The People’s Republic of China (PRC) recently launched two initiatives in relation to enterprise bankruptcies.
On 1 August 2016, the Supreme People’s Court (the SPC) launched the Information Website for National Bankrupt Enterprises Recombinational Cases (the Website). The Website will be used as a centralised information system through which information and actions relating to enterprise bankruptcy proceedings will be published and undertaken.
On 27 September 2016, Beijing established the first specialised bankruptcy court in PRC under its No. 1 Intermediate People’s Court. Shanghai, Tianjin, Chongqing. Eleven other provinces are also expected to set up specialised bankruptcy courts under their respective intermediate people’s courts later this year.
Implications for applicants and creditors
The launch of the Website, the setting up of specialised bankruptcy courts and increased judicial staffing in the PRC is a positive step forward for both applicants and creditors when they seek to exercise their respective rights during the enterprise bankruptcy process.
The Website seeks to expedite enterprise bankruptcy proceedings and improve transparency by allowing traditional processes to be done through online platforms. The Website allows applicants to submit their applications for compulsory enterprise bankruptcy and creditors to submit their claims online, amongst other functions.
With the increase in enterprise bankruptcy cases in the PRC over recent years, these measures indicate that the PRC government is investing considerable efforts into resolving bankruptcy proceedings in an effective and efficient manner.
However, due to the infancy of both initiatives, the empirical effects of both the Website and the new bankruptcy courts will become more apparent over time.
The developments in detail
New information website for bankrupt enterprises
The Website was set up after the SPC issued the following three notices on 26 July 2016 (the Notices):
- Issues Related to the Use of Judges’ Work Platform in Enterprise Bankruptcy Cases (Trial Draft)
- Issues Related to the Use of Bankruptcy Administrators’ Work Platform in Enterprise Bankruptcy Cases (Trial Draft) and
- Supreme People’s Court’s Rules Relating to Information Publication of Enterprise Bankruptcy Cases (Trial Draft)
The Website is a new centralised information system aimed at increasing transparency and credibility in the enterprise bankruptcy process. The Website will be used by the people’s courts and bankruptcy administrators to disclose information and publish notices during the bankruptcy process, including legal documents, debtor information and creditor claims. Debtor information will include the debtor’s latest annual reports and balance sheets.
The guiding principle is that the information published on the Website should be consistent with the People’s Court records. To further promote the use of the Website, several provisions in the Notices require any information disclosed through traditional means to be also published on the Website and such publication will have the same legal effect as if the information had been disclosed or submitted through traditional means.
The Website is split into the following two platforms:
- judge’s working platform and
- bankruptcy administrator’s working platform
Judge’s working platform for applicants
Applicants for compulsory enterprise bankruptcy can submit their applications on the Website through the judge’s working platform. The people’s court must notify the applicant of acceptance, rejection or the requirement for supplemental documents in relation to the application within 7 days from the date of the application. Once the People’s Court approves the application, the applicant must still submit the physical documents with the People’s Court.
Bankruptcy administrator’s working platform for creditors and restructuring investors
Creditors can take the following actions through the bankruptcy administrator’s working platform:
- submit their claims by uploading the relevant documents onto the Website
- attend creditors’ meetings and vote and
- challenge a bankruptcy administrator’s decision on a claim
The Notices also specify that all of the above actions have the same legal effect as if the creditor had conducted them through traditional means.
Restructuring investors can also request specific information from the bankruptcy administrator pursuant to the relevant restructuring settlement agreement through the Website.
New bankruptcy courts
The Beijing bankruptcy court was established pursuant to the Notice Concerning the Plan for Establishing Liquidation and Bankruptcy Trial Divisions in Intermediate Courts issued by the SPC in August 2016 (the Plan). The Plan aims to establish bankruptcy courts under People’s Intermediate Courts across the PRC and increase the number of judges and support staff focusing on bankruptcy-related issues.
In light of the economic downturn, the Plan was implemented in response to the steady increase in compulsory enterprise bankruptcy cases in the PRC. Specifically in Beijing, there were 117 cases in 2013, 192 cases in 2014, and 311 cases in 2015. It is likely that the number of bankruptcy cases in the PRC will continue to rise. PRC officials have indicated that the aim of these specialised bankruptcy courts is to help facilitate the timely rebirth of companies through restructuring and settlement, and the efficient liquidation of companies with no prospects of recovery.
Traditional position and limitations
In June 2006, the Enterprise Bankruptcy Law of PRC came into effect (the EBL). The EBL is the main law governing enterprise bankruptcies, restructurings and settlements in the PRC. Bankruptcy applications are made in accordance with Article 8 of the EBL and PRC courts must decide whether or not to accept a bankruptcy application within 15 days of the receipt of the application. In accepting an application for bankruptcy, the PRC court will also designate a bankruptcy administrator.
Despite the EBL being effective for more than 10 years, the number of enterprise bankruptcy cases has been sparse over the years. It has been reported that some reasons for this include the lack of qualified judicial personnel and the low acceptance rate of bankruptcy applications by PRC courts. Bankruptcy cases involve complex legal and political issues which are time consuming to deal with and highly demanding on judges. Further, local governments tend to discourage bankruptcies because of the negative impact it may have on the local economy, tax revenues and credit ratings.
Instead of having to apply or claim through traditional means, applicants and creditors can now make applications and claims more conveniently through the Website. The setting up of dedicated judicial resources for enterprise bankruptcy proceedings will better position the PRC for the increasing number of enterprise bankruptcy cases. Despite the convenience, applicants and creditors should still obtain legal advice before utilising the Website to exercise their rights.
Although the practical impact of the Website and bankruptcy courts will not be clear for some time, these initiatives are positive steps forward for the PRC and promote greater supervision, efficiency and transparency in the enterprise bankruptcy process.