Supreme People’s Court & National Development & Reform Commission Solicit Public Comments on Bankruptcy (insolvency)-Related Policy Document

Solicitation of public comments on the SPC website

This post focuses on one discrete but important initiative of the Supreme People’s Court (SPC)–improving its bankruptcy system. 

Late in the afternoon of 18 September, the Supreme People’s Court (SPC) and the National Development & Reform Commission (NRDC) separately posted on their official websites a solicitation of opinions/public consultation on a policy document directed towards improving measures related to China’s bankruptcy (insolvency)-system and ensuring that bankruptcy administrators can carry out their duties according to law 关于完善企业破产配套制度保障管理人依法履职 进一步优化营商环境的意见(征求意见稿).  The NRDC link is available here .  For some reason, the document has been posted as a Word document, but I have uploaded it here. It has been reposted on several Wechat accounts as well. As mentioned before, soliciting views from the public means that views “from the market” are needed. The usual practice when the SPC drafts policy documents is quite often soliciting the views of certain experts outside the court system in the drafting process (as well of many in the court system and in relevant departments).  This seems to be changing, as the SPC has solicited public opinion on several policy documents in the past year. As previously mentioned, soliciting views from the public requires high level internal approval at the SPC. The deadline for public comments is October 18, 2020, but presumably in practice a bit of flexibility is possible. The notice direct comments to be sent by fax to 86-10-67556808 or 86-10-68502342, or alternatively, by email to: pochanzhidu@163.com.  As will be clear from my brief summary, the document evidences the many complexities involved.

The document is linked to a multi-institutional document of over a year ago on reforming China’s system for improving entities exiting the market 加快完善市场主体退出制度改革方案, of which the SPC is only one of many institutions.

  As for what the practical link is to the real economy–one discrete example is that according to this report in the 21st Century Business Herald that as of early September, at least 500 real estate developers have made bankruptcy filings (compared to 450 for all of 2019).  The recent SPC policy document on the economy 为加快完善社会主义市场经济体制提供司法保障)has a paragraph that touches on many bankruptcy related issues (I regret to say I didn’t unpack that paragraph sufficiently), seen here:

As machine translated:

5. Improve the exit mechanism of judicial treatment for market players. Grasping the main line of supply-side structural reforms, in accordance with the requirements of the National Development and Reform Commission’s “Accelerating the Improvement of Market Entities Exit System Reform Program”, speed up the clearing of “zombie companies”, give full play to the rescue function of bankruptcy and reorganization, and strengthen the management of troubled but have operational value Protection and treatment of enterprises. Refine the implementation rules of the reorganization procedure, and strengthen the effective connection of the out-of-court reorganization system, the pre-reorganization system and the bankruptcy reorganization system. Improve the working mechanism for the government and the court to coordinate the handling of corporate bankruptcy incidents, and explore methods and measures to comprehensively manage corporate dilemmas and co-handle financial risks. Expand and extend the social functions of the bankruptcy system, and promote the establishment of a socialist market entity rescue and withdrawal mechanism covering various market entities such as for-profit legal persons, non-profit legal persons, unincorporated organizations, and natural persons. Improve cross-border bankruptcy and related enterprise bankruptcy rules, and promote the resolution of judicial problems such as cross-border bankruptcy and bankruptcy of complex entities. Further improve the procedures for the initiation and hearing of corporate bankruptcy, and increase the intensity of the implementation of transition to bankruptcy. Optimize the administrator system and management model, and promote the improvement of the protection mechanism and supporting policies for the rights and interests of relevant entities during the exit process of market entities. Strengthen the professionalization and informatization of bankruptcy trials, and improve the quality and efficiency of bankruptcy cases.

This blogpost will briefly summarize some of the main points in the document (primarily the headings of each article) with occasional quick comments in italics) and leave it to those with real expertise in this area to explain the issues in greater detail:

Starting with the section on basic principles:

1) Combination of guarantee and supervision. Relevant government departments and financial institutions shall actively support and cooperate with managers to independently perform duties such as taking over, investigating, and disposing of the property of bankrupt enterprises in accordance with the law…–this is consistent with China’s state-led economy.  (The role of a US bankruptcy administrator , for example is different) This basic principle is linked with 18) on “establishing a normalized government/courts unified coordinated system” (“要建立常态化的府院破产统一协调机制”). 

Machine translation) of Article 18: Local people’s governments at all levels must actively support the people’s courts in bankruptcy trials, give full play to the government’s active role in bankruptcy procedures in accordance with the law, and avoid improper interference in bankruptcy judicial practices and the work of administrators. Encourage local people’s governments to establish a normalized coordination mechanism between government and courts. Relevant government departments responsible for maintaining social stability, funding guarantees, credit restoration, business cancellation, and corporate taxation should participate as member units.

In this late 2017 blogpost, I discussed some of the problems. A detailed article by a judge from Shanghai bankruptcy tribunal details many of the issues.  The #2 Circuit Court (its circuit is the northeastern provinces, China’s rustbelt) held a conference recently on bankruptcy in which a senior # Circuit Court judge commented on some of the issues:

(machine-translation) government-court linkage is not a new idea. It has been explored for nearly ten years and some experience has been accumulated, but the development is not sufficiently balanced and the results are hardly significant. The main reason is that on the one hand, judges do not have a clear understanding of the regularity and particularity of bankruptcy reorganization, and lack the initiative to communicate with the government; on the other hand, the government has insufficient knowledge of bankruptcy and has a tendency to stigmatize and avoid it. To this end, it is necessary to deepen the understanding of the necessity and importance of the linkage between the government and the court; to enhance the initiative of the court, especially the leading cadres of the court…

2. Strengthen data sharing and business collaboration. 

3. Employee protection;

4. Prevent debt evasion;

Better the notification system for changes in status of the bankrupt enterprise 

This title understates the content here, which includes:  

  1. independent public announcement system of bankruptcy status (and related public announcement issues);
  2. better implementing a simplified cancellation system of business registration for bankrupt enterprises;
  3. create registration system for the restriction of employment of relevant personnel in bankrupt enterprises– (linked to the social credit system, to make it more difficult for managers who caused a bankruptcy to be reemployed);
  4. Establishing and perfecting business processes that are connected with bankruptcy procedures--on support by involved financial institutions, but also mentioning systems for the bankruptcy of financial institutions (it appears we can expect more failures in the financial sector;
  5. Facilitate the opening and renewal of the administrator’s [bank ] account;
  6. Support the administrator to take over and investigate the debtor’s bank account;
  7. Assist and cooperate with the advancement of bankruptcy procedures, calling on banks to better cooperate in creditor committee procedures and mentioning again the bankruptcy of financial institutions–that the administrator must coordinate and communicate with the regulatory authorities to maintain the stability of the financial system (金融机构破产的,管理人与相关金融监管部门应当加强协调沟通,维护金融体系的稳定);
  8. Strengthen financing support for bankrupt and reorganized enterprises;
  9. Improve and reorganize the financial credit of enterprises, to make it possible for companies under reorganization to be eligible for credit.

Improve the handling of tax-related affairs of bankrupt companies

10. Guarantee the supply of necessary invoices for bankrupt enterprises (companies should coordinate with the tax authorities and vice versa);

11. Tax owed by the bankrupt enterprise shall be written off in accordance with the law;

12. Facilitate the cancellation of tax registration;

13. Restore the tax credit of enterprises (undergoing reorganization);

14. Implement the pre-tax deduction policy for income tax in the reorganization and settlement.

Improving asset disposal

15. Effectively activate land assets–this means ease procedures for the sale of land use rights;

16. Properly determine the ownership of assets;

17. Legally dissolve the property preservation measures of bankrupt enterprises–this is directed at better intergovernmental cooperation if a company undergoing bankruptcy procedures has had its property subject to some sort of asset freezing procedures;

Strengthening organizational guarantees

18. (set out above)

19. Strengthen information sharing, communication and coordination.

From the topics listed above, the many issues involved in getting a bankruptcy system appropriate for China’s economic system in place can be seen. 

Solicitation of public comments on the NRDC website

 

Supreme People’s Court Monitor in People’s Court Daily

Earlier this month I had the honor of receiving an invitation from He Fan (何帆), head of the planning department of the Judicial Reform Office of the Supreme People’s Court (SPC) to write a short article on the SPC case database (裁判文书网)and its impact outside of China for People’s Court Daily (人民法院报). I saw the invitation as a significant opportunity to be able to address the readers of the SPC’s media at this historical point. Fortunately, Professor He Haibo of Tsinghua University School of Law (who along with colleagues) has done extensive research on the case database), had been invited earlier. His article had already been published when I received He’s invitation, giving me an example to consider.

I drafted the article in English and was honored to be able to persuade Fu Panfeng (傅攀峰), assistant research fellow with the International Law Institute of the Chinese Academy of Social Sciences, to transform it into readable Chinese. Several readers of drafts made insightful suggestions which were incorporated into the final version.

The article was published on 11 September in the SPC’s electronic media (Wechat and Weibo)–see the screenshot below from the beginning of the Wechat version. It was published on 13 September in the People’s Court Daily (see the screenshot above). Several Wechat public accounts have republished it, including that of Hu Changming, of the Law Institute of the Chinese Academy of Social Sciences (his version has one additional sentence). The English version below is not identical with the Chinese version, because the amendments occurred in several rounds.

I am very honored to be invited to provide some thoughts about the impact of the 裁判文书网 from an international perspective. When I first started to become interested in the developments of the Chinese courts about 30 years ago, Chinese law could only be found only in books, with few published cases. I have seen the development and impact in China of the 裁判文书网 with my own eyes. Much is made of the number of judgments that have been posted, but I will bring the focus back to each individual judgment.

Outside of China, the 裁判文书网 has had a great impact on a broad range of people, because it is one of main faces of Chinese justice that the world sees. Although it may not be apparent, every judgment or ruling has many readers—the parties themselves plus many unknown readers inside and outside of China. It is from those documents that readers from far away will consider whether that court gives a fair hearing to the parties involved, regardless of the crime committed or nature of the breach. Readers will consider whether the facts presented support the legal conclusion, whether the legal conclusion is supported by logical, clear and persuasive reasoning, how was the case decided, and for criminal cases, whether the punishment appears appropriate given the facts set out. To the readers outside of China, each judgment or ruling is an original and unfiltered voice of Chinese justice and gives a view of many aspects of Chinese society and economy, historical and contemporary. We note that the legal requirement is that all judgments and rulings that can be published are published.

As to who outside of China is concerned about the judgments and rulings on裁判文书网, that includes a broad range of types of institutions and people. One type of institution is foreign governments and their departments. The foreign affairs, commercial, intellectual property authorities of foreign countries look to judgments and rulings posted on the 裁判文书网 to understand how the Chinese courts consider cases that involve its citizens, companies, and other institutions, especially if national diplomats monitor the particular cases. If cases are translated into foreign languages, foreign judges may read them to understand how Chinese judges consider similar cases.

Other frequent readers of cases in the 裁判文书网 are private lawyers, in-house counsel and executives, who may directly or indirectly oversee company-related litigation in China. It enables them to make more informed strategic decisions about many aspects of doing business in China, because they can search previous similar cases. Will a Chinese court support their claim against a party who has breached its obligation to the company, regardless of the nationality of the company? Will a Chinese court protect the intellectual property rights of the foreign company in the event of breach? In a dispute, is the opposing party’s settlement offer reasonable?

Non-profit organizations, whether religious, or secular, consult the 裁判文书网. How do Chinese courts protect the rights of the religious, or, for example, members of environmental organizations?

Foreign journalists, too, use the 裁判文书网, too, to understand from the sources what Chinese justice means in action.
Two other categories must be mentioned–academics and students abroad as well individuals. Many professors and students at foreign universities undertake big data studies involving cases in the Chinese courts, looking to the 裁判文书网.
Finally, foreign individuals who work, study, and live in China also may be readers of Chinese judgments or rulings. Will a Chinese court protect the rights of a foreign individual whose Chinese employer has failed to comply with his legal obligations?

The foreign community is aware of the requirement from this summer for judges to search for like cases. It has generally been considered to be a positive development, as on the one hand, it enables like cases to be decided similarly, and formalizes the practice of lawyers and other litigation representatives submitting cases for judges to consider.

As to suggestions from outside of China, we would suggest on the one hand, that requirements to delete sensitive personal or corporate information be strengthened, so that the 裁判文书网not be used as a way to obtain confidential corporate or sensitive personal information.

The 裁判文书网 is an important public good, and the technical aspects should be made convenient and as user-friendly as possible to all users.