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From different angles and levels, these provisions and policies interpret in more detail issues on the bankruptcy of state-owned enterprises and legal-person enterprises as well as the protection of employees in the enterprise.
All these laws and regulations related to bankruptcy, however, lead to a situation of segregation: the bankruptcy of state-owned enterprises is separate from that of other legal person enterprises, while the bankruptcy of companies is subject to the provisions of Chapter 8 of the Company Law of People’s Republic of China (the “Company Law”). Fortunately, substantial changes have taken place to this situation of segregation since the Supreme People’s Court issued the Rules.
II.C.2. Subjects of Bankruptcy, Jurisdiction over Bankruptcy Cases and Acceptance
Due to the limit of powers of the Supreme People’s Court, the Rules make no breakthrough to the eligibility of subjects of bankruptcy. The Rules still provides that the bankrupt debtor should be a legal person, and non-legal-person enterprises, individual businessmen, partnerships and rural operators of contracted business are not eligible for bankruptcy.
Moreover, we notice that Article 240 of the Supreme People’s Court’s Opinions on Issues concerning the Application of the Civil Procedural Law of the People’s Republic of China provides that the bankrupt debtors should include “Chinese-foreign equity joint ventures, Chinese-foreign contractual join ventures and wholly foreign-funded enterprises”, but this provision does not mention whether these foreign-funded enterprises should be legal persons, since the Chinese-foreign contractual join ventures and wholly foreign-funded enterprises may be in a non-legal person form. In the absence of this, does it mean that those foreign-funded enterprises without legal person status may be subject to the rules? In respect of this issue, further discussion will be made later.
Although, in respect of the geographic jurisdiction over bankruptcy cases, the Rules maintains the doctrine of “plaintiff accommodated to defendant” as advocated in many laws and regulations, i.e., an bankruptcy case of enterprise is under the jurisdiction of the people’s court at the place where the debtor is domiciled, the Rules for the first time addresses the issue of adjustment on the geographic jurisdiction, i.e., with the approval of the joint people’s court at a higher level, under a special circumstance, adjustment may be made to the geographic jurisdiction of a particular bankruptcy case of enterprise within a province, autonomous region or municipality directly under the Central Government. In the opinion of the authors, this exception provides a legal basis for the parties in a bankruptcy case to assert “forum non conveniens”.
In detail, the Rules enumerates the materials that must be provides by a debtor to petition for bankruptcy or a creditor to petition for bankruptcy of the debtor, and provides that the people’s court must decide on whether to accept the petition within 7 days. To this end, the people’s court must perform examination of the bankruptcy petition.
For the first time, the Rules provides that the people’s court may decide not to accept a petition for bankruptcy, once the debtor is found to have concealed or transferred property and petitioned for bankruptcy for the escape of debts, or the creditor is found to have petitioned for bankruptcy of the debtor to harm the business reputation of the debtor and fair competition.
Even if the people’s court has accepted the debtor’s petition for bankruptcy, the people’s court may rule to reject the petition for bankruptcy after finding any of the circumstances above or the missing of substantial property of the debtor, which cannot be reasonably explained.
II.C.3. Creditor’s Rights in Bankruptcy and Its Declaration
The Rules for the first time provides for the full scope of the creditor’s rights in bankruptcy, i.e., (1) creditor’s right without a property charge arising before the declaration of bankruptcy; (2) creditor’s right with a property charge before the declaration of bankruptcy but the creditor has given up its preemptive right; (3) creditor’s right with a property charge before the declaration of bankruptcy on the part of amount exceeding the value of the charged property; (4) creditor’s right arising from the payment or acceptance and payment by the drawee or acceptor to the holder of a negotiable instrument without knowing the fact that the issuer of the instrument has been declared bankruptcy; (5) creditor’s right which can be calculated in currency enjoyed by the other party according to law or contract arising from the rescission of a contract by the liquidation committee; (6) creditor’s right arising from the debtor’s trustee’s carrying out trust affairs in the interest of the debtor after the bankruptcy of the debtor; (7) creditor’s right arising from the issuance of debentures; (8) creditor’s right enjoyed by the debtor’s guarantor that have repaid debt in lieu of the debtor and may claim reimbursement from the debtor; (9) creditor’s right declared by the debtor’s guarantor that has exercised in advance the right of reimbursement according to Article 32 of the Guaranty Law of the People’s Republic of China; (10) the guaranty liability determined by an effective legal instrument to be assumed by the debtor as a guaranty before the declaration of bankruptcy; (11) the compensatory liability arising from the debtor’s tort or breach of contract causing property losses to others before the declaration of bankruptcy; and (12) other creditor’s rights determined by the people’s court. These provisions are critical for the protection of the interests of relevant creditors.
As for as declaration of creditor’s rights on bankruptcy, the Rules provides for an exception to Article 9(2) of the Bankruptcy Law. Previously, a creditor who fails to declare its right before deadline was automatically regarded as having given up its right. Now, the Rules incorporates the exceptional circumstances in Article 76 of the Civil Procedural Law which stipulates that “where a part fails to comply with the limit of time for irresistible reasons or other proper reasons, the party may apply for extension of the limit of time within 10 days of the clearance of the impediment, and the people’s court shall decide whether to allow the extension.” Obviously, such an interpretation is more reasonable.
Meanwhile, the Rules makes a broader interpretation of Article 19 of the Bankruptcy Law. Consequently, a reconciliation agreement may be reached not only before the declaration of bankruptcy, but also after the people’s court’s declaration of bankruptcy between the creditor’s meeting and debtor, and the people’s court should rule to discontinue the enforcement of the bankruptcy declaration, and announce publicly to discontinue the bankruptcy proceedings. This provision reflects the emphasis on the reconciliation agreement and appropriate flexibility.
II.C.4. Declaration of Bankruptcy and Its Effectiveness
Declaration of bankruptcy and its effectiveness is an outstanding issue in hearing of bankruptcy cases. According to Article 199 of the Civil Procedural Law, “Unable to repay a debt due” is preliminary in the declaration of bankruptcy. The Rules has clarified the concept of “unable to repay a debt due” in Article 3(1) of the Bankruptcy Law, i.e., after the expiration of the time limit for the performance of a debt, the debtor is obviously lack of the ability to repay the debt. It is further presumed that a debtor who stops repaying a due debt in a continuing state is “unable to repay a debt due”.
What effectiveness is it causing after the declaration of bankruptcy? Article 75 of the Supreme People’s Court’s Opinions on Issues concerning the Understanding and Enforcement of the Enterprises Bankruptcy Law of the People’s Republic of China (Trial) formerly provides that: “The ruling of the people’s court in a bankruptcy case shall not be appealed except one to reject a petition for bankruptcy. A party who disagrees with the ruling may apply to the people’s court making the ruling for reconsideration.”
However, the Rules breakthroughs the above provision, and provides that the party is entitled to complain about the declaration of bankruptcy. Article 38 of the Rules provides concretely that: “After declaration of bankruptcy, the creditor or debtor who opposes to the declaration of bankruptcy may complain to the people’s court at a higher level within 10 days of the declaration of bankruptcy of the enterprise by the people’s court. The people’s court at a higher level shall form a collegiate panel to hear the complaint, and rule within 30 days.” From this provision, the complaint is no different from an appeal.
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