The PRC bankruptcy administrator

The new PRC Enterprise Bankruptcy Law (the Bankruptcy Law) came into effect on 1 June 2007. The Supreme People's Court promulgated in April 2007 three regulations, namely "The Provisions of the Supreme People's Court on the Designation of Administrators during the Trial of Enterprise Bankruptcy Cases" - (the Designation Provisions), "The Provisions of the Supreme People's Court on Determination of the Administrator's Remunerations" - (the Remunerations Provisions) and "The Provisions of the Supreme People's Court on Some Issues about the Application of the Law for the Enterprise Bankruptcy Cases That Have Not Been Concluded When the Enterprise Bankruptcy Law of the People's Republic of China Comes into Effect" - (the Transitional Provisions). These regulations also came into effect on 1 June 2007.

Panel of administrators
The Designation Provisions provide guidelines on how the People's Courts should appoint an administrator in bankruptcy cases. The administrator must be selected from a panel of qualified professional intermediary institutions such as law firms, accounting firms, bankruptcy liquidation firms or individuals (the Panel). The Panel is normally expected to operate to cover enterprises within the specific jurisdiction of the corresponding Higher People's Court. For a Higher People's Court not within the four centrally-controlled municipalities (i.e. Beijing, Tianjin, Shanghai and Chongqing), the court should also indicate the designated members on the Panel in respect of and under the jurisdiction of the various Intermediate People's Courts under its auspices.

In cases of bankruptcy of a commercial bank, securities company, insurance company or any other financial institution, or cases involving an enterprise of national influence, the relevant People's Courts are required to invite Panel members in the respective jurisdictions with adequate national resources to bid to be appointed as the administrator. There must be at least three such Panel member intermediary institutes in the bidding.

Grant Thornton's Recovery & Reorganisation division has recently conducted a survey on various announcements made by the People's Courts over four municipalities, 22 provinces and five autonomous regions (i.e. 31 Higher People's Court jurisdictions in total). The survey focused on the administrator registration process from around June 2007. Based on publicly available information and as of 11 September 2007, a summary of the relevant survey is given in Table 1below. (this is not meant to be exhaustive or exclusive).

The People's Courts of some jurisdictions, e.g. Yunnan and Chongqing, made announcements of their Invitation to Register before 1 June 2007. Announcements of the Preliminary Panels usually specified a deadline for the submission of any objections from the public against the Preliminary Panel. After the expiration of the objection period, the People's Courts advertised the Final Panel. As of 11 September 2007, nine jurisdictions had announced their Final Panels. Beijing announced its Final Panel on 25 September 2007. The Intermediate People's Courts of some jurisdictions have made various announcements even though their corresponding Higher People's Courts have not made any, e.g., Guangdong and Hubei. From 1 June 2007, but prior to the determination of the Final Panels, some courts, e.g. the Beijing and Foshan Intermediate Courts, will appoint administrators to new bankruptcy cases from a temporary panel set up internally by these courts during the transitional period.

The People's Court may set various criteria for selecting the administrators to form the Panel. In some jurisdictions, a detailed scoring system is used. For example, in Beijing, a maximum total score of 100 for each CPA applicant is calculated based on six criteria, namely, the turnover of the business generally (20); the size of the CPA firm by head count and number of qualified CPAs (20); practical experience in handling bankruptcy cases (30); the number of relevant liquidation reports issued (15); the number of relevant published articles (5) and professional liability insurance cover (10). It is interesting to note that, for Beijing, the scores for each individual applicant under each of the six criteria were announced in the list of Preliminary Panel of firms. The final Panel in Beijing includes four international accounting firms, of which Grant Thornton is one.

Based on the survey beside, in general, 40% - 60% of the panel members are law firms, 20% - 40% are accounting firms and 5% - 20% are bankruptcy liquidation firms.

Remuneration of administrators
The Remunerations Provisions stipulate that the People's Court shall, according to the total value of distributable properties of the bankrupt enterprises, determine (subject to a floating range of 30%) the administrator's remuneration on a prescribed scale rate, as listed in Table 2 below.

When the administrator's basis of remuneration is determined by the Court, it will not be adjusted unless an objection stands at the creditor's meeting. Adjustments may be made according to the circumstances of the bankruptcy case and the administrator's performance by reference to the complexity of the bankruptcy case; his diligence; his contribution to the revival of the business; the risks borne and the responsibilities shouldered by the administrator; the local residents' disposable income and the general price level of the location of the debtor; and other relevant factors.

The administrator's remuneration shall be paid out of the debtor's assets. If the debtor's assets are not sufficient to pay the administrator's remuneration and his expenses, the administrator may ask the People's Court to terminate the bankruptcy procedures unless funding is to be provided by creditors, shareholders of the debtor enterprise or any other interested parties.

The value of collateral or secured assets which a secured or preferred creditor holds should not be included in the total value of distributable properties. If the administrator makes reasonable efforts in dealing with collateral or secured assets, he has the right to charge the secured creditor for appropriate remuneration. If the administrator and the secured creditor cannot agree, the People's Court shall determine the remuneration.

Transitional arrangements
The Transitional Provisions provide a basis to deal with bankruptcy cases which were not completed as of 1 June 2007. Essentially, it adopts the position of requiring "old" cases to follow the "new" law to the extent possible, without disturbing the rights and entitlements of parties already established under the "old" law. For example, where a "bankruptcy liquidation committee" has been formed, that committee will take up the role of Administrator after 1 June 2007. Where claims have not yet been settled, those of directors and employees would in principle be dealt with under the new law. Creditors who have had their "set-off" position determined cannot ask to reopen their case under the new law. As for any pertinent judicial interpretations made by the Supreme People's Court before 1 June 2007 that conflict with the new Bankruptcy Law, the People's court will not apply such interpretations to those enterprise bankruptcy cases which remained open as of 1 June 2007. Hence, one can conclude that the "interpretations" or "answers to questions" by the Supreme People's Court in 1991 and 2002 respectively in relation to the 1986 Enterprise Bankruptcy Law will no longer apply except in relation to pre-1 June 2007 cases and only to the extent that they do not contradict the new law. It is expected that further judicial interpretation of the new PRC Bankruptcy Law will be promulgated in the near future.

alan.tang@gthk.com.hk
pauline.au@gthk.com.hk