Major Developments in China’s Surging Restructuring Market

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In summary

This article outlines China’s latest developments in bankruptcy and restructuring. The Supreme People’s Court has released several influential judicial documents. There have also been notable developments on cross-border bankruptcy, active reform in the personal bankruptcy regime and the introduction of rules targeted at safeguarding bondholders’ rights and remedies in bankruptcy proceedings.

Discussion points

  • Key judicial documents released recently in relation to bankruptcy
  • Recent developments on cross-border bankruptcy in China
  • Recent pilot projects on personal bankruptcy regime in China
  • Recent rules and development on rights and remedies of bondholders

Referenced in this article

  • Notice of the Supreme People’s Court on Issuing the Minutes of the National Court Work Conference on Bankruptcy Trials
  • Interpretation on Several Issues Concerning the Application of the PRC Enterprise Bankruptcy Law (III)
  • Minutes of the National Working Conference on the Trial of Civil and Commercial Cases by Courts
  • Minutes of Symposium on the Trial of Bond Dispute Cases by Courts Nationwide
  • Minutes on Mutual Recognition of and Assistance to Bankruptcy Proceedings between the Courts of the Mainland and the HKSAR
  • Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Bankruptcy Proceedings in the HKSAR
  • In re Reward Science and Technology Industry Group Co Ltd
  • In the matter of CEFC Shanghai International Group Limited (in Liquidation in the Mainland of the People’s Republic of China) and in the matter of the inherent jurisdiction of the Court

Getting started

Since its first promulgation in 2006, the Enterprise Bankruptcy Law of People’s Republic of China (the “Bankruptcy Law”) has been playing an increasingly important role in the business environment in China. To facilitate the implementation of the Bankruptcy Law and to guide courts of all levels to deal with bankruptcy cases in a more efficient way, the Supreme People’s Court of China (the “SPC”) issued three judicial interpretations and one meeting minutes; besides, another SPC meeting minutes on civil and commercial cases contains one chapter regarding bankruptcy. Companies in financial distress, creditors, and potential investors now have a clearer understanding of the bankruptcy procedures.

Key judicial documents released recently in relation to bankruptcy


The most important updates in the legal practices of bankruptcy law in recent years are reflected in:

  • the Notice of the Supreme People’s Court on Issuing the Minutes of the National Court Work Conference on Bankruptcy Trials (the 2018 SPC Meeting Minutes), published on 4 March 2018;
  • the Interpretation on Several Issues Concerning the Application of the People’s Republic of China Enterprise Bankruptcy Law (III) (the Interpretation III), published on 27 March 2019;
  • the bankruptcy chapter in the Minutes of the National Working Conference on the Trial of Civil and Commercial Cases by Courts (the 2019 SPC Meeting Minutes), published on 8 November 2019;
  • the Minutes on Mutual Recognition of and Assistance to Bankruptcy Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (the Minutes); and
  • The Supreme People’s Court’s Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region (the Opinion).

In general, these judicial documents released by the SPC were issued to facilitate the supply-side structural reforms to get rid of ‘zombie companies’, to optimise the business environment, to promote high-quality development and to disperse market risks. These judicial documents have provided guidelines on various disputed issues regarding bankruptcy.

This article will address five major aspects: substantive consolidation; selection of bankruptcy administrators; automatic stay and restrictions on creditors; reorganisation; and cross-border issues between mainland China and Hong Kong.

Substantive consolidation

Substantive consolidation among affiliated debtor entities is a double-edged sword: on the one hand, it is helpful to prevent the debtor’s fraudulent conduct and asset manipulation that jeopardise the creditors’ interest; on the other hand, the abuse or overuse of substantive consolidation may unfairly reduce the recovery rate of some creditors.

In light of a number of controversial consolidation cases encountered by local courts, the 2018 SPC Meeting Minutes stress that substantive consolidation should only be used in exceptional circumstances and lay down strict criteria and remedial procedures.

Criteria for consolidation

As an exception to the general rule of respecting the company’s independent legal personality, substantive consolidation can only be invoked when the legal personality of each affiliate is highly mingled; the differentiation of each affiliate’s assets is excessively costly; and the separation of bankruptcy proceedings will result in unfair treatment of the creditors.

Special procedures for consolidation

  • Hearings: upon the court’s receiving of a petition for consolidation, it notifies the interested parties and convenes a hearing among them. It also makes the consolidation decision, taking into consideration various factors, including the extent and duration the affiliates’ assets have been mingled, inter-party debts and claims among the affiliates, the impact of consolidation on the overall interests of creditors and the impact of consolidation on the likelihood of successful reorganisation.
  • Remedies: should any interested party oppose the consolidation decision, it may petition a higher level court for a review of the consolidation decision.

Legal consequences

The assets of the consolidated affiliates are deemed as a single estate, the debts and claims between the consolidated affiliates are extinguished, and creditors of the consolidated affiliates will participate and receive payments through one bankruptcy proceeding.

In case of reorganisation, only one reorganisation plan will be made to cover all consolidated affiliates, and one affiliate remains after the reorganisation.

Selection of bankruptcy administrators

A bankruptcy administrator is the main facilitator and executor in bankruptcy cases; thus, their capabilities are crucial in the effective handling of bankruptcy cases. The SPC issued the Provisions on Designating the Administrator during the Trial of Enterprise Bankruptcy Cases (the Administrator Designation Provisions) in 2007, soon after the Bankruptcy Law came into effect, to set out rules on how bankruptcy administrators should be selected and appointed in bankruptcy cases.

According to the Administrator Designation Provisions, higher courts at the provincial level should prepare their roster of qualified bankruptcy administrators, and only institutions, including law firms, accounting firms and liquidation firms, that have offices or branches in that particular province are eligible for the roster. For normal bankruptcy cases, the bankruptcy administrator will be selected from the roster by lottery, and for more complex cases, the courts may sometimes select the bankruptcy administrator through a bidding process.

With the increasingly frequent emergence of large-scale and complex bankruptcy cases in recent years, the SPC felt that the Administrator Designation Provisions no longer met the practical needs in selecting competent and appropriate bankruptcy administrators. Consequently, it proposed three improvements in the 2018 SPC Meeting Minutes to:

  • encourage a competition mechanism to select bankruptcy administrators, especially in high-profile cases, such as the bankruptcy of a listed company, to guarantee the competency of the selected administrator;
  • expand the roster pool of certified bankruptcy administrators by introducing professionals in bankruptcy and enterprise management experts and reaching out to external bankruptcy administrators from other provinces when needed; and
  • facilitate the establishment of bankruptcy administrators associations and the setting up administrators’ compensation funds.

Automatic stay and restrictions on creditors

Removal of asset preservation measures

The Bankruptcy Law imposes an automatic stay on any legal proceedings against the debtor upon the acceptance of bankruptcy by the court. In particular, after the court accepts the bankruptcy application, any asset preservation measures (eg, attachment, seizure and freezing) against the debtor’s assets must be removed.

In practice, there were controversies regarding, among other things, whether the asset preservation measures referred only to those in civil legal proceedings and whether the asset preservation measures were automatically ineffective or needed to be separately removed by the relevant authority.

The 2018 SPC Meeting Minutes clarify that, after receiving the court order on acceptance of the bankruptcy application, the enforcement court should remove the asset preservation measures against the debtor’s assets or issue letters handing over the disposal right of the assets preserved to the court accepting the bankruptcy application. If the enforcement court refuses to remove the asset preservation measures, the court accepting the bankruptcy application can apply to the upper-level court of the enforcement court for correction.

The 2019 SPC Meeting Minutes reiterate the above contents and further clarifies that authorities other than the courts – such as the tax authorities, public security bureaus and customs – should also refer to the above procedures and remove the asset preservation measures accordingly.

Enforcement of security

In accordance with the Bankruptcy Law, enforcement of any security against the debtor’s assets is suspended during the reorganisation period, provided that the secured creditor may apply to the court to resume enforcement, if the collateral is likely to suffer damage or substantial depreciation in value, which will impair the interest of the secured creditors. There were disputes on under what circumstances the secured creditors may apply for resuming the enforcement.

The 2019 Meeting Minutes clarify that the administrator or the debtor in possession should confirm in a timely manner whether the collateral is necessary for reorganisation, and if the collateral is not necessary for reorganisation, the administrator or the debtor in possession should, in a timely manner, dispose of the collateral and use the proceeds to repay the secured creditors.

The 2019 Meeting Minutes further provide that where the secured creditor applies to the court for resuming enforcement, if the condition mentioned in the first paragraph is not satisfied, or if it is satisfied but the administrator or the debtor in possession has evidence showing that the collateral is necessary for the reorganisation and provides security of compensation corresponding to the damage or depreciation, the court should disapprove the creditor’s application.

Acknowledgement of arbitration

The Bankruptcy Law provides that after a court accepts an application for a debtor’s bankruptcy, any civil lawsuit regarding the debtor can only be brought before the court accepting the bankruptcy application. It is widely considered that this provision requires the court to exercise jurisdiction over litigation only, but does not challenge the validity of an arbitration clause between a creditor and the debtor.

Interpretation III confirms that if an arbitration clause is entered into before a bankruptcy application is accepted, the party should apply to the selected arbitration institution to confirm the claims and debts. It is generally considered that this provision further confirms the validity of an arbitration clause in bankruptcy cases.


Pre-packaged reorganisation

The Bankruptcy Law does not contain the concept of pre-packaged reorganisation, which allows the debtor and its major creditors, investors and other key stakeholders to formulate and agree on a reorganisation plan, and then have the court approve the agreed plan expeditiously.

In practice, there have been pilot experiments of pre-packaged reorganisation in some provinces. For instance, debtors in Zhejiang province can pre-register with local courts before commencing formal bankruptcy proceedings; thus, relevant parties are able to start negotiations at a relatively early stage to prevent a further deterioration of the debtors’ financial condition.

The SPC also recognises the value and importance of pre-packaged reorganisation. The 2018 SPC Meeting Minutes encourage the courts to explore different approaches to pre-packaged reorganisation and confirm that the reorganisation plans can be prepared by out-of-court agreements reached by the debtors, creditors and other stakeholders.

The 2019 SPC Meeting Minutes further emphasise the transition from pre-packaged reorganisation to reorganisation proceedings: if the out-of-court agreement reached by the debtor and some of the creditors before the court accepts that the reorganisation application is consistent with the reorganisation plan formulated in the reorganisation proceedings, the consent of the creditors on the out-of-court agreements should be deemed as their consent on voting for the reorganisation plan. However, if the reorganisation plan revises the out-of-court agreement and has adverse impacts on the relevant creditors, or is related to the relevant creditors’ major interests, the affected creditors may have another vote on the reorganisation plan.

Debtor in possession

In accordance with the Bankruptcy Law, a debtor can, under the administrator’s supervision, manage its assets and business itself in reorganisation upon the court’s approval of its application. It is not clear under what circumstances the court will approve the debtor’s application for such debtor in possession (DIP).

The 2019 SPC Meeting Minutes have shed some light on this issue. The Minutes clarify that the court may approve the debtor’s DIP application if the following conditions are met:

  • the debtor’s internal governance mechanism still works normally;
  • the debtor’s DIP is favourable for its continuance of operation;
  • the debtor has not hidden or transferred its assets; and
  • the debtor has not acted seriously against the interests of the creditors.

Different from the DIP system in the United States, a DIP in China can exercise the administrator’s powers only in respect of asset management and business operation, rather than all the administrator’s powers. The other powers to investigate assets, to review the creditors’ claims, to claw back certain transactions, to represent the debtor in litigation, etc, should still be exercised by the administrator.

The 2019 SPC Meeting Minutes further confirm that the administrator should supervise the DIP process. If the DIP is found to act seriously against the creditors’ interests or to have other aspects that are not suitable for DIP, the administrator can apply to the court for termination of DIP. If the administrator fails to apply to the court, the interested parties, such as the creditors, may also apply to the court.

Further guidance on cramdown

The 2018 SPC Meeting Minutes require the courts to exercise extra caution when cramming down a reorganisation plan that is not approved by any voting class. Specifically, the SPC imposes two additional conditions for the use of cramdown:

  • if there are multiple classes of creditors, at least one class has approved the reorganisation plan; and
  • the dissenting votes in each class are entitled to no less than what they could have received had the debtor been liquidated.

Amendment of reorganisation plans

The 2018 SPC Meeting Minutes allow the debtor or the administrator to amend the approved reorganisation plan once, given that the original plan becomes infeasible owing to changes to national policies, laws and regulations. Debtors or the bankruptcy administrators may petition to amend the reorganisation plan, and the amendment must go through the voting procedure again. If the proposed amendment is not approved, the court will convert the reorganisation proceedings into liquidation proceedings.

Recent developments on cross-border bankruptcy in China

Article 5 as the basis for recognition and enforcement

Article 5 of the Bankruptcy Law provides the basis and criteria for recognising foreign bankruptcy proceedings. First, recognition must be based on treaty or reciprocity. Second, recognition cannot be contrary to the basic principles of Chinese law; jeopardise China’s sovereignty, security or public interest; or impair the legitimate rights and interests of domestic creditors.

To our knowledge, despite it being effective for over a decade, article 5 has never been invoked. This is mainly because there are few, if any, treaties or conventions to which China is a signatory that provide for a basis for recognition of foreign bankruptcy proceedings, and the Chinese courts have long adopted a narrow theory of factual reciprocity, which means reciprocity cannot be established unless Chinese bankruptcy proceedings have first been recognised in the relevant foreign jurisdiction.

Recent development on reciprocity

In the past six years, there has been a slight but discernible change in the courts’ attitude regarding reciprocity. In Several Opinions of the Supreme People’s Court on Providing Judicial Services and Safeguards for the Construction of the ‘Belt and Road’ by the People’s Courts (the 2015 SPC Opinion), the SPC opens the door for lower courts to adopt a more flexible theory of reciprocity, allowing Chinese courts to take the first step in recognising judgments of other jurisdictions after considering factors such as past communications with the other jurisdiction on the intention to build international judicial cooperation and its commitment of providing judicial reciprocal treatment.

Despite the more liberal reciprocity theory, questions remain on whether the 2015 SPC Opinion extends to foreign bankruptcy proceedings or merely applies to civil and commercial judgments outside the bankruptcy scenario, as well as whether the Opinion should be limited to cases or jurisdictions in relation to the Belt and Road Initiative or reflects a broader change of position.

Aside from the development of the reciprocity theory, in 2015 the US Bankruptcy Court for the District of New Jersey recognised a Chinese bankruptcy proceeding in relation to Zhejiang Topoint Photovoltaic Co Ltd, where an order was issued approving the debtor’s petitions of the bankruptcy proceeding commenced in China to be recognised as a ‘foreign main proceeding’ under Chapter 15 of Title 11 of the US Code and of relevant judicial assistance to be taken in the United States, including the automatic stays, etc.[1]

Four years later in 2019, the US Bankruptcy Court for the Southern District of New York recognised Chinese reorganisation proceeding in relation to Reward Science and Technology Industry Group. The judge, upon considering the creditors’ objections, issued an order to recognise the Chinese proceeding as a foreign main proceeding; give the Chinese administrator full authority to administer the debtor’s assets and affairs in the United States; and stay on any action concerning the debtor’s assets in the United States, including two sets of litigation launched by the dissented creditors, etc.[2]

More recently, the High Court of Hong Kong successively recognised the appointment of bankruptcy administrators of two Chinese companies, CEFC Shanghai International Group Limited and Shenzhen Everich Supply Chain Co Ltd, in January and May 2020.[3] In the CEFC case, Mr Justice Harris commented that ‘[t]he extent to which greater assistance should be provided to mainland administrators in future will have to be decided on a case-by-case basis and the development of recognition is likely to be influenced by the extent to which the court is satisfied that the mainland, like Hong Kong, promotes a unitary approach to transnational insolvencies.’

The above precedents appear sufficient to fulfil even the strictest factual reciprocity requirement. Chinese courts are more likely to recognise the bankruptcy proceedings of jurisdictions that have already recognised Chinese bankruptcy proceedings. In addition, given that Mr Justice Harris hinted at the potential implications of Chinese courts’ attitudes towards cross-border bankruptcy, it would be interesting to see how the Chinese courts will respond to the CEFC case.

Improvements in the 2018 SPC Meeting Minutes and the future outlook

The 2018 SPC Meeting Minutes have two general provisions on cross-border bankruptcy. They stress the importance of balancing different interests in cross-border cases and encourage lower courts to explore ‘new methods’ of applying reciprocity (which may be read to echo the 2015 SPC Opinion). They further state that, if recognition is granted pursuant to article 5, the foreign debtor’s assets in China should first be used to pay off domestic priority creditors (ie, secured creditors and employment-related and tax creditors), and the remaining assets can be distributed according to the rules of the foreign court.

Recognising the urgent need for detailed rules on handling cross-border bankruptcy, the SPC is said to be working on further guidelines in respect of recognition of foreign bankruptcy proceedings.

Developments in 2021 on cross-border insolvency between mainland China and Hong Kong

Owing to the lack of relevant arrangements, cross-border insolvency cooperation between mainland China and Hong Kong has long been a puzzle to practitioners. Starting from the 1990s, mainland courts, especially courts in Guangdong, have adopted various approaches in dealing with Hong Kong proceedings involving mainland elements; however, since there was no clear guidance, the approaches were not consistent, and most courts tended to be conservative when handling cross-border issues.

On 14 May 14 2021, the SPC published the Minutes and the Opinion. According to the Minutes, intermediate courts of mainland China and the High Court of Hong Kong are able to mutually recognise and assist in insolvency proceedings. The Opinion subsequently sets out 24 articles regarding several basic questions in cross-border cooperation. As a starting point, the Opinion will first take pilots in Shanghai, Xiamen and Shenzhen.

Types of proceedings

According to the Opinion, only collective insolvency proceedings opened in Hong Kong have the possibility to be recognised, specifically a compulsory winding up, a creditors’ voluntary winding up and schemes of arrangement for the purpose of restructuring debt, initiated by a liquidator or provisional liquidator and sanctioned by Hong Kong court. Other proceedings, for example, receivership, are excluded as they are not considered collective proceedings.

Main and non-main proceedings and jurisdiction

The Opinion does not introduce the concept of main proceedings and non-main proceedings proposed by the UNCITRAL Model Law. Under the current arrangement, recognition only applies to proceedings taking place in Hong Kong where the debtor has its centre of main interests (COMI).

A debtor’s COMI is presumed to be in Hong Kong if it is registered therein. At the same time, the courts will consider the following open-ended elements: the main place of representation or business and the place where the main assets are located. In addition, the COMI is determined at least six months prior to the commencement of the recognition application.

Rights of the Hong Kong administrator

After recognition, a Hong Kong administrator (ie, liquidator or provisional liquidator) may exercise rights, including taking possession of property, seals, account books, documents and other data of the debtor; investigating the financial position of the debtor; managing and disposing of the debtor’s property; participating in legal actions on behalf of the debtor; and accepting and examining declarations of claims by creditors in mainland China. Material disposal of the debtor’s assets (eg, waiving property rights, attaching security to the debtor’s assets, lending loans to others and transferring assets out of mainland China) requires additional approval by the mainland Chinese courts.


On application, preservation measures are available in accordance with mainland Chinese law from the time of receipt of an application for recognition and assistance until the application is determined.

After recognition of Hong Kong proceedings, three types of relief are automatically granted: all payments of debts made by the debtor are invalid; there is a moratorium on civil claims (litigation and arbitration); and all preservation measures are lifted.


The Opinion adopts the concept of modified universalism, giving priority to fair distribution but also taking into consideration the interests of domestic creditors. Only after distribution to priority claims in accordance with mainland Chinse bankruptcy law (ie, employees’ salary, tax and secured claims) can the remaining assets of the debtor be further distributed to creditors on a pari-passu basis pursuant to the Hong Kong proceedings.

The Opinion is a milestone for the long-waited cooperation between mainland China and Hong Kong; however, as a non-statutory arrangement document, it only draws an outline for deeper cooperation and awaits the provision of a detailed mechanism. For example, the Opinion allows a Hong Kong administrator or creditors to apply to have a mainland Chinese administrator appointed by a mainland Chinese court, but it is silent on ancillary proceedings. The Opinion also mentions parallel proceedings between the two places without identifying the main or non-main proceedings.

In general, although many issues remain unresolved compared with the UNCITRAL Model Law, the Minutes and the Opinion demonstrate China’s active response to the rapid development of global economic activities and its efforts to further deepen international cooperation.

Recent pilot projects on personal bankruptcy regime in China

In China, bankruptcy proceedings apply to legal persons only, and there is no personal bankruptcy system under the Bankruptcy Law; however, China is exploring personal bankruptcy in certain places and intends to promote personal bankruptcy legislation.

In 2019, courts in Wenzhou and Taizhou, Zhejiang province, successively published rules on trials in respect of the personal debt clean-up procedure, which is similar to the bankruptcy procedure.

In late 2019, a court in Wenzhou concluded the first case of the personal debt clean-up procedure. According to the bulletin published by the Intermediate People’s Court of Wenzhou, the creditors agreed on the repayment plan proposed by the debtor (repayment of 1.5 per cent of the total claims within 18 months). The debtor promised that, within six years of the time that he will have completed performance of the repayment plan, if his family’s annual income exceeds 120,000 yuan, he will use 50 per cent of the surplus to repay the unpaid claims of the creditors. The court then issued an order on the debtor, restricting certain behaviours, such as high consumption. Those restrictions would be removed upon his application, provided that the repayment plan has been completely performed and that certain conditions on the repayment rate and the performance period are satisfied.

On 1 March 2021, the Personal Bankruptcy Regulation of the Shenzhen Special Economic Zone came into effect. The practice of this regulation may help promote the national legislation regarding personal bankruptcy.

Recent rules and the development on rights and remedies of bondholders

In July 2020, the SPC issued the first guidelines on trials of bond disputes, the Minutes of Symposium on the Trial of Bond Dispute Cases by Courts Nationwide (the Bond Minutes). The Bond Minutes cover contractual, tortious and bankruptcy issues related to bonds.

Bankruptcy petition against the issuer

The persons that can file bankruptcy petitions against the bond issuer as the debtor used to be unclear and disputed. In accordance with the Bond Minutes, the following parties may file a bankruptcy petition against the bond issuer:

  • the bond trustee can file a bankruptcy petition in its own name, representing the bondholders based on the documents regarding bond raising, the agreement on bond trusteeship or the authorisation by resolution of bondholders’ meeting;
  • the other bondholders can file a bankruptcy petition individually or in concert, where the bondholders’ meeting resolves to authorise the bond trustee or a representative to claim rights; and
  • the bondholders can file a bankruptcy petition individually or in concert based on this resolution, where the bondholders’ meeting resolves that the bondholders may claim rights themselves since the bond trustee is negligent in claiming rights.

Responsibilities and liabilities of the bankruptcy administrator

Apart from those provided in the Bankruptcy Law, the Bond Minutes specify some of the particular responsibilities and liabilities of a bankruptcy administrator of a bond issuer.

  • After a bond issuer enters into bankruptcy proceedings, the bankruptcy administrator is responsible for information disclosure in respect of the relevant bonds issued, unless the bond issuer is approved to act as a DIP. In this regard, the administrator ensures the authenticity, accuracy and completeness of the disclosed information. The bankruptcy administrator is liable for any misrepresentation, misleading statement or major omission in the information disclosed by it after taking over the bond issuer, which may affect the investors’ judgement on the issuer’s solvency.
  • The bankruptcy administrator must confirm in a timely manner the claims registered by the trustee on behalf of the bondholders according to the position registration documents issued by the bond registration authority. If the bankruptcy administrator fails to confirm the claims without justifiable reason, it is liable for compensation of reasonable expenditure of the trustee, such as the litigation costs, attorneys’ fees and business trip expenses, as well as the interest losses arising from the delay.


[1] In re Zhejiang Topoint Photovoltaic Co Ltd, No. 14-24549 (Bankr DNJ).

[2] In re Reward Science and Technology Industry Group Co Ltd, No. 19-12908 (Bankr SDNY).

[3] In the matter of CEFC Shanghai International Group Limited (in Liquidation in the Mainland of the People’s Republic of China) and in the matter of the inherent jurisdiction of the Court, [2020] HKCFI 167. In the matter of Shenzhen Everich Supply Chain Co Ltd (in Liquidation in the Mainland of the People’s Republic of China) and in the matter of the inherent jurisdiction of the Court, [2020] HKCFI 965.

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