Corporate Reorganization under the Enterprise Bankruptcy law of the People's Republic of China - the Relevance of Anglo-American Models for China

Abstract

In 2006, in an effort to nurture its corporate rescue culture, the People’s Republic of China (PRC) enacted a rescue-oriented bankruptcy law, the Enterprise Bankruptcy Law 2006 (the EBL 2006). However, it remains unknown as to how effective the implementation of this new corporate rescue regime will be. This thesis aims to address this uncertainty by drawing upon data from an empirical study, which covers a period of nearly five years of enforcement, investigating how this law has been translated from the law in the books into the law in action.
This thesis has four research questions. The first question examines the extent to which China’s new corporate rescue law is used to rehabilitate troubled companies. The second seeks to identify which party dominates the existing corporate rescue processes. The third explores how economic value is preserved and distributed in corporate rescues. The final question assesses whether court confirmation of reorganization plans is adequate in fulfilling the goals of the corporate reorganization regime in China.
By reviewing and analysing the collected data, this thesis has found that the PRC Bankruptcy Law has been mainly used to reorganize large companies in China. As for the nature of control over the legal process in rescues, this thesis has found that most PRC rescues use an administrator-in-possession model. The data suggest that China’s new rescue law has been effective in preserving going concern value as it has increased the average unsecured creditor recovery rate from less than ten per cent in liquidations to thirty-four per cent in reorganizations.
But, great challenges arise in distributing value, especially in listed company reorganizations, as this thesis finds that two fundamental distribution principles – the absolute priority and pari passu principles - are often breached in China’s corporate rescue cases. Finally, the data demonstrate that China’s courts are currently unable to fulfil the legal policy goals of the PRC’s corporate rescue regime when confirming corporate reorganization plans; this failure can largely be attributed to the lack of judicial independence.