The necessity of a personal bankruptcy system in China

By Wang Wei and Gao Menglu, Co-effort Law Firm
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The basic law establishing China’s current bankruptcy system framework is the Enterprise Bankruptcy Law, adopted by the Standing Committee of the Tenth National People’s Congress on 27 August 2006. From its name and contents it can be seen that this law limits the scope of application of the bankruptcy system to enterprises with legal personality, and ignores natural persons.

王炜 WANG WEI 协力律师事务所高级合伙人 Senior Partner Co-effort Law Firm
王炜
WANG WEI
协力律师事务所高级合伙人
Senior Partner
Co-effort Law Firm

By contrast, in many countries with bankruptcy legislation, “personal bankruptcy” usually constitutes an important part of the bankruptcy system. The term “personal bankruptcy” means a legal system under which an individual who is insolvent declares bankruptcy by way of the statutory procedure, distributes all of his or her property in an equitable manner to all of his or her creditors, and is exempted from liability for the portion that he or she is unable to pay back. Accordingly, it can be said that, by only implementing “enterprise legal person bankruptcy”, China finds itself in the minority around the world. To remedy the absence of a personal bankruptcy system and improve China’s bankruptcy system are imperative.

SIGNIFICANCE AND NECESSITY

Simplification of social claim-debt relationships, which are conducive to maintaining a good economic order. In modern society, the relationships between economic entities are tightly interconnected, numerous and complex, and claims and debts are intertwined and interlinked. The unresolvability of one claim-debt relationship can make the thorough clearance of multiple claim-debt relationships linked to it impossible. Such “debt chains” can affect the stability of social order and the normal operation of the economic order. If debtors with no capacity to perform are continually given an out from the “debt chain” through a personal bankruptcy system, complex claim-debt relationships in society can be simplified and clarified, which is conducive to maintaining a good economic order.

Conducive to the efficient use of judicial resources and stability of social order. Difficulty in enforcement is one of the major issues in judicial practice. If an individual is denied the right to declare bankruptcy, his or her creditors will seek other judicial relief, which may waste judicial resources. The establishment of a personal bankruptcy system can provide a more reasonable basis for relief and more efficiently resolve complicated claim-debt relationships. Where effective judicial relief procedures are lacking, private means of relief such as kidnapping, intimidation, etc., may be sought in their stead, which undermines social order.

高梦露 GAO MENGLU 协力律师事务所律师助理 Paralegal Co-effort Law Firm
高梦露
GAO MENGLU
协力律师事务所律师助理
Paralegal
Co-effort Law Firm

More conducive to realizing the principles of fairness and equality, and the recovery of debt claims. The principle of equality among entities in a market economy signifies not only that claims are to be accorded by equal protection, but also that when an equal indebted entity becomes insolvent, the law is also required to offer such entity an equal way out. Given that China recognizes the bankruptcy of enterprises, recognition of the bankruptcy of individuals is the next logical step. A personal bankruptcy system can also go some way towards resolving the problem of difficulty of enforcement, with the claims of each creditor being fairly repaid through the personal bankruptcy system, avoiding dilemma where claims are unrecoverable in fact due to the insolvency of the debtor.

Gives the debtor a chance at a new beginning, and manifests the values of humanism. After the establishment of a personal bankruptcy system, the basic living standards of a bankrupt is protected, releasing them from their heavy debt burden, clearing the red and allowing them to restart from zero, permitting them to maintain their dignity. Accordingly, it can be said that a personal bankruptcy system upholds the concept of assistance found in the philosophy of humanism and highlights the best in humanity.

Keeps with the trends of internationalization and uniformity in legislation. The establishment of a personal bankruptcy system is a requirement for Chinese legislation to keep pace with that internationally. Among countries worldwide that have bankruptcy legislation, such as the US, UK, Japan, etc., personal bankruptcy occupies an important position in their bankruptcy law system. With the further development and closeness of China’s market economy and the international economy, China must keep pace with other countries in terms of bankruptcy law as well.

On 11 July 2017, the Supreme People’s Court responded in the following manner to a proposal for the establishment and implementation of a personal bankruptcy system, made by an average citizen named Pan Dingxin on the public interaction space of its official website: “The establishment and implementation of a personal bankruptcy system is beneficial for individuals or households that are burdened by major financial difficulties to be lawfully released from a portion of their debts through a personal bankruptcy procedure, allowing them, through effort, to return to normal production and a normal life. Accordingly, a personal bankruptcy system has relatively major protective effects for individuals or households that are experiencing serious financial difficulties.

“However, a personal bankruptcy system touches upon numerous factors, such as the establishment and improvement of a personal credit system and the development of a stronger commercial or market orientation by commercial banks. Additionally, the implementation of a personal bankruptcy system requires that legislation be drawn up by the National People’s Congress or its Standing Committee. We are confident that, with the development and improvement of the socialist market economy system with Chinese characteristics, the National People’s Congress or its Standing Committee will, when appropriate, formulate a personal bankruptcy law on the basis of a summarization of the experience in implementing the Enterprise Bankruptcy Law of the People’s Republic of China. The Supreme People’s Court will actively co-operate with the work of relevant state authorities to push forward the implementation of a personal bankruptcy system.”

From the foregoing response by the Supreme People’s Court it can be seen that the legislative and judicial authorities are currently striving to find a way to create a personal bankruptcy system and leverage its functions of permitting individuals to lawfully realize a withdrawal from the market and recovery of a normal life, safeguarding social stability, etc. The lack of a personal bankruptcy system in China at present is chiefly due to the weak system for the registration of personal property, weaknesses in the related complementary credit system and social security system, etc. Nevertheless, the establishment of a personal bankruptcy system is the trend of the times.

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

Co-effort

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