New Rules of Bankruptcy in China Go back »

2012-03-01 | Nanjing

The Bankruptcy Law of PRC (Law) came into effort on June 1st, 2007, however, the Law has been criticized that failed to function well in the past four years. To clarify some uncertain points which are not clearly provided in the Law, Supreme Court of PRC issued the Provisions (I) of the Law (Provision I) on August 29, 2011 and announced that Provisions I would be valid after September 26, 2011.

Provisions I is composed of nine articles, concerning the application procedure of bankruptcy, among which the definition of cause of bankruptcy and allocation of burden are highlighted.

1. Cause of Bankruptcy

Cause of bankruptcy is the precondition for the court to accept the application for a bankruptcy.

In case that the debtor himself (the capacity of third party bears joint and several liabilities for the debtor’s debt to discharge will not be considered) is unable to pay the due debt, the following circumstances will be accepted as cause of bankruptcy by the court:

(1) The debtor’s assets are insufficient to pay its entire debts or;

(2) The debtor is obviously unable to pay its entire debts.

Furthermore, Provisions I clearly interprets the up-mentioned cause of bankruptcy and unifies the understanding as to determine the bankruptcy cause in practice.

It is stipulated in Article 2 of Provisions I that the debtor will be considered as unable to pay the due debt in case that debtor has not paid the due debt fully if the debt is lawfully.

Provisions I also clarifies how to judge whether the debtor is obviously unable to pay its entire debts. Balance sheet, audit report or asset appraisal report will be key indicators.

In Article 4 of Provisions I, the standards of “insufficient to pay” is listed, such as the lacks of financial liquidity, legal representative is missing and no other person in charge of asset management, the debtor has been suffering from financial loss for long time and shows difficulty to become profitable in the future.

2. Burden of Proof

It is logical to say that the priority of reviewing the application for bankruptcy procedure is to consider whether the burden of proof for the application has been met or not.

The Provisions I clearly states that the creditor shall submit evidence to prove that the debtor fails to pay the due debt, which means that the burden of proof to prove whether the causes of bankruptcy have been met does not fall to the creditor when applying for bankruptcy. It is the debtor’s obligation to argue and prove that no cause of bankruptcy met within objection period otherwise the court will accept the bankruptcy application. The objection period is seven days starting from the debtor receiving the notice from the court.

It can be concluded that the stipulation of Provisions I shows the strong will from China authority to make full use of bankruptcy law to built and restructure the legal order for the improvement of market economy. It is suggested to keep an eye on the further developments.

For more information please send an email to: c.dandrea@picozzimorigi.it, or visit our website www.picozzimorigi.cn and www.picozzimorigi.com

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