China Law Update - September 2006

PRC Enterprises Bankruptcy Law

The first unified PRC Enterprises Bankruptcy Law (the "New Bankruptcy Law"), which was issued in August 2006 by the Standing Committee of the National People's Congress, replaces the Enterprise Bankruptcy Law of 1986 (the "1986 Law"), which only applied to State-Owned Enterprises ("SOEs"). The New Bankruptcy Law, which will take effect on June 1, 2007, significantly changes bankruptcy practices and proceedings in China, aligning them more closely with international standards.

Scope of the New Bankruptcy Law

In contrast to the 1986 Law, the New Bankruptcy Law applies to all domestic enterprises, including SOEs, private enterprises and foreign-invested enterprises. (It does not apply to individuals and partnerships.) An enterprise that is obviously not capable of repaying its debts, or is unable to pay its debts even after sale of its assets (the "Debtor"), is to be liquidated or reorganized in accordance with the New Bankruptcy Law. However, according to Article 133 of the New Bankruptcy Law, a bankruptcy involving an SOE that is within the scope of regulations issued by the State Council prior to implementation of the New Bankruptcy Law is still subject to relevant provisions issued by the State Council. Additionally, under Article 134, bankruptcies of financial institutions are subject to measures that are to be promulgated by the State Council. The New Bankruptcy Law allows financial regulatory authorities of the State Council ("Financial Authorities") to petition the court for reorganization or bankruptcy of commercial banks, stock companies and insurance companies if the company meets the conditions for bankruptcy as defined in the New Bankruptcy Law. Financial Authorities that lawfully take over or become the trustee of a financial institution with significant operational risks may also petition the court for an end to litigation or proceedings in which the financial institution is the defendant or the entity to be punished by the court.

Cross-Border Bankruptcy

According to Article 5 of the New Bankruptcy Law, in overseas bankruptcy cases that involve domestic assets of the Debtor, Chinese courts should recognize and execute judgments by foreign courts in bankruptcy cases in accordance with international treaties ratified by China or under the following conditions:

• The judgment is in compliance with the fundamentals of Chinese law;
• The judgment does not violate China's sovereignty, security or public interests; and
• The judgment does not infringe upon the legal rights and interests of domestic creditors.

Since these conditions are vague, Chinese courts will obviously have a strong influence on whether or not a foreign court's decisions in bankruptcy cases are accepted and executed. Still, Article 5 of the New Bankruptcy Law represents progress towards the acceptance of foreign bankruptcy decisions.

The Interim Measures on Dealing with Foreign-InvestedEnterprises' Complaints

The Interim Measures on Dealing with Foreign-Invested Enterprises' Complaints (the "Interim Measures"), which were issued by the Ministry of Commerce ("MOFCOM") in September 2006 and took effect on October 1, 2006, may be welcomed by foreign investors and foreign-invested enterprises ("FIEs") in China.

The Interim Measures enable FIEs and their foreign investors ("Complainants") to submit complaints if they believe their legitimate rights and interests have been infringed upon by administrative actions. Complaints can be submitted to State FIE Complaint Centers in the Investment Promotion Bureaus of the MOFCOM ("State Complaint Centers") or to provincial or local FIE complaint centers and other competent authorities ("Local Complaints Centers").