Law on Enterprises
Bankruptcy (Trial Implementation)
(Adopted 2 December 1986 by the 18th Session of the Standing
Committee of the 6th National People's Congress)
TABLE OF CONTENTS
CHAPTER I GENERAL PRINCIPLES
CHAPTER II SUBMISSION AND HEARING OF A BANKRUPTCY APPLICATION
CHAPTER III CREDITOR'S MEETINGS
CHAPTER IV CONCILIATION AND REORGANIZATION
CHAPTER V DECLARATION OF BANKRUPTCY AND BANKRUPTCY LIQUIDATION
CHAPTER VI SUPPLEMENTARY PRINCIPLES
APPENDIX
CHAPTER I
GENERAL PRINCIPLES
Article 1
This Law has been formulated to suit the needs of socialism's
planned development of the commodity economy and reform of
the economic system, to promote enterprises owned and operated
by the State, to strengthen the economic responsibility system
and democratic administration, to improve economic conditions,
to increase economic benefits and to protect the legal rights
and interests of creditors and debtors.
Article 2
This Law is applicable to State enterprises.
Article 3
Enterprises which have incurred serious losses due to poor
management and administration and are unable to discharge
matured liabilities will declare bankruptcy in accordance
with the provisions of this Law.
Should one of the following situations exist when a creditor
lodges a bankruptcy application against an enterprise, declaration
of bankruptcy shall not be granted:
(1) where the enterprise concerned is a public enterprise
or an enterprise with an important bearing on the national
economy and the people's livelihood, in which case the relevant
government departments will provide economic assistance or
take other measures to assist in the discharge of liabilities
(2) where a guarantee is obtained and liabilities are discharged
within six months of a bankruptcy application being lodged
Upon a bankruptcy application being lodged by a creditor
against an enterprise, should the higher level department
in charge request reorganization to be carried out and in
addition if the enterprise and the creditor meet and reach
a conciliated agreement, the bankruptcy procedures will be
suspended.
Article 4
The State will use various channels to make appropriate arrangements
for the re-employment of the staff and workers of the bankrupt
enterprise and will guarantee their basic living requirements
in the period prior to their obtaining new employment. Detailed
measures will be determined elsewhere by the State Council.
Article 5
Bankruptcy cases will come within the jurisdiction of the
local People's Court where the debtor is located.
Article 6
This Law has no provisions for criminal proceedings for bankruptcy
cases. In lieu, the legal provisions for civil proceedings
will be applicable.
CHAPTER II
SUBMISSIONS AND HEARINGS OF A BANKRUPTCY APPLICATION
Article 7
Where a debtor is unable to discharge a matured liability,
a creditor may apply for the debtor to be declared bankruptcy.
When a creditor submits a bankruptcy application, relevant
testimonial evidence of the amount of the claim, of whether
or not it is secured by property and of the fact that the
debtor is unable to discharge the matured liability shall
be provided.
Article 8
A debtor, following the approval of the higher level department
in charge, may lodge an application to be declared bankrupt.
When a debtor submits a bankruptcy application it shall explain
the circumstances of the enterprise's losses and submit relevant
accounting statements and detailed lists of debts and claims.
Article 9
A creditor shall be notified within ten days of the hearing
of a bankruptcy case in the People's Court and a public announcement
shall be issued. Creditors already known to the Court shall
be notified again within ten days of the receipt by the People's
Court of the detailed list of liabilities submitted by the
debtor. The public announcement and the notice shall each
stipulate the date on which the first creditors' meeting will
be convened.
Creditors shall, within one month of receiving notification
or within three months of the public announcement being issues
for those who have not received notification, apply to the
People's Court for recognition of their creditor's rights
and state the amount of their claim, whether or not it is
secured by property, as well as submit relevant testimonials.
Failure to lodge a claim within the time limit will be regarded
as voluntary renunciation of the claim.
The People's Court shall separately register those claims
secured by property and those unsecured by property.
Article 10
Where a bankruptcy application has been lodged by a creditor,
the debtor shall submit to the People's Court the relevant
materials stipulated in the second paragraph of Article 8
of this Law within 15 days of receiving notification from
the People's Court.
Where the debtor is a guarantor for another unit, news of
the bankruptcy application shall be passed on to the relevant
parties concerned within five days of the principal receiving
notification from the People's Court.
Article 11
Following the hearing of a bankruptcy case in the People's
Court, other civil implementing procedures concerning the
debtor's property must be suspended.
Article 12
Following the hearing of a bankruptcy application in the People
Court, the discharge of creditors' claims by the debtor will
be invalid unless the repayment is part of the debtor's necessary,
normal production operations.
CHAPTER III
CREDITOR'S MEETINGS
Article 13
All creditors, without exception, are members of creditors'
meeting. Members of creditors' meeting will enjoy voting rights
with the exception of creditors with property security that
have yet to renounce their preferential repayment rights.
After the debtor's guarantor has discharged the liability
on the debtor's behalf, the guarantor may become a creditor
and enjoy voting rights.
The Chairman of the creditors' meeting will be appointed
by the People's Court from among the creditors with voting
rights.
The debtor's legal representative must attend the creditors'
meeting and answer questions from the creditors.
Article 14
The first creditors' meeting, which will be convened by the
People's Court, shall be convened within 15 days of the expiry
of the claim declaration period. Later meetings will be convened
when considered necessary by the People's Court or the Chairman
of the meeting, or may also be convened at the request of
the liquidation group or by creditors whose combined holdings
equal one-quarter or more of the total non-property guarantee
claims.
Article 15
The functions and powers of creditors' meeting are:
(1) examination of relevant testimonials for claims, determination
of whether or not the claims involve property security and
their amount
(2) discussion and adoption of the draft conciliation agreement
(3) discussion and adoption of the plan for the handling and
distribution of bankruptcy property
Article 16
Resolutions of a creditors' meeting will have the approval
of the majority of creditors with voting rights present at
the meeting and moreover the combined amount of claims they
represent must equal one-half or more of the total amount
of claims unsecured by property.
Resulutions concerning adoption of draft conciliation agreements
must be approved by creditors whose combined holdings equal
two-thirds or more of non-property guarantee claims.
Resolutions passed at creditors' meetings will be binding
on all creditors.
Should a creditor consider a resolution of creditors' meeting
to be in violation of legal provisions, a request for a ruling
may be made to the People's Court within seven days of the
resolution being passed.
CHAPTER IV
CONCILIATION AND REORGANISATION
Article 17
Where a creditor lodges a bankruptcy application against an
enterprise the higher level department in charge of the enterprise
may, within three months of the hearing of the case in the
People's Court, apply for reorganization of the enterprise
to be carried out. The reorganization term should not exceed
two years.
Article 18
Following the submission of an application for reorganization
the enterprise shall submit a draft conciliation agreement
to the creditors' meeting.
The conciliation agreement shall stipulate the time limit
for the enterprise's discharge of liabilities.
Article 19
Where a conciliation agreement is reached between the enterprise
and the creditor's meeting, following its approval by the
People's Court the said Court will issue a public announcement
and bankruptcy proceedings will be suspended. The conciliation
agreemnet will be legally effective from the date of the announcement.
Article 20
Management of the reorganization of an enterprise will be
responsibility of its higher level department in charge.
Plans for the enterprise's reorganization shall be discussed
at a representative meeting of the enterprise's employees.
A report on the state of the enterprise reorganization shall
be made at a representative meeting of the enterprise's employees
and their opinions will be heard.
Reports on the state of the enterprise's reorganization shall
be made to the creditors' meeting at regular intervals.
Article 21
Should one of the following situations occur within the enterprise
during the reorganization period, following a ruling by the
People's Court, the reorganization of the enterprise will
be ended and it will be declared bankrupt:
(1) non-implementation of the conciliation agreement
(2) continual worsening of the financial state of affairs
resulting in a creditors' meeting requesting the end of reorganization
(3) the occurrence of one of the actions listed in Article
35 of this Law which seriously harms creditors' interests
Article 22
If, following reorganization, the enterprise is able to discharge
its liabilities in accordance with the conciliation agreement,
the People's Court shall end bankruptcy proceedings against
the enterprise and issue a public announcement.
If at the end of the term for reorganization the enterprise
is unable to discharge its liabilities in accordance with
the conciliation agreement, the People's Court shall declare
the enterprise bankrupt. Moreover, in accordance with the
provisions of Article 7 of this Law, claims will be registered
anew.
CHAPTER VI
DECLARATION OF BANKRUPTCY AND BANKRUPTCY LIQUIDATION
Article 23
Should one of the following situations occur the People's
Court makes a ruling and declare the enterprise bankrupt:
(1) where in accordance with the provisions of Article 3
of this Law a bankruptcy declaration shall have been made
(2) where in accordance with the provisions of Article 21
of this Law reorganization is to be ended
(3) where the term for reorganization has expired and the
enterprise is unable to discharge liabilities in accordance
with the conciliation agreement
Article 24
The People's Court shall establish a liquidation group within
15 days of the enterprise being declared bankrupt to take
over control of the bankrupt enterprise.
The liquidation group will be responsible for the care, stocktaking,
valuation, handling and distribution of the bankruptcy property.
The liquidation group may carry out necessary civil matters
in accordance with the law.
Members of the liquidation group will be appointed by the
People's Court from among persons within the higher level
department in charge of the enterprise, government finance
departments, other relevant departments and professional personnel.
The liquidation group may engage any necessary work personnel.
The liquidation group will be responsible to the People's
Court and moreover will present the Court with reports on
the state of their work.
Article 25
No unit or individual shall unlawfully handle a bankrupt enterprise
property, account books, documents, materials, seals, etc.
A bankrupt enterprise's debtors and property holders can
only discharge liabilities or hand over property to the liquidation
group.
Article 26
Where a bankrupt enterprise has yet to fulfil a contract the
liquidation group may decide whether to terminate or to continue
to fulfil the contract.
Where a decision by the liquidation group to terminate the
contract causes another party concerned to suffer losses,
the amount of loss compensation will be regarded as a bankruptcy
claim.
Article 27
In the period before the liquidation group carries out transfer
procedures the legal representative of a bankrupt enterprise
will be responsible for taking care of the enterprise's property,
account books, documents, materials, seals, etc.
In the period before bankruptcy proceedings are completed
the legal representative of a bankrupt enterprise will work
according to the requirements of the People's Court or the
liquidation group and may not leave his post without authorization.
Article 28
Bankruptcy property is made up of the following property:
(1) all property managed and administered by the bankrupt
enterprise at the time of the bankruptcy declaration
(2) property obtained by the bankrupt enterprise between the
time of the bankruptcy declaration and the end of bankruptcy
proceedings
(3) other property rights over which the bankrupt enterprise
exercises authority
Property already classed as a security is not part of the
bankruptcy property. Should the value of the security be in
excess of the amount of the claim for which it is a security,
the amount in excess will be taken as part of the bankruptcy
property.
Article 29
Should another's property be intermingled with that of the
bankrupt enterprise it will be recovered through the liquidation
group by the person with rights to the said property.
Article 30
Non-secured property claims and secured property claims with
renounced preference repayment rights established before the
bankruptcy declaration are bankruptcy claims.
Expenses incurred by a creditor during bankruptcy proceeding
may not be taken as bankruptcy claims.
Article 31
Immature claims at the time of the declaration of bankruptcy
will be taken as matured claims, but the immature interest
shall be deducted.
Article 32
A creditor with claims secured by property which were established
before the bankruptcy declaration will enjoy preferential
repayment rights on the said security.
Where the amout of claim secured by property is in excess
of the value of the security, the yet to be discharged portion
will become a bankruptcy claim and be repaid in accordance
with bankruptcy proceedings.
Article 33
Claims held by a creditor against a bankrupt enterprise may
be offset before the commencement of bankruptcy liquidation.
Article 34
The appropriation of the following bankruptcy expenses from
the bankrupt property will take precedence:
(1) expenses incurred in the supervision, selling and distribution
of the bankruptcy property, including expenses for the hiring
of work personnel
(2) legal expenses for the bankruptcy case
(3) other expenses paid out during bankruptcy proceedings
for the common benefit of creditors
Where the bankruptcy property is insufficient to pay the
bankruptcy expenses the People Court shall declare the termination
of bankruptcy proceedings.
Article 35
The following actions will be invalid if carried out by a
bankrupt enterprise in the period beginning six months before
the hearing of its bankruptcy case by the People's Court and
ending on the date of the bankruptcy declaration:
(1) concealment, private distribution or gratuitous assignment
of property
(2) irregular underselling of property
(3) supply for property security to creditors originally without
property security
(4) advance discharge of immature liabilities
(5) renunciation of its own claims
Should any of the above-mentioned actions have been carried
out by the bankrupt enterprise the liquidation group has the
right to apply to the People's Court for the recovery of the
property. Recovered property will become bankruptcy property.
Article 36
Where a complete set of equipment is included in the bankruptcy
property it shall be sold as a whole. If unable to be sold
in its entirely it may be sold by the piece.
Article 37
The bankruptcy property distribution plan prepared by the
liquidation group will be implemented following its discussion
and adoption at creditor's meeting and further submission
to the People's Court for a ruling.
After the priority appropriation of bankruptcy expenses from
the bankruptcy property, discharge of liabilities will take
the following order:
(1) wages owed to employees by the bankrupt enterprise and
labor insurance fees
(2) taxes owed by the bankrupt enterprise
(3) bankruptcy claims
Where the bankruptcy property is insufficient to fully discharge
liabilities in the order stipulated above, it will be distributed
proportionally.
Article 38
On the completion of the distribution of bankruptcy property
the liquidation group will request the People's Court to conclude
bankruptcy proceedings.
After the conclusion of bankruptcy proceedings outstanding
claims will no longer be discharged.
Article 39
After the conclusion of bankruptcy proceedings the liquidation
group will cancel registration with the bankrupt enterprise's
original registration organ.
Article 40
Where a bankrupt enterprise has carried out one of the actions
stated in Article 35 of this Law and this is discovered within
a year of the conclusion of bankruptcy proceedings, the People's
Court will recover the property and a further discharge of
liabilities will be carried out in accordance with the provisions
of Article 37.
Article 41
Where a bankrupt enterprise has carried out one of the actions
stated in Article 35 of this Law, disciplinary sanctions will
be brought on the legal representative of the enterprise and
the persons directly responsible. Should the actions of the
legal representative of the enterprise and the persons directly
responsible constitute a criminal offence, criminal liability
will be investigated in accordance with the law.
Article 42
After an enterprise has been declared bankrupt, government
inspection departments and auditing departments will be responsible
for ascertaining the enterprise's responsibility for the bankruptcy.
Where the legal representative of a bankrupt enterprise bears
the main responsibility for the bankruptcy, disciplinary sanctions
will be brought against him.
Where the higher level department in charge of a bankrupt
enterprise bears the main responsibility for the bankruptcy,
disciplinary sanctions will be brought against the leaders
of the higher level department in charge.
Should the legal representative of a bankrupt enterprise
and the leaders of the higher level department in charge of
the said enterprise cause, through neglect of their duties,
the bankruptcy of an enterprise which results in serious losses
to State property, criminal liability will be investigated
in accordance with the provisions of Article 187 of the Criminal
Code of the People's Republic of China.
CHAPTER VI
SUPPLEMENTARY PRINCIPLES
Article 43
This Law will be effective for trial implementation three
months after the implementation of the Law on State Industrial
Enterprises. Detailed plans and measures for the trial implementation
will be determined by the State Council.
APPENDIX
Article 187 of the Criminal Code
State employees who through neglect of their duties have caused
serious loss to public property, State and citizens' right
will be sentenced to a specified prison sentence or forced
labor for a period of five years or less.
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