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Corporate Reorganization Reform in China: Findings from an Empirical Study in Zhejiang

Published online by Cambridge University Press:  20 May 2016

Zinian ZHANG  and
Roman TOMASIC
Zinian ZHANG
Affiliation:
University of Leeds, Englandz.zhang2@leeds.ac.uk
Roman TOMASIC
Affiliation:
University of Southern Australia, Australiaroman.tomasic@unisa.edu.au
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Abstract

In 2006, China enacted its first rescue-oriented Enterprise Bankruptcy Law with the aim of establishing its corporate rescue culture. But the corporate reorganization procedure that is at the heart of the new bankruptcy law has not been used frequently. It is appropriate to ask why the use of China’s new corporate rescue law has been so low. Meanwhile, in the existing corporate reorganizations under the 2006 Law, most debtors were excluded from the reorganization process, so that the Chinese new debtor-in-possession model, which seems to be a desirable control format, was largely shelved. Why so? This article explores these two issues through the use of empirical data collected from Zhejiang, a province with a significantly larger number of reorganizations than most other Chinese provinces.

Type
Articles
Information
Asian Journal of Comparative Law , Volume 11 , Issue 1 , July 2016 , pp. 55 - 85
Copyright
© National University of Singapore, 2016 

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Footnotes

*

Lecturer at School of Law, University of Leeds, England; previously Research Fellow at the Centre for Cross-Border Commercial Law in Asia, School of Law, Singapore Management University, Singapore.

**

Professor of Law, School of Law, University of South Australia, GPO Box 2471, Adelaide, 5001, Australia, and Visiting Professor of Company Law, Durham Law School.

References

1. Earlier versions of this article were presented at the East Asian Law & Society Conference (Shanghai, Shanghai Jiaotong University, 22 March 2013) and the 6th Insolvency Research Conference (London, The Insolvency Service and University College London (UCL), 19 April 2012).

TOMASIC, Roman and ZHANG, Zinian, “From Global Convergence in China’s Enterprise Bankruptcy Law 2006 to Divergence in Implementation: The Case of Corporate Reorganizations in China” (2012) 12 Journal of Corporate Law Studies 295 Google Scholar (noting that reorganization is only used for a small number of large companies in China).

2. Zhang has found that the debtor-in-possession model was only used in twenty-six percent of reported Chinese reorganizations; see further: ZHANG, Zinian, Corporate Reorganization Under the Enterprise Bankruptcy Law of the People’s Republic of China – The Relevance of Anglo-American Models for China (PhD Thesis, Durham University, 2014) at 131 Google Scholar.

3. Ibid at 115.

4. See PARRY, Rebecca and ZHANG, Haizheng, “China’s New Corporate Rescue Laws: Perspectives and Principles” (2008) 8 Journal of Corporate Law Studies 113 Google Scholar.

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19. Ibid, art 87.

20. Ibid, art 89.

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35. See WANG, Xinxin, “Lun Pochan Anjian Shouli Nan Wenti De Jiejue (论破产案件受理难问题的解决) [Difficulties in Commencing Corporate Bankruptcy Processes in China]” (2011) 3 Falu Shiyun (法律适用) [Journal of Law Application] 29 Google Scholar [Wang, “Difficulties of Commencing”].

36. HAN, Changyin and HE, Huan, “Pochan Jiexian De Lifa Gongneng Wenti (破产界限的立法功能问题) [Bankruptcy Tests and Practices]” (2013) 2 Zhenzhi Yu Falu (政治与法律) [Politics and Law] 2 Google Scholar.

37. Tomasic and Zhang, supra note 1 at 311.

38. This article uses the practitioner-in-possession and administrator-in-possession model interchangeably.

39. Booth, supra note 7 at 303.

40. See generally MCCORMACK, Gerard, “Control and Corporate Rescue – An Anglo-American Evaluation” (2007) 56 International and Comparative Law Quarterly 515 Google Scholar [McCormack, “Control and Corporate Rescue”].

41. ROACHE, John T, “The Fiduciary Obligations of a Debtor in Possession” (1993) 1993 University of Illinois Law Review 133 at 140-141 Google Scholar.

42. See BRADLEY, Michael and ROSENZWEIG, Michael, “The Untenable Case for Chapter 11” (1992) 101 Yale Law Journal 1043 at 1044 Google Scholar.

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47. McCormack, “Control and Corporate Rescue”, supra note 40 at 544.

48. WANG, Xinxin, “Xing Pochanfa De Tupo (新破产法的突破) [Innovations in the New Bankruptcy Law]” (2006) 2 Faren (法人) [Legal Entity Journal] 20 Google Scholar.

49. WANG, Weiguo, “Xing Pochanfa Caoan Yu Gongsi Faren Zhili (新破产法草案与公司法人治理) [The Draft of the New Bankruptcy Law and Bankruptcy Corporate Governance]” (2005) 2 Faxuejia (法学家) [The Jurists] 5 at 7 Google Scholar [Wang, “The Draft”].

50. WANG, Xinxin, “Lun Pochan Guanliren Zhidu Wanshan De Ruogan Wenti (论破产管理人制度完善的若干问题) [Improving the Insolvency Practitioner System]” (2010) 9 Fazhi Yanjiu (法治研究) [Legal Research] 14 at 15 Google Scholar.

51. Wang, “The New Law”, supra note 13 at 39.

52. Li and Wang, supra note 34 at 62.

53. Ibid at 67.

54. Wang, “The Draft”, supra note 49 at 15.

55. Tomasic and Zhang, supra note 1 at 311-315.

56. The reorganization case of Zhejiang Wei’er Trade Limited and its four subsidiaries, which was accepted by Yongkang Lower People’s Court, Zhejiang on 2 September 2009, was not included, because this case was not found by this study due to the limit of the methodology.

57. This table is based on the data collected by Zinian Zhang in 2012-13. Most of these cases were also mentioned in an official report issued by Zhejiang Supreme People’s Court. For western scholars, there are two databases, LawinfoChina and Westlaw China, which collect a huge number of China’s court cases. Zhang tried to use these two databases to verify the collected cases in Zhejiang. Unfortunately, largely because only a small proportion of China’s court cases is included in these two databases, these Zhejiang cases could not be found there.

58. The GDP growth rates were obtained from the World Bank statistics. See The World Bank, “GDP Growth (Annual %)”, online: The World Bank <http://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG>.

59. According to a report of Zhejiang Supreme People’s Court, in Wenzhou, one of eleven prefectures of Zhejiang, there were 3,122 judgement debtor companies which were unable to pay their judgement debts from 2010 to 2013, and the local Wenzhou courts had to drop the judgment enforcement procedures because there were not company assets which could be found. In other words, these companies were bankrupt, but the bankruptcy procedures were not used, and these companies just disappeared without being formally investigated through bankruptcy processes. Arithmetically, it could be estimated that there might be about 11,447 companies ((3,122×11)∕3) that were dissolved and were bankrupt in Zhejiang as a whole annually during this three-year period, but they did not enter the formal bankruptcy procedures. Given the annual 56,961 company dissolutions in Zhejiang as shown in Table 3, the real company bankruptcy rate should be at least 20.10 percent. See The Zhejiang Supreme People’s Court, “2012 Zhejiang Fayuan Qiye Pochan Shenpan Baogao (2012年浙江法院企业破产审判报告) [2012 Report on Trying Corporate Bankruptcies]” (6 May 2013), online: Xing Lang <http://blog.sina.com.cn/s/blog_45c1e92a0101mxyd.html#commonComment>.

60. See The Zhejiang Supreme People’s Court, “Zhejiang Fayuan Jieshao” (浙江法院介绍) [An Introduction to the Zhejiang Courts], online: The Zhejiang Supreme People’s Court <http://www.zjcourt.cn/20060320000004/>.

61. Personal Interview, Administrator 2, an accountant, Zhoushan, Zhejiang, China, 12 January 2012.

62. Personal Interview, Administrator 3, a lawyer, Zhoushan, Zhejiang, China, 12 January 2012.

63. In the 1990s, foreign experts advised China to establish a special bankruptcy court system to deal with corporate bankruptcies, but this proposal was rejected. See generally Terence C. HALLIDAY, “The Making of China’s Corporate Bankruptcy Law” (2007) Oxford Series in Law, Justice and Society 2 at 7.

64. In 2012, Zhejiang courts as a whole handled 148 cases per judge. See Jianhua YU and Huanliang MENG, “Zhejiang Fayuan Banan Faguan Renjun Jieanliang Wei Quanguo Pingjunsu Liangbei (浙江法院办案法官人均结案量为全国平均数两倍) [Zhejiang Judges Handled Double the National Average Number of Cases]” Zhejiang Fayuan Xinwen Wang (浙江法院新闻网) [Zhejiang Courts Net] (18 January 2012), online: Zhejiang Courts Net <http://court.gmw.cn/public/detail.php?id=83910>.

65. Two personal interviews: Administrator 2, an accountant, Zhoushan Zhejiang, China, 12 January 2012, and Administrator 3, a lawyer, Zhoushan, Zhejiang, China, 12 January 2012.

66. See also MCGINTY, Andrew and LEOW, VC, “China’s Insolvency Law Two Years On: Are Government-Driven Restructurings the New Trend” (2009) 11 Journal of International Banking and Financial Law 689 Google Scholar.

67. In January 2013, Zinian Zhang had a talk with Mr Hongzhu Zhang, the director of the second civil chamber of the Zhejiang Supreme People’s Court, who is in charge of designating all insolvency practitioners in Zhejiang. During the talk, Mr Zhang confirmed that no training courses or qualification exams were made.

68. Personal Interview, Administrator 2, an accountant, Zhoushan, Zhejiang, China, 12 January 2012.

69. Ibid.

70. Ibid.

71. Personal Interview, Administrator 3, a lawyer, Zhoushan, Zhejiang, China, 12 January 2012.

72. See TANG, Haiqing and SHI, Yinghua, “Mingyin Qiye Pochan Chongzhen Zhi Sifa Tansuo (民营企业破产重整之司法探索) [Private Company Reorganization]” (2011) 12 Fazhi Yanjiu (法治研究) [Legal Research] 102 Google Scholar and 105 (noting that the government guarantee in writing was obtained in that case).

73. Personal Interview, Administrator 3, a lawyer, Zhoushan, Zhejiang, China, 12 January 2012.

74. LIEBMAN, Benjamin L, “A Populist Threat to China’s Courts?” in Margaret YK WOO and Mary E GALLAGHER, eds, Chinese Justice: Civil Dispute Resolution in Contemporary China (Cambridge: Cambridge University Press, 2011), 269 at 282 Google Scholar.

75. Personal Interview, Administrator 2, an accountant, Zhoushan, Zhejiang, China, 12 January 2012.

76. Ibid.

77. See XIA, Zihang, “Cheng Jianlong Bei Xingju ST Jingding Chongzu Xian Zhuanji (陈建龙被刑拘ST金顶重组现转机) [Hopes Arise After the Arrest of Cheng Jianlong]” Meiri Jingji Xingwen (每日经济新闻)[National Business Daily] (10 July 2009), online: National Business Daily <http://www.nbd.com.cn/articles/2009-07-09/225422.html>>Google Scholar.

78. Personal Interview, Administrator 1, a lawyer, Hangzhou, Zhejiang, China, 5 January 2012.

79. Ibid.

80. Ibid.

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83. Personal Interview, Administrator 2, an accountant, Zhoushan, Zhejiang, China, 12 January 2012.

84. Ibid.

85. WANG, Qing, CHAI, Lingling, and DING, Lingyang, “Jingji Handong Li De Yiqu Jiekun Ge (经济寒冬里的一曲解困歌) [A Relief Song Sung in an Economic Winter]” Shaoxing Ribao (绍兴日报) [Shaoxing Daily] (26 February 2009) at 6 Google Scholar.

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87. Personal Interview, Administrator 2, an accountant, Zhoushan, Zhejiang, China, 12 January 2012.

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91. They were one company from Jinghua and another one from Pujiang.

92. The company was from Hangzhou.

93. It was a company from Hangzhou, where the reorganization plan was proposed by the debtor itself, and the absolute priority rule was bypassed in that case.

94. The Dadi reorganization case was part of a group reorganization procedure of Hualun Group Limited in the Fuyang City, Zhejiang.

95. Personal Interview, Judge 2, a judge, Hangzhou, Zhejiang, China, 18 January 2012.

96. Pujiang Lower People’s Court, “Zhejiang Tianting Zhiye Youxian Gongsi Pochan Chongzhen Gongzuo De Jingyan Zongjie (浙江天听纸业有限公司破产重整工作的经验总结) [Experience in Handling the Reorganization Procedure of Tianting Paper Limited]” 89 (on file with authors).

97. Ibid.

98. Personal Interview, Administrator 1, a lawyer, Hangzhou, Zhejiang, China, 5 January 2012.

99. Ibid.

100. Ibid.

101. Personal Interview, Judge 2, a judge, Fuyang, Zhejiang, China, 17 January 2012.

102. See generally WANG, Xinxin, “Chongzheng Zhidu Lilun Yu Shiwu Xinglun (重整制度理论与实务新论) [Theories and Practices of Corporate Reorganization]” (2012) 11 Falu Shiyun (法律适用) [Journal of Law Application] 10 Google Scholar (discussing the widely-used going concern sale rescues in China).

103. Personal Interview, Administrator 2, an accountant, Zhoushan, Zhejiang, China, 12 January 2012.

104. Personal Interview, Administrator 8, a lawyer, Hangzhou, Zhejiang, China, 6 January 2012.

105. It would be quite difficult for Chinese courts to remain independent when handling administrative cases in which government authorities are challenged by citizens. See generally O’BRIEN, Kevin J and LI, Lianjiang, “Suing the Local State: Administrative Litigation in Rural China” in Neil J DIAMANT, Stanley B LUBMAN, and Kevin J O’BRIEN, eds, Engaging the Law in China (Stanford: Stanford University Press, 2005), 31 CrossRefGoogle Scholar.

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117. Wang, “Difficulties of Commencing”, supra note 35 at 32.

118. WANG, Weiguo, ZOU, Hailin, and LI, Yongjun, “Pochanfa Shinian (破产法十年) [Ten Years of Drafting the Enterprise Bankruptcy Law]” (Seminar of the Civil and Commercial Law Centre, China University of Political Science and Law, 12 March 2004)Google Scholar, online: The Civil and Commercial Law Centre of China University of Political Science and Law <http://www.cupl.edu.cn:81/html/msjjfxy_xsw/col531/2011-11/19/20111119110131584730800_1.html>.

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138. There have already been some debates in Chinese academic circles, but more in-depth and empirical research is needed. See for example LI, Yongjun and LI, Dahe, “Chongzhen Chenxu Kaishi De Tiaojian Ji Sifa Shencha (重整程序开始的条件及司法审查) [The Conditions of the Beginning of the Reorganization Procedure and Its Judicial Review: A Query Into the Merger Reorganization]” (2013) 26 Beijing Hangkong Hangtian Daxue Xuebao (北京航空航天大学学报) [Journal of Beijing University of Aeronautics and Astronautics (Social Sciences Edition)] 48 Google Scholar, and WANG, Xinxin and ZHOU, Wei, “Guanlian Qiye De Hebin Pochan Chongchen Qidong Yanjiu (关联企业的合并破产重整启动研究) [Entry to Consolidated Reorganization of Related Companies]” (2011) 29 Zhenfa Luntan (政法论坛) [Tribune of Political Science and Law] 72 Google Scholar. See also STEPHEN, Gilbert J, “Substantive Consolidation in Bankruptcy: A Primer” (1990) 43 Vanderbilt Law Review 207 Google Scholar (discussing bankruptcy consolidation in the US), and The Jones Day LLP, “Substantive Consolidation and Non-debtor Entities: The Fight Continues” (May/June 2011), online, The Jones Day LLP <http://www.jonesday.com/Substantive-Consolidation-and-Nondebtor-Entities-The-Fight-Continues-06-01-2011/?RSS=true>.