The “PRC Bankruptcy Law ( 中華人民共和國企業破產法)” (the “Law“) has been in effect since 1 June 2007. However, PRC courts had been most reluctant to accept creditors’ applications for insolvency/bankruptcy of enterprises unable to pay their debts as they fell due. That was due chiefly to the absence of clarity and guidance on the proof of insolvency and the burden of proof.
With the issuance of definite guidelines by the PRC Supreme Court on the enforcement of the Law, referred to as the Judicial Interpretation below, it is generally believed that PRC courts are now able to, and indeed have to, deal with applications for bankruptcy in accordance with the stipulations in the Judicial Interpretation.
PRC Supreme Court’s stipulations applicable to the several issues in implementing the ‘Enterprise Bankruptcy Law’ (1) (最高人民法院關於適用《中華人民共和國企業破產法》若幹問題的規定 (一))(the “Judicial interpretation”)
The much needed Judicial Interpretation was issued by the PRC Supreme Court, for implementation as from 26 September 2011. It provides clarifications to primarily the following areas:
In essence, the court shall accept a petition for bankruptcy, if the following conditions are met, namely:
The Judicial Interpretation further clarifies with regard to the above bankruptcy conditions, briefly as follows:
The PRC Supreme Court appears to have taken note of the fact that it would be difficult, if not impossible, for the creditor to obtain internal financial information pertaining to the debtor, to prove the debtor’s asset to debt or liquidity status. Thus, per the Judicial Interpretation, the creditor is only required to provide evidence proving the debtor’s insolvency (being condition (a) mentioned above) in its petition for bankruptcy, and unless the debtor is able to prove otherwise within the time stipulated in the Law, the court shall accept such petition accordingly.
With the implementation of the Judicial Interpretation, courts are now obliged to accept applications for bankruptcy if the conditions of bankruptcy (as stipulated therein) are met. In fact, it is expressly set out in the Judicial Interpretation that the applicant for bankruptcy may submit its application to the next higher court if the relevant (lower) court should fail or refuse to attend to or accept its application for bankruptcy in accordance with the stipulations in the Judicial Interpretation.
While it remains to be seen how the Judicial Interpretation will be implemented and abided by the courts, it should nonetheless give much comfort to creditors faced with insolvent debtors. Petitions (for bankruptcy) will no longer be cast aside simply, and creditors can now expect the courts to deal with their petitions for bankruptcy in accordance with the stipulations in the Judicial Interpretation and the Law.