TWELVE YEARS TO SHARPEN ONE SWORD, BUT CAN IT CUT? DOES CHINA’S NEW BANKRUPTCY LAW PROVIDE ADEQUATE PROTECTION FOR FOREIGN CREDITORS? Submitted by Jason Corbett LLB, LLM A thesis submitted in total fulfilment of the requirements for the degree of Doctor of Juridical Science School of Law Faculty of Law and Management La Trobe University Bundoora, Victoria 3086 Australia October 2010 TABLE OF CONTENTS TABLE OF CONTENTS....................................................................................................1 LIST OF FIGURES ............................................................................................................6 LIST OF TABLES..............................................................................................................6 ABBREVIATIONS ............................................................................................................7 ABSTRACT........................................................................................................................8 STATEMENT OF AUTHORSHIP ....................................................................................9 ACKNOWLEDGEMENTS..............................................................................................10 1. INTRODUCTION ........................................................................................................11 1.1 Introduction.............................................................................................................11 1.2 Methodology ...........................................................................................................12 1.3 Structure of Thesis ..................................................................................................14 2. THE HISTORY AND DEVELOPMENT OF CHINESE BANKRUPTCY LAW ......17 2.1 History and Development of Bankruptcy Law .......................................................17 2.2 The History of Chinese Bankruptcy Law ...............................................................18 2.2.1 Historical and Cultural Development ..............................................................18 2.2.2 The Bankruptcy Law of 1906 ..........................................................................21 2.2.3 The 1909-1949 Period......................................................................................23 2.2.4 The Mao Era 1949-1976 ..................................................................................25 2.3 Development of Commercial Bankruptcy Law ......................................................27 2.3.1 Early Developments.........................................................................................27 1 2.3.2 Experimental Legislation to the Lead Up of the 1986 Bankruptcy Law .........29 2.3.3 The 1986 Enterprise Bankruptcy Law .............................................................31 2.3.4 Problems with the 1986 Law and the Development of a Unified Law............32 2.3.5 Issues Arising During the Drafting of the 2006 EBL ......................................35 2.4 Number of Bankruptcy Cases .................................................................................39 2.5 Rule of Law in China..............................................................................................40 2.6 Chapter Conclusions ...............................................................................................42 3. THE 2006 ENTERPRISE BANKRUPTCY LAW.......................................................43 3.1 The Implementation of the 2006 Enterprise Bankruptcy Law................................43 3.2 Scope of Application: Overview.............................................................................45 3.2.1 The new law and the State-Owned Enterprises ...............................................46 3.2.2 Bankruptcy Law and Financial Organisations.................................................48 3.2.3 Non-Legal Persons Including Partnerships and Sole Proprietorships .............50 3.2.4 The Bankruptcy Law and Individuals..............................................................52 3.3 Bankruptcy Tests and Application..........................................................................52 3.4 The Role of a Bankruptcy Administrator................................................................56 3.4.1 Appointment of the Administrator...................................................................58 3.4.2 Qualifications of the Administrator .................................................................59 3.4.3 Selection of an Administrator ..........................................................................60 3.4.4 Remuneration of the Administrator .................................................................63 3.5 Security, Creditors and Workers’ Rights ................................................................64 3.5.1 Stay of Proceedings by Secured Creditors during Bankruptcy Proceedings ...65 3.5.2 Enforcement of Security by Secured Creditors ...............................................67 3.5.3 Role of the Administrator in Dealing with Secured Assets .............................68 3.5.4 Issues relating to Workers’ Rights...................................................................71 3.6 Corporate Restructuring..........................................................................................74 2 3.6.1 Requirements for Application to the Proceedings ...........................................76 3.6.2 Administration and Debtor in Possession within the Proceeding....................77 3.6.3 Interests of Parties Affected by the Proceedings .............................................78 3.6.4 How the Proceedings are to be Governed........................................................79 3.6.5 Legal Liability of Individuals ..........................................................................82 3.6.6 The Framework for a Reorganisation ..............................................................83 3.7 Cross-Border Insolvency Issues..............................................................................89 3.7.1 Development of a Cross-Border Insolvency Law............................................89 3.7.2 UNCITRAL Model Law..................................................................................92 3.7.3 Cross-Border Recognition Issues with Hong Kong.........................................93 3.7.4 Cross-Border Recognition Issues with the United States ................................97 3.8 Conciliation...........................................................................................................102 3.9 Chapter Conclusion...............................................................................................106 4. CASE STUDIES.........................................................................................................107 4.1 Criteria for Selection of Cases Studies .................................................................107 4.2 Case Studies of Chinese Companies and Bankruptcy ..........................................108 4.2.1 B&T Case.......................................................................................................108 4.2.2 Guangdon International Trust and Investment Corporation (GITIC)............109 4.2.3 FerroChina .....................................................................................................113 4.2.4 Monkey King Group ......................................................................................115 4.2.5 Asia Aluminium.............................................................................................117 4.2.6 East Star Airlines ...........................................................................................121 4.2.7 GBS Group S.p.A. .........................................................................................123 4.2.8 Sanlu Group Share Limited Company...........................................................125 4.3 Chapter Conclusions .............................................................................................129 5. ENDOGENOUS ISSUES: PROBLEMS AND SOLUTIONS...................................130 3 5.1 Endogenous Issues ................................................................................................130 5.1.1 Problem One: Can a Chinese Court give a Fair and Impartial Judgment? ....130 5.1.2 Problem Two: Undue Influence of Local Government and Officials............132 5.1.3 Problem Three: The Legal Representative and the Company Chop..............134 5.1.4 Problem Four: Pre-IPO Placements ...............................................................138 5.1.5 Problem Five: The Global Financial Crisis — Additional Non-performing Loans.......................................................................................................................145 5.1.6 Problem Six: Proof of Debt Amounts in Chinese Contracts..........................149 5.1.7 Problem Seven: Alternatives to Bankruptcy..................................................151 6. BANKRUPTCY LAW AND REGULATION IN CHINA: PROBLEMS AND SOLUTIONS ..................................................................................................................153 6.1 Issues and Problems with the 2006 Enterprise Bankruptcy Law..........................153 6.1.1 Problem One: Lack of a Bankruptcy Infrastructure within China.................153 6.1.2 Problem Two: Lack of Cross-Border Insolvency Mechanisms with China ..159 6.1.3 Problem Three: Need for Additional Creditors’ Rights.................................161