Recently, an important development has occurred in China’s cross-border insolvency regime: The Supreme People’s Court of China (“Supreme Court”), the highest level of court in mainland China, is starting to pay more attention to the importance of recognizing and enforcing the judgments or rulings of bankruptcy cases made by foreign courts, particularly when such cases involve a debtor’s assets located within China. This is evidenced by the Supreme Court’s promulgation of the Minutes of the Conference on Bankruptcy Trials Heard by Courts in China (In Chinese: 全国法院破产审判工作会议纪要) (“Minutes”) on 3 March 2018.
China’s Enterprise Bankruptcy Law
The Enterprise Bankruptcy Law of the People’s Republic of China (中华人民共和国企业破产法) (“Bankruptcy Law”) is the main piece of legislation that governs mainland China’s cross-border insolvency regime. The Bankruptcy Law came into force on 1 June 2007, and applies to all legal entities in China, including Chinese state-owned enterprises and private companies, wholly-foreign owned enterprises, and Sino-foreign joint ventures. It does not apply to individuals.
Under the previous bankruptcy regime, Chinese courts rarely recognized and enforced the judgments or rulings of bankruptcy cases made by foreign courts. Only two cases of recognition/enforcement can be found in the public record prior to the enactment of the Bankruptcy Law:
- In 2005, the Guangzhou Intermediate People’s Court recognized the verdict of a bankruptcy case issued by the Poitiers Commercial Court in France; and
- In 2001, the Foshan Intermediate People’s Court recognized a judgment concerning bankruptcy made by a court in Milan, Italy, as well as a “Confiscation of Property Transfer Order” issued by an Italian civil and criminal court.
The Bankruptcy Law attempted to improve this situation by giving creditors of foreign enterprises the right to have judgments/rulings on bankruptcy cases made by foreign courts against debtors whose assets are located within China recognized and enforced by Chinese courts, so long as certain conditions are met. Article 5 of the Bankruptcy Law stipulates the following conditions for recognition and enforcement:
- There are relevant international treaties or reciprocal relations between China and the foreign country in which the court is located;
- The judgment/ruling of the foreign court does not violate the basic principles of the laws of China;
- The judgment/ruling of the foreign court does not jeopardize the state sovereignty, national security and social public interests of China; and
- The judgment/ruling of the foreign court does not harm the lawful rights and interests of the creditors within China.
According to the public record, however, there has only been one case since the Bankruptcy Law came into force where a Chinese court has recognized the ruling on a bankruptcy case made by a foreign court. The case in question involved the Wuhan Intermediate People’s Court, which recognized the ruling on a bankruptcy case made by Montabaur Court in Germany in 2012.
Minutes and Impacts
Given the increasing presence of Chinese investment globally, it has become imperative for China to recognize and enforce foreign rulings on bankruptcy cases. Against this background, the Supreme Court promulgated the Minutes. The stipulations contained in Articles 49 and 50 of the Minutes concern China’s cross-border insolvency regulations.
Article 49 specifically concerns the “cross-border insolvency and reciprocity principle”. According to Article 49, the People’s Courts, when handling cross-border insolvency cases, must:
- Properly resolve the legal conflicts and contradictions concerning cross-border insolvency; and
- Reasonably determine the jurisdiction of cross-border insolvency cases.
Article 49 also specifies that the Chinese courts, under the principle of equality, must ensure that:
- The balance between the interests of foreign creditors and creditors in China is well-coordinated; and
- The domestic employees’ claims and tax claims etc. are prioritized, considered and properly protected.
Finally, under Article 49 of the Minutes, the Chinese courts must:
- Actively participate in and promote the negotiation and signing of international treaties on cross-border insolvency;
- Explore new ways of applying the principle of reciprocity;
- Strengthen the cooperation between Chinese courts and administrators with respect to cross-border insolvency; and
- Promote the health and orderly development of international investment.
Article 50 of the Minutes concerns the “protection of rights and balance of interests in cross-border insolvency cases”. According to Article 50, cross-border insolvency cooperation shall be carried out in accordance with Article 5 of the Bankruptcy Law.
Article 50 of the Minutes also stipulates that after the People’s Court has recognized the judgment or ruling of the bankruptcy case made by a foreign court, the order of priority for payment out of the debtor’s assets will firstly be domestic secured creditors, followed by employee wages, social insurance and tax owed etc., and then finally the remaining assets of the debtor can be assigned in accordance with the requirements of the foreign court.
Foreign bankruptcy cases have rarely been recognized by Chinese courts in the past. As a result, the administrators and creditors involved in the bankruptcy proceedings according to foreign laws have often been unable to adequately realize the rights and interests of foreign-invested enterprises in China. The publication of the Minutes indicates that Chinese courts are attempting to recognize and enforce cross-border insolvency cases. It is expected that the difficulties in relation to realizing the interests of those within and outside China involved in China related bankruptcy proceedings will be more easily overcome in the near future due to the implementation of the Minutes.