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The first personal bankruptcy case in China

The first personal bankruptcy case in China

It has been long held in China that a debt must be repaid, particularly the debt of a father by his son. Is this going to change? What does the first personal bankruptcy case in China tell us?

On 9 October 2019, a court in Wenzhou, Zhejiang province, delivered the first judgment regarding personal bankruptcy in China. In this case, a debtor with over 2 million RMB (approximately 250,000 euros) in debts reached a settlement with four creditors. This resulted in a first-time repayment of around 32,000 RMB (approximately 4,000 euros) within 18 months, and, within six years upon the completion of the first repayment plan, the debtor will have to pay 50% of his household income exceeding 120,000 RMB (approximately 15,000 euros).

Personal bankruptcy regime in China

At present, there is no concrete personal bankruptcy law in China. The current 2006 Enterprise Bankruptcy Law (EBL) only applies to enterprises, including legal persons and unincorporated organisations [1] but excluding natural persons. The discussion about the need to include legislation in China’s bankruptcy law related to natural persons (consumers), however, has been ongoing. Such legislation would rather go against the long-held Chinese tradition that a debt must be repaid; particularly, the debt of a father must be repaid by his son (父债子偿). In June 2019, the Supreme Court issued The Guidelines for People’s Courts on Enforcement Work (2019-2023) (《人民法院执行工作纲要》), confirming the attempt to establish a personal bankruptcy system. In July 2019, the National Development and Reform Committee under the State Council, together with 13 other government departments jointly issued The Reform Plan for Accelerating the Improvement of Market Entity Exit System (《加快完善市场主体退出制度改革方案》), which stated the intention to establish a personal bankruptcy system, primarily associated with joint guarantee cases. Subsequently, Wenzhou became the first trial place across the nation to deal with these cases. The Intermediate Court in Wenzhou published The Implementing Opinions on the Centralised Clean-up of Personal Debt (《关于个人债务集中清理实施意见》, hereinafter “Implementing Opinions”), which only take effect within the municipality of Wenzhou but formulate the guiding rule for resolving the present case. There are in total 44 articles in the Opinions. In the meantime, there are an additional 18 pending personal bankruptcy cases in Wenzhou.

Key elements in implementing opinions

Conditions for commencing personal bankruptcy proceedings

According to the Implementing Opinions, personal bankruptcy proceedings, or, in the original words, centralised personal debt clean-up proceedings, can only be initiated when the debtor cannot fulfil a monetary obligation imposed by a valid judgment, and he or she does not have enough assets to repay the debt in full or clearly lacks the ability for repayment. And one of the following circumstances also occurs: (i) an enterprise has entered into insolvency proceedings or has been declared bankrupt, and the debtor is associated with guarantee responsibility; (ii) the debtor is responsible for the debt of a company because of piercing the corporate veil; (iii) the debtor is responsible for the debt of unincorporated organisations; (iv) the debtor cannot repay the debt because of “life difficulties”; (v) the debtor has voluntarily proposed a repayment plan and obtained the consent of all the creditors.

The debtor should also meet all the following conditions: (i) there are no other cases involving monetary payment outside Wenzhou, unless a creditor outside Wenzhou agrees to participate in the proceedings voluntarily; (ii) the debtor and his or her spouse should both declare their assets fully and faithfully; (iii) the spouse should agree to accept investigations by a court, including investigations on his or her bank account; other family members should also agree to asset investigations if necessary; (iv) the debtor should agree not to conduct high consumption activities nor to spend unnecessary expenses other than for life and work.

Appointing an administrator

The court should appoint an administrator to administer a personal bankruptcy case. For cases arising out of enterprise insolvency, the administrator appointed by a judge for the enterprise should be the administrator for the natural person. For other cases, the people’s court should appoint an administrator, or the debtor and creditors can jointly agree on a representative creditor selected by the creditors’ meeting to act as an administrator. The administrator should inform all the creditors in writing within 20 days from the moment the court accepts a petition to open proceedings and make public announcements; the announcement period should be within the range of 30 days to 3 months.

Repayment plan

In principle, a creditors’ meeting should agree on matters by unsecured creditors’ consensus. A creditors’ meeting can also agree to other voting mechanisms, such as 2/3 voting or a double majority decision. The people’s court should, upon the receipt of a repayment plan, inform creditors to convene a creditors’ meeting to discuss and vote on the repayment plan. When the creditors’ meeting refuses to approve the repayment plan for a second time, the court shall declare the closure of the proceedings. A normal debt collection and enforcement proceedings then proceed, and the debtor should still be liable for all the previous debts. After the completion of the repayment plan, which the present rules do not put a time limitation on, the debtor should still be responsible for debts arising out of personal injury caused by intentional infringement and alimonies. The court can refuse to approve a repayment plan when one of the following conditions occurs: (i) the plan violates statutory rules, prohibition rules or public order and cannot be amended; (ii) the plan is reached through unjust methods; (iii) there is no possibility to implement the plan; (iv) the debtor privately satisfies the interest of one or more creditors and severely infringes the interest of other creditors; (v) other circumstances decided by the court.

Credit restoration

The purpose of establishing a personal bankruptcy regime includes the restoration of a debtor’s credit position. Therefore, the Implementing Opinions also prescribe rules on credit restoration:
(i) For a debtor with a debt of less than 2 million RMB and with a repayment rate higher than 30%, the credit can be restored after 1 year upon completion of the repayment plan;
(ii) For a debtor with a debt of more than 2 million RMB but less than 5 million RMB and with repayment rate higher than 30%, the credit can be restored after 1 to 3 years upon completion of the repayment plan;
(iii) For a debtor with a debt of more than 5 million RMB but less than 20 million RMB and with a repayment rate higher than 10%, the credit can be restored after 2 to 5 years upon completion of the repayment plan;
(iv) For other circumstances, the credit can be restored after 3 to 6 years upon completion of the repayment plan.

Restraining order

The debtor cannot perform the following activities before the credit is restored:
(i) conducting high consumption activities and spending unnecessary expenses other than for life and work, except for economy class flights or second class for the high speed train;
(ii) taking on positions as a legal representative or being a shareholder in profitable companies;
(iii) taking on positions as a legal representative or director or supervisor of state-owned enterprises;
(iv) other circumstances decided by the court.

Going abroad for work reasons should be approved by the court, in advance.

The way forward

In Chinese newspapers and media, the present trial has been portrayed as the first success in the Chinese personal bankruptcy regime. However, there are many uncertainties. First of all, there is no specialised law for personal bankruptcy at the national level. The present case is only in accordance with a local court’s rule, and it is questionable whether these rules will be adopted elsewhere, or whether such proceedings would be eligible for a challenge in higher courts. The present rules only apply to inhabitants within Wenzhou, and the courts may have problems extending their jurisdiction to assets outside Wenzhou. Besides, because the present opinions are at a local level, there are no cross-border provisions for international cases. It is uncertain how to treat foreign creditors and how to trace foreign assets.

Second, the present rules only allow the commencement of proceedings when there is a monetary judgment delivered by a court, usually when the enforcement process encounters difficulties. In other words, the court would not accept a voluntary petition filed by a debtor without a valid judgment. Also, there is no other alternative to transform or convert litigation proceedings into personal bankruptcy proceedings. It remains to be seen how a debtor can apply more efficiently for debt discharge or alteration.

It is also interesting to note that Implementing Opinions introduced a collective action principle for creditors in cases related to financial matters. However, this provision is quite vague about what types of cases constitute cases related to financial matters, or whether there is a difference between financial creditors (banks) and other creditors.

Third, the present case is based on household income, namely, the debtor and the spouse should jointly bear the repayment obligations. This mechanism interacts with arrangements within family law and raises concerns about cases of divorce, succession or other circumstances, which are not adequately dealt with under the present rules.

In short, the introduction of a new personal bankruptcy regime in China is promising and is expected to expand across the nation. It is also a good start to progressively propagate the idea of personal bankruptcy, save honest persons from endless debt overdue and protect weaker parties with the least dignity. However, challenges lie ahead. Where not all rules are adequately designed, the effectiveness of the new regime needs to be tested. More discussions should be triggered at this early stage, among both academics and practitioners.

2 Comments

Shuai

Hi Elroam, many thanks for your comments. For your first question, it is within a court's discretion to determine public order. However, we need to wait for more judgments before we can conclude how courts would interpret it. For your second question, the Supreme Court of China has a more detailed guideline on the determination of unnecessary expenses, and it is within the local courts' power to make such a decision. As mentioned, this is the first trial case, and there are still quite a few unaddressed issues.

Elroam

Very interesting one. Very useful. I was just wondering:

Such wording as " public order", means what exactly ? Too broad or not concrete it seems. For, according to the post, the court refuses to approve repayment agreed so, by debtors and creditors. So, what can constitute public order and refusal to approve it, all, if has been agreed in fact?

Also, we couldn't understand, who decides what are unnecessary expenses other than for life and work ? Is it the court, or the administrator ? ( or at least the initial findings or assessment).

But great one.....Thanks

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