From Global Convergence in China's Enterprise Bankruptcy Law 2006 to Divergent Implementation : Corporate Reorganization in China

The drafting of a new bankruptcy law for China proved to be a lengthy and agonizing process, but a new Enterprise Bankruptcy Law was finally enacted in 2006; China had reviewed the experiences of other countries and sought to introduce a new law that suited its socio-economic and political conditions but which was comparable with international practice in this area. The introduction of a new insolvency law which provided for corporate rescue or reorganization of companies was the most distinctive feature of this process of legal modernization, which closely followed reforms to China's Company Law and its Securities Law. Following the enactment of these new bankruptcy law provisions, one might have expected that they would have been widely applied by the courts. That was not to be. Based on data collected by Zhang, we found, for example, that although there were over 3,200 bankruptcy cases heard by PRC courts in 2007, (and 2,955 cases heard in 2008; 2,434 cases in 2009 and 1,973 cases heard in 2010) there has been very limited application of the corporate reorganization legislative provisions; this was the case in most provinces apart from three that were most developed economically (Guangdong, Zhejiang and Jiangsu), in which two thirds of rescue or reorganization cases were heard.We found that about 100 reorganization cases had been heard by Chinese courts over a three year period after the passage of the new Enterprise Bankruptcy Law. Of these, 31 were listed companies and 74 were non-listed. These rescue cases comprised an average of about 0.98% of all bankruptcy cases heard in China. This is in contrast to the USA where rescue filings comprised an average of 22.8% of all bankruptcy filings; and the UK (England and Wales) where the comparable figure was 8.23%. This paper explores the reasons for the failure of Chinese courts to apply these legal provisions, despite the evidence of widespread corporate failure. In a high percentage of cases (40 out of 70 reorganization cases), a liquidation committee was appointed as the administrator of the bankrupt company; such committees were heavily influenced and controlled by local government officials. This calls into question the future of the administrator system as it presently operates in China. The present research suggests that corporate reorganization has become politicized by local government in China. The paper further explores the conduct of local government upon corporate reorganizations in China