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Bankruptcy Comes to China

BEIJING – China’s businessmen have always needed resilience, but now they must become accustomed to the specter of bankruptcy. For China now has a bankruptcy code with teeth, and the country’s courts are beginning to enforce it with rigor.

Bankruptcy legislation in China started right after Deng Xiaoping launched his pro-market reforms three decades ago. The Law on Enterprise Bankruptcy (Trial Implementation), the first of its kind, was enacted in 1986. Its execution, however, was crippled by its very narrow scope for application, the absence of corresponding laws governing corporate restructuring, excessive government intervention, incompatibility with the policy-based bankruptcy procedure then in place, technical errors, and a general inability to make the code operational.

So, in 2006, a revised version of the law was enacted, marking an important milestone in China’s efforts to build an effective legal system as it moves towards a market economy. Compared with the original bankruptcy code, the 2006 code is firmly rooted in the needs of a market economy.

First, it aims to ensure that obligations are fairly and regularly met when a debtor becomes financially insolvent. Thus, it seeks to protect the lawful rights of both creditors and debtors.