Necessity and feasibility of summary bankruptcy proceedings

By Wang Wei, Gao Menglu, Co-effort Law Firm
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It is difficult for an enterprise to avoid losses on outbound investments. As a link to its risk management, an enterprise should timely declare insolvency and liquidate subsidiaries or participated companies that do not provide value. This article provides a brief introduction to summary bankruptcy proceedings.

Wang Wei Senior Partner  Co-effort Law Firm
Wang Wei
Senior Partner
Co-effort Law Firm

The PRC Enterprise Bankruptcy Law, which took effect on 1 June 2007, marks a significant progress in the market economy in China. It indicates that China began paying greater attention to the orderly exit of market players. However, judicial practices of enterprise bankruptcies reveal that a number of companies, especially small to medium-sized enterprises, do not exit the market through bankruptcy proceedings. The reason is that red tape and the high costs of current bankruptcy proceedings discourage many enterprises seeking such help. For this reason, China, in consideration of its national conditions, should absorb and learn from the advanced domestic and foreign experiences in legislation and design simpler and more cost-saving summary bankruptcy proceedings to cater to the current need.

The summary bankruptcy proceedings refer to those that apply to cases where the amount involved is small, the creditor’s right and debt are clear, and there are a few creditors. Summary bankruptcy proceedings are recognized in the common law and civil law systems of most countries. They are laid down in Bankruptcy Act 1994 of Germany, Law of Bankruptcy of Japan, and others.

As judicial practice of enterprise bankruptcy raises actual demand for the summary bankruptcy proceedings, this article aims to provide a brief analysis of the necessity and feasibility of the same in China.

Gao Menglu Associate  Co-effort Law Firm
Gao Menglu
Associate
Co-effort Law Firm

Necessity

Saving judicial costs and improving judicial efficiency. Bankruptcy cases vary in sizes and levels of difficulty. The principle of proper proceedings and costs necessarily require applications of different processes to different cases. The summary bankruptcy proceedings suit hearing of cases involving small amounts and avoid unnecessary costs related to general proceedings. Summary proceedings shorten the time for hearings as they simplify some procedures unnecessary for small-claim bankruptcy cases. As a result, a case can be closed within a short time, increasing trial efficiency.

Catering to the need for further improvement of bankruptcy law system. Although China’s current bankruptcy laws do not strictly realize the doctrine of general bankruptcy (that is, to extend subjects of bankruptcy to business bankruptcy and consumption bankruptcy of natural persons) as do the mainstream of bankruptcy laws worldwide, the scope of applicability is further expanded and no longer limited to corporate entities like previous bankruptcy laws and regulations, mainly applicable to state-owned enterprises.

Partnerships, sole proprietorships, and other profit-making organizations, established in accordance with the law, can go bankrupt. Another issue that legislation must address is the design of insolvency of natural persons. With the constant broadening of the scope of subjects of bankruptcy, more flexible and versatile proceedings, especially summary bankruptcy proceedings, are necessary to meet the requirements of different debtors for market exits to the maximum extent.

Feasibility

Revised Civil Procedure Law provides important guidelines. China has been implementing parallel existence and effective connection of general and summary proceedings in civil procedures. The Civil Procedure Law provides for summary proceedings, including establishment of a small-claim litigation system, expanding the scope of application of summary proceedings, and further simplifying the hearing procedure, all of which serve as important basis and operational guidelines to create summary bankruptcy proceedings.

Practices of local courts provide precious experience. In recent years, local courts in some parts of China made bold explorations and attempts in summary trials with satisfactory results. Take the Intermediate Court of Shenzhen, for example. In 2017, the court placed 93 bankruptcy cases on docket and heard 86 cases through summary bankruptcy proceedings. The average time limit for hearings was less than three months. The Guidelines for Summary Proceedings to Accelerate Hearing of Bankruptcy Cases (effective on 1 June 2018), issued by the High People’s Court of Shanghai Municipality, and the Minutes of Meeting on Pilot Summary Hearing Proceedings for Bankruptcy Cases, issued by the Intermediate People’s Court of Wenzhou, are examples of the attempts of local courts to explore and establish highly efficient and convenient summary bankruptcy proceedings for enterprises seeking market exits.

After a brief discussion of the necessity and feasibility of the summary bankruptcy proceedings, we will touch on the specific contents of the proceedings to be considered at design. Legislators should strictly observe two basic principles. First, there should be no harm to the rights and interests of the parties concerned, and second, there should no violation of the concept of procedural justice. Proceeding design is optimized to protect better the rights and interests of the parties concerned, promote orderly market exits of enterprises, and push forward healthy development of the society and economy. If the contents of the proceedings cause harm to the rights and interests of the parties concerned, their legitimacy will be challenged. Improvement of efficiency should not have adverse effect on procedural justice. The design of the summary bankruptcy proceedings should achieve unification of efficiency and procedural justice.

In conclusion, China has had basic conditions to create and implement summary bankruptcy proceedings. Although local courts in some areas have practiced summary bankruptcy proceedings to some extent, Beijing should accelerate steps towards national legislation and formulate summary bankruptcy proceedings suitable to the national conditions of China.

Wang Wei is a senior partner and Gao Menglu is an associate at Co-effort Law Firm

Co-effort Law Firm35/F Huaneng Union Tower
No. 958 Lujiazui Ring Road
Pudong New Area, Shanghai 200120, China
Tel: +86 21 6886 6151
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E-mail:
wangwei@co-effort.com
gaomenglu@co-effort.com