China: Restructuring & Insolvency (3rd edition)

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This country-specific Q&A provides an overview to restructuring and insolvency laws and regulations that may occur in China.

This Q&A is part of the global guide to Restructuring & Insolvency (3rd edition). For a full list of jurisdictional Q&As visit

  1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?

    Under Chinese law, the forms of security that can be granted over movable property are mortgage, pledge and statutory lien, whereas the very form of security over immovable property is mortgage. The effectiveness of a mortgage on immovable property is conditioned upon registration of the mortgage with the competent authority, and failure to complete the registration will disqualify the creditor from being compensated in priority. For movable property, registration of mortgage is not a prerequisite for its effectiveness, but a registered mortgage may protect the creditor from a claim of a bona fide third party. Pledge over movable property will not come into effect until the property is transferred to the pledgee, and without the transfer, the pledge will be deemed not granted. Lien can only be created under law, and the lien holder of movable property must legally take possession of the property.

  2. What practical issues do secured creditors face in enforcing their security (e.g. timing issues, requirement for court involvement)?

    In bankruptcy proceedings, security interests in collateral rank higher than taxes due and employees’ claims to the extent of the value of the collateral. But this general rule does not apply to employees’ claims established before August 27, 2006. During restructuring, the exercise of security interests in collateral is suspended, unless the collateral is in danger of damage or significant decrease in its value. In bankruptcy liquidation or settlement proceedings, a secured creditor may at any time request the administrator to dispose of the collateral and repay debts owed to the creditor in priority to other subordinate creditors with the proceeds obtained from the proposal. In bankruptcy of real estate companies, claims of housing purchasers and those for construction costs take precedence over security interests. But opinions are divided as to whether an unregistered mortgage on immovable property can frustrate the claim of an ordinary creditor in bankruptcy proceedings.

  3. What is the test for insolvency? Is there any obligation on directors or officers of the debtor to open insolvency procedures upon the debtor becoming distressed or insolvent? Are there any consequences for failure to do so?

    If a debtor is unable to repay its debts as they become due, and its assets are insufficient for the settlement of all its debts or it is obviously insolvent, this provides a ground for the debtor to be bankrupted. Chinese law is silent on any obligation on the part of the management of a debtor to initiate a bankruptcy procedure, but in the dissolution and liquidation proceedings of a company, the liquidation team is obliged to promptly request the court of competent jurisdiction to declare the company bankrupt if it discovers that the assets of the company are insufficient to settle its debts, or else the team will be held accountable for any losses incurred by the creditors therefrom.

  4. What insolvency procedures are available in the jurisdiction? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play? How long does the process usually take to complete?

    Bankruptcy procedures available in China include liquidation, restructuring and settlement. In a liquidation or settlement procedure, the administrator takes over the debtor; while in a restructuring procedure, upon the approval of the court, the debtor may manage its own assets and operate its business under supervision of the administrator, who is nevertheless still in charge of the debtor. Bankruptcy procedures are judicial proceedings subject to the direction and supervision of the court. The administrator is appointed by and report to the court and performs its duties in accordance with law under supervision of the creditors’ meeting and the creditor committee. Creditors exercise their rights via the creditors’ meeting or the creditor committee, but the establishment of the creditor committee is contingent on the decision made at the first meeting of creditors. Certain personnel of the debtor are obliged to provide cooperation in the procedures. In the case where the creditors file for liquidation of the debtor, the capital contributors of the debtor have the right to request for restructuring of the debtor, and if the proposed restructuring plan involves adjustment of the interests of the capital contributors, they are entitled to vote on such plan. Chinese law does not prescribe a specific time limit for hearing a bankruptcy case, but in practice, some courts have set their own one-, two- or three-year limit based on the complexity of bankruptcy cases. For simple bankruptcy cases involving a small amount, some courts have adopted a six-month summary procedure on a trial basis.

  5. How do creditors and other stakeholders rank on an insolvency of a debtor? Do any stakeholders enjoy particular priority (e.g. employees, pension liabilities)? Could the claims of any class of creditor be subordinated (e.g. equitable subordination)?

    In the bankruptcy of a debtor, the debtor’s assets are required to apply towards payment of bankruptcy expenses and collective debts in the first place, and then towards settlement of other debts in the sequence of employees’ claims, social insurance premiums payable, taxes due, and ordinary claims. Any late-payment penalties arising from unpaid taxes are ordinary claims if the penalties are imposed before the court accepts the bankruptcy application, or they are not considered as bankruptcy claims at all if imposed after the acceptance of the application. Holders of security interests have a priority right to compensation over certain assets. According to the minutes of the meeting of PRC courts on trial of bankruptcy cases, punitive claims, such as civil punitive damages, administrative fines and criminal fines, as well as claims unduly arising between affiliated companies, are subordinate to other ordinary claims.

  6. Can a debtor’s pre-insolvency transactions be challenged? If so, by whom, when and on what grounds? What is the effect of a successful challenge and how are the rights of third parties impacted?

    The administrator may request the court to invalidate any transfer of assets for no consideration, transaction for a clearly unreasonable price, provision of security for any unsecured debt, prepayment of any debt that are not due, or waiver of any claim, in each case by the debtor within one year before the court accepts the bankruptcy filing, or any repayment of certain debts within six months prior to the acceptance of the filing. The right to request for invalidation as described above is vested in the administrator, with the debtor being listed as defendant and the third-party victims as beneficiary. The Enterprise Bankruptcy Law of China does not provide a statute of limitation for making the request. If successfully requested, the debtor’s act in question will be deemed void ab initio, and the interests of the third parties will be restored to the state as if the debtor’s act has never taken place.

  7. What form of stay or moratorium applies in insolvency proceedings against the continuation of legal proceedings or the enforcement of creditors’ claims? Does that stay or moratorium have extraterritorial effect? In what circumstances may creditors benefit from any exceptions to such stay or moratorium?

    After the court accepts a bankruptcy filing, the measures that have been adopted to preserve the debtor’s property should be discharged, any enforcement proceedings suspended, and any pending civil action or arbitration discontinued and not resumed until the administrator takes over the property of the debtor. Chinese law provides details for conversion of an enforcement procedure into a bankruptcy procedure, or specifically, if the party subject to enforcement in an enforcement procedure is an enterprise legal person and has the ground to be bankrupted, the enforcement applicant or the party subject to enforcement may apply for conversion of the enforcement procedure into a bankruptcy procedure. A bankruptcy procedure initiated in accordance with Chinese law has legal effect on the debtor’s assets located outside China, so a stay or moratorium has extraterritorial effect, subject to the acknowledgement by the foreign court concerned.

  8. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play?

    A restructuring procedure as provided by Chinese law may be divided into three stages: (i) review and acceptance of a restructuring application, (ii) prepare and approval of a restructuring plan, and (iii) execution of the restructuring plan. Compared to liquidation, the statutory requirements for restructuring are less strict and more encouraging, so as to facilitate an as early as possible restructuring of distressed companies. Just like what is generally required in the bankruptcy scenario, a restructuring procedure may be initiated if a debtor is unable to repay its debts as they become due and its assets are insufficient for the settlement of all its debts, or if a debtor is unable to repay its debts due and is obviously insolvent. In addition, a restructuring procedure can also be triggered if a debtor is very likely to lose its ability to repay debts. It is noteworthy that, in practice, when vetting a restructuring application, a court usually assesses the value of the debtor and the feasibility of its intended restructuring.

    The Enterprise Bankruptcy Law sets forth two modes of management. One is that the administrator manages the assets and business affairs of the debtor, in which case, the administrator may appoint the management personnel of the debtor to take charge of the debtor’s business affairs. The other is to have the debtor manage its own assets and business affairs under supervision of the administrator, subject to the approval of the court.

    In the first mode as mentioned above, the administrator plays the key role in the restructuring, while in the second mode, the debtor is the core player, and the administrator acts as a supervisor. The administrator is appointed by, under the direction and supervision of, and compensated at the discretion of, the court. In a restructuring procedure, a court not only plays the role of an impartial referee, but also handles matters such as coordination with other courts or authorities, to ensure a success of the restructuring. Creditors have the right to know, to supervise and to vote regarding the restructuring procedure in which they are involved. Sometimes creditors may become providers of new financing, while some other times they act as the restructuring party, but in general, the participation of creditors in restructuring is somewhat insufficient, and they wield limited power in the process.

  9. Can a debtor in restructuring proceedings obtain new financing and are any special priorities afforded to such financing (if available)?

    A debtor in restructuring proceedings is allowed to obtain new financing. As the Enterprise Bankruptcy Law provides, where a debtor or its administrator takes out a loan for the purpose of continuing the debtor’s business during the restructuring period, the debtor or the administrator may create a security interest for the loan. In addition, although the law does not expressly categorize loans raised during restructuring as collective debts, some court decisions have treated such loans as collective debts, and this practice is garnering wider acceptance in the judicial sector. New financing that is secured with a debtor’s assets ranks higher than its bankruptcy expenses, collective debts and unsecured claims, while new financing that is not secured and deemed as a collective debt takes precedence over unsecured claims but is subordinate to bankruptcy expenses. On a whole, Chinese legislation on new financing obtained during restructuring is sketchy. No detailed provisions can be found as to the ranking and priority of claims and purposes of new financing, and loan seems to be the only way for a debtor to get new financing.

  10. Can a restructuring proceeding release claims against non-debtor parties (e.g. guarantees granted by parent entities, claims against directors of the debtor), and, if so, in what circumstances?

    Chinese law clearly provides that a creditor’s claim against a debtor’s guarantor or any other obligor that is jointly and severally liable with the debtor is not be affected by the debtor’s restructuring plan. During the restructuring proceedings, non-debtor parties are not exempted from being sued, and the rights to sue non-debtor parties are not prejudiced by the restructuring.

  11. Is it common for creditor committees to be formed in restructuring proceedings and what powers or responsibilities to they have? Are they permitted to retain advisers and, if so, how are they funded?

    The formation of a creditor committee is subject to vote by the creditors’ meeting. In practice, it is normally the administrator who proposes whether or not to set up a creditor committee, and the administrator’s role in the formation and composition of a creditor committee is crucial. A creditor committee is not a must in restructuring, and it is usually formed in large and complicated restructuring cases. The Enterprise Bankruptcy Law has laid down in detail the powers of a creditor committee, for example, monitoring the management, disposal and distribution of the debtor’s assets, proposing to hold meetings of creditors, and exercising other powers granted by the creditors’ meeting. In addition, the law also requires that an administrator shall promptly report to the creditor committee if it disposes of the debtor’s assets in a way prescribed by the law and having a significant impact on the interests of the creditor.

    There are no words in the law as to retainment of advisers by creditor committees. Advisor’s fees may not be paid out of bankrupt assets. Creditor committees or creditors may hire advisors at their own discretion and expense.

  12. How are existing contracts treated in restructuring and insolvency processes? Are the parties obliged to continue to perform their obligations? Will termination, retention of title and set-off provisions in these contracts remain enforceable? Is there any ability for either party to disclaim the contract?

    The law empowers an administrator to unilaterally terminate any contract that has not been fully performed and the counterparty to the contract to urge the performance of the contract. If the administrator does not inform the counterparty within two months following the date when the competent court accepts the bankruptcy filing or not respond within 30 days following the date when the counterparty urges the performance of the contract, the contract will be deemed to have been terminated. If the administrator decides to continue the performance of the contract, the counterparty is entitled to demand the administrator to provide security, and the administrator’s failure to do so will result in the termination of the contract. If the contract is decided to be performed continuously, its existing provisions, including those on termination of the contract, retention of title, and debt offset, will remain valid, and should continue to be performed by the parties to the contract accordingly. No other person has the right to directly disclaim the contract, but if the administrator determines to continue the performance of the contract, it should promptly inform the creditor committee or the court of its decision.

  13. What conditions apply to the sale of assets / the entire business in a restructuring or insolvency process? Does the purchaser acquire the assets “free and clear” of claims and liabilities? Can security be released without creditor consent? Is credit bidding permitted? Are pre-packaged sales possible?

    As the law provides, bankrupt assets should be sold via auction, but the creditors’ meeting may resolve to dispose of the assets by other ways. In recent years, an increasing number of bankruptcy auctions are carried out online. Digital or physical, one thing remains unchanged is that open bidding is at the core of a fair auction. Buyers merely take away the debtors’ assets, which are free of liabilities and do not contain any equities in the debtors, either. In this way, buyers will not get embroiled in any dispute arising out of such liabilities or equities. Generally, the foregoing purchase will not incur any obligations that are not relating to the purchased assets, but under some circumstances, such as when the bankrupt assets are to be disposed of as a whole, the purchaser may be asked to shoulder extra obligations, for example, to employ the debtor’s employees. In bankruptcy procedures, existing security over bankrupt assets will not be released automatically, and the administrator may have the security released by repaying corresponding debts or provide other security to the satisfaction of the claiming creditor.

    If the debtor reaches an asset disposal agreement with an intending investor before the bankruptcy filing is accepted by the court, such agreement should not be deemed different from any other agreement concluded before the acceptance, and it will not automatically become enforceable after the acceptance. If the administrator intends to continue the performance of the agreement, it may face various conditions precedent, for instance, the performance should be reviewed by the creditors’ meeting and be reported to the creditor committee or the court, and disposal of assets contemplated under the agreement may not be viable until the court announces the bankruptcy of the debtor.

  14. What duties and liabilities should directors and officers be mindful of when managing a distressed debtor? What are the consequences of breach of duty? Is there any scope for other parties (e.g. director, partner, shareholder, lender) to incur liability for the debts of an insolvent debtor?

    The directors, supervisors or officers of an enterprise bear duties of loyalty and care to the enterprise during its business operation. If any of them breaches the foregoing duties, resulting in the bankruptcy of the enterprise, he/she should bear civil liability under law and, in addition, may not hold any position as director, supervisor or officer of any enterprise within three years following the end of the bankruptcy proceedings. When an enterprise is in a deadlock situation, its shareholders, if the enterprise is a limited liability company, or its directors and the controlling shareholder, if it is a joint stock limited company, have an obligation to liquidate the enterprise in a timely fashion, which is a natural extension of the duties of loyalty and care. If their failure to fulfill such duties results in the loss of any major assets, books, important documents, etc. of the enterprise, which renders the liquidation of the enterprise unfeasible, they will be held jointly and severally liable for the enterprise's debts.

  15. Do restructuring or insolvency proceedings have the effect of releasing directors and other stakeholders from liability for previous actions and decisions?

    When an enterprise goes bankrupt, a possible cause that will make a director or shareholder of it liable for its bankruptcy is that the director or shareholder has violated his/her duty of loyalty or care to the enterprise, and there is causation between such violation and the bankruptcy. Otherwise, the directors and shareholders of the enterprise will not be held accountable for their normal operation of the enterprise. Likewise, the liability that the directors and shareholders should assume for previous actions and decisions will not be released simply because a procedure of liquidating or restructuring the enterprise is initiated.

  16. Will a local court recognise concurrent foreign restructuring or insolvency proceedings over a local debtor? What is the process and test for achieving such recognition? Has the UNCITRAL Model Law on Cross Border Insolvency or the UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments been adopted or is it under consideration in your country?

    The UNCITRAL Model Law on Cross Border Insolvency has not been adopted in China so far, but as the globalization spreads and against the background of China’s intensified efforts to propel the “Belt and Road” initiative, China is destined to make a difference in cross-border insolvency.

    The positive conditions for China to recognize and enforce a foreign judgment or ruling on a bankruptcy case are as follows: such judgment or ruling must be final and legally effective and involve assets located in China and requiring the enforcement by a Chinese court; recognition of the foreign judgment or ruling must be based on an international treaty that both the foreign country and China have entered into or acceded to, or in line with the principle of reciprocity. The negative conditions for the recognition and enforcement are that the judgment or ruling does not violate the basic principles of PRC law, or impair the sovereignty, security or public interest of China or the Chinese creditors’ legal rights and interests.

  17. Can debtors incorporated elsewhere enter into restructuring or insolvency proceedings in the jurisdiction?

    No, they cannot. According to China’s General Principles of Civil Law regarding enterprise legal persons, an enterprise legal person must have a capital prescribed by Chinese law, have its own articles of association, organizational structure and premises, be able to bear civil liability independently, and have been approved by and registered with China’s competent authorities. Enterprise legal persons also include Sino-foreign equity joint ventures, Sino-foreign contractual joint ventures and wholly foreign-owned enterprises which are established in China, meet all the qualification requirements for a Chinese enterprise legal person and have been approved by and registered with the Chinese authority in charge of industrial and commercial affairs. In sum, an enterprise legal person here means a Chinese enterprise legal person.

  18. How are groups of companies treated on the restructuring or insolvency of one or more members of that group? Is there scope for cooperation between office holders?

    There’s no explicit provisions in China’s bankruptcy law on consolidated bankruptcy of members of a company group. Chinese courts respect the independent legal person status of each group member, and, as a basic principle, treat the bankruptcy of each member as an isolated case. Only when the insolvent members of a company group are inextricably intertwined, and separation between their assets would result in unreasonably high costs and severely prejudice the creditors’ rights to a fair compensation, will the courts handle the bankruptcy cases of the members on a substantively consolidated basis. If more than one member of a company group has a ground to be bankrupted, but their bankruptcy cases are not qualified to be heard on a substantively consolidated basis, their courts may coordinate with each other how their bankruptcy cases will be heard based on the applications of relevant parties and taking into account the efficiency of hearing, the order of the bankruptcy filings, the scale of each insolvent member and the location of the controlling member, among other concerns, and then request their common higher-level court to designate a court to hear all these bankruptcy cases. In practice, to facilitate the disposal of the assets and dealing with the debts of group members of which the bankruptcy cases are heard on a substantively consolidated basis, the hearing court usually appoints the same administrator for all the members involved.

  19. Is it a debtor or creditor friendly jurisdiction?

    The purpose of China’s bankrupt law is to settle claims and debts fairly and protect the legitimate rights and interests of both creditors and debtors, so as to maintain the order of socialist market economy. Although maximizing creditors’ interests is not highlighted in China’s bankruptcy law, the provisions on creditors’ meeting, the right to request for invalidation of prescribed acts, the right of offset, exemption right, etc. clearly demonstrate the legislator’s intention to lean towards protecting creditors’ interests during liquidation. In restructuring proceedings, the introduction of voting groups composed of capital contributors and the voting power granted to voting groups show the legislator’s attention to the rights and interests of contributors/shareholders and to equal protection of the interests of all parties including creditors, debtors and contributors.

  20. Do sociopolitical factors give additional influence to certain stakeholders in restructurings or insolvencies in the jurisdiction (e.g. pressure around employees or pensions)? What role does the state play in relation to a distressed business (e.g. availability of state support)?

    As provided for in China’s bankruptcy law, employees’ claims rank second only to security interests in collateral and are followed by social insurance premiums payable and taxes due. Employees’ claims established before August 27, 2006 prevail over secure interest, according to relevant policy. Since the current Enterprise Bankruptcy Law came into force, government or political factors have stopped playing a key or decisive role in bankruptcy proceedings, and bankruptcy cases have been handled by operation of law and in a market-oriented manner. The state’s role has turned to focusing on providing funds and policy support. For instance, 1) some local governments allocate funds to pay compensation of administrators; 2) some local governments set up a mechanism to secure back pay for employees of bankrupt enterprises, helping the employees fulfill their claims; 3) some enterprises form their administrative liquidation teams during their internal sorting of debts, and such teams may take the role of administrator after bankruptcy process commences; and 4) courts emphasize coordination between governments and courts in dealing with bankruptcy cases, by jointly formulating a coordination mechanism regarding protection of state-owned assets, safeguarding of financial security, guarantee of employee placement and reemployment, equal protection of the non-public economy, etc.

  21. What are the greatest barriers to efficient and effective restructurings and insolvencies in the jurisdiction? Are there any proposals for reform to counter any such barriers?

    The biggest hurdles facing efficient and effective bankruptcies in China are perhaps the absence of legal basis for natural person bankruptcy, the public’s lack of understanding of the bankruptcy law, overgeneralization of the law, insufficient social supporting systems that are needed in the implementation of the law, an inadequate level of market-oriented operation of the restructuring system, and insufficiency of judicial professionals in the bankruptcy sector . To clear these hurdles, we recommend: 1) enacting natural person bankruptcy law; 2) stepping up efforts to raise public awareness of China’s bankruptcy law and directing market players to do their part in bankruptcy proceedings; 3) improving and adopting self-management practice by debtors in restructuring proceedings and enhancing the marketization of restructuring; 4) summarizing experience gathered in handling bankruptcy cases over the past 11 years following the promulgation of the bankruptcy law, and timely publishing judicial interpretations of the bankruptcy law to address pressing issues in practice; and 5) improving social supporting laws and systems for the implementation of the bankruptcy law, for example, setting up funds to secure payment of employees’ pay and administrators’ compensation, and bringing about market-oriented reforms in industrial and commercial administration, financial bailouts for distressed enterprises, restoration of the credit of restructured enterprises, tax adjustment for bankrupt enterprises, deregistration of bankrupt enterprises, management of enterprises’ archives, etc., in each case with an aim to solve existing problems at their roots. In recent years, Chinese courts have gained a lot of ground in the trial of bankruptcy cases, and the number of accepted filings has surged significantly. By handling bankruptcy cases, courts endeavor to resolve overcapacity and remove zombie companies, thus setting up a comprehensive system for bankruptcy proceedings and greatly improving China’s business environment. At the year end of 2018 and in early 2019, China saw a successive launch of three bankruptcy courts in Shenzhen, Beijing and Shanghai, which have greatly boosted the professionalism of China’s trial practice in the bankruptcy sector and substantially contributed to the tackling of “difficulties in enforcement of court decisions”.