Are bankruptcy cases about to rise significantly?

The Supreme People’s Court on 6 February 2017 promulgated the Guiding Opinions on Several Issues concerning Enforcement Cases Referred for Bankruptcy Examination. This is a new initiative of the Supreme People’s Court to address “difficulties in enforcement”, and may also contribute to the application of the Enterprise Bankruptcy Law to a large extent. Before that, Shenzhen Intermediate People’s Court had made a trial implementation of Several Opinions Concerning Initiation of Bankruptcy Proceeding for Unenforceable Cases, in 2013. Guangdong High People’s Court also issued Several Opinions concerning Enforcement Cases Referred for Bankruptcy Examination on 17 November 2016. Therefore, successful conclusion of such cases was available in southern China before the issuance of the Supreme Court’s guiding opinions.

The Chinese court system has long been plagued by difficulties in enforcement. In the past decade, however, only 3,000 bankruptcy cases were accepted by courts at various levels throughout the country. The main reasons for such contradictions are as follows: If an enterprise subject to enforcement has no property to enforce, the enforcement case would be ruled as termination. The enterprise, however, will continue to exist as a “zombie” and relevant parties have no incentive to push such an enterprise to enter into bankruptcy proceedings. The guiding opinions were issued to that effect. It is also the realistic need of the people’s courts to follow the law of justice, improve the judiciary work mechanism, and solve remaining difficulties in enforcement.

The guiding opinions, however, cannot break through existing legal requirements since they are “guiding opinions”. In terms of initiation of bankruptcy cases, the guiding opinions impose restrictions on three aspects: (1) the subject must be an enterprise; (2) the subject must meet the substantial conditions set out in article 2 of the Enterprise Bankruptcy Law. In practice, all the parties subject to enforcement meet this requirement as enforcement against them is not likely to be made; and (3) it is conditioned on written consent from the parties subject to enforcement or the applicants of enforcement. It is a principle set out in China’s bankruptcy legislation that bankruptcy proceedings must be initiated upon application by interested parties.

Xu Shengfeng is a senior partner at Zhong Lun Law Firm, the deputy director of Shenzhen Institute of Enterprise Bankruptcy and a senior researcher of the Bankruptcy Law Research Cen tre at China’s Renmin University. Li Chengwen is a non-equity partner at Zhong Lun Law Firm