We look at the reforms to the insolvency law in Shenzhen, China prompted by the coronavirus (COVID-19) pandemic. Written by Catherine Shen, ABLI.
China is looking to enact the personal bankruptcy regime in Shenzhen, one of its largest cities. On 2 June 2020, the Shenzhen Municipality published the draft of China's first ever personal bankruptcy regulations for public consultation. The Personal Bankruptcy Regulations of the Shenzhen Special Economic Zone (Draft for Comments) has a total of 157 articles across 13 chapters, and public consultation ended on 18 June 2020.
To pre-empt the possibility where debtors from all over China come to Shenzhen to evade debts once the regime is in place, the regulations require debtors to have made social contribution in the municipality for three consecutive years, among other conditions, before they can avail themselves of protection. Further, the threshold for creditor-initiated personal bankruptcy filings is set at half a million RMB in debts that have fallen due (individually or collectively) to prevent abuse by creditors with smaller claims.
A bankruptcy application filed for improper purposes such as ‘transferring assets, maliciously evading debts or damaging others’ reputation’ will not be accepted. Nor will those filed by parties who have "undermined the bankruptcy procedure" by means such as making false representations or providing false evidence. Further, the regulations have a list of circumstances under which debts are not allowed to be discharged and activities for which liabilities will not be exempted, all in an effort to prevent the regulations from being taken advantage of to maliciously evade debts or commit bankruptcy fraud.
Once a personal bankruptcy application is accepted, a debtor will need to serve a three-year probation period before debts are fully discharged. During this period, the debtor must report income, expenditure and assets to the bankruptcy department and the administrator on an annual basis, and will be subject to restrictions on spending, such as those on purchasing real estate and cars, renovating homes, travelling by luxurious means of transportation and renting high-end office premises for work. Violating these restrictions will result in the extension of the probation period.
Further, the debtor will be disqualified from holding directorship of listed companies, non-listed public companies and financial institutions. Bankruptcy declaration is a must before he/she can borrow RMB 1,000 or more.
The regulations give debtors who file for personal bankruptcy an option to apply for reorganisation, in the same way available to corporate debtors under the Enterprise Bankruptcy Law. A debtor must submit a reorganisation plan if he/she wishes to do so. The reorganisation plan is subject to court sanction, after being approved by more than 50% in number of creditors present in each class and more than 75% in value represented by those creditors. Further, a reorganisation plan is subject to a three-year timeline, with the interval between each repayment not exceeding three months.
Similar to corporate debtors, settlement by reaching an agreement is available under the draft personal bankruptcy rules. The regulations also list the qualifications and duties of administrators and provide for a summary procedure where only one creditors’ meeting is required.
As China’s technology hub, Shenzhen is home to millions of small and individual businesses and start-ups that have been battered by the financial fallout of the coronavirus pandemic. It is hoped that the regulations, once passed, will be of assistance to those struggling but honest businesses as collective debts will then not be transferred without limitation to individuals and their families.
A tracker of insolvency reforms globally produced by LexisNexis in partnership with INSOL Europe is now available: Coronavirus Tracker of insolvency reforms globally.
We look at various countries worldwide which are expediting reforms to their restructuring and insolvency laws, temporarily suspending onerous insolvency law provisions, increasing limits for statutory demands, suspending enforcement powers and introducing other measures to deal with the COVID-19 crisis. As the situation is rapidly evolving with more countries adding new measures daily, you should contact local lawyers in the relevant jurisdiction to check the current measures in force.
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Neeta started her legal career at Allen & Overy in 2008 in the midst of the global financial crisis and the collapse of Lehmans where she gained most of her paralegal experience.
Neeta also did a short stint in litigation at the Revenue and Customs Prosecutions Office in 2006. Neeta graduated with a 2:1 honours degree from University of London, Queen Mary College and went on to obtain a distinction from the College of Law in the Legal Practice. She has been working at Lexis Nexis since April 2013.
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