Review and Future Prospects of China’s Enterprise Bankruptcy Law
The year 2024 marks the seventeenth anniversary of the Enterprise Bankruptcy Law of the People’s Republic of China. Since its implementation on June 1, 2007, this law has become a fundamental pillar of China’s market economy. It has played a crucial role in facilitating the orderly exit of enterprises from the market, protecting the rights of creditors, and fostering high-quality economic development. However, as the economic landscape evolves and the needs of businesses become more diverse, the Enterprise Bankruptcy Law faces new challenges and necessitates updates.
On April 16, 2024, during the 23rd meeting of the Standing Committee of the 14th National People’s Congress, it was officially announced that revising the Enterprise Bankruptcy Law would be part of the annual legislative work plan. This decision underscores China’s commitment to refining the mechanisms for market exits and indicates significant upcoming legal reforms to adapt to contemporary economic dynamics. The revision process reflects a synthesis of the practical experiences gathered over the past 17 years and aims to anticipate and respond to future economic and legal needs. By reviewing and looking forward to China’s bankruptcy law system, we will better understand the key role of this law in promoting economic transformation and maintaining market order.
I. Review of Bankruptcy Trials in 2023
In 2023, amidst China’s rapidly changing economic environment, significant progress and adjustments were made in the realm of bankruptcy adjudication. Confronted with both domestic and international economic fluctuations and challenges, China’s judiciary has shown robust capabilities in addressing corporate distress and market uncertainties. In 2023 alone, Chinese courts concluded a staggering 29,000 insolvency cases involving claims totaling RMB 2.3 trillion. These numbers highlight not only the pervasive impact of economic volatility and operational difficulties faced by enterprises but also the critical role and efficacy of China’s legal system in mitigating these issues.
Out of these bankruptcy cases, 1,485 involved reorganization or settlement, with successful outcomes being particularly noteworthy. The effective operation of these mechanisms helped 762 enterprises to recover, avoiding liquidation and safeguarding 118,000 jobs. This approach underscores that China’s bankruptcy system is not merely about liquidating distressed assets but is also fundamentally about rescuing businesses, preserving employment, and promoting economic rejuvenation.
The scope and adaptability of China’s judiciary in handling bankruptcy cases are evident. 2,445 primary people’s courts handle initial bankruptcy proceedings. More complex cases are managed by 356 intermediate people’s courts, while 23 high people’s courts oversee and guide the overall judicial process. Additionally, 17 specialized bankruptcy courts focus on intricate and large-scale cases, particularly in economically vibrant regions such as Jiangsu, Zhejiang, and Guangdong, where the volume of bankruptcy cases is highest. This tiered and specialized court structure reflects China’s strategic approach to addressing regional economic disparities and ensures that bankruptcy cases of varying complexity are managed effectively and professionally.
Insolvency administrators are pivotal in the bankruptcy process, responsible not only for the technical tasks of asset liquidation and debt repayment but also for balancing the interests of all parties involved to ensure fairness and efficiency. Currently, China boasts 230 insolvency administrator associations that enhance the quality and capability of administrators through professional training and resource support. With 6,289 registered insolvency administrators nationwide, including 3,728 active practitioners, they play a dual role as both executors of legal procedures and champions of enterprise rehabilitation and creditor protection.
The data and cases from 2023 demonstrate that China’s bankruptcy adjudication has advanced significantly in both quantity and quality, showcasing the system’s increasing specialization and effectiveness.
II. Industry insolvency trends under the influence of policy
Since 2016, the government’s focus has shifted towards improving the business environment to promote economic growth and innovation. Various rounds of tax and fee reductions have been implemented to alleviate financial pressures on businesses, streamline administrative processes, lower market entry barriers, and encourage innovation and entrepreneurship. These policies have eased operational pressures for many businesses and have driven the rapid growth of emerging sectors such as the internet economy and e-commerce. However, they have also hastened the decline of traditional retail sectors, with the rise of online shopping modes significantly impacting traditional retail businesses. In 2023, a large number of traditional wholesale and retail enterprises went bankrupt, totaling 25,290 cases, reflecting their struggle to adapt to the rapidly evolving market conditions.
The financial sector experienced notable turbulence in 2023, leading to several bankruptcies. Since 2017, the implementation of financial deleveraging policies aimed at reducing systemic risks within the financial system has tightened regulations on financial institutions, particularly concerning shadow banking and high-leverage activities. As these policies persisted, some smaller financial institutions failed to adapt to the new regulatory environment and sought dissolution or bankruptcy. For instance, in 2023, 11 financial companies filed for dissolution or bankruptcy.
The real estate sector has been profoundly affected by both policy regulations and market fluctuations in recent years, resulting in a surge of bankruptcies. Since 2021, regulatory measures in the real estate sector, such as purchase restrictions, tightened lending policies, and controlled land supply, have been introduced to cool the overheated market and curb speculation. However, these measures have also strained the financial positions of some enterprises. Coupled with industry cycles, these policies have led to 18,883 real estate company bankruptcies. This includes major players like Evergrande Group, China Aoyuan, and Sunac Group, which have had to seek recognition of their overseas debt restructuring in the U.S. District Court for the Southern District of New York.
Overall, these policy implementations have profoundly influenced various industries, fostering growth and innovation in some areas while accelerating adjustment and market exits in others.
III. Trends in cross-border insolvency and international cooperation
As globalization deepens, China’s economy is becoming increasingly intertwined with the global market, making the handling of cross-border bankruptcy cases ever more critical. Cross-border bankruptcy involves coordinating laws and interests across multiple jurisdictions, presenting significant challenges but also creating opportunities for enhanced international cooperation and judicial trust.
In recent years, Chinese courts have adopted a more proactive and sophisticated approach to managing cross-border bankruptcy cases, as evidenced by several landmark cases. For instance, the Beijing Bankruptcy Court formally recognized the insolvency ruling of the Aachen District Court in Germany, demonstrating China’s respect for and acknowledgment of international insolvency proceedings and marking deeper judicial cooperation between China and Germany.
Similarly, the Shanghai Third Intermediate People’s Court recognized the liquidation proceedings of a Hong Kong company, a first for Chinese courts in recognizing an insolvency decision from the Hong Kong Special Administrative Region. This precedent acknowledges Hong Kong’s unique legal status under the “one country, two systems” framework and sets the stage for more extensive judicial cooperation with Hong Kong in the future. Additionally, the recognition of the Tokyo District Court’s civil reorganization by Chinese courts further illustrates the openness and adaptability of China’s judiciary in handling cross-border bankruptcy cases from different legal systems.
These cases highlight the growing sophistication of China’s legal and judicial capabilities in managing cross-border bankruptcies and the strengthening of collaborative relationships between Chinese and international courts. As economic globalization continues and multinational corporations and cross-border investments increase, the frequency of cross-border bankruptcy cases is expected to rise. This trend requires Chinese courts to become more familiar with international insolvency frameworks and to strengthen communication and cooperation with foreign judicial bodies.
IV. Future Outlook: Prospects for China’s Bankruptcy Laws
Looking ahead, China’s insolvency legislation and judicial practice are expected to achieve important breakthroughs in a number of key areas as follows:
(i) Revision of the Enterprise Bankruptcy Law:
The forthcoming revision of the Enterprise Bankruptcy Law is expected to bring about a series of significant changes that are designed to better address the complex challenges facing the current economic environment and legal system. The revisions are likely to include enhanced creditor protection, optimization of the bankruptcy process and improved efficiency of enterprise reorganization.
(ii) Impact of the new company law:
The newly revised company law will have a profound impact on the way in which companies respond to potential insolvency. The new law requires companies to consult labor unions and employees when filing for bankruptcy, which will change the way companies interact with creditors and shareholders and further strengthen corporate governance and transparency.
(iii) Bankruptcy treatment of the real estate industry:
Due to the specificity and scale of the real estate sector, particularly the complexities involved in cross-border US dollar debt restructuring, the handling of insolvency cases in this sector remains a top priority. The government and the judiciary need to continue to focus on and improve the insolvency treatment mechanism for real estate companies in order to effectively deal with the high risk and complexity of this industry.
(iv) Insolvency treatment of financial institutions:
Financial institutions have a key role in the economic system and the development of their insolvency management strategies is particularly important. In the future, China will need more complete and specific insolvency management programs for financial institutions to ensure that when financial institutions face insolvency, their assets and liabilities can be dealt with swiftly and efficiently to prevent the propagation of systemic risks.
(v) Standardization and refinement of insolvency management work:
Continuous promotion of standardization and refinement of insolvency management work is the key to improving the efficiency and fairness of insolvency proceedings. By continuously improving and standardizing bankruptcy administration processes and regulations, China can ensure that bankruptcy cases are handled more fairly and efficiently, thereby maintaining social and economic order.
As China’s legal system continues to improve and enforcement mechanisms are strengthened, the country’s legal framework for insolvency will become increasingly mature. This will not only provide a solid legal foundation for optimizing the business environment, but also provide strong safeguards to protect the legitimate rights and interests of creditors and debtors, as well as contribute to the high-quality development of China’s economy.