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Originally published:
Sep-26-2006
View More Articles on Bankruptcy
 Secured Creditors to Take Precedence Over Employees
On August 27, China’s legislature – the Standing Committee of the National People’s Congress – passed the Enterprise Bankruptcy Law, which will go into effect on June 1, 2007. The law was 12 years in the making and is considered by legal experts to be a major move to bring China more in line with international standards and market-based economies.
The Enterprise Bankruptcy Law replaces a 1986 trial corporate bankruptcy law that technically applied only to state-run companies. The major policy change, under the new law, is that secured creditors will receive precedence over employees in bankruptcy pay-outs. According to one pundit, “Chinese policymakers have taken another step in breaking the lifetime employment system at state enterprises that ensured that bankruptcies were rare and job security was paramount.”
Primary beneficiaries of these changes will be Chinese banks as the law addresses one of their biggest risks – recovering money from borrowers when business goes bad. Standard & Poor’s estimated that bad loans accounted for about 21% to 25% of all credits extended in China at the end of 2005.
The new law will essentially bring an end to the government rescue of non-performing, non-financial state-owned enterprises (SOEs). From 1994 to 2005, China allowed 3,658 state enterprises to close with government financial support. The Chinese government has in place a plan to close down another 2,000 SOEs by 2008. Because this plan was drawn up before the promulgation of the new bankruptcy law, these companies will be allowed to close down with government bailouts, and to pay laid-off workers first – if they apply for bankruptcy prior to June 1, 2007, the date the new law takes effect.
The 1986 law will be abolished concurrent with the Enterprise Bankruptcy Law taking effect on June 1, 2007.
Comparison of 2006 Law to 1986 “Trial” Law
Enterprise Bankruptcy Law
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1986 Law
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| - focuses on protecting creditors' rights and conforming with international standards |
- focuses on protecting workers' interests |
| - applies to private and state-run companies, foreign or domestic |
- technically applies only to state-run organizations (SOEs) |
| - pays secured creditors first, then workers |
- pays displaced workers first |
| - permits reorganization |
- does not address reorganization |
| - sets clear procedures for bankruptcy of financial institutions |
- does not address bankruptcy of financial institutions |
| - allows creditors to initiate bankruptcy proceedings |
- does not address creditors initiating bankruptcies |
Some Blogs on Chinese Law
China Law Blog -- focuses on business law in China. It is written by Dan Harris, an international lawyer based in the United States and Steve Dickinson, an international lawyer based in China.
China Challenges -- The mission of this weblog is to explore the various political, economic, and social implications of the rise of the Peoples Republic of China in the 21st Century.
Chinese Law Professor Blog -- Law Professor Blogs is a network of web logs ("blogs") designed from the ground-up to assist law professors in their scholarship and teaching. Each site focuses on a particular area of law and combines both (1) regularly-updated permanent resources and links, and (2) daily news and information of interest to law professors. Our editors are leading scholars and teachers who are committed to providing the web destination for law professors in their fields.
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Disclaimer: This information is provided by ABC-Amega Inc. for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.
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