Necessity and feasibility of summary bankruptcy proceedings

It is difficult for an enterprise to avoid losses on outbound investments. As a link to its risk management, an enterprise should timely declare insolvency and liquidate subsidiaries or participated companies that do not provide value. This article provides a brief introduction to summary bankruptcy proceedings.

The PRC Enterprise Bankruptcy Law, which took effect on 1 June 2007, marks a significant progress in the market economy in China. It indicates that China began paying greater attention to the orderly exit of market players. However, judicial practices of enterprise bankruptcies reveal that a number of companies, especially small to medium-sized enterprises, do not exit the market through bankruptcy proceedings. The reason is that red tape and the high costs of current bankruptcy proceedings discourage many enterprises seeking such help. For this reason, China, in consideration of its national conditions, should absorb and learn from the advanced domestic and foreign experiences in legislation and design simpler and more cost-saving summary bankruptcy proceedings to cater to the current need.

The summary bankruptcy proceedings refer to those that apply to cases where the amount involved is small, the creditor’s right and debt are clear, and there are a few creditors. Summary bankruptcy proceedings are recognized in the common law and civil law systems of most countries. They are laid down in Bankruptcy Act 1994 of Germany, Law of Bankruptcy of Japan, and others.

Wang Wei is a senior partner and Gao Menglu is an associate at Co-effort Law Firm