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Issue 11, November 2011

 Featured Article

Enterprise looking to file for bankruptcy-where to go?
　

         There has been a rash of factory and business owners abandoning their companies in Wenzhou, Zhejiang, as a result of rampant usurious loans in the local business communities that severely hampered those businesses’ ability to service those high interest non-standard (mostly illegal) loans, as well as increasingly challenging business operational environment.
         In fact, at last count at least 90 Wenzhou business owners have decided to abandon their businesses and skipped town. Once the dust settles over the initial business abandonments, there will be a noticeable increase in bankruptcy filings with local Chinese courts.
        Ironically, a couple of months ago China’s Supreme People’s Court (the “Court”) issued its first judicial interpretation relating to China’s Enterprise Bankruptcy Law, which came into effect on June 1st, 2007. (For those unfamiliar with the significance of the Supreme People’s Court’s judicial interpretations, they are general legal rules and principles that all lower courts in China must follow when hearing and adjudicating cases. Although the Chinese judicial system does not adopt case precedent system, these types of judicial interpretation are in effect laws thanks to statutory empowerment).
        Under China’s bankruptcy regime, a business may file for bankruptcy if it loses the ability to pay off debts as they become due and (1) its assets are insufficient to discharge all of its debts or if (2) it clearly lacks the capacity to discharge such debts.

“Losing ability to pay off debts”
       In the interpretations issued relating to bankruptcy laws, the Court clarifies the meaning of “losing the ability to pay off debts as they become due” to include situations where a debt relationship is established, has matured and debtor is unable to pay off entire debt owed.

“Assets insufficient to discharge debts”
       The Court then establishes a rebuttable presumption that a company’s “assets are insufficient to discharge all of its debts” if its balance sheet, auditing report or asset appraisal report indicates all of assets are insufficient to pay off all of its debts.

“Lacks capacity to discharge debts”
       The Court further explains that even if ostensibly the debtor company’s assets are greater than its debts, a company will be deemed to “clearly lack the capacity to discharge all of its debts” if i) there is a severe cash flow shortage or company assets cannot readily be converted into cash; ii) its legal representative is missing and there is no other person available to manage company assets; iii) people’s court’s judgment execution has caused company to lose the ability to pay off debts; iv) it has sustained long term business losses and will be difficult to reverse operating losses; or v) other circumstances leading to the debtor’s inability to pay off debts.

Increase lower court supervision
       In addition to clarifying circumstances or events permitting companies to apply for bankruptcy filing, the interpretations also provided a mechanism by which a bankruptcy applicant may take its bankruptcy application to an upper level court for reconsideration if trial court refuses to hear the applicant’s bankruptcy application.
       This approach acts as a deterrence and countermeasure to trial court’s often seen reluctance in accepting bankruptcy filings. Through the interpretations, the Court attempts to resolve a current problem stemming from lower courts’ unwillingness to accept bankruptcy filings. The reality on the ground is that if legitimate bankruptcy applications are rejected, this will steer away trouble businesses from winding down unsuccessful businesses responsibly and leads to company abandonment which will further disrupt economic order.