China's New Bankruptcy Law Brings Its System More in Line with International Standards

February 15, 2007

After approximately 12 years in the making, China's first comprehensive bankruptcy law (the "Bankruptcy Law") will take effect on June 1, 2007.  This new Bankruptcy Law, passed on August 27, 2006, replaces the Interim Enterprise Bankruptcy Law of the People's Republic of China (Trial Implementation) enacted in 1986, which has been applied primarily to state-owned enterprises ("SOEs") and varied in application and result from province to province.  Inconsistent treatment for different legal entities under the 1986 bankruptcy law created uncertainty, particularly for foreign creditors of an insolvent enterprise.

The new Bankruptcy Law is intended to uniformly apply the same procedure to virtually all business enterprises, including SOEs and private enterprises.  If implemented properly, it should provide to investors and lenders with more certainty when a bankruptcy occurs regarding the potential recovery of the capital invested and loans granted.  In addition, the new Bankruptcy Law dramatically reduces government involvement in the process.  It also provides an increased role for creditors and enhanced priority of treatment for creditor claims, and recognizes foreign judgments regarding property located in China under certain circumstances.

This e-alert summarizes some of the important concepts and procedures in the Bankruptcy Law and the substantive developments underlying these new provisions.

Click here to read the e-Alert.


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