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This chapter discusses the ongoing reforms and reforms needed to balance the roles of different institutions for the perfection of China’s bankruptcy market. Many institutions, such as the central government and people’s courts, compete to construe the bankruptcy laws or control the bankruptcy process of listed companies. The author argues that people’s courts are more proper to implement the bankruptcy law because of their impartiality, professionalism and legal competence. The protection of creditors’ rights to participation and to adequate information should be enhanced. The dominance of the liquidation-group administrator has brought many negative results to creditors and to bankrupt listed companies. The author, therefore, argues that the people’s court should reduce designating liquidation groups as administrators and that a bankruptcy professional market should be cultivated. Last but not least, the author proposes that the government should play a dominant role, outside of the bankruptcy process, in providing public services and create a supporting environment for enterprise bankruptcies and a complementary role in the bankruptcy process. If the roles of these institutions are properly balanced, the EBL can play a much better role in addressing enterprise bankruptcies.
This chapter examines the negative influence of government intervention on the bankruptcy institutions, including the administrator mechanism, the creditors’ meetings and committees and the people’s courts. The 2006 EBL establishes a new administrator mechanism, strengthens the power of creditors’ meetings and committees, and entrusts the people’s court with cram down power to confirm reorganisation plans rejected by creditors. In practice, however, liquidation-group administrators dominate the reorganisation of listed companies. The creditors’ meetings and committees are rather weak and cannot check and supervise the liquidation-group administrator. The people’s courts cannot make independent rulings on cramming down reorganisation plans rejected by creditors. The government intervention, moreover, results in unfair preferential treatment to large shareholders while leaving the creditors inadequately protected. As to the listed companies, many do not gain going-concern ability after their reorganisation. They encounter great difficulties in finishing their asset restructuring, unduly squandering market resources. In short, the government intervention renders these bankruptcy institutions weak and cannot function as expected by the lawmakers. It frustrates the realisation of the goals of the reorganisation system in China. The author argues that the government should return the powers to the bankruptcy institutions to let them serve a better function in China’s market.
“The 1986 Enterprise Bankruptcy Law (1986 EBL) was adopted after many ineffective attempts to reform SOEs. It, in fact, neither effectively reformed SOEs as anticipated by the government, nor succeeded as a bankruptcy law in addressing the creditor-debtor problem. Lawmakers granted the government extensive roles in the bankruptcy of SOEs because of a misunderstanding of the nature and the goals of the bankruptcy regime when it was transplanted into China from other jurisdictions. They did not treat this law as a real bankruptcy law, but rather as an ‘SOE-rescuing law’ or ‘workers’ resettlement law’.This chapter introduces the background of government intervention in enterprise bankruptcies, the object dimension and temporal scope of this study, and research methodologies of this study: which includes empirical study, doctrinal approach and historical approach. It presents a general picture of the pending issue: whether the government is needed in addressing the bankruptcy problem of enterprises, especially listed companies in China with a socialist market economy.”
This chapter focuses on the bankruptcy goals in China. It mainly explores the theoretical underpinnings of the bankruptcy goals. The author argues that the bankruptcy law is not only a procedural law, but also a substantive law. The bankruptcy law not only aims to realise such substantial rights under non-bankruptcy laws, but has its own value as a market institution: to provide fair protection to market players – creditors, debtor and other stakeholders – to set the order of priority, distribute the financial risks of the failure of the debtor fairly and uphold the value of the rule of law in bankruptcy procedures. Undoubtedly, the bankruptcy goals bear distinct imprints of China’s socialist market economy. The socialist market economy in China has distinguished itself from capitalist market economies in two key respects: (1) a strong public sector and (2) a policy of strong state intervention. These special characteristics have some implications for bankruptcy goals in China, i.e. the need to secure the strong dominance of the public sector, allow government intervention in enterprise bankruptcies and protect the interests of stakeholders, especially the workers.
This book studies the government intervention in the bankruptcy of listed companies in China in the context of the socialist market economy. Government intervention is an old and sophisticated problem in the economic field in China. This book aims to examine the extent of government intervention and the roles the government should and should not play in enterprise bankruptcies. By studying the reorganisation of fifty-three listed companies and careful data analysis, this book argues that the establishment of a comprehensive bankruptcy law – the Enterprise Bankruptcy Law (EBL) of the People’s Republic of China (PRC) is inadequate to prevent the government from intervening in the reorganisation of listed companies.
Notwithstanding that the goals of the government may not be consistent with the legislative goals of the 2006 EBL, the government is determined to realise its own goals in the reorganisation of listed companies in practice, namely, to further local economic interests such as local fiscal revenue, local employment rates, local and regional economic development, a friendly business environment; and political interests in protecting the interests of workers and maintenance of the order of the socialist market economy. By studying the reorganisation of fifty-three listed companies that entered reorganisation after the 2006 EBL came into effect, this chapter identifies the administrative means applied by local governments to intervene in the reorganisation of listed companies – controlling the access to the bankruptcy/reorganisation procedure, organising liquidation groups, resettling workers, introducing strategic investors, granting government subsidies and intervening in the cram down process of reorganisation plans rejected by creditors or shareholders. Some administrative means applied by local governments facilitate the bankruptcy of listed companies, such as the resettlement of workers and subsidising financially distressed listed companies. Certain other administrative means, such as blocking listed companies’ access to the bankruptcy procedure, may hinder the bankruptcy process.
This chapter compares the government powers in the 1986 and 2006 EBLs and explores the reasons that have led to government intervention in enterprise bankruptcies. The government intervention in the 1986 EBL can be attributed to its inappropriate goals (the mixture of administrative goals with bankruptcy goals) and Chinese lawmakers’ misunderstanding of its nature and goals as is discussed in Chapter 2. The 2006 EBL, however, successfully detaches the bankruptcy goals from the administrative goals because of the change of economic strategy, construction of supporting institutions, and the legal and institutional development concerning listed companies. The 2006 EBL becomes a bankruptcy law in a real sense, addressing the debt problems between the debtor and its creditors. The role of the government has been greatly constrained in the legal text of the 2006 EBL. The government, however, may not give up its powers easily. The governments try all means to avoid delisting and liquidating listed companies, in order to maintain a strong public sector and protect local interests associated with the listed companies. It is still necessary to examine the administrative goals of the government and its means of intervening in the bankruptcy process of listed companies.