Plain-Language Explanation of the Enterprise Bankruptcy Law of the People's Republic of China

When Can the Bankruptcy Law Be Applied? An enterprise qualifies for bankruptcy proceedings if it meets both of the following conditions: ・ It is unable to repay its due debts; and ・ Its assets are insufficient to settle all outstanding debts, or it is clearly incapable of repayment. Three possible outcomes are available: 1. Bankruptcy liquidation: The enterprise ceases operations entirely, and its assets are sold off to distribute proceeds to creditors. 2. Reorganization: The enterprise is granted a chance to rehabilitate itself (similar to 'bankruptcy protection'). 3. Settlement: Creditors negotiate with the debtor to accept reduced payments or deferred repayment. Applicable Entities: Only corporate legal persons (i.e., companies) are covered. Sole proprietors and partnerships are excluded (partners in a partnership bear unlimited personal liability; their debts are settled personally, bypassing enterprise-level bankruptcy). Extraterritorial Effect: A bankruptcy proceeding initiated in China applies also to the debtor’s assets located abroad. Chapter II: Application and Acceptance (How to File and How Courts Respond) Section I: Filing an Application Who May File for Bankruptcy? ・ Debtor (the company itself): May voluntarily file for reorganization, settlement, or liquidation upon recognizing its insolvency. ・ Creditor(s): May file for reorganization or liquidation if the debtor fails to repay overdue debts. ・ Liquidation Obligor: Upon discovering insolvency during dissolution and liquidation, the liquidator must file for bankruptcy liquidation. Required Documents: Application form + supporting evidence. If filed by the debtor, additional documents include: statement of asset status, schedule of debts, schedule of claims, financial statements, employee resettlement plan, and records of wage and social insurance contributions. Section II: Court Acceptance Timeline: ・ Filed by creditor → court notifies debtor within 5 days → debtor may object within 7 days → court rules on acceptance within 10 days. ・ Filed by debtor → court rules on acceptance within 15 days. ・ In exceptional circumstances, this deadline may be extended by up to 15 days. Automatic Stay Effects Upon Acceptance (Critically Important): Once the court accepts a bankruptcy application, the following take immediate effect: ・ No individual creditor may be repaid separately (such preferential payments are void); all creditors must await distribution according to statutory priority. ・ All seizures, freezes, and enforcement actions against the debtor’s assets are suspended—creditors may not unilaterally seize assets. ・ All lawsuits and arbitrations involving the debtor are stayed pending assumption of responsibility by the administrator. ・ The debtor’s legal representative may not leave their place of residence nor assume new director, supervisor, or senior management roles at other companies. ・ Any third party holding funds or property belonging to the debtor must return them to the administrator. Chapter III: The Administrator (The 'Steward' of Bankrupt Assets) The administrator is appointed by the court to manage bankruptcy affairs and serves as the bankrupt enterprise’s 'temporary steward.' Who May Serve as Administrator? Eligible entities include liquidation teams, law firms, accounting firms, and bankruptcy liquidation agencies…

Enterprise Bankruptcy Procedures and Debt Repayment

3. Appointment of the Bankruptcy Administrator. Once a company enters bankruptcy proceedings, its former legal representative, directors, general manager, supervisors, and other officers cease exercising their prior authority. Management of the company is transferred to the bankruptcy administrator. Administrators may be law firms, auditing firms, appraisal institutions, or bankruptcy liquidation agencies. However, not all such intermediaries qualify: only those listed on the roster of bankruptcy administrators maintained by the local Higher People’s Court may serve. Thus, after the bankruptcy case is docketed, the court accepting the case appoints an administrator from that official roster. The administrator then assumes control over the bankrupt company and handles all related matters. While the administrator acts externally on behalf of the company, litigation involving the bankrupt entity continues to name the company itself as the party; the administrator participates merely as its representative, and the administrator’s head signs relevant legal documents—e.g., powers of attorney and certificates of legal representative status. 4. Administrator’s Assumption of Control Over the Bankrupt Enterprise. The administrator’s primary duties include managing the bankrupt enterprise and overseeing its liquidation. Day-to-day operations fall entirely under the administrator’s authority. This assumption of control is comprehensive, covering the enterprise’s business license, official seals, accounting books, contracts, working capital, personnel files, and other records—as well as physical assets, over which the administrator exercises disposal rights. 5. Audit and Appraisal. If the administrator is not itself an auditing or appraisal institution, it must engage qualified auditing and appraisal agencies to examine the enterprise’s financial statements and appraise its assets. This determines the enterprise’s debt-to-asset ratio and asset valuations, providing the basis for subsequent asset disposition. 6. Acceptance of Creditor Claims. Creditors may file claims with the administrator starting from the date of public announcement—or from the date they receive formal notice of the claim-filing period. After accepting the bankruptcy case, the people’s court publishes a public notice in the People’s Court Daily. Based on submitted claims, the administrator compiles a register of creditor claims, recording each claimant’s name, claim amount, date of claim origination, and underlying cause. 7. Creditor Meeting. Because bankruptcy liquidation may result in full or partial non-recovery of claims—or recovery at only a minimal rate—the law designates the creditor meeting as the highest decision-making body in bankruptcy proceedings. All creditors who have duly filed claims are entitled to attend and participate in the creditor meeting…

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