. This is one of
several moves to increase the transparency of the bankruptcy
process through the close supervision of the work of
administrators (see later) by the creditors’ committee.
Practically speaking, the powers of a creditors’ committee
are much wider than a committee of inspection in most other
countries. |
| 6. |
Reorganisation |
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The
1986 Law provides for reconciliation (和解) and reconstruction
(整頓) whereas
the 2006 Law refers to reorganisation (重整) and reconciliation
(和解). The new
law gives debtors more flexibility in the way in which they approach their debt
burdens.
Under
the 1986 Law, only the SoE’s supervisory body could propose
reconstruction within three months of registration by the
court of the petition. Under the 2006 Law, either the debtor
or its creditors may apply directly to the court for
reorganisation. Alternatively, after the registration of a
bankruptcy petition has been filed by a creditor; the debtor,
any creditor, or any owner or stakeholder holding more than
one-tenth of the capital (one-third in the 1st Draft) of the
debt may apply to the court for reorganisation of the
enterprise. As for reconciliation, only the debtor may apply
to the court.
During
the period of reorganisation, the debtor may apply to continue
to manage its business under the supervision of a court
appointed administrator. Alternatively, the administrator may
take control of the assets of the debtor and run its business.
This is thus a clear adoption of the
“debtor-in-possession” concept. |
| 7. |
Resettlement
of employees |
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Since 1994, the treatment of
employees had been one of the key contentious issues in the
revision of bankruptcy law. The 2006 Law stipulates that any
portion of unpaid wages or social insurance premiums for
workers which has accrued prior and up to 27 August 2006 after
exhausting unencumbered assets in the estate, shall be settled
with priority from the assets which are subject to security or
priority rights in favour of designated creditors. The
specially “assigned” assets comprise essentially of assets
of the enterprise which are subject to rights of security,
lien or pledge, or any other statutory preferential rights.
The practical effect of this is to give workers a higher
priority than secured creditors. This provision derives as a
basis from a key feature of the CSOP, which deals with the
“policy bankruptcies” for specific SoEs in the 1990s. |
| 8. |
Bankruptcy
offences |
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Apparently in response to
“false bankruptcy, genuine evasion” (假破產真逃債)
situations, the 2006 Law stipulates that certain acts carried
out by the directors, managers or other officers of the debtor
may constitute bankruptcy offences. These include intentional
or reckless acts which cause the bankruptcy of the debtor;
refusal to co-operate with the court or administrator; refusal
to surrender assets, books and records; forgery or destruction
of the seals, books and records of the enterprise; and
fraudulent transfer or concealment of assets.
Directors, managers or
officials who commit any of the above acts shall be subject to
fines, criminal prosecution, personal liability and/or
automatic disqualification to act as directors or take part in
any managerial role in other businesses for three years.
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| 9. |
Bankruptcy administration |
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Under the 1986 Law, bankruptcy
administration was carried out by a liquidation committee
appointed by the court. Members of the liquidation committee
were appointed by the PRC Court from representatives of the
supervising body (where SoEs are involved), and the local
finance, tax and other relevant Government departments.
The 2006 Law introduces the key
concept of the office and appointment of an administrator (管理人).
| (i) |
Appointment
and role
Upon
acceptance of the registration of the bankruptcy
petition, the court shall appoint an administrator.
Under the 1st Draft of the new bankruptcy law, creditors
may appoint another person to replace the one appointed
by the court. However, in the 2nd Draft and the 2006
Law, the court maintains a final say in the appointment
of administrators. Where the creditors’ meeting
considers that the appointed administrator fails to
discharge his duties properly, it may make an
application to the court to appoint another person to
replace that administrator.
An administrator has a
key role to play in bankruptcy and reorganisation. In a
bankruptcy case, the administrator replaces the
liquidation committee and manages the debtors’ assets
and liabilities in the bankruptcy proceedings. In
reorganisation, he either supervises the debtor or plans
and implements the reorganisation programme himself. |
| (ii) |
Eligibility
and qualification
Under the 1st Draft,
professional intermediary institutions such as law
firms, accounting firms, bankruptcy liquidation firms,
or any professional person with relevant knowledge and
experience who has obtained the requisite professional
qualifications may be appointed as an administrator.
Under the 2nd Draft and
the 2006 Law, the appointment of individuals as
administrators is restricted to professionally qualified
persons within the aforementioned intermediary
institutions. Furthermore, such appointments may only be
made under special circumstances, after the court has
consulted the relevant intermediary institution. The
individual must be covered by professional liability
insurance. |
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Conclusion
The
2006 Law is a significant move towards an effective bankruptcy
framework in the PRC. It is now incumbent upon all players concerned
including investors, financiers, accountants, lawyers and, most
important of all, the PRC Government regulators and judiciary, to
ensure that the system is implemented in a transparent manner and
that all PRC courts enforce the 2006 Law in a consistent manner.
This law is going to play a key role in the PRC’s political and
economic reform to develop a modern market economy.
anita.so@gthk.com.hk
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