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bankruptcy, insolvency

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

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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:

 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;

Improve information about 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.

Improve 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.

 

Solicitation of public comments on the NRDC website

 

 

bankruptcy law, big data, Uncategorized

Supreme People’s Court releases 2016 bankruptcy data

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7427ea09324917a26ee719The Supreme People’s Court (SPC) issued 2016 data on bankruptcy cases on 24 February: 5665 cases were accepted by the Chinese courts while 3602 were closed.  This is up substantially from 2015, when 3568 cases were accepted.  This is an increase of 53.8% over 2015.   Of these, 1041 were bankruptcy reorganization cases, up 85.2% over 2015. As this blog has previously reported,  long delays in filing bankruptcy cases have meant that practically all bankruptcy cases have been liquidation rather than reorganization cases. This is contrast to the downward trend in bankruptcy cases 2005-2014, shown in the graph published on this earlier blogpost. These numbers represent only a tiny proportion of what the Chinese government terms “zombie enterprises,” but it does show that the SPC has been doing its part to serve the nation’s major economic strategies.

What has the SPC done to support this important government strategy highlighted in the 5th Plenum?  In reverse chronological order, a quick list of some of the highlights:

  1. In February, 2017, the SPC issued guidance  to the lower courts on transferring cases that are in debt enforcement proceedings into bankruptcy, so that bankruptcy reorganization has a chance of working. Justice Du had flagged the importance of this a year ago. The Zhejiang Higher People’s Court piloted measures because the courts of that province are piloting bankruptcy reforms. As reported in a December, 2016 blogpost, close to half (40-50%) of the unsatisfied enforcement cases are ones that are wholly unsatisfied, with a goodly portion involving corporate judgment debtors. Judge Du pointed out that unsatisfied judgments because of local protectionism have led to conflicts between creditors and “fierce” conflicts between courts. He called for courts not to engage in “buck passing” on enforcement cases that are transferred to another court for bankruptcy procedures.
  2. In December, 2016, the SPC and lower court judges (as well as Chinese bankruptcy practitioners and scholars) were involved in dialogue with American bankruptcy judges and practitioners on bankruptcy issues, under the framework of US Department of Commerce initiative
  3. On 1 August 216, launched a bankruptcy electronic information platform  (it harmonizes with President Zhou Qiang’s promotion of information technology in the Chinese courts). According to the SPC’s press release, close to 9000 cases are in the database. The platform has assembled relevant documents on some high profile cases, such as Dongbei Special Steel. This platform has received a good market response with 9,760,000 page views as of early February, 2017 (likely to be primarily bankruptcy professionals).
  4. In June, 2016, as this blog has reported earlier, the SPC has required lower courts to establish specialized bankruptcy divisions (4 on the provincial level, 47 intermediate courts, and 22 basic level courts).  One of the aims of the SPC is to create a corps of more competent judges to handle bankruptcy cases. Given the link between the bankruptcy of large state owned enterprises and social stability highlighted by judges writing on this topic previously, serving as a bankruptcy judge in China requires a set of skills unneeded in other jurisdictions.
  5. As more and more companies go into bankruptcy, (as highlighted in this blogpost), more labor litigation can be expected. Senior SPC judges have highlighted that people are increasingly aware of their rights. Those with the means are going to court to try to protect them. The SPC is likely to work on technical issues highlighted in the report such as: how to characterize labor claims in bankruptcy, and whether they should be treated as labor disputes or claims against the bankruptcy estate; whether labor disputes needed to be submitted first to labor arbitration; how the courts can better obtain files from labor arbitration authorities and can ensure labor disputes are addressed and not avoided; and how to ensure that bankrupt enterprises pay social insurance payments for their employees.
  6. Expect to see the SPC focus on bankruptcies (or reorganization) in important areas of the Chinese economy, such as real estate.  This analysis published by a member of the Shanghai Bar Association highlighted some of the complex interests relating to the bankruptcy reorganization of real estate companies : is it practicable;  the workers; the lender, who are often private (shadow) lenders; the individual purchasers. These cases generally involve a string of companies.

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    ©Evan Eckard