Very few people noticed but China’s new bankruptcy law took effect today, June 1.
The law was passed last year after more than a decade of preparation. Most observers will tell you that it is a good law. On par with international standards.
Basically, it creates a system for companies that cannot pay their debts to go into bankruptcy. The process will mostly be managed by the courts. Secured creditors get first dibs on any assets that can be found. Employees are next. All other creditors come after that.
Up until now, going into bankruptcy or securing defaulted payments from a business partner was a complex process, particularly for foreign companies. It should be easier now.
As usual with new laws, there are still a few questions. The law puts an inordinate amount of responsibility on the hands of local courts to manage the process of bankruptcy. It’s up to them to accept a case or stop the process cold in its tracks. Also, it’s up to the courts to appoint administrators who then manage whatever assets are available to be managed.
Putting such a big onus on single individuals who are often poorly trained and may put a priority on local interests above the spirit – if not the letter – of the law, may open the door to corruption and abuses.
But China is training more judges on an ongoing basis and, in fairness, developing a legislative system takes time and requires a balancing of multiple efforts on different fronts.