Supreme People’s Court releases 2016 bankruptcy data

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.

How Zhejiang courts support its economy

zhejiang

My apologies to blog followers for my absence.  I will address Zhou Qiang’s comments on judicial independence in a later blogpost, for which I want to do some more detailed research than is possible at this time.

This blogpost will look at a less contentious question–what does the profile of civil and commercial disputes in Zhejiang province mean for the Zhejiang/Chinese economy and the role of the courts (in civil/commercial disputes).

Judge Zhang Hengzhu, head of the #2 civil division of the Zhejiang Higher People’s Court (High Court), spoke in early January at a conference organized by Tiantong & Partners, the boutique litigation law firm on civil and commercial disputes in his province.

What is special about Zhejiang?

The Zhejiang economy is dominated by small and medium enterprises (SMEs), many integrated with the global economy.  These companies are private, family-owned companies. Judge Zhang noted that these companies tend to have irregular corporate governance, with vague lines between property ownership by the company founder, the company, and affiliates.

Civil & commercial litigation in Zhejiang

Zhejiang (and Jiangsu) are the two most litigious provinces in China. The Zhejiang courts accepted over a million cases (1,112,900) in the first nine months of 2016, up 11% over 2015, of which over half (572,300) were civil and commercial cases, up 7% year on year.  [Comment–year-end numbers will be even higher.]

A significant proportion of those cases during that period were bad debt-related. About 17% of those cases (136,500) were private (shadow) lending disputes, involving total amounts in disputes of RMB 78.366 billion (almost USD 11.4 billion).  Private/shadow lending in Zhejiang is a supplement or replacement for bank financing. During the same period, about half as many financial disputes were accepted (85,400), up almost 20%, but the total amounts in dispute were RMB 232 billion, or USD 33.79 billion).  [Comment–year-end numbers will be even higher.]

How Zhejiang courts support SME economy

Judge Zhang commented on what the Zhejiang courts have been doing to support the province’s SME-dependent economy.  Those actions, which appear unusual those unused to the Chinese judicial system, include:

  • Taking the lead to generate judicial guidance on private (shadow) lending.  In 2009,  the High Court was the first to issue provincial level guidance. which it updated in 2013.
  • In 2013, it issued a concurrence (in the form of a meeting summary) with the provincial procuratorate and public security department on criminal law issues relating to collective fundraising.
  • The High Court is working with the provincial financial institutions on the disposal of non-performing assets.
  • It was one of the first provincial courts to take steps to generate judicial guidance on bankruptcy law and to take steps to deal with zombie enterprises (after raising it with the provincial Party secretary and government, who issued written instructions (批示)。
  • In late 2016, establishing a joint mechanism with fourteen departments of the provincial government to advance the use of bankruptcy and related issues, such as re-employment of workers, use of land formerly used by bankrupt enterprises, generating bankruptcy-favorable tax policies (document on the mechanism found here).

 

 

 

Chinese courts recruiting more bankruptcy forces

imgres-1The Supreme People’s Court (SPC) recently issued a notice  (notice concerning the plan for establishing liquidation and bankruptcy trial divisions in intermediate courts)(bankruptcy division notice) (关于在中级人民法院设立清算与破产审判庭的工作方案) aimed at establishing liquidation and bankruptcy trial divisions in China’s intermediate courts and increasing the number of judges and support staff focusing on liquidation (winding up companies not in bankruptcy) and bankruptcy-related issues, to implement the central leadership decision to use bankruptcy law to reduce the number of zombie enterprises.

SPC Judge Du Wanhua had foreshadowed this development in many previous statements. The SPC required the concurrence of the Central Staffing Commission, a Party-State organization that regulates staffing in Party and state entities. A summary of the bankruptcy division notice follows below:

  • Establish bankruptcy divisions in intermediate courts, with some courts taking the lead;

In the directly administered cities, at least one intermediate court should establish a bankruptcy division, intermediate courts in provincial capitals and cities of deputy provincial level also. At lower levels, it will depend on economic development, local need, and professional infrastructure, with provincial courts to make arrangements with staffing authorities.

The following locations will take the lead in establishing bankruptcy divisions: Beijing, Shanghai, Tianjin, Chongqing; and the provincial capitals (and cities of deputy provincial level) of Jilin, Jiangsu, Zhejiang, Anhui, Shandong, Henan, Hubei, Hunan, Guangdong, and Sichuan. These arrangements are to be put in place by the end of July, with the other areas to follow by year end. This blog has reported on previous bankruptcy developments in Jiangsu,  Zhejiang, Anhui, Shandong, and Guangdong.

  • Sets out the work of  bankruptcy divisions;

Try compulsory liquidation and bankruptcy cases, guide lower courts trying these types of cases; coordinate with other courts on these issues; manage and train bankruptcy administrators.

  • Describes the jurisdiction of the bankruptcy divisions;

Intermediate courts should be responsible for the compulsory liquidation and bankruptcy of companies registered at the business registration authorities (administration of industry and commerce) of its own level and below, with variations possible if the provincial high court approves.

  • Staffing principles

Staffing should be according to judicial reform principles and linked to the caseload–the judges should be those familiar with liquidation and bankruptcy from the same or lower courts and they should have a clerk and judicial assistance on a 1:1:1 principle.

  • Measures needed

Improved measures are needed to supervise and evaluate liquidation and bankruptcy work; expedited liquidation and bankruptcy procedures need to be explored; promote reforms in trying liquidation and bankruptcy cases; put in place judicial responsibility (this relates to the judicial lifetime responsibility system announced in September, 2015) to ensure an honest judiciary.

  • Coordinate better with local Party/state authorities

Liquidation and bankruptcy divisions should report regularly to the local Party committee/government to seek their support and major issues should be reported to the SPC.

Some thoughts

This is a positive step although it cannot deal with the underlying political issues related to implementing bankruptcy law in China, particularly local government interference in bankruptcy cases.  Putting in place more qualified judges and support staff is a critical part of making bankruptcy law work.  The political support of the local authorities remains critical and the local judiciary provides a training and liaison function. The bureaucratic level of a troubled company (state owned enterprise) affects the ability of a court to deal its issues.

Academics reaching out beyond the universities and social media is playing a positive role in creating a corp of more competent bankruptcy specialists in the judiciary.  The Bankruptcy Law and Restructuring Research Center of the China University of Political Science and Law, directed by Professor Li Shuguang  has established a Wechat public account, which provides bankruptcy and liquidated news to the profession, including judges, as well chat groups in which Chinese bankruptcy professionals can share their experiences and tap into the experience and knowledge of others.

 

 

Chinese bankruptcy courts to become “hospitals for sick companies”

hospital-clipart-hospital3As recent blogposts  (and academic studies) have shown, Chinese bankruptcy courts have been acting as underused morgues rather than hospitals for ailing Chinese companies.  The Supreme People’s Court (SPC) anticipates major changes, because (as highlighted on this blog) the government has decided that a stake needs to be driven through the heart of zombie companies.

This blogpost will focus on the role that courts are to play in clearing up zombie enterprises.  But because the role of the courts in bankruptcy is linked to other government policies, it will also flag some significant ones that have not yet come to the attention of observers outside of China. It appears that behind the scenes, officials have been working on putting together the policy machinery to do so and that the process is ongoing.

In late February, the SPC convened a conference of bankruptcy judges and other officials on dealing with zombie enterprises in Hangzhou, Zhejiang Province, both to transmit the newest judicial policy on bankruptcy and to find out from local judges and other officials what the issues are.

Judge Du Wanhua, a senior SPC judge, has been designated to take the lead on bankruptcy law reforms. The location of the conference is intentional, because (as mentioned in an earlier blogpost), Zhejiang Province has been piloting new approaches to bankruptcy law. The Zhejiang Higher People’s Court has been working with government to promote bankruptcy related policies, but at the same time has emphasized that the courts need to hear cases independently. In 2015, the courts of that province accepted over 600 bankruptcy cases.

According to Judge Du, the “courts are to become hospitals for sick companies.” Listed below is the approach that the SPC is intending for the lower courts to take (with some of my comments).

  • The courts should promote more bankruptcy reorganization and conciliation, and diminish liquidation cases (a contrast to what has occurred in recent years).  (The SPC has promoted this approach through recent reports promoting reorganizations by the courts and is continuing to promote this in its pronouncements. Local governments are adopting policies to promote reorganization of companies.)
  • A market-oriented mechanism should be established which classifies zombie enterprises.  The mechanism should distinguish ones than can be saved through restructuring or conciliation procedures from the ones that should be liquidated.  The classification should fulfil the industrial development goals, targets, and other principles of the central government.  (But, Professor Liu Zhibiao, a leading economist suggested in a recent interview that it should the market to determine this, not government.)
  • The rights and interests of the state, workers, creditors, and investors should be protected (listed in this order).
  • A corporate restructuring bankruptcy information platform mechanism that uses modern information technology tools should be created to promote the greatest degree of success of corporate restructuring, and better use of economic resources.  (This is consistent with government (including SPC) policy promoting the use of information technology tools);
  • A unified coordination mechanism for bankrupt enterprises needs to be created under the local Party committee’s strong leadership and support of the relevant government departments to ensure cases are handled in an orderly manner. (However, in the fall of 2015, Ma Jian of the SPC’s research office pointed to local government interference in the acceptance, and trial of bankruptcy cases, as being an major issue.
    • A local court judge writing recently described a judge’s role: “bankruptcy involves the vital interests of many people, and directly affects social harmony and stability. Thus the social dimension of bankruptcy cases determines that the court can not ” go it alone” in bankruptcy cases. Some local governments do not want companies to go bankrupt for statistical , performance, maintenance of stability and other considerations.  [According to Professor Liu, it can have a negative effect on the performance evaluation of local officials.] The court should actively seek the support of the local government where the debtor is located, to provide good placement of workers of bankrupt enterprises, payment of wages, disposal of plant or other fixed assets disposal.  By communicating with relevant departments, policy support can be provided to help pay taxes , apply for transfer [of property], coordinate the interests of creditors, debtors , investors, employees and others) ;
  • Orderly mechanisms should be established to deal with wages, state tax, and the priority and realization of secured claims, unsecured claims.
  • Local courts should establish bankruptcy divisions and provide bankruptcy judges with better bankruptcy law training;
  • Procedures should be established to consolidate related bankruptcy proceedings in different courts;
  • Procedures for bankruptcy administrators should be drafted and their status should be improved;
  • Special funds should be established to pay for bankruptcies and bankruptcy administrators.

Related to this are the following government initiatives:

  • Local governments, such as Guangdong, are starting to issue policy programs on “supply-side reforms.” The Guangdong program, issued on 28 February, contains a section on bankruptcy. The policies reiterate and further detail the principles Judge Du enounced (and merit further analysis).
    • The Guangdong policies mention separate databases for bankrupt state-owned and non state owned enterprises, mentioning that special policies would be forthcoming for state owned enterprises and that courts would be given the “green light” to deal with the bankruptcy of zombie companies. Reflecting policies seen elsewhere, the Guangdong government is seeking to encourage private enterprises to assist in reorganizing state-owned zombie enterprises and is considering establishing special funds to assist companies to upgrade.
  • The central government is also looking to simplify procedures by which companies with no debts can be closed.  During 2015, the State Administration of Industry and Commerce announced that it was piloting reforms in a number of locations, first designating Shenzhen, the Pudong district of Shanghai, and several other locations, and subsequently expanded the locations.
  • Training sessions on bankruptcy law, either within the courts or with related government agencies and institutions. In late February, the Changsha (Hunan) Intermediate People’s Court held a training session with experts from the SPC (First Circuit Court) and professors of bankruptcy law from Beijing, while the local government in Quanzhou organized cross-institutional training.
  • Local courts (such as this one in Quzhou, Zhejiang Province) are providing reports to local government/Party Committees on what the courts can do.

But what are bankruptcy judges really doing?  If a recent message on Wechat is any indication, they are reaching out to their fellow judges for guidance and creating a chat group on how to deal with the many legal and social complexities that bankruptcy cases pose.

Can bankruptcy court “doctors” save zombie enterprises and their millions of employees?  It is very early days. What can safely be said is that bankruptcy and zombie enterprise related policies merit close monitoring by lawyers, the business community and others.