Law In Books Versus Law In Action In the Landmark Shenzhen, China, Personal Bankruptcy Regime

Abstract

The first personal bankruptcy regime in Mainland China celebrated its second anniversary on March 1, 2023, and empirical assessment of the law in action during these first two years reveals some troubling deviations from the early promise of the new law on the books. In the first year, a handful of judges were charged with an arduous in-person review process for over 1000 applicants, and they accepted only 25 for case initiation. The second year saw an important efficiency enhancement, with initial case review delegated to an administrative body, which tripled the number of opened cases. Nonetheless, most debtors continue to be dissuaded from applying at all, and hundreds of applications have been rejected, in part on the non-statutory grounds that the court is admitting only business-related cases. Moreover, the default gateway of liquidation-and-discharge has been successfully used only once, secretly relegated to "last resort" status. Debtors are effectively limited to proposing that creditors accept a payment plan offering full repayment of principal within five years, and creditors have rejected many such plans. While most admitted restructuring cases have led to confirmed plans, many of these successes are built on very shaky foundations that portend likely struggle and repeat default ahead. The new system thus seems to be operating in quite a skewed fashion, admitting only a very small fraction of applicants and offering relief on narrow and demanding grounds. This is a disappointing abandonment of the textual promise of broad, standardized relief consistent with international best practices. As national authorities in China (and elsewhere) consider adopting a country-wide personal bankruptcy law, Shenzhen's experience illustrates the challenges of striking the right balance between relief and responsibility in personal insolvency regulation.

Keywords: personal bankruptcy, SME insolvency, China data transparency, empirical bankruptcy data