The Shenzhen Intermediate People’s Court (SIPC) ruled on 20 June 2023 that enforcement of the first case to date of personal bankruptcy reorganisation within its jurisdiction had been completed, with the debtor economically “reborn”.
Based on publicly available information and model cases, this article analyses both current practices and dilemmas of quasi-personal bankruptcy proceedings or personal debt liquidation in mainland China.
Pilot programme
Partner
Jingtian & Gongcheng
China has yet to establish a national system for personal bankruptcy. Research on establishing a system was explicitly proposed in 2019, when 12 ministries and commissions – in conjunction with the Supreme People’s Court – jointly issued the Reform Plan for Accelerating the Improvement of the Exit System for Market Entities.
Since then, pilot cities in Zhejiang, Jiangsu, Guangdong and Shandong provinces have successively introduced supporting rules for “quasi-personal bankruptcy” within their jurisdictions while, as a special economic zone, Shenzhen promulgated the Regulations on Personal Bankruptcy.
Exempt property and waiting period systems, unique to personal bankruptcy, were added with reference to Enterprise Bankruptcy Law provisions on bankruptcy filing and acceptance, debtor’s assets, bankruptcy costs and common benefit debts, types of bankruptcy proceedings, administrator system, and legal liabilities. Successful foreign practices were also studied.
The exempt property system allows part of the debtor’s personal property to be exempted from debt repayment, subject to legal provisions and the principle of public order and good morals. Exempt property is mostly of reasonable value and necessary for life, work, study or healthcare.
The waiting period follows the court declaration of debtor’s bankruptcy, during which the debtor remains subject to court-imposed restrictions and supervision of the administrator and creditors.
If the debtor is found not to have violated relevant examination requirements on expiration of the waiting period, which is usually three to five years, the outstanding debts can be exempted.
Limited scale
The purpose of personal bankruptcy is mainly to “rescue” honest but unfortunate debtors, in crisis only because of business or out-of-control distresses. Cases usually demonstrate the following traits:
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- More than half of the debtors are in financial trouble because of startup failure or poor management;
- More than half of the debts in question are less than RMB1 million (USD140,200) with more than 80% below RMB5 million; and
- The debt repayment rate is relatively high.
But there is much room to grow in terms of the number of personal bankruptcies accepted and handled.
Even in Shenzhen, with a relatively sound personal bankruptcy and trial system, the SIPC received 1,031 personal bankruptcy filings from when the Regulations on Personal Bankruptcy became effective, on 1 March 2021, to 28 February 2022. However, only 74 of the filings entered review process and only 25 were accepted.
Regional ventures
The good news is that quasi-personal bankruptcy practices in pilot provinces have gone beyond simple liquidation of personal debts.
Many model cases contain complicated scenarios, such as:
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- Joint liquidation of a husband and wife’s common debt;
- Appointing the enterprise’s bankruptcy administrator to double as administrator for personal bankruptcy of its de facto controller or controlling shareholder, liquidating personal debt and removing major obstacles to corporate bankruptcy;
- For individuals not registered as local permanent residents, accepting their personal bankruptcy filings according to the number of years contributing to the local social security programme or income tax payments, which improves inclusiveness of local filings; and
- Promptly terminating personal bankruptcy proceedings after the administrator finds the debtor has acted in bad faith. In addition, some pilot courts have closed personal bankruptcy cases with debts exceeding RMB100 million in aggregate.
Dilemmas and obstacles
Difficulty in commencing proceedings. Local personal bankruptcy rules are generally based on the Enterprise Bankruptcy Law, with additional requirements that the natural-person debtor should meet certain conditions to be eligible for filing.
For example, the rules in Taizhou, in the Wujiang district of Suzhou and Gaoqing county of Shandong, all require the eligible debtor to be a natural person who bears joint and several liability for a failed company. The Taizhou and Dongying rules also require court findings confirming the debtor’s inability to pay off all debts. In practice, pilot courts still place stringent conditions on acceptance of personal bankruptcy filings. Some initiate substantive examination during case acceptance, which places a hefty burden of proof on the applicant and adds uncertainty to the proceedings.
Regional practice lacks upper-tier law support, and only applies within court jurisdiction. Each pilot area has effectively expanded the scope of eligible applicants by setting required minimum years of social security contributions and income tax payments. On the creditor side, proceedings apply to creditors within the jurisdiction as well as those outside the jurisdiction, but have expressly joined the debtor’s personal bankruptcy proceedings.
Majority voting is not directly applicable. Wujiang and Gaoqing both stipulate that a debt repayment scheme can only be adopted with the unanimous consent of unsecured creditors. If the financial institution creditors deem their voting rights and compliance basis inadequate, the scheme is likely to be rejected.
Lack of consensus on determining reasonable ratio of debt settlement. In published model cases, the debt settlement ratio is extremely low, as shown by the assets and future earnings of debtors investigated by administrators. Eventually, in order to get the debt repayment scheme approved, improvements may be needed via third-party intervention or asset revitalisation, and the debtor continues to face significant challenges in living standards and debt repayment going forward.
Practical advice
Personal bankruptcy in China remains young and inexperienced, and the lack of a high-tier law has limited efficiency of the pilot practices.
To gain creditors’ understanding, debtors should actively report and disclose their assets to creditors and the enforcement court. Debtors jointly and severally liable for a particular enterprise should – with reference to the enterprise’s reorganisation and liquidation – begin preparing for personal debt clearance early on in order to improve the debt settlement rate.
Finally, married couple debtors are advised to jointly settle their debts.
Wang Zhenxiang is a partner at Jingtian & Gongcheng
Room 3001, Area A, China Resources Tower
No.1366 Qianjiang Road, Hangzhou 311500, China
Tel: +86 571 8992 6523
Fax: +86 571 8992 6501
E-mail: wang.zhenxiang@jingtian.com
