A Lengthy Stay? The Impact of the PRC Enterprise Bankruptcy Law on the Rights of Secured Creditors

UNSW Law Journal, Vol. 30, No. 3, p. 755, 2007

U of Melbourne Legal Studies Research Paper No. 469

20 Pages Posted: 22 May 2010

Date Written: May 19, 2010

Abstract

As China has transitioned from a centrally planned economy to a ‘socialist market economy,’ the availability of credit and the ease with which creditors can recover debts and enforce their rights, particularly rights to enforce security over assets, have become increasingly important. A critical issue that arises in any credit economy is how to balance the rights of secured creditors with the goals of bankruptcy law,1 a process that inevitably involves an adjustment between the following competing interests: (i) the interest of secured creditors in enforcing security and recovering debts without delay or impediment; (ii) the interest of unsecured creditors (including employees) in recovering outstanding payments in a fair and equitable manner (the so-called ‘pari passu’ principle); and (iii) the interest of the debtor in reviving its fortunes and avoiding liquidation to the extent possible (the so-called ‘corporate rescue’ option).

Invariably, the process requires breathing space at the start of the bankruptcy proceedings so that a thorough investigation can be conducted into the assets and liabilities of the debtor and the interested parties have an opportunity to decide on the most appropriate course of action. In general, this involves a choice between, on the one hand, liquidating the assets of the debtor and satisfying the claims of creditors out of the liquidation proceeds to the extent possible, and, on the other hand, giving the debtor a chance to restructure its debt obligations so that it can trade its way out of its financial problems and return itself to a state of solvency.

The most effective way to create breathing space for the above purposes is to impose a postponement (or stay) on enforcement action against the debtor; namely, action by creditors to recover outstanding debts from the assets of the debtor. There are several important questions that need to be considered in this regard. One question is whether the stay should apply to enforcement action by both unsecured and secured creditors, bearing in mind that secured creditors have priority over the assets that are subject to the security and are therefore in a special position. Another question is when a stay against action by secured creditors should be imposed. Should it be imposed right at the start (ie from the date on which the court accepts bankruptcy jurisdiction)? Or should it be imposed only after the commencement – and only for the duration – of a formal debt-restructuring plan that is agreed by all creditors?

All of these competing interests and questions vied for the attention of the drafters of the new PRC Enterprise Bankruptcy Law (‘EBL’) and were required to be balanced and accommodated in the EBL as enacted. The drafting process for the EBL commenced in 1994 and involved several hotly debated drafts.2 It was finally promulgated on 27 August 2006 and came into effect on 1 June 2007. This article considers the impact of the EBL on the rights of secured creditors in the following areas: the extent and nature of the stay on enforcement action by secured creditors during bankruptcy proceedings; the enforcement of security rights by secured creditors during bankruptcy proceedings; the duties, responsibilities and powers of the administrator in respect of secured assets; and the priority that secured creditors enjoy to recover payment from secured assets.

Part II of this article provides a brief overview of the EBL, highlighting innovations that are relevant to the issues discussed below and providing the context for an analysis of the rights of secured creditors. Part III analyses the impact of the EBL on the rights of secured creditors in the areas set out above and suggests issues that require clarification, either in regulations or judicial interpretations. Part IV concludes by outlining the general impact of the EBL on the development of bankruptcy law in China and identifying two key concerns for secured creditors.

Keywords: China, Secured Creditors, Unsecured Creditors, Enterprise Bankruptcy Law

JEL Classification: K00, K19, K29

Suggested Citation

Godwin, Andrew, A Lengthy Stay? The Impact of the PRC Enterprise Bankruptcy Law on the Rights of Secured Creditors (May 19, 2010). UNSW Law Journal, Vol. 30, No. 3, p. 755, 2007, U of Melbourne Legal Studies Research Paper No. 469, Available at SSRN: https://ssrn.com/abstract=1612072

Andrew Godwin (Contact Author)

Melbourne Law School ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia

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