Chinese Abacus and China Money On June 1, 2007, the Enterprise Bankruptcy Law went into effect in the People’s Republic of China. The law, 12 years in the making, was passed by the Standing Committee of the National People’s Congress in August 2006. It is an effort on the part of China to bring its bankruptcy rules and procedures more in line with international standards and market-based economies. By doing so, China hopes to increase the confidence of foreign investors and creditors, and with it, investment into Chinese firms.

In a September Credit-to-Cash Advisor article, China Adopts New Bankruptcy Law, we compared the new bankruptcy law to China’s previous 1986 trial law. In this article, we compare highlights of some of the provisions of the new Chinese law to current U.S. bankruptcy law. You will also find brief definitions of some key U.S. bankruptcy terms at the end of the comparison table.

	China's Enterprise Bankruptcy Law	U.S. Title 11 Federal Bankruptcy Law
Forms of Relief	Three forms: restructuring, liquidation, and conciliation.	Two forms: restructuring and liquidation. China’s conciliation relief might be analogous to informal compositions (workouts) and out-of-court wind-downs in the U.S.
Scope	Applies to state-owned and private corporate entities, but not to partnerships or individuals.	Applies to all forms of companies, as well as individuals.
Insolvency Requirements - Voluntary Bankruptcy	Debtor may file for any form of relief if it meets two requirements: (1) it is unable to pay its debts when due; and (2) its total liabilities exceed the value of its assets.	There is no insolvency requirement for a business to file a voluntary bankruptcy petition.
Involuntary Bankruptcy Requirements	Creditors may force a debtor into bankruptcy if the debtor is unable to pay its debts when due. No requirements re liabilities vs. assets.	An involuntary bankruptcy petition can be filed by creditors if the creditor or creditors (depending on total number of creditors): Have undisputed accounts totaling more than $10,000; and Can prove the debtor is not paying the majority of his non-disputed accounts as they become due; and Makes the involuntary petition “in good faith”.
Administration of Estate	People’s Court appoints an Administrator when the bankruptcy is accepted by the Court. Debtor may request court’s permission to manage the estate under supervision of the Administrator.	Bankruptcy Court appoints a Trustee when the bankruptcy is filed. In most reorganizations, however, the debtor automatically assumes the identity of “debtor in possession” and continues to operate the business and maintain control of its assets.
Automatic Stay	Takes effect upon the Court’s acceptance of the bankruptcy application. There is a potential 15-day gap between filing and acceptance during which creditors can continue to pursue collection efforts.	Stay of creditor actions against the debtor automatically goes into effect when the bankruptcy petition is filed.
Avoidance Powers	Administrator can recover assets transferred during a specific time period prior to the acceptance of the bankruptcy application. These fall into three categories: Debt payments made during six months prior to bankruptcy acceptance and while debtor was insolvent (as defined in the law). Transfers indicative of fraud made during one year prior to acceptance of bankruptcy case (for instance, a transaction at an unreasonably low price). Transfers involving actual fraud (for instance fabricating debtors or hiding property to avoid obligation of debt).	Trustee or debtor-in-possession can undo a transfer of assets made during a specific time period prior to the filing of the bankruptcy petition (called preferences). There are three types of preference: Insider transfers made within, usually, one year prior to bankruptcy filing. Fraudulent transfers made within one year (or up to seven years in some states) prior to bankruptcy filing. Non-insider transfers – the most common – made within 90 days prior to bankruptcy filing.
Executory Contracts	Administrator (or debtor) is allowed to assume or reject executory contracts.	The Trustee (or debtor) is allowed to assume or reject executory contracts.
Reclamation	Suppliers of goods dispatched for delivery before the bankruptcy may take back those goods if the full price has not yet been paid.	Suppliers may reclaim goods sold to the debtor “in the ordinary course of business” where the debtor was insolvent and received the goods within 45 days prior to commencement of the bankruptcy case.
Setoff	A creditor owing debts to the debtor may request the ability to offset them against what the debtor owes them. Setoff is not allowed in some circumstances.	Setoff of mutual pre-petition obligations is under the jurisdiction of state law.
Post-Petition Financing	The Administrator or debtor (if provided rights to oversee the business) may obtain loans (grant liens) in order to continue operations. The law does not specify that such liens can only be granted on unencumbered assets.	If the debtor can demonstrate that financing could not be procured on any other basis, the Court can, subject to certain limitations, authorize the debtor to grant the debtor-in-possession lender a lien that has priority over pre-bankruptcy secured creditors and a claim with super-priority over administrative expenses (including vendor and employee claims).
Adequate Protection	Collateral rights of secured creditors are suspended during reorganization. In cases where collateral value may be decreased in such a way that it hurts the rights of the secured creditor, the creditor can request the People’s Court allow resumption of its collateral rights. Law does not, however, elaborate on how such protection will be provided.	Secured creditors may seek adequate protection or seek relief from stay where collateral value may decrease. Adequate protection is spelled out and includes such methods as periodic cash payments, additional or replacement liens, or other relief that supplies the "indubitable equivalent" of the creditor's interest.
Determining Debts Owed	All creditors must declare any debts owed (with the exception of employee-related debts) within a time frame provided by the People’s Court. Creditors must provide a written explanation of the claim as well as evidence supporting it.	The debtor provides a schedule of debts to the Bankruptcy Court. Only those creditors whose debts are not listed, or that are listed as disputed, contingent or unliquidated, are required to file a proof of claim prior to a bar date set by the Court.
Administrative Expenses	Makes a distinction between two types of administrative costs: expenses directly related to the bankruptcy filing and requirements, and “debts of common benefit”, which include costs to continue the company during the adjudication of the bankruptcy. Both costs are to be paid “when they occur”, with bankruptcy costs taking precedence where assets are insufficient to pay both.	Gives priority for payment of reasonable and necessary administrative expenses, which are to be paid in full from the estate’s unencumbered assets.
Creditors' Committee	All creditors with lawfully declared credits are members of the Creditors’ Meeting, which has duties similar to those of the U.S. Creditor’s Committee. The Creditor’s Meeting has the ability to establish a Creditors’ Committee of no more than nine members, one of whom must represent the debtor’s employees.	The Trustee appoints unsecured creditors (usually selected from the 20 largest) to an Unsecured Creditor’s Committee, which is purely voluntary. There is no limit to the number of members, although the Committee generally consists of three to nine creditors.
Submission of Reorganization Plan	Draft reorganization plan to be submitted within six months after the Court has accepted the case. The court may extend the period for three months upon showing good cause. If the plan is not submitted in a timely fashion, then reorganization is terminated and the debtor is declared bankrupt – to be liquidated. There is no provision for submission of competing plans by creditors and/or shareholders.	Debtor has exclusive right to submit reorganization plan for 120 days post bankruptcy filing. Once this period has expired, a creditor or the Trustee may file a “competing” plan for consideration by the creditors and Court.
Claim Classes (Paid 1st to Last)	Four classes of creditors: secured creditors employees tax creditors ordinary creditors	Basically five classes of claims: secured creditor claims administrative expenses (costs of the bankruptcy) pre-petition priority claims (includes wages) general unsecured creditors claims shareholder claims
Approval of Reorganization Plan	Plan must receive approval of more than half the number of creditors in each class present at the meeting and more than two-thirds of the total amount of claims in each class.	Debtor has 180 days after filing of petition to obtain acceptances to reorganization plan. (Court must first approve Disclosure Statement.) All creditors have the right to vote. Court holds Confirmation Hearing and if no timely objections by any creditors, determines whether to confirm the Plan.
Cram Down	Permits the Court to approve the reorganization plan over a dissenting class of creditors where: Secured creditors, employees and tax creditors are either unimpaired or have voted in favor of the plan; and Ordinary creditors receive at least as much as they would under a liquidation; and Equity holders have been treated fairly or voted to approve the plan; and Members of the same voting class are treated fairly and equally; and The debtor’s business plan is feasible.	If all requirements for confirmation are met, except that not all classes of claims have accepted the plan, the Court may still approve the plan provided that certain requirements are met. The basic requirement is that the plan is fair and equitable with respect to each class of claims or interests that has not accepted the plan. Fair and equitable is further defined to ensure that each member of the class will receive a value that is not less than the amount that such holder would receive or retain if the debtor were liquidated under Chapter 7.
Cross-Border Insolvency	Recognizes foreign proceedings and provides that parties may apply to the People’s Court for recognition and enforcement of a bankruptcy judgment made in a foreign court that involves debtor property located in the PRC.	Incorporates the Model Law on Cross Border Insolvency drafted by the United Nations Commission on International Trade and Law.

Short Definitions of Some Key U.S. Bankruptcy Terms

Adequate Protection: Security, collateral or some other measure provided by the debtor in bankruptcy, to protect a secured creditor from depreciation of its collateral pending confirmation of a plan.
Administrative Expenses: Costs and expenses of preserving the debtor's estate or business after the Bankruptcy case is filed, as well as professional fees such as trustees, attorneys', and/or accountants' fees.
Avoidance Powers: Rights given to the bankruptcy Trustee (or the debtor-in-possession) to recover certain transfers of property such as preferences made before the commencement of a bankruptcy case.
Bar Date: A date assigned by the Bankruptcy Court (in Chapter 11) by which creditors need to file a proof of claim to ensure their claim against the debtor is listed on the schedule of liabilities. The bar date is usually listed on the Court’s Notice to Creditors.
Claim Classes: A group of claims/creditors having similar characteristics and entitled to similar treatment in a bankruptcy case.
Cram Down: Action by which the Bankruptcy Court may order a plan approved over the negative vote of a class of dissenting creditors.
Debtor-in-Possession (DIP): Company that continues to operate under the same management in a Chapter 11.
Debtor-in-Possession Lender: A firm that provides companies in Chapter 11 specially designed loans to assist the company to continue business until reorganization is accomplished.
Executory Contracts: Characterized by the U.S. Supreme Court as contracts “on which performance is due to some extent on both sides.” There is no definition within the Bankruptcy Code. Types of contracts held to be executory include insurance contracts, partnership agreements, franchise agreements, repurchase options, software licenses, collective bargaining agreements, joint venture agreements, and settlement agreements.
Post-Petition Financing: Called “DIP or debtor-in-possession financing” -- financing arranged by a company while under the Chapter 11 to enable it to continue its business. DIP financing is unique from other financing methods in that it usually has priority over existing debt, equity and other claims.
Reorganization Plan: Detailed description of the terms and conditions of how the debtor will pay creditors' claims over a fixed period of time.
Setoff: A right under state bankruptcy laws that entitles the creditor to offset a debt owed by the creditor against a debt owed to the creditor by the debtor. In order for a setoff to be allowed, both debts must have arisen before commencement of the bankruptcy case. This right is not automatic and must be allowed by the Bankruptcy Court.

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