Chinese Cross-Border Insolvencies: Current Issues and Future Developments（1）


Dr. Shi Jingxia


This article deals with several problems pertaining to cross-border insolvency, an important but ignored area in China. In this article, the current status of Chinese bankruptcy laws has been firstly addressed, with a focus on its legal blank on the cross-border insolvency and unsatisfactory judicial practice. Thereafter, the influential GITIC case has been analyzed, which further highlights the inadequacy of Chinese bankruptcy legislation and crying needs for its reform. Basing on the essential principles embodied in the UNCITRAL Model Law and EU Regulation, the gaps between Chinese bankruptcy laws and international practice have been made clear. Accordingly, the developments of Chinese cross-border insolvency have been proposed in order to provide helpful references for the future legislation.

I. Introduction

The recent decades have witnessed a proliferation of cross-border insolvency cases along with the development of increasing integration of the global economy. But the realm of cross-border insolvency is full of chaos over a long period of time.[1] Given the diversity in national insolvency laws which often relate to divergent political goals and cultural expectations,[2] it may readily be appreciated how much greater are the obstacles to the harmonization of cross-border insolvency.[3] Happily, it seems that such recent initiatives as United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-border Insolvency (hereinafter “Model Law”), EU Regulation on Insolvency Proceedings (hereinafter “EU Regulation”), are gaining more and more approbation. [4]
China has carried on “open and reform policy”, which transformed itself from a backward country into a key player in the international community during the past two decades.[5] As well as the accelerated growth in foreign investment and trade, globalized production and distribution of goods and services makes it inescapable for China to face more and more cross-border insolvency cases. But bankruptcy law has been lamentedly slow to develop in China [6] and its importance to the economic development has been largely ignored over the years. In spite of several cases indicating some kind of attitude towards cross-border insolvency, the dearth of specific provisions inevitably leads to difficulties and inconvenience in practice.[7] This situation presents a lot of issues, just as the recent GITIC case exemplifies.[8] #p#分页标题#e#
The primary purpose of this article is to examine the current issues of Chinese cross-border bankruptcy and then to consider possible developments in future. The main contents of various parts of this article can be summarized as follows:
In Part II, the present state of Chinese bankruptcy law is briefly reviewed in order to provide a general idea on Chinese bankruptcy legislation and judicial practice, especially in what ways problems would arise in cross-border cases containing a Chinese dimension. This part addresses firstly the basic features of Chinese bankruptcy laws and legal blank on cross-border insolvency. Thereafter, the focus shifts to the judicial practice of Chinese courts concerning foreign-related bankruptcies. This part illustrates the weakness of Chinese bankruptcy laws and highlights the pressing demand for its reform.
Part III touches upon the GITIC bankruptcy case, which involves numerous foreign creditors and draws far-ranging international attention. The equitable treatment for all creditors, letters of comfort, composition of liquidation committee, voidable transactions and other legal issues in relation to this case will be deliberated in this part. In particular, this part probes into several issues that make this case more complex, including foreign creditors and domestic creditors, registered foreign debt and unregistered foreign debt, corporate creditors and individual depositors. Obviously, the issue regarding realization of creditor’s equality must be seriously treated.
Part IV sets out possible developments of Chinese cross-border bankruptcy. Firstly, there is a pressing need for China to reform its bankruptcy law. Given the Model Law and EU Regulation are of paramount significance in this field, it might be helpful to use them as frame of reference for reform of Chinese cross-border bankruptcy. Secondly, it moves to the crucial question of international cooperation in cross-border insolvency. In particular, several basic issues, universality versus territoriality, jurisdiction to open insolvency proceedings, recognition and assistance in insolvency proceedings are given consideration in this part. These analysis aims at discovering the gap between Chinese current legislation and the Model Law so as to explore corresponding adaptation once China enacts the Model Law in future. #p#分页标题#e#
In Part V, it is concluded that China should adopt internationally recognized cross-border insolvency norms. The increasing acceptance of the principles embodied in the Model Law and EU Regulation provides suitable moment for China to conform its bankruptcy laws to the international standard. But at the same time, China should take its basic national conditions into account as well in order that its bankruptcy legislation could operate well in practice.

II. Cross-Border Insolvencies in China

In contrast to China’s centuries-old history, Chinese bankruptcy law is still in its infancy period.[9] The current bankruptcy system of China consists mainly of 1986 Enterprises Bankruptcy Law of PRC (Trial Implementation, hereinafter “EBL”),[10] Procedure for Bankruptcy and Debt Repayment provided in the 1991 Civil Procedure Law (hereinafter “CPL”),[11] accompanying judiciary opinions[12] and other relevant regulations. China does not apply its bankruptcy system uniformly. The EBL only applies to the State-Owned Enterprises (SOEs)[13] whereas the relevant provisions in CPL apply to the bankruptcy of non-state-owned legal persons.[14] There is no legislation available on the bankruptcy of natural persons in China at present.

1. Legal Blank on Cross-Border Insolvency

The EBL is composed of only 43 articles included in six chapters, involving bankruptcy filing and case acceptance, creditors’ meetings, reconciliation and reorganization, bankruptcy declarations and liquidation. As the first bankruptcy law in China, EBL actually embraces the dual policies of restricting substantial application of bankruptcy remedies and emphasizing conciliation.[15] Besides, the absence of true market indicators and relevant legislation leads to inactive application of the EBL in China.[16] Such factors as inaccurate analysis of a company’s efficiency, effect on banks and other state-run firms, and interconnection between the judiciary and the administrative arms of the government, conspire against courts’ applying the EBL to liquidate insolvent SOEs.[17] As a result, the bankruptcy cases are rare in Chinese court despite the existence of a considerable number of technically insolvent SOEs.[18] #p#分页标题#e#
When it comes to cross-border insolvency, China lacks as yet explicit legislation at a national level. As mentioned above, EBL only applies to the SOEs and excludes all vehicles for foreign investment.[19] The bankruptcy provisions in the CPL are too simple to address any specific issue on cross-border insolvency although it may apply to the foreign-related legal person. Other laws and regulations concerning foreign investment enterprises also keep silent on this issue.[20] Foreign-related Enterprises Liquidation Regulations[21] provide the procedures of the normal liquidation rather than bankruptcy liquidation of foreign-related enterprises.
It may be worth the whistle that article 73 of a New Judicial Interpretation promulgated by the Supreme People’s Court (SPC)[22] states that the bankrupt enterprise’s properties outside the territory of China shall be recalled by the liquidation team. It seems safe to infer that the bankrupt enterprise’s properties shall include those assets located outside the territory of China. But the SPC’s New Judicial Interpretation remains unanswered as to how to recall those properties, which could be a practical problem difficult to solve.
Interestingly, bankruptcy provisions for foreign-related enterprises have, however, at one time been developed at a local level in Guangdong Province [23] and Shenzhen Special Economic Zone (SEZ).[24] Shenzhen Regulations stated that a bankruptcy declaration made in accordance with the bankruptcy law of a foreign jurisdiction shall be of no effect against the property of the debtor situated in the Shenzhen SEZ.[25] But that bankruptcy estate in the proceedings opened by Chinese courts may possibly include the whole assets of the debtor.[26] The rationale behind these provisions was to protect the interests of Chinese citizens and corporations. From a viewpoint of pure protectionism, this approach may be correct. None the less, such approach is harder to justify on the grounds of creditor equality since it could assume a double standard and induce unfair outcome in practice. In the meantime, viewed from the international perspective, these provisions lay emphasis on the territoriality principle, which is unappealing in the context of cross-border cooperation. For instance, given the rejection of Chinese courts to recognize the effect of foreign bankruptcy proceedings upon the debtor’s assets in china, it may appear necessary for foreign liquidator to file de novo a bankruptcy case against the debtor so as to obtain these assets. The duplication of proceedings inevitably decreases the amount of payment for creditors involved. #p#分页标题#e#
When the foreign liquidator or creditors demand the takeover of the debtor’s assets situated in China, the approach of share transfer is preferred than that of direct turnover. Under the Guangdong Regulations, a foreign liquidator would have been entitled to make suggestions about the disposal of foreign debtor’s assets in the SEZ.[27] The debtor’s assets, however, shall be generally disposed of by the way of share transfer. It is noteworthy that there are different requirements on share transfer, given the divergent vehicles of foreign-related enterprises. The procedures for share transfer involving wholly-owned foreign enterprises is simpler than those regarding sino-foreign joint ventures.[28] The latter shall be subject to the approval of the Chinese partner whereas the former is not subject to this requirement. The rationale behind this distinction is to protect the Chinese partner against unwanted loss owing to the foreign partner’s bankruptcy.[29] In addition, share transfer must receive the necessary sanction from the local Municipal People’s Government. Proceeds from the share transfer must not be transferred out of the SEZ until the liquidation expenses, taxation and other local liabilities had been repaid.[30]
These provisions were designed to meet the requirements that combine fixity with flexibility. On the one hand, the bankruptcy of a debtor in its foreign jurisdiction does not deprive it of the capability of disposing of its own assets located in China. On the other hand, permitting the debtor to retract his assets in China by way of share transfer and then to incorporate them into the bankruptcy estate does not affect the business operation, thereby protecting the interests of the Chinese partner. But in practice, it is very difficult to keep absolutely the foreign-related enterprise from adverse effects once the investors failed in foreign jurisdictions. Furthermore, these provisions drew lots of criticism from foreign creditors towards the administrative intervention in the process of assets disposal. #p#分页标题#e#

2. Judicial Practice Concerning Cross-Border Insolvencies

The issues associated with cross-border bankruptcy do exist in Chinese economy life irrespective of the present legal void. In particular, various foreign-related enterprises in China are often affected by foreign bankruptcy declaration. In the event that the foreign investor (whether individual or corporation) has been declared bankrupt in a foreign jurisdiction, the status of his assets situated in China will inevitably become a tough issue. The legal blank on cross-border insolvency gives rise to various difficulties in judicial practice. There are several cases here indicating incoherent attitudes of Chinese courts towards solving these problems.

(a) The LMK Nam Sang Dyeing Case

The first failure of a foreign-related enterprise took place in Shenzhen when LMK Nam Sang Dyeing Factory (hereinafter ‘LMK”) collapsed.[31] LMK, operated by a Hong Kong company, was a wholly-owned foreign enterprise. In 1983, LMK was insolvent when its controlling parent company was being wound up by a Hong Kong court.[32] The Peat Marwick Accounting Firm, as the receiver appointed in the Hong Kong proceeding, approached the Chinese authorities to claim the control of LMK’s assets in Shenzhen. Without legal authority at that time as regards the recognition of such insolvency proceeding, this case was not coped with as a formalized bankruptcy proceeding.[33] The court simply allowed Peat Marwick to negotiate with the local government. Peat Marwick succeeded in gaining control of LMK’s assets and then distributed them in the Hong Kong proceedings.[34] The LMK case illustrated the need for a bankruptcy law to deal with the legal proceedings surrounding the failure of foreign-related enterprises, and induced to some degree the generation of the Shenzhen Rules.[35]

(b) Liwan District Construction Company Case

In the case of Liwan District Construction Company v Euro-America China Property Limited, the defendant was a company registered in Hong Kong and entered into several contracts with the plaintiff. The plaintiff lodged a complaint in Guangzhou Intermediate People’s Court due to the defendant’s breach of contract. This case became more complex when the defendant was wound up by a Hong Kong court.[36] In this case, the decision was mainly produced in accordance with contract law principles, paying little attention to the bankruptcy issues.[37] But in any case, the People’s court applied a territoriality approach to resolve cross-border insolvency issues.[38] In its decision, the People’s Court did not recognize the appointment of the Hong Kong representative, furtherly holding that he lacked the authority to represent the defendant in the Chinese litigation. Therefore, the Hong Kong representative could not exercise the power that was granted to the liquidation committee under the EBL.[39] The court’s primary intention appears to protect the Chinese party’s rights and interests. Certain principles embraced in the Guangdong Regulations then in effect supported the approach adopted by the court as well. #p#分页标题#e#

(c) BCCI (Shenzhen Branch) Case

BCCI was a banking group headquartered in Luxembourg and with numerous subsidiaries and branches in the world. BCCI also did business in China, by setting up a branch in Shenzhen. In the early 1990s, BCCI was declared bankrupt in more than 70 jurisdictions.[40] Shenzhen Branch of Bank of China, as the biggest creditors of BCCI Shenzhen Branch, applied to Shenzhen Intermediate Court (hereinafter ‘SIC’) for the bankruptcy declaration of BCCI Shenzhen Branch and commencement of debt repayment. SIC accepted and heard this case in 1992. In response to the application from Chinese creditors, SIC issued an order to freeze the assets of BCCI Shenzhen Branch within China in a short time. Pursuant to article 5 of Shenzhen Rules[41] and articles 243 of CPL, [42] SIC appointed the liquidation committee to take charge of the liquidation of BCCI Shenzhen Branch. Accordingly, the Chinese creditors only participated in the proceeding opened by SIC (named as ‘small-pond plan’), not being involved in the global liquidation of BCCI (named as ‘big-pond plan’). The report of liquidation committee indicated the total assets of BCCI in China amounted to US$20 million, but with nearly US$80 million liabilities. These assets were ultimately distributed among domestic creditors in accordance with Chinese bankruptcy procedure.[43] In this case, the approach adopted by SIC guaranteed Chinese creditors a little quick repayment although it actually lowered the rate of recovery.[44] This case could serve as a typical exemplification on China’s adherence to the territoriality principle in dealing with cross-border bankruptcy cases.

It is difficult to draw a comprehensive conclusion about Chinese cross-border insolvencies from very few cases. Nonetheless, it has been observed that there is an absence of clear legislative guide for Chinese courts to cope with these problems. Protection of local creditors has been considered as an important factor[45] although it is not easy to succeed due to the innocence of current international practice. More importantly, the notion of international cooperation on cross-border insolvency is still a rather new thing to Chinese courts, which constitutes a self-blockade harmful to China’s climate of investment and trade. #p#分页标题#e#

III. GITIC Bankruptcy Case

On 16 January 1999, Guangdong International Trust and Investment Company (hereinafter “GITIC”)[46] was, under the EBL, declared bankrupt by the Guangdong People’s High Court[47] because of its inability to pay maturing debts.[48] A creditors’ committee was set up at the first creditors’ meeting in April 1999 to oversee the disposal of the GITIC’s assets.[49] In order to protect lawful rights and interests of GITIC’s creditors, Guangdong provincial government took unprecedented steps of calling together municipal and county government officials to urge them to force local debtors to pay back what was owned to the GITIC.[50] The courts at all levels in Guangdong issued orders and announcements to all debtors and guarantors that outstanding funds must be paid.[51] The courts tried to get back the debts by freezing, confiscating and auctioning the assets of debtors. [52]
After four years’ investigation and legal hearings, the GITIC bankruptcy case ended on 28 February 2003. And a total of 2.536 billion yuan (US$305.54 million) has been repaid to GITIC,s creditors over the past four years. The payment mainly came from public auctions of GITIC,s properties, including the 63-storey GITIC Plaza. Creditors expressed satisfaction with a recovery rate reaching 12.54 per cent and the speed and efficiency of Chinese courts in handling the high-profile case. [53]
As the first case concerning the bankruptcy of leading state-owned financial institution in China,[54] the GITIC case involves the largest-ever amount of assets and foreign debts in China,[55] drawing international-wide attention in short time. This case has raised several noteworthy legal issues during the period of hearing. Given its unprecedented nature and historic importance, it seems worthwhile to examine the GITIC case here in some detail.

1. Equitable Treatment for Creditors and Registration of Foreign Debts

The equitable treatment for all creditors is recognized as one of core principles of insolvency and bankruptcy laws worldwide. But it is not an easy task for Chinese courts to put this principle in operation. The creditors of GITIC come from many different jurisdictions. Besides, the requirements of Chinese laws that foreign debts should be registered make this issue more complicated. #p#分页标题#e#

(a) Foreign Creditors and Domestic Creditors

GITIC had over 200 creditors from Mainland China, Hong Kong, Macao, the United States, Japan, Thailand and Australia other than individual depositors.[56] In China, previous liquidation of insolvent financial institutions had been carried out under central bank’s administration, in which foreign creditors were paid in full.[57] But following the collapse of GITIC, PBOC announcement on the closure of GITIC dated on October 6, 1998 only stated that overseas liabilities registered with the State Administration of Foreign Exchange (hereinafter “SAFE”, China’s foreign exchange control authority) and principal and interest of individual depositors shall have priority in repayment.[58] The announcement actually indicated China had taken a clear stance that it was under no obligation to bail out GITIC and foreign creditors should not anticipate full repayment as ever.[59] Afterwards, the further decision put GITIC’s foreign creditors at the mercy of the bankruptcy court, where they enjoy none of the privileges of the GITIC’s domestic creditors, even though the foreign loans had been registered with the SAFE. Creditors, whether foreign or domestic, were required to undertake their lending responsibility without exception.[60] This drew strong criticism from foreign banks and other creditors, who insisted on priority in repayment.
But as far as the principle of bankruptcy laws is concerned, the Chinese courts are on the right track for ranking all creditors equally in this regard. Under the EBL, the order for the distribution of unsecured assets is, firstly to wages and labor insurance benefit owed by the debtor to its workers and staff, then second-rank priority is given to taxation obligations, and lastly to general claims.[61] Thus, there is no legal basis on which foreign creditors could obtain priority. Moreover, if foreign creditors were granted priority in repayment, domestic creditors would actually be put in more miserable circumstances.[62] At the same time, from an international perspective, all creditors that belong to the same rank shall be treated impartially regardless of their nationality. There is no insolvency law granting foreign debts priority over domestic debts. #p#分页标题#e#

(b) Registered Foreign Debts and Unregistered Foreign Debts

Another problem relating to the treatment of creditors stems from the existing Chinese laws that require all indebtedness within China to foreign lenders to be approved and register with the SAFE.[63] Unregistered foreign debts, that is, foreign debts which are not on file at the SAFE, are unrecognizable and unenforceable.[64] The treatment of SAFE-registered foreign debts has been a key element of uncertainty in the GITIC case. At the second creditors’ meeting held on October 22, 1999, the liquidation committee informed creditors of that only RMB 24.33bn worth of claims from a total of RMB 38.9bn would be recognized. The reduction totaling RMB 14.57bn (US$1.75bn) consisted mainly of unregistered overseas debts.[65] The Guangdong People’s High Court announced the refusal and gave creditors 15 days to object.[66]
One of objections concerns the guarantees granted by GITIC to its Hong Kong subsidiary. Creditors insisted that this kind of guarantee should not be regarded as overseas indebtedness and formal registration with the SAFE was not required.[67] But in accordance with Chinese laws regarding foreign debt guarantees, the guarantee refers to domestic enterprises in China, foreign-related enterprises, 100 per cent subsidiaries of institutions within China and enterprises registered out of China but with shares purchased by Chinese parties.[68] Hence, the said guarantee provided by GITIC shall fall into the scope of foreign debts and registration with the SAFE shall be compulsory.
It should be pointed out that there exists a misunderstanding regarding the requirements of registration of foreign debts in that it is sometimes supposed that foreign lenders obtain guarantees from Chinese government once foreign debt has been registered with the SAFE. But in fact, the purpose of registration of foreign debts with the SAFE is to monitor and collect data on overseas indebtedness of China.[69] In the meantime, this registration also enables the borrower to gain authorization to use Renminbi, China’s currency, for buying foreign currency so as to repay the foreign creditors. [70] Accordingly, this registration is purely an administrative process and by all means should only be viewed as a means of tracking capital inflows and outflows instead of guarantee for foreign currency loans or debts offered by Chinese government.[71] In this sense, the bankruptcy of GITIC was a watershed for foreign banks which had lent to Chinese Itics [72] (International Trust and Investment Companies) in the belief that it was sovereign debts which Chinese government should take the responsibility of repayment. #p#分页标题#e#

(c) Individual Depositors and Corporate Creditors

Apart from numerous corporate creditors, GITIC had 25,000 individual depositors. PBOC announcement once mentioned that priority in repayment should be given to the overseas lenders and individual creditors. As a matter of fact, GITIC’s individual depositors were repaid in full on their principal, but not on their interest outside the bankruptcy proceeding.[73] This drew strong criticism from foreign creditors[74] though individual depositors were paid out of provincial money rather than from the bankruptcy estate.[75]
These criticisms to some extent are justifiable in view of the non-obsevance of the principle of equal treatment for all creditors. Besides, it was unlawful for GITIC to accept savings from natural persons as GITIC in nature is not a deposit-taking institution.[76] Consequently, ‘illegal’ depositors, who were attracted by illegally high interest rates, should not have been protected.[77] None the less, it should be acknowledged that there exists an unwritten, but deep-rooted, consideration for the Guangdong provincial government to pay individual depositors. Considering that China now lacks a deposit insurance system, it will inevitably lead to huge social unrest due to the failure to repay for individual depositors, which is undesirable for China’s stability and solidarity.[78]

*
Professor of Law, China University of International Business and Economics, Beijing, PRC. E-Mail: shijingxia@vip.sina.com. The main parts of this article was prepared during my academic visit to the Center for Commercial Law Studies (CCLS), Queen Mary and Westfield College, University of London from 20 February 2000 to 19 August 2000. I would like to express special and enduring gratitude to Professor Ian F. Fletcher not only for his constructive comments on this article but also his ardent encouragement for this research. Errors of fact, judgments are of course mine. In addition, the financial support from EU-China Higher Education Cooperation Program for my academic visit to CCLS was acknowledged with appreciation as well. #p#分页标题#e#
[1] See, eg Charles D. Booth, “Recognition of Foreign Bankruptcy: An Analysis and Critique of the Inconsistent Approaches of United States’ Courts,”(1992) 66 Am. Bankr. L. J., p. 135.
[2]See Douglas Boshkoff, “Some Gloomy Thoughts Concerning Cross-Border Insolvencies,” (1994) 72 Wash. U. L.Q., p. 936.
[3]See, eg Jay Lawrence Westbrook, “Developments in Transnational Bankruptcy,” (1995) 39 St. Louis U. L. J., p. 745.
[4]In addition to the Model Law and EU Regulation, there are other projects having been paid more and more attention as well in recent years. These mainly include ‘The World Bank Global Insolvency Project’, ‘The Transnational Insolvency Projects’ among the member states of NAFTA,‘Cross-Border Insolvency Concordat’ undertaken by the Committee J of International Bar Association (IBA), etc.
[5]See Sheryl Miller, “Institutional Impediments to the Enforcement of China’s Bankruptcy Laws,”(1996) 8 Int’l Legal Persp., p. 188, 213.
[6]See Steven L. Toronto, “Bankruptcy of Foreign Enterprises in the PRC: An Interpretation of the ‘Rules Concerning Bankruptcy of Foreign Related Companies in the Shenzhen Special Economic Zone’,”(1990) 4 J. Chinese L., pp. 290-291.
[7]See Part II below.
[8]See Part III below.
[9]For a good overview of the development of Chinese bankruptcy laws, See Feng Chen, “Chinese Bankruptcy law: Milestones and Challenges,”(1999) 31 St. Mary’s L. J., pp. 49-52; See also Neal Stevens, “Confronting the crisis of Insolvency in China’s State-owned Enterprises: Can the Proposed Bankruptcy Law Erase the Red Ink?” (1998) 16 Wis. Int’l J., p. 559.
[10]The EBL was promulgated at the 18th Session of the Standing Committee of the 6th National People’s Congress on 2 December 1986, effective as of 1 November 1988. For the English version of EBL, See Douglas G. Boshkoff & Yongxin Song (translated), “China’s New Bankruptcy Law: A translation and Brief Introduction,” (1987) 61 Am. Bankr. L. J., pp. 359-369; see also “Bankruptcy Law of the People’s Republic of China: Principles, Procedure & Practice,” Henry R. Zheng (translated), (1987) 19 Vand. J. Transnat’L, pp. 683-738. #p#分页标题#e#
[11]Civil Procedure Law of the People’s Republic of China was adopted and came into effect on 9 April 1991. Its bankruptcy provisions are very short and basically replicate main elements of the EBL despite of some substantive differences. See Gordan G. Chang, “Bankruptcy Law in China: Too Much or Too Little?”(1999) 5 China L. & Prac, pp. 22-23.
[12]In line with the implementation of the EBL, the Supreme People’s Court of P. R. of China promulgated the Opinions on Issues Concerning the Implementation of the Tentative EBL (hereinafter “The Supreme Court Bankruptcy Opinions”) on 17 November 1991. Likewise, the Supreme Court promulgated the Opinions on Issues Concerning the Implementation of the CPL (hereinafter “The Supreme Court CPL Opinions”) on 14 July 1992.
[13]Enterprise Bankruptcy Law, art. 2. Initially, EBL was to have had a broader scope of application. See Mark E. Monfort, “Reform of the State-Owned Enterprises and the Bankruptcy Law in the People’s Republic of China,”(1997) 22 Okla. City U. L. Rev., pp. 1078-1079.
[14]The Supreme Court Bankruptcy Opinion, (n. 12 above), art. 74.
[15]Given the vigorous use of EBL could have potentially left millions of workers unemployed, creating substantial social and political problems, it is not surprising that the EBL actually acts as mere threat of bankruptcy. See Shirley S. Cho, “Continuing Economic Reform in the People’s Republic of China: Bankruptcy Legislation Leads the Way,”(1996) 19 Hastings Int’l & Comp. L. Rev., p. 745.
[16]There are lots of criticisms towards the implementation of EBL, arguing that it seems “more bark than bite”. See, eg Jonathan L. Flaxer, “Bankruptcy in China,”(1994) Am. Bankr. Inst. J.,p. 24.
[17]For the elaboration of these factors, See Steven L. Seebach, “Bankruptcy behind the Great Wall: Should U.S. Business Seeking to Invest in the Emerging Chinese Market Be Wary?”(1995) 8 Transnat’l Law., pp.355-57. #p#分页标题#e#
[18]Most of bankruptcy cases having been heard by Chinese courts involve privately-owned enterprises, collectively owned enterprises and joint-venture enterprises. See Steven L. Seebach, Ibid., p. 358.
[19]Whether or not the Bankruptcy law would encompass foreign enterprises was debated at length. See Henry R. Zheng, (n. 10 above), p. 685; See also Shirley S. Cho, (n. 15 above), p. 746.
[20]The Chinese legislation on foreign-related enterprises mainly include: The law on Sino-Foreign Equity Joint Ventures of P. R. of China (July 1979, as amended in 2001), The Law on Wholly-Owned Foreign Enterprises of P. R. of China (April 1986, as amended in 2000), The Law on Sino-Foreign Contractual Joint Ventures of P. R. of China (April 1988, as amended in 2000) and accompanying Implementation Rules. These Laws and Rules are, without exception, silent on the bankruptcy issues although they mention the termination and liquidation of these enterprises.
[21]Foreign-Related Enterprises Liquidation Regulations was promulgated by the Ministry of Foreign Trade and Economic Co-operation (MOFTEC) and effective as of 9 July 1996.
[22]Provisions on Some Issues Concerning the Trials of Enterprise Bankruptcy Case of the Supreme People’s Court of China (Interpretation No. 23 [2002] of the SPC) was adopted at the 1232nd meeting of the Judicial Committee of the Supreme People’s Court on July 18, 2002, promulgated on 30 July 2002 and came into effect as of 1 September 2002. These provisions are enacted in combination with the actual situation on the trial of enterprise bankruptcy cases by the people’s courts with a view to correctly applying the Law of the PRC on EBL, CPL and regulating the trial of enterprise bankruptcy cases.
[23]Guangdong Special Economic Zone Foreign-Related Companies Bankruptcy Regulations (hereinafter ‘Guangdong Regulations’) was promulgated by the Standing Committee of the Guangdong People’s Congress on 20 October 1986, effective as of 1 January 1987. This Regulation has been repealed and substituted by the 1993 Guangdong Province Company Bankruptcy Regulation. The new Regulation contains no provisions on cross-border insolvency. #p#分页标题#e#
[24]In 1979, the Chinese government created in southern China four Special Economic Zone (SEZ) where outsiders could invest and become owners in Chinese enterprises. The four SEZ include Shenzhen, Zhuhai, Xiamen and Shantou. Shenzhen has the largest number of foreign investors in China. Its proximity to Hong Kong gives Shenzhen access to one of the largest consumer markets in the world.
Regulations on Foreign-Related Companies Bankrupcy in the Shenzhen Special Economic Zone (hereinafter ‘Shenzhen Regulations’) was promulgated on 7 December 1986 and became effective as of 1 July 1987. The Rules was repealed and substituted by the 1993 Shenzhen Special Economic Zone Enterprises Bankruptcy Regulations. Likewise, nor does this new Regulation contain provisions regarding cross-border insolvency.
[25]Shenzhen Regulations, ibid., art. 5.
[26]Ibid., art. 31. This article stated that bankrupt estate include the debtor,s assets when it was declared bankrupt. It is arguably inferred from this article that the debtor,s assets shall include its overseas assets.
[27]Guangdong Regulations, (n. 22 above), art. 40.
[28]The Law on Sino-Foreign Contractual Joint Venture of People’s Republic of China (2000), art. 10; The Implementation Rules for the Law of Sino-Foreign Contractual Joint Venture of People’s Republic of China (2000), art. 23; The Law on Sino-Foreign Equity Joint Venture of People’s Republic of China (2001), art. 4; The Implementation Rules for the Law on Sino-Foreign Equity Joint Venture of People’s Republic of China (2001), art. 23, 24; The Law on Wholly Foreign-Owned Enterprises of People’s Republic of China (2000), art. 5; The Implementation Rules for the Law on Wholly Foreign-Owned Enterprises of People’s Republic of China (2000), art. 23, 24.
[29]Guangdong Regulations, (n. 23 above), art. 44. This article provided that the disposal of the assets, which was to take the form of share transfers or the assignment of rights and interests, was not to be made if the transfer would have had any adverse effect on the normal production and operation activities of the company. #p#分页标题#e#
[30]Guangdong Regulations, (n. 23 above), art. 45.
[31]See Steven L. Toronto (n. 6 above), p. 277.
[32]Under British Insolvency laws, “winding up a company” is equivalent to liquidation of a company.
[33]See Steven L. Seebach (n. 17 above), p. 353.
[34]See Steven L. Toronto (n. 6 above), pp. 280-281.
[35]As far as the author is aware, it is not clear whether there were Chinese creditors or not and how were their claims dealt with in this case. But given the fact that LMK case happened at the early stage of Chinese “open door policy” and the pressing needs for China to attract foreign capital to accelerate its economic development, it was likely that the foreign creditors were in fact given priority in this case.
[36]With respect to the details of this case, See Donald J. Lewis & Charles D. Booth, “Case Comment, Liwan District Construction Company v Euro-America China Property Limited,”(1990) 6 China L. & Prac., p. 27.
[37]See Charles D. Booth, “The Transnational Aspects of Hong Kong Insolvency Law,”(1995) 2 Sw. J. L. & Trade Am., p. 71.
[38]Ibid., pp. 72-73.
[39]For further analysis of this problem, See Donald J. Lewis & Charles D. Booth (n. 36 above), pp. 33-34.
[40]With regard to the overview of the BCCI insolvency proceeding at a global level, see Christopher K. Grieson, ‘Shareholder Liability, Consolidation and Pooling’, in Current Issues in Cross-Border Insolvency and Reorganization, E. Bruce Leonard and Christopher W. Besant (ed., 1994), pp. 220-225; see also Christopher K. Grieson, “Insolvency of Financial Institutions,” (1996) 5 Int’l Bus. Lawyer, p. 213.
[41]Note 23, 24 above and accompanying text.
[42]This article provides for jurisdictional basis of Chinese courts on foreign-related civil procedures, including bankruptcy proceedings. Pursuant to this article, SIC may exercise jurisdiction against the BCCI Shenzhen Branch on the basis of assets-presence, the location of representative office, etc. #p#分页标题#e#
[43]See Shi Jingxia, Legal Issues in Cross-Border Insolvency (China, Wuhan University Press, 1999), p. 70; see also Xu Liangdong, Trial Procedures of Bankruptcy Cases (China, 1997), pp. 59-60.
[44]In the global liquidation of BCCI which lasted for several years, the creditors finally recovered about 40 per cent of their claims thank to the effective cooperation among the liquidators and courts from different jurisdictions. See Leslie A. Burton, “Toward An International Bankruptcy Policy in Europe: Four Decades in Search of A Treaty,”(1999) 5 Ann. Surv. Int’l & Comp. L., p. 227.
[45]As a matter of fact, the concern for the protection of local creditors is blameless since it is a standard that is fairly and widely accepted as a legitimate criterion on which to base any use of its discretionary powers by the national courts in an international context. See, eg U.S. Bankruptcy Code, s. 304 (c) (2).
[46]GITIC, as one of a select group of “champions of economic reform”, was established in July 1980 and later became the second largest foreign debenture issuer in China and a fund-raising arm for the Guangdong provincial government as well. GITIC had spectacular rise and fall in the business history of China. See, eg ‘The Spectacular Rise and Fall of GITIC’ (18 May 1999), available at ‘http://www.chinaonline.com/top_stories/breakingnews_b2_99051423.html’.
[47]GITIC registered with the Guangdong Administration on Industry and Commerce and had its domicile in Guangdong. Pursuant to art. 5 of the EBL, bankruptcy cases shall be subject to the jurisdiction of the People’s Courts in the location of the debtor.
[48]China originally intended to close GITIC under the administrative procedures that had been employed to cope with ailing financial institutions. In fact, the GITIC was shut down initially by People’s Bank of China (PBOC) on 6 October 1998, without any reference to the EBL. See, eg Kynge, James & Harding, “China Suffers Biggest Financial Failure”, Fin. Times, 7 October 1998. #p#分页标题#e#
The Bank of China, one of the four largest state-owned banks, was appointed as an administrator to take charge of the GITIC liquidation. The three-month liquidation, however, found GITIC was insolvent seriously. GITIC and three of its subsidiaries --GITIC Shenzhen Company, Guangdong International Leasing Company and Guangxin Development Enterprise—had to apply for bankruptcy protection. See, eg ‘Chinese Court Declares GITIC Bankrupt’, available at ‘http://www.chinaonline.com/top_stories/today_b2_99011803.html’.
China’s approval of GITIC’s bankruptcy was the outcome of painful choices. See, eg ‘Q&A: Guangdong Deputy Governor Speaks on GITIC and Guangdong Enterprise’, available at ‘http://www.chinaonline.com/top_stories/breakingnews_b2-99031516.html’; see also‘China’s Central Banker Speaks out about GITIC Bankruptcy Proceedings’ (11 February 1999), available at ‘http://www.chinaonline.com/top_stories/today_b2-99020110.html’; Zhu Jun, “Closure of Financial Institutions in China”, in Strengthening the Banking System in China: Issues and Experience, BIS Policy Papers No 7, p. 313 (October 1999).
[49]See, eg Jacob, Rahul & Lucas, Louise, ‘China: Government Details GITIC Assets’, Fin. Times, 23 April 1999.
[50]Debts owed by 422 Guangdong-based units account for 95 per cent of total outstanding debts to GITIC and subsidiaries. A total of 134 government bodies have outstanding guarantees on loans made by GITIC, accounting for 73 per cent of total amount. See, eg ‘GITIC Loans to Guangdong-based Units Worth 18.8 bln yuan’, 31 March 2000, available at ‘2000 WL 16717065’.
[51]See Matthew Miller and William Kazer, ‘The Loans That Went Too Far’, S. China Morning Post, (30 March 2000), available at ‘2000 WL 14847902’.
[52]For example, Guangdong People’s High Court froze RMB 800 million (US$96.64) in assets of GITIC’s debtors. After freezing the assets, the court notified the relevant local governmental authorities that the businesses are forbidden from transferring, leasing or using as collateral any of their land, property, vehicles, stock rights and registered capital. See, eg., ‘Chinese Court Freezes US$97 Million in Assets of GITIC’s Debtors’, Nanfang Daily (China), 12 May 1999. Also, Liquidators have completed some auctions of the GITIC’s stock holdings, selling stakes in three listed companies at a discount. See, eg ‘China – Hubei Xingfu on the Block’, China online (4 August, 2000), available at ‘ 2000 WL 4756621’; Wang Rong,‘GITIC Auctions off Assets’, China Daily (3 August 2000), available at ‘ 2000WL 25554296’. #p#分页标题#e#
[53]See, eg ‘Creditors Satisfied with the GITIC Bankruptcy Settlement’, available at ‘http://www.southcn.com/english/news/money/200303030369.htm’.
[54]Until the GITIC case, the EBL had been used mostly for the bankruptcies of small state-owned enterprises, and had never been used in the case of a large financial institution, or for a debtor which had significant foreign indebtedness. See T K Chang, “The East Is in the Red,” (March 1999) IFLR, p. 43.
[55]When it went bust, GITIC had assets of US$2.58 billion against liabilities of US$4.35 billion.
[56]The foreign currency obligations of GITIC are estimated to be in excess of US$4 billion, about half of its loans and balance in guarantees.
[57]For example, in the administrative closure of Hainan Development Bank (21/06/98) and China Agriculture Trust and Investment Corporation, CATIC (04/01/97), overseas debts obtained full repayment. See Liu Shiyu, “China’s Experience in Small and Medium Financial Institutions Resolution,” in Strengthening the Banking System in China: Issues and Experience, BIS Policy Papers No. 7, p. 299 (October 1999).
[58]See, eg T K Chang (n. 54 above), p. 44.
[59]See A V Rajwade, “Investing in the Chinese Puzzle,” Business Standard (15 March 1999), available at ‘1999 WL 5943936’.
[60]See, eg “Reexamination of GITIC Bankruptcy Case,” (1999) Special Information (China), p. 2; See also “Analysis – China Plans Public Fund Injection for ITICs,” Asia Pulse (11 January 2000), available at ‘2000 WL 2676073’.
[61]Enterprise Bankruptcy Law, art. 37(2).
[62]Recovery from the assets of GITIC would be virtually impossible for many Chinese creditors, including foreign-funded banks, joint ventures and state-owned enterprises.
[63]Foreign Exchange Control Regulation of the People’s Republic of China (adopted at the 41st meeting of standing committee of State Council, effective as of 1 April 1996, amended on 14 January 1997), art. 24. This article provides that China shall implement a system for registration of foreign debt. All organizations within China shall carry out registration of foreign debt in accordance with the State Council Regulations Concerning Monitoring and Collecting of Data on Foreign Debt. #p#分页标题#e#
[64]In GITIC’s case, half the US$1.93 billion (US$3.28 billion) in direct foreign debts had not been registered with SAFE. See Mary Kwang, “China’s Financial System Rocked,”The Straits Times (Singapore, 14 February 1999), available at ‘1999 WL 8246230’. Similarly, in connection with the way derivative-related debts arising from the collapse of GITIC are settled, unless these transactions with GITIC were individually registered, they should be placed in subordination to other debts arising out of GITIC’s failure. See, eg “PBC Said to Clam Up on GITIC”, Derivatives Week (March 2000), available at ‘2000 WL 11658639’.
[65]In the meanwhile, it also meant that the number of approved creditors has fallen from as many as 320 to 215. See Michael Dwyer, “GITIC: Repayment Begin”, Austl. Fin. Rev., 2 November 2000, available at ‘2000 WL 26260447’. But there is still different news in regard to the treatment of SAFE-registered foreign debts, arguing that the RMB 21.1 billion claims accepted by the liquidation committee included all foreign-currency claims which GITIC had not registered with the SAFE although they were technically illegal. See, “China GITIC Passes Pay-out Plan to Creditors”, Dow Johns Int’l News, 30 October 2000. It was explained that quite a large percentage of debt claims was rejected for various reasons, such as some claims’ not being liable to GITIC, claims without enough evidence, etc. See, eg “GITIC Liquidators Accept 21.1 Billion Yuan in Creditors Claims”, Asian Econ. News, 30 October 2000, available at ‘2000 WL 23766302’.
[66]See Lin Ho Swee, “GITIC: Payout Blow for Creditors”, Fin. Times, 23 October 1999; See also “Creditors of China’s GITIC Object to Plan”, 9 November 1999, available at ‘http://www.chinaonline.com/topstories/C9110807.asp’; “GITIC Debts Lower, Liquidators Say”, Hong Kong Ming Bao, 23 October 1999. #p#分页标题#e#
[67]See T K Chang (n. 54 above), p. 45.
[68]Rules for Implementation of Administrative Measures for Foreign Guarantee by the Institutions within China (promulgated on 26 September 1991 by the People’s Bank of China), art. 6. These Rules are substituted by ‘Administration Regulations on Foreign Guarantee Provided by Domestic Institutions’(promulgated on 21 August 1996 by the People’s Bank of China, effective as of 1 October 1996). The new Regulations contain similar provisions in its art. 2.
[69]Interim Regulations Concerning Monitoring and Collecting of Data on Foreign Debts (approved by State Council of P. R. of China on 17 June 1987, promulgated by the SAFE on 27 August 1987), art. 1.
[70]As is commonly known, China has been implementing the policy of foreign exchange control. Renminbi (Chinese currency) can not be converted freely. Therefore, the Chinese borrower needs to convert its own Renminbi capital into relevant foreign exchange in order to pay the overdue principal and interests of foreign debts once the borrower itself has not enough foreign exchange to do so.
[71]See, eg “Q&A: Guangdong Deputy Governor Speaks on GITIC and Guangdong Enterprise”(n 47 above); See also “GITIC Interest Taxes Add Insult to Injury”, S. China Morning Post, 31 March 2000, available at ‘2000 WL 14847846’.
[72]Itics stands for “International Trust and Investment Company”. As vehicles to raise foreign funds for developing local economies, Chinese Itics once peaked at 1000 in 1992. But the Mainland China’s financial system has become more diverse and sophisticated in recent years, sharply reducing the scope and need for Itics. See, eg “Bankruptcy Looms for Ailing DITIC”, S. China Morning Post, 18 September 2000, available at ‘2000 WL 26863111’.
[73]See, eg “Declared Bankruptcy: GITIC Cast Off Eventually” (1999) Special Information (China), p. 6.
[74]They insisted that since some parts of the announcement concerning the repayment in full (at least of principal) of individual depositors had already been honored, the rest of the promise should also be carried out. See Mark Landlers, “China Gives Foreign Creditors A Rude 1999 Awakening”, N. Y. Times, 12 January 1999, p. 4; See also T K Chang (n. 54 above), p. 44. #p#分页标题#e#
[75]See “GITIC Interest Taxes Add Insult to Injury”, n. 70 above.
[76]See generally, Interim Regulations on Administration of Trust and Investment Institutions (promulgated by People’s Bank of China in 1986).
See also Regulations on Saving Management of People’s Republic of China (promulgated on 11 December 1992 by the State Council of PRC (Order No 107), effective as of 1 March 1993), art. 8. This article stipulates that any units and individual shall not carry out the savings operation except the savings institutions’. Pursuant to art. 4 of this Regulation, ‘savings institutions’ refer to various banks, credit cooperatives, and postal units carrying on the savings business under the approval of the People’s Bank of China and its branch. Therefore, GITIC should not belong to these categories of savings institutions.
Further, Punishments for Financial Unlawful Dealings of People’s Republic of China (promulgated on 22 February 1999 by the State Council of PRC, effective as of the same date), art. 28. (Providing that International Trust and Investment Companies (ITICs) shall not accept individual deposits and issue loans.)
[77]Regulations on Savings Management of People’s Republic of China, ibid,, art. 5. This article provides that ownership and all other legal interests of individual depositors shall be protected. Inference from this article should be that ‘illegal interests’ should not be protected.
[78]Commercial Banking Law of People’s Republic of China (adopted at the 13th. Meeting of Standing Committee of 8th. National People’s Congress on 10 May 1995) has similar provisions on preferential rights of individual depositors. Art. 71(2) says that in the case of bankruptcy liquidation of commercial banks, after the payment of liquidation expenses, wags and labor insurance fees, principal and interests of individual savings shall be given priority.