REGULATIONS
China's Parliament Adopts Bankruptcy Law
August 31, 2006
John R. Rieger

After working on a draft law for 12 years, the Chinese Parliament finally adopted a new bankruptcy law on Sunday August 27, 2006. The law was needed to replace out-of-date rules that have been in place since 1986 and applied only to state-owned enterprises. The new rules will apply to both private and state owned entities, including foreign companies.

The initial draft was originally submitted to parliament back in October 2004 after 10 years of drafting. It was expected that the document would have been passed in 2005. However it took longer than expected to get approved and passed. The law comprises 11 chapters and 136 articles and contains rules that are familiar to those in western countries.

The rules provide for the ordering of priorities for creditors and also allows for the opportunity for corporate reorganizations. The law allows for a "debtor in possession" provision with supervision by an administrator. The law will allow for the formation of a creditors committee which will now be able to elect the administrator which was not the case under the 1986 law.

From the view of a foreign company doing business in China, it provides additional security and guidance when extending credit to a company. The new rules will establish priority to credit which is secured which was not the case prior to this law. Under the 1986 law, workers were given priority status over corporate creditors. The new law allows creditors or financial supervision agencies to initiate bankruptcy proceedings against companies.

The law will come into effect next June 1, 2007.

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