In the jurisdiction of the People’s Republic of China (the “PRC”), the primary sources of law governing restructuring, reorganisation and liquidation are as follows.

Laws Governing Financial Restructuring

Financial restructuring usually involves out-of-court negotiations to adjust a company’s debt and capital structure, or to implement other financial arrangements to improve its finances. The aim is to enhance the company’s ability to repay debts and remain operational. This process is mainly regulated by the Civil Code of the PRC and related laws, regulations and judicial interpretations concerning creditor-debtor relationships.

Laws Governing Reorganisation and Liquidation

The reorganisation and liquidation of enterprises are mainly regulated by the Enterprise Bankruptcy Law of the PRC, effective 1 June 2007 (the “Enterprise Bankruptcy Law”), along with relevant provisions of the Company Law of the PRC (the “Company Law”). Additionally, the Supreme People’s Court of the PRC (the “Supreme Court”) has issued judicial interpretations and documents, such as the Provisions on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the PRC (I), (II) and (III) from 2011 to 2019, and the Minutes of the National Court Bankruptcy Trial Work Conference in 2018, to clarify the application of the Enterprise Bankruptcy Law.

Listed companies must also comply with the Securities Law of the PRC, the Minutes of the Meeting on the Trial of Listed Companies’ Bankruptcy Reorganisation Cases, and other relevant laws, regulations, judicial interpretations and stock exchange rules and guidelines.

While the Enterprise Bankruptcy Law does not explicitly apply to partnerships, creditors can file for bankruptcy liquidation if a partnership cannot repay its debts, following procedures similar to those in the Enterprise Bankruptcy Law.

Since its enactment in 2006, the Enterprise Bankruptcy Law has not been formally revised, but current judicial practices have surpassed its provisions primarily in two areas of pilot programmes, pre-reorganisation and personal bankruptcy.

Practices in pre-reorganisation

Pre-reorganisation involves negotiations among debtors, creditors, and other stakeholders (such as investors) under court supervision to reach a preliminary agreement on a reorganisation plan before entering formal bankruptcy proceedings. The plan is then submitted to the court for approval, aiming to streamline the process, cut time costs, and increase reorganisation success rates.

Currently, local courts in Beijing, Shanghai, Shenzhen, Guangdong, Shandong and Chongqing have issued Guidelines for Pre-reorganisation Work in Bankruptcy Reorganisation Cases, providing a legal and procedural framework for pre-reorganisations of local enterprises. Pre-reorganisation cases are also rising across the country.

Practices in personal bankruptcy

The PRC lacks a nationwide personal bankruptcy law. Shenzhen pioneered a personal bankruptcy pilot programme, with its regulations taking effect on March 1, 2021. Subsequently, Wenzhou Intermediate People’s Court, along with other institutions, launched local personal debt clean-up pilot measures on 1 July 2021. In recent years, the National People’s Congress and the Supreme Court have been exploring a nationwide legal framework for personal bankruptcy.

While there is no set timeline for revising the Enterprise Bankruptcy Law, ongoing discussions and pilot programmes pave the way for future changes. We anticipate future amendments or new legislation to address issues such as pre-reorganisation and personal bankruptcy.

Bankruptcy occurs when a business cannot repay its due debts and its assets fall short of its liabilities, or when it is obviously insolvent (the “Bankruptcy Scenarios”). There are three types of bankruptcy proceedings: reorganisation, settlement and liquidation, which can be initiated voluntarily or involuntarily.

Voluntary bankruptcy occurs when a company files for reorganisation, settlement, or liquidation with a court due to a Bankruptcy Scenario. The applicant must submit a bankruptcy application along with pertinent evidence. In a voluntary bankruptcy, the enterprise (as debtor) must prove insolvency by providing documents such as a property status report or financial statements.

Bankruptcy reorganisation or liquidation can be involuntarily initiated by either creditors or other entitled parties, often when the debtor fails to meet its financial obligations. The applicant must submit a bankruptcy application, along with applicable evidence, to the court.

The key statutory officers involved in bankruptcy proceedings in the PRC include bankruptcy court judges, administrators and creditors’ committees. The legal concept of receiver does not exist in the PRC.

Bankruptcy Court Judge

The bankruptcy court judges play a pivotal role in both liquidation and reorganisation cases, initiating, supervising, and adjudicating the proceedings. They ensure the process is lawful, transparent, and fair, protecting the legitimate rights and interests of debtor, creditors, and other stakeholders.

Their key responsibilities include: accepting or rejecting bankruptcy cases; appointing the administrator; supervising the process to ensure the administrator’s and creditors’ meetings’ fulfilment of duties; overseeing the execution of property distribution plans and reorganisation plans; approval and rulings on significant matters; reviewing and approving reorganisation plans; and concluding bankruptcy proceedings.

Administrator

The administrators are crucial in bankruptcy proceedings. Their primary duties encompass managing the debtor’s assets and operations, preparing asset inventories and creditor lists, and disposing of the debtor’s property. They report to the court and operate under the supervision of both the creditors’ meeting and the creditors’ committee.

The court selects and appoints administrators, typically from a panel of experienced intermediary firms, such as law firms, accounting firms, and liquidation agencies. For standard cases, selection is often by lottery. For larger, high-profile cases, a national public tender is conducted to choose a highly skilled administrator who can offer the most effective solutions.

Once appointed, the administrator generally assumes control over the debtor’s property and business affairs, taking over the management role from the debtor. However, in some reorganisation cases, upon the debtor’s request and with the approval of the court, the debtor may continue managing assets and business operations under administrator supervision.

Creditors’ Committee

A creditors’ committee, elected by the creditors’ meeting, is a standing body that oversees the administrator’s actions between formal creditors’ meetings and addresses various bankruptcy-related matters. It includes creditor representatives and one representative of the debtor’s employees or the labour union, with a maximum of nine members confirmed by the court in writing.

The committee has the authority to supervise the administrator and the debtor, including supervising the administrator’s work, managing and disposing of the debtor’s assets, applying for replacement of the administrator, and reporting to the creditors’ meeting.

In bankruptcy proceedings, creditors are categorised by their repayment priority as follows.

• Preferential creditors – while the Enterprise Bankruptcy Law grants secured creditors priority from collateral, certain preferential claims may take precedence over secured claims in specific circumstances outlined by law. See 2.2 Priority Claims in Restructuring and Insolvency Proceedings for details.
• Secured creditors – the creditors whose claims are secured by collateral, such as mortgages, pledges, or liens on the debtor’s property, have the priority right to be repaid before unsecured creditors from the proceeds of the collateral.
• Bankruptcy expenses creditors – bankruptcy expenses include costs related to bankruptcy administration, such as litigation fees, asset management expenses, and administrator remuneration. They take precedence over ordinary claims, typically funded by the bankruptcy estate, except when related to collateral management and disposal, in which case they are paid first from collateral liquidation.
• Common benefit debts creditors – common benefit debts are essential new debts incurred during bankruptcy for ongoing operation, such as wages, medical expenses, basic social security contributions, etc, or expenses arising from the management and liquidation of bankruptcy estates, or loans needed to complete unfinished projects. They enjoy repayment priority, but bankruptcy expenses take precedence if assets are insufficient.
• Employee creditors – creditors of employee claims include wages owed to employees, unpaid medical, disability, and death benefits, unpaid contributions to employees’ pension and medical insurance accounts, and any compensation required by law.
• Social insurance and tax creditors – this group includes unpaid social insurance contributions not covered under employee claims, and any outstanding taxes owed by the debtor.
• Unsecured creditors – these creditors have no security interests in the debtor’s assets, and rank below secured and other specified creditors in repayment.
• Subordinated creditors – this category includes punitive damages, administrative fines, and criminal penalties incurred prior to the acceptance of the bankruptcy case. Subordinated claims are only paid after the full repayment of unsecured creditors.

Secured creditors generally enjoy priority payment from the proceeds of secured collateral.

However, to ensure fairness in specific situations, PRC law allows the following preferential claims to take precedence over secured creditors in the allocation of proceeds from the secured collateral.

Residential Property Delivery Claims

If a developer mortgages a residential building (in progress) to a bank, and then sells various units to consumers, the consumers who have fully paid for the residential properties will have the right to claim delivery of the property before construction claims, mortgages, and other creditor claims.

Construction Project Price Claims

Unpaid contractors may request a project’s sale or auction, with priority in payment from the proceeds. The statutory limitation for the contractors to exercise this priority right is eighteen months from the date the construction claims are due. 

Ship Priority Rights

Ship priority rights include claims for unpaid crew wages, compensation for injuries or damages during ship operations, port fees, and salvage costs. These claims take priority over ship mortgages and maritime liens.

Civil Aviation Liens

Expenses related to rescuing or maintaining civil aircraft have priority over aircraft mortgages.

In the PRC, creditors can safeguard their interests by establishing various security rights over collateral, as follows:

• real property – creditors may mortgage the debtor’s real property, including buildings and land use rights for construction;
• movable property – creditors may pledge the debtor’s movable property and mortgage specific movable property, such as production equipment, raw materials, work-in-progress, and finished products. Additionally, creditors have lien right over movable property they legally possess; and
• rights – creditors may also charge specific rights held by the debtor, such as equity interests, shares, bonds, certificates of deposit, promissory notes, intellectual property, existing and future accounts receivable, and guarantee deposits.

Outside reorganisation or insolvency, creditors can enforce their security interests through litigation, arbitration, or a special non-litigious procedure that allows a court ruling for auction or sale of secured property. If the court issues a favourable ruling, it can enforce the sale without a full trial, expediting the creditors’ debt recovery.

Once a judgment, ruling, or order is obtained, creditors may seek court enforcement to auction, sell, or offset the secured property.

For rights and remedies in a reorganisation context, see 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation. For insolvency, see 5.4 The Position of Shareholders and Creditors in Liquidation.

Unsecured creditors can protect their interests through several means, as follows.

• Pre-judgment execution and property preservation – creditors can seek property preservation or pre-judgment execution from courts or arbitration commissions during litigation or arbitration to prevent assets transfers by the debtor.
• Retention of ownership – in sales contracts, sellers may agree to retain ownership of goods until full payment. This retention should be registered with the Credit Reference Centre at the People’s Bank of China to safeguard sellers from any bona fide third-party claims.
• Set-off rights – if an unsecured creditor owes debts to a company before its bankruptcy, it may use set-off rights to offset mutual debts with the bankrupt company to reduce risk exposure.

For rights and remedies in a reorganisation context, see 4.5 The Position of Office Holders in Restructuring, Rehabilitation and Reorganisation. For insolvency, see 5.4 The Position of Shareholders and Creditors in Liquidation.

Overview of Legislation

Out-of-court restructuring typically occurs before formal bankruptcy proceedings, involving negotiations among debtors, its investors, creditors, potential investors, and other stakeholders, to reach a restructuring agreement based on the parties’ free will. Generally, out-of-court restructuring includes three categories – pre-reorganisation, voluntary restructuring by negotiations, and restructuring led by a financial creditors’ committee.

From a legislative perspective, the laws and regulations of the PRC lack a systematic framework for out-of-court restructuring, with relevant provisions scattered in judicial interpretations by the Supreme Court and in rules published by various local courts, leading to regional variations in practice.

The parties may convert the restructuring agreement into a formal reorganisation plan through the statutory reorganisation procedures pursuant to the Enterprise Bankruptcy Law. Section 3.2 Legal Status delves into the legal differences between these agreements and plans.

Pre-reorganisation

As specified in 1.1 Legal Framework, some local courts have issued guidelines for pre-reorganisation, providing a legal basis and procedural framework for pre-reorganisations of local enterprises. Pre-reorganisation cases are rising nationwide.

Pre-reorganisation, a unique out-of-court restructuring form, involves court intervention before bankruptcy proceedings. In some regions, courts appoint provisional administrators to investigate debtors, facilitate stakeholder negotiations, and guide consensus on restructuring plans. Pre-reorganisation can be initiated ex officio by the court or government, or upon the request of an applicant subject to court review. Many local courts tend to promote pre-reorganisation to leverage market mechanisms and judicial guidance for distressed enterprises, thereby improving reorganisation efficiency and success rates.

Voluntary Restructuring

Voluntary restructuring, outside pre-reorganisation, relies on freely negotiated agreements without legal procedure requirements. It may involve debt restructuring, asset restructuring, debt-for-equity swaps, or other methods.

Restructuring Promoted by Financial Creditors’ Committee

In the PRC, the Financial Creditors’ Committee is an important out-of-court mechanism, usually initiated and formed by banking or no-banking financial creditors. They may engage third-party advisors, such as legal or financial consultants, to assist the debtor company in formulating a restructuring plan or providing professional advice. The committee aims to coordinate the debt restructuring between the companies and multiple financial creditors, based on formal policy documents and regulatory guidance rather than formal laws.

Widely used in corporate debt restructuring, particularly for large enterprises or listed companies facing debt crises, the committee helps negotiate debt extensions, interest reductions, and operational continuity. The debt restructuring of Yuntianhua Group exemplifies the committee’s role. While preventing unilateral creditor actions that could worsen financial difficulties, the committee’s decisions lack legal binding, risking restructuring failure if creditor banks decline participation or fail to implement agreements.

A legally executed out-of-court restructuring agreement binds participants, but not non-participating creditors or third parties. Merely reaching this agreement does not prevent individual creditors from taking action such as filing lawsuits or initiating bankruptcy proceedings. This may hinder the successful implementation of the restructuring agreement.

However, if the restructuring agreement is approved through reorganisation procedures under the Enterprise Bankruptcy Law and recognised by a court ruling as a reorganisation plan, it becomes legally binding on both the debtor and all creditors.

Notably, the Supreme Court has emphasised linking out-of-court restructuring with formal reorganisation proceedings. In its published meeting minutes, the Court outlined that before a company enters formal reorganisation, creditors and other interested parties may engage in out-of-court negotiations to develop a restructuring plan. This plan may serve as the basis for drafting the reorganisation plan submitted to the court for review and approval in a bankruptcy reorganisation process. Furthermore, if a restructuring agreement reached between the debtor and some creditors before the bankruptcy reorganisation aligns with the draft reorganisation plan, creditors’ consent to the out-of-court agreement counts as consent to the reorganisation plan during the court proceedings.

The Enterprise Bankruptcy Law provides for two preventive bankruptcy procedures – reorganisation and settlement, both aimed at rescuing financially distressed enterprises and facilitating their recovery.

Entities Subject to the Procedures

Both reorganisation and settlement procedures are only available to enterprises with independent legal personality established under the PRC law. However, personal bankruptcy procedures, including reorganisation and settlement, are currently being piloted only in select regions (see 1.1 Legal Framework).

Initiating Criteria

When Bankruptcy Scenarios (see 1.2 Types of Insolvency) arise for a debtor, the eligible initiating parties have the right, but not the obligation, to file for reorganisation or settlement with the court.

To initiate reorganisation or settlement procedures, a petition must be filed with the court, along with the required supporting documents. Upon receiving the petition, the court will review the case to determine if the conditions for reorganisation or settlement are met before officially accepting the case.

Eligible Initiating Parties

In a reorganisation procedure, the eligible initiating parties may include the debtor, creditors, or shareholders holding more than 10% of the debtor’s registered capital. For financial institutions such as commercial banks, securities firms, and insurance companies, the financial regulatory authorities under the State Council have the authority to apply to the court for reorganisation of such institutions.

For a settlement procedure, only the debtor may file a petition.

Entities and Rights Subject to Reorganisation

In bankruptcy reorganisation procedures, the entities and rights subject to reorganisation include the following.

• Creditors – the reorganisation plan addresses the modification and settlement of various types of claims, including secured claims. Creditors’ rights are adjusted according to the terms of the reorganisation plan.
• Contracting parties of the debtor – the administrator has the right to decide whether to terminate or continue contracts that were established before the acceptance of the bankruptcy petition and have not been fully performed by both parties.
• Shareholders of the debtor – the reorganisation plan may involve adjustments to shareholders’ rights. This could include requiring shareholders to transfer their equity, increase capital contributions, or alter their representation on the board of directors.

Organisation and Representation of Creditors and Shareholders

The Creditors’ Meeting is the body responsible for protecting the collective interests of creditors and representing them in their requests. It is composed of creditors who have filed their claims, and it exercises powers such as verifying claims, deciding whether to continue or cease the debtor’s business, approving the reorganisation plan, passing resolutions on the liquidation and distribution of bankruptcy estates, etc. Generally, resolutions of the creditors’ meeting require approval by a simple majority of creditors with voting rights who are present at the meeting, and the claims they represent must account for more than half of total unsecured claims. These resolutions are binding on all creditors. The creditors’ meeting may establish a creditors’ committee (see 1.3 Statutory Officers).

Shareholders may attend creditors’ meetings to discuss the draft reorganisation plan. If the plan involves adjustments to shareholders’ rights, a separate shareholder group will be formed to vote on such matters.

Determination of Claims

Claims are determined through a process of filing, verification, and confirmation. Creditors must file their claims, along with their values, with the administrator within a prescribed period. The administrator will review the claims, assessing their nature, amount, secured assets, etc., and compile a claims list for submission to the creditors’ meeting for verification.

If there are no objections from the debtor or creditors, the court will issue a ruling confirming the claims. However, if either the debtor or creditors dispute the claims recorded in the claims list, and the administrator’s explanation or adjustments do not resolve the dispute, the objecting party may file a lawsuit for claim confirmation with the court within 15 days after the creditors’ meeting concludes.

Preventive Reorganisation Measures

As outlined in 3. Out-of-Court Restructuring, the PRC allows for restructuring prior to the formal acceptance of a bankruptcy reorganisation petition by the court – ie, pre-reorganisation. Regarding the stay of individual enforcement actions, the local rules of Beijing and Jiangxi Province explicitly grant the provisional administrator the right to apply to the relevant court for a suspension of enforcement proceedings against the debtor’s assets. However, the local rules of Shanghai and Chongqing do not contain such provisions.

Dissenting Creditors

For the approval of the draft reorganisation plan, voting must be conducted in divided groups of creditors (ie, the secured creditors group, the employee creditors group, the tax creditors group, and the unsecured creditors group), with each creditors’ group required to approve the plan. A creditors’ group will approve the draft reorganisation plan if more than half of the creditors present in that group agree to it, and the total amount of claims they represent exceeds two-thirds of the group’s total claims. Moreover, if the draft reorganisation plan includes adjustments to shareholders’ equity, a separate shareholders group must be established to vote on those matters. If all voting groups approve the reorganisation plan, it is considered passed. However, if certain voting groups reject the plan, the debtor or administrator may negotiate with the dissenting groups, and they can vote again after negotiations. If the dissenting group either refuses to vote again or votes against the plan in the second round, but the reorganisation plan satisfies specific statutory conditions, the debtor or administrator may apply to the court for approval of the plan, overriding the dissenting creditors. Before ruling on whether to approve the reorganisation plan, the court will review the plan focusing on several aspects, including whether the plan protects the repayment interests of dissenting parties in each voting group.

New Money

After the initiation of reorganisation proceedings, the administrator or self-managed debtor, with approval from the creditors’ meeting or court permission (if the creditors’ meeting hasn’t convened yet), may obtain financing to continue the debtor’s business. Such financing is treated as common benefit debts (see 2.1 Types of Creditors). These debts are prioritised for repayment ahead of employee claims, social insurance and tax claims, and unsecured claims, but are subordinate to preferential claims, secured claims, and bankruptcy expenses. Creditors providing this new financing are entitled to request that the debtor or administrator offer security to secure its repayment.

In practice, if the prior secured creditors and those with priority claims for construction project payments agree to subordinate their claims and the creditors’ meeting votes in favour, the newly incurred common benefit debts may be granted super-priority status, meaning such common benefit debts will be repaid before secured claims and construction price priority claims.

Typical Timelines and Milestones

Timelines and milestones are generally as follows.

• Filing and acceptance of reorganisation petition – the court will rule whether to accept the reorganisation petition within 15 days of its filing by the debtor and within 22 days if filed by creditors. If there are special circumstances requiring an extension, the court may extend the decision period by an additional 15 days with approval from the higher court.
• Preparation and approval of reorganisation plan – the debtor or administrator must submit a draft reorganisation plan to both the court and the creditors’ meeting within six months of the court’s ruling to accept the reorganisation petition. If necessary, and with sufficient reason, the debtor or administrator can request an extension of up to three months from the court. Within ten days of the plan being passed by the creditors’ meeting, the debtor or administrator must apply to the court for approval of the plan. If the court finds that the plan complies with the law, it must approve the plan within 30 days of receiving the application, thereby terminating the reorganisation procedure and issuing a public notice.
• Implementation of reorganisation plan – once the court approves the reorganisation plan, the administrator oversees its execution during the supervision period specified therein. During this period, the debtor must report to the administrator on the implementation of the plan and the debtor’s financial status. If necessary, the administrator may apply to the court for an extension of the supervision period. When the supervision period ends, the administrator must submit a supervision report to the court. The administrator’s supervisory duties will come to an end once the supervision report is submitted.

Termination of the Reorganisation Procedure

The reorganisation period begins when the court rules to approve the debtor’s reorganisation (ie, the acceptance of the reorganisation petition) and ends upon the termination of the proceedings. It does not include the implementation phase of the reorganisation plan.

The reorganisation proceedings may be terminated under any of the following circumstances:

• the debtor’s business and financial condition continues to deteriorate, with no possibility of recovery;
• the debtor engages in fraud, maliciously reduces assets, or commits other acts significantly detrimental to creditors;
• the debtor’s actions prevent the administrator from performing their duties;
• the debtor or administrator fails to submit a draft reorganisation plan to the court and creditors’ meeting within the prescribed period;
• the court approves the reorganisation plan;
• the draft reorganisation plan is neither approved by the creditors’ meeting nor receives court approval; and
• the draft reorganisation plan approved by the creditors’ meeting fails to obtain final court approval.

Judicial Involvement

The judiciary, particularly the court handling the reorganisation, plays a crucial role throughout the reorganisation process. From accepting the reorganisation petition and appointing the administrator to convening creditors’ meetings, approving the reorganisation plan, and supervising its execution, each step necessitates court involvement and rulings. For instance, court approval is essential for the reorganisation plan to become effective.

Consequences of Violating the Reorganisation Plan

Once the reorganisation plan is approved by the court, it is binding on both the debtor and all creditors. If the debtor fails to implement or refuses to implement the plan, the administrator or an interested party may petition the court to terminate the implementation of the reorganisation plan and declare the debtor bankrupt.

For creditors who violate the reorganisation plan, such as by failing to comply with the agreed debt relief or continuing individual recovery actions, they may lose their right to repayment under the plan, or the court may take measures to enforce the implementation of the reorganisation plan.

Generally, the administrator manages the debtor’s operations, but may appoint the debtor’s existing management team to handle day-to-day affairs. Meanwhile, upon the debtor’s application, the court may allow the debtor to manage operations on its own, under the administrator’s supervision, if the debtor meets the following conditions:

• the debtor’s internal governance mechanism is functioning properly;
• independent management is beneficial for the debtor’s ongoing operations;
• the debtor is not engaged in concealing or transferring assets; and
• the debtor is not involved in any actions that seriously harm the interests of creditors.

If the debtor manages its assets independently, such management and any disposal of assets will be subject to supervision by the administrator and the creditors’ committee, and related management and disposal plans must be approved by the creditors’ meeting.

After the initiation of the reorganisation proceedings, the debtor may borrow funds to continue operations, either with the approval of the creditors’ meeting or with prior court permission before the first creditors’ meeting is held.

In bankruptcy reorganisation proceedings, the administrator is responsible for managing the debtor’s affairs and the reorganisation procedure. The administrator’s duties, powers, and appointment can be found in 1.3 Statutory Officers.

Shareholders

Once the reorganisation procedure begins, shareholders’ rights are largely curtailed. They cannot exercise their voting rights or influence management decisions. They are prohibited from requesting distributions of investment returns during the reorganisation period. Furthermore, shareholders who have not (fully) paid in their subscribed capital will be required by the administrator to make those payments immediately. However, they do retain the right to claim any remaining assets after all creditors have been paid. This right is contingent on the fulfilment of all creditor claims, meaning shareholders typically only benefit if the company’s assets exceed its liabilities.

Shareholder representatives may attend creditors’ meetings to discuss the draft reorganisation plan. If the plan includes adjustments to shareholder rights, a specific group for shareholders must be formed to vote on these matters. When all voting groups approve the draft plan, it is adopted. However, the shareholder group can reject any adjustments to their rights, potentially blocking the plan. Nonetheless, if the court deems the adjustments fair and equitable, it can rule to approve the draft plan directly.

Creditors

In the bankruptcy reorganisation proceedings, creditors hold various rights and positions, including, but not limited to, the following.

• Right to dispute claims – creditors can contest the validity of claims confirmed by the administrator. If the administrator upholds the dispute, the creditor may file a claim confirmation lawsuit in court.
• Right of set-off – creditors who owe debts to the debtor before the acceptance of reorganisation petition can assert a right of set-off against their claims, unless prohibited by regulations.
• Right to seek revocation – after the reorganisation petition is accepted, if the administrator fails to request the revocation of the debtor’s gratuitous transfers transactions at unfair prices, or abandonment of claims, creditors can sue to revoke such actions and return the recovered assets to the debtor’s estate.

Once the court accepts the reorganisation petition, any preservation measures imposed by creditors on the debtor’s assets should be lifted, and enforcement proceedings on the debtor’s assets against those assets must be suspended. During the reorganisation period, the exercise of secured rights over specific assets of the debtor by the creditors is temporarily suspended. However, if there is a risk of damage to or significant decrease in the value of the secured assets that could jeopardise the rights of the secured creditor, the creditor may petition the court to restore the exercise of their secured rights.

In retention-of-title sales, if the debtor as a buyer undergoes bankruptcy reorganisation before the legal transfer of ownership, the sales contract is considered unfulfilled, allowing the administrator to decide whether to terminate or continue it. If terminated, the seller can demand that the debtor return the goods. If continued, the debtor must make payments or fulfil other contractual obligations at the time the bankruptcy reorganisation petition is accepted. If the debtor’s administrator fails to make timely payments or improperly disposes of the goods, the seller can reclaim the goods; however, this does not apply if the debtor has paid over 75% of the purchase price or if a third party has acquired ownership in good faith. If reclamation is not possible, the seller can demand continued payments from the debtor and seek damages for non-payment or improper disposal, treating these as common benefit debts.

Creditors may sell their claims during the reorganisation period, but they must notify the administrator. The transferee may exercise the rights of the original creditor in the reorganisation proceedings in their own name from the date the administrator is notified of the claim transfer.

In the PRC, liquidation is categorised into two main types: bankruptcy liquidation and dissolution liquidation.

Bankruptcy Liquidation

When Bankruptcy Scenarios (1.2 Types of Insolvency) arise for a debtor, the debtor or its creditors may file bankruptcy liquidation with the court. Additionally, if a debtor has already dissolved but not liquidated, or if the liquidation has not been completed, and the assets are insufficient to cover the debts, the liquidation committee shall file a petition for bankruptcy liquidation with the court.

Furthermore, during a reorganisation procedure, if the debtor’s financial condition worsens, making recovery unlikely, or if the debtor fails or refuses to implement the reorganisation plan, the administrator or interested parties can request the court to declare the debtor bankrupt, transitioning to bankruptcy liquidation. In a settlement procedure, if the settlement agreement is not approved by the creditors’ meeting or the court, or if it was concluded fraudulently or by other illegal means, or if the debtor is unable to perform or does not perform a settlement agreement, creditors can request the court to declare the debtor bankrupt and switch to bankruptcy liquidation.

Bankruptcy liquidation procedures mainly apply to legal entities established under the PRC law. In addition, certain non-legal entities, such as partnerships and sole proprietorships, may also undergo bankruptcy liquidation in reference to the procedures outlined in the Enterprise Bankruptcy Law.

Dissolution Liquidation

A company must undergo liquidation when dissolved for the following reasons:

• the business term specified in the company’s articles of association has expired, or other dissolution conditions outlined in the articles of association occur;
• a shareholders’ resolution is passed to dissolve the company;
• the company’s business license is revoked, or it is ordered to close or be deregistered by the authorities; and
• severe management difficulties arise within the company, leading to significant losses for shareholders, and these issues cannot be resolved by other means; in this case, shareholders holding more than 10% of the company’s voting rights petition the court to dissolve the company.

If a company is dissolved for any of the above reasons, the directors (or others specified in the articles of association or a shareholders’ resolution) must form a liquidation committee within 15 days of the dissolution to proceed with the liquidation process. If a company fails to form a liquidation committee or does not proceed with liquidation after formation, any interested party may apply to the court to appoint a liquidation committee. Additionally, if the company is dissolved due to revocation of its business license or forced closure, the relevant administrative authority may also petition the court to appoint a liquidation committee.

Dissolution liquidation applies to both legal entities and non-legal entities.

Since dissolution liquidation is not initiated due to insolvency, 5.2 Course of the Liquidation Procedure to 5.4 The Position of Shareholders and Creditors in Liquidation focus specifically on bankruptcy liquidation procedures.

Direct Consequences of Initiating Bankruptcy Liquidation

Once bankruptcy liquidation proceedings commence, preservation measures on the debtor’s assets should be lifted, and enforcement actions must be suspended to prevent any further diminishment of the bankruptcy estate. Additionally, any payments made by the debtor to individual creditors become invalid.

The legal representative of the debtor (which may include financial managers and other operational personnel, as decided by the court) is obligated to:

• properly safeguard the assets, seals, financial records, and other important documents they manage;
• comply with requests from the court and the administrator, providing truthful answers to inquiries;
• attend creditors’ meetings and answer creditors’ questions truthfully;
• not leave their place of residence without court permission; and
• not assume directorship, supervisory, or senior management positions in other companies.

After the initiation of bankruptcy liquidation proceedings, any debtors to the debtor shall settle the debts with the administrator and any holder of the debtor’s assets shall deliver the relevant assets to the administrator.

For contracts with the debtor that were already in effect prior to the commencement of bankruptcy proceedings, and that remain unfulfilled by either party, the administrator will decide whether to terminate or continue performance of the contract.

Responsibilities of Participants in Bankruptcy Liquidation

Administrator

After entering the bankruptcy liquidation process, the administrator must act diligently and faithfully in their duties, treating all creditors, the debtor, and interested parties fairly. Their primary responsibilities include, but are not limited to, taking control of the debtor’s assets and documents, formulating a bankruptcy estate distribution plan for discussion and approval at the creditors’ meeting, and implementing the distribution plan ultimately confirmed by the court.

Creditors’ Meeting

The creditors’ meeting represents the interests of all creditors and has the authority to supervise the administrator, as well as to approve plans for both the disposal and distribution of bankruptcy estates. The creditors’ meeting may establish a creditors’ committee (see 1.3 Statutory Officers).

Court

The court is responsible for initiating, supervising, and ruling on bankruptcy proceedings. This includes reviewing the legality of the administrator’s actions and the resolutions of the creditors’ meeting, as well as confirming the plans for the disposal and distribution of bankruptcy estates approved by creditors’ meeting. The court’s role is to ensure that the proceedings are conducted lawfully and fairly.

The bankruptcy liquidation procedure may conclude under any of the following circumstances:

• the debtor's assets are insufficient to cover bankruptcy expenses;
• after the bankruptcy is accepted by the court, the debtor reaches a settlement agreement with all creditors;
• the debtor has settled all due debts, or a third party has paid off all of the debtor's due debts;
• a third party provides adequate security for the debtor; and
• there are no assets available for distribution or all assets have already been distributed.

Shareholders

Once the bankruptcy liquidation procedure is initiated, shareholder rights are significantly restricted. On one hand, shareholders can no longer exercise their rights as shareholders; on the other hand, while they have a right to claim any remaining assets, this can only be realised after all creditor claims have been satisfied.

Creditors

Once the bankruptcy liquidation procedure is initiated, any new civil lawsuits filed by creditors seeking repayment from the debtor will not be accepted by the court. Creditors may seek repayment only by submitting their claims to the administrator and participating in the bankruptcy liquidation proceedings.

Secured Creditors

Creditors with secured claims on specific bankruptcy estates have priority in receiving payment from those assets during the liquidation process. If these creditors do not receive full compensation after exercising their rights, the unpaid portion of their claims will be treated as unsecured claims. If secured creditors believe their rights have been infringed, they can file a lawsuit with the court handling the bankruptcy application. However, the voting rights of secured creditors are limited; they do not have voting rights regarding the distribution plan for bankruptcy estates.

Unsecured Creditors

Unsecured creditors are last in the statutory order of priority for repayment. If the assets of the bankrupt enterprise are insufficient to cover all priority claims, unsecured creditors may receive only partial payment or, in some cases, may not receive any payment at all. Unsecured creditors are entitled to participate in creditors’ meetings and vote on the management, disposal, and distribution plans for the bankruptcy estates. Additionally, if they feel their rights have been violated, they can also bring a lawsuit to the court that is handling the bankruptcy case.

The PRC has yet to establish a comprehensive and systematic legal framework for cross-border insolvency. The existing provisions on cross-border bankruptcy are scattered across various laws and regulations.

The primary legal basis for cross-border insolvency in the PRC is found in Article 5 of the Enterprise Bankruptcy Law. The first paragraph of this article addresses the extraterritorial effect of bankruptcy proceedings initiated by Chinese courts, while the second paragraph outlines the conditions under which foreign bankruptcy proceedings are recognised and assisted in the PRC. This article provides a direct legal foundation for Chinese courts to recognise and enforce foreign bankruptcy judgments and rulings. Additionally, the Supreme Court issued the Minutes of the National Court Bankruptcy Trials Work Conference in March 2018. Chapter 9 of these Minutes is specifically dedicated to cross-border insolvency, offering guidance based on Article 5 of the Enterprise Bankruptcy Law. It emphasises the principle of reciprocity and the balance of creditor interests in cross-border bankruptcy cases.

Since Chinese mainland and Hong Kong operate under different legal systems, Hong Kong bankruptcy proceedings only have an effect on a debtor’s assets in Chinese mainland after being recognised and assisted by Chinese mainland courts. To streamline cross-border insolvency cases between Chinese mainland and Hong Kong, the Supreme Court and the Hong Kong Government signed a Memorandum of Understanding on Mutual Recognition and Assistance to Bankruptcy Proceedings between Mainland and Hong Kong Courts in May 2021. On the same day, the Supreme Court issued the Opinions on the Pilot Program for Recognition and Assistance to Bankruptcy Proceedings from the Hong Kong Special Administrative Region, providing clear guidelines for pilot courts in Chinese mainland to recognise and assist Hong Kong bankruptcy proceedings. Pilot courts, such as Xiamen Intermediate People’s Court, have since introduced detailed procedural guidelines, including the Guidelines for Applying for Recognition and Assistance of Hong Kong Special Administrative Region Bankruptcy Proceedings (Trial).

Save for the above judicial cooperation arrangements with Hong Kong mentioned above, China has not signed any specific agreements or arrangements on cross-border insolvency with other countries or jurisdictions. In judicial practice, Chinese courts review and recognise foreign bankruptcy proceedings (excluding those from Hong Kong) primarily based on the principle of reciprocity, in accordance with Article 5 of the Enterprise Bankruptcy Law and Chapter 9 of the Minutes of the National Court Work Meeting on Bankruptcy Trials, while also referring to international practices.

In judicial practice, one of the conditions for recognising foreign bankruptcy proceedings in the PRC is that the court initiating the bankruptcy procedure must have jurisdiction.

For bankruptcy proceedings initiated by Hong Kong courts, pilot courts in Chinese mainland assess jurisdiction according to the “centre of main interests” (COMI) rule. The main interest centre typically refers to the debtor’s place of registration and should be determined by considering various factors such as the location of the debtor’s primary business office, main place of operation, and location of significant assets. Additionally, it is required that Hong Kong must have been the debtor’s main interest centre for at least six consecutive months at the time when applying for recognition and assistance by the Hong Kong administrator.

As for bankruptcy proceedings initiated by courts in other jurisdictions, there are currently no established domestic legal provisions for assessing jurisdiction. However, in practice, Chinese mainland courts may refer to the COMI rule when examining jurisdictional issues.

The applicable law for foreign-related civil relations is determined in accordance with the Law of the PRC on the Application of Laws to Foreign-Related Civil Relations, unless stipulated otherwise by any special provisions. Since Article 5 of the Enterprise Bankruptcy Law contains specific provisions regarding cross-border bankruptcy relations, the applicable law for cross-border bankruptcy cases is governed by this article.

Article 5 establishes that, for bankruptcy judgments or rulings rendered by foreign courts involving assets of the debtor located within the territory of the PRC, applications for recognition and enforcement must be reviewed by the courts. The court will assess these applications based on international treaties to which the PRC is a party, or on the principle of reciprocity. Additionally, the courts will ensure that the recognition and enforcement do not violate the fundamental principles of Chinese law, harm national sovereignty, security, or public interest, and do not infringe upon the legitimate rights and interests of creditors within the PRC. Only if these conditions are met will the court issue a ruling for recognition and enforcement.

According to Article 5 of the Enterprise Bankruptcy Law and judicial practice, Chinese courts generally recognise and enforce foreign bankruptcy proceedings when the following conditions are met:

• the bankruptcy judgment or ruling has become effective;
• the foreign bankruptcy proceeding is a collective proceeding that excludes individual claims;
• the foreign bankruptcy proceeding is initiated by a court in the jurisdiction where the debtor's main interests are located;
• the PRC has entered into relevant international treaties or has a reciprocal relationship with the foreign country; and
• the recognition or enforcement of the bankruptcy ruling does not violate the fundamental principles of Chinese law, nor does it harm national sovereignty, security, or public interest, or infringe upon the legitimate rights and interests of creditors within the PRC.

For the recognition and assistance of bankruptcy proceedings initiated in Hong Kong by Chinese mainland courts, the specific conditions require that:

• the debtor’s main interest centre must have been located in Hong Kong for at least six consecutive months at the time of applying for recognition and assistance by the Hong Kong administrator;
• the bankruptcy proceeding must be a collective proceeding; and
• the debtor's primary assets in Chinese mainland must be located within pilot regions (Shanghai, Xiamen, Shenzhen), or the debtor must have an operating location or representative office in these pilot regions.

In recent years, Chinese courts have been gradually advancing judicial cooperation with courts in other countries and regions when handling cross-border bankruptcy cases. Courts in Shanghai, Xiamen, and Beijing have successively issued rulings to recognise and enforce foreign bankruptcy proceedings. However, as of now, the PRC has not reached any agreements regarding cooperation between bankruptcy administrators with other countries.

According to judicial cooperation arrangements in bankruptcy procedures between Chinese mainland and Hong Kong, once a Hong Kong bankruptcy procedure is recognised by the pilot court in mainland, it may designate a mainland administrator at the request of the Hong Kong administrator or creditors. Moreover, the two administrators should enhance communication and cooperation. Additionally, if bankruptcy proceedings are conducted separately for the same debtor or related debtors in both Hong Kong and the mainland, the administrators from both regions should strengthen their communication and collaboration.

In bankruptcy proceedings initiated in PRC courts, claims of the same type are treated equally, regardless of whether the creditors are foreign or domestic.

However, if a foreign court requests recognition and enforcement of judgments or rulings concerning the debtor’s assets within PRC, and if the PRC court recognises the foreign court’s bankruptcy judgments or rulings, the debtor’s assets in PRC will first be used to fully satisfy the claims of creditors under PRC bankruptcy proceedings. Any remaining assets can then be distributed according to the provisions set forth by the foreign court.

The latest amendments to the Company Law, effective from 1 July 2024, reinforce the duties and responsibilities of directors, supervisors, and senior management. For example, directors shall be responsible for company liquidation, and may be personally liable for losses caused while performing their duties. More details can be found in 7.2 Personal Liability of Directors. Under the Company Law, there are two major duties of directors – the fiduciary duty and the duty of diligence.

Fiduciary Duty

The fiduciary duty requires directors to take measures to avoid conflicts of interest and prohibits them from using their position to gain improper personal benefits. Specifically, acts that violate the fiduciary duty by directors include, but are not limited to, the following:

• misappropriating company assets or embezzling company funds;
• depositing company funds into accounts under their personal name or under the name of another individual;
• using their authority to engage in bribery or receive other unlawful income;
• retaining commissions from transactions conducted between the company and third parties; and
• disclosing company secrets without authorisation.

Duty of Diligence

The duty of diligence requires that directors exercise reasonable care in performing their duties, always acting in the best interests of the company. The specific requirements and responsibilities for directors in fulfilling the above duties are detailed in 7.2 Personal Liability of Directors.

In the following circumstances, directors may be held personally liable if a debtor engages in voidable or invalid transactions, such as transactions at manifestly unreasonable prices, unlawful preferential payments to specific creditors, or concealing or transferring assets to evade debts, and such actions harm creditors’ interests, the debtor’s legal representative (who may be a director or manager) and other directly responsible individuals may be liable for compensation.

The following are examples of grounds for liability and potential consequences.

1. Directors who breach their fiduciary duty or duty of diligence and cause the company’s bankruptcy may be held civilly liable.
2. Directors who allow or assist shareholders in unlawfully withdrawing their capital contributions may be held jointly liable with the shareholders.
3. Directors may be liable for damages if the company unlawfully distributes profits or unlawfully reduces its registered capital.
4. If directors unlawfully engage in related-party transactions, seek business opportunities belonging to the company, or carry out competing business, the benefits from these activities shall accrue to the company, and such directors shall be liable for damages caused to the company.
5. Directors who violate laws, regulations, or the articles of association in performing their duties, and thereby cause losses to the company, will be held liable for compensation.
6. If the directors cause losses to a third party during the performance of their duties, the company shall be liable for such losses, while the concerned director shall also be liable for compensation provided that the losses are caused by his or her wilful misconduct or gross negligence.
7. Directors have a duty to verify and urge the shareholders to pay their capital contributions. If they fail to fulfil this duty in a timely manner, causing losses to the company, the responsible directors will be liable for compensation.
8. Directors are responsible for a company’s liquidation. If directors fail to promptly or diligently carry out liquidation duties, leading to losses to the company, the responsible directors will be liable for compensation. If their intentional misconduct or gross negligence results in losses to creditors, they will also be held liable.

In these situations, where the directors bear responsibility, the administrator may pursue claims against the directors on behalf of the insolvent company. If the administrator fails to act promptly, subject to certain statutory conditions, the company’s creditors or shareholders may also bring directors’ liability claims.

The situations described in items (a) to (g) in 7.2 Personal Liability of Directors, where directors may be held personally liable, also apply to supervisors, manager, financial manager, and other senior officers.

Directors and senior officers may be personally liable under the circumstances set out in 7.2 Personal Liability of Directors and 7.3 Duties and Personal Liability of Officers. As a result, they may be prohibited from serving as directors, supervisors, or senior officers of any company for a specified period. For example, if a director, supervisor, or senior officer breaches their fiduciary duty or duty of diligence, leading to the bankruptcy of the company, they will be barred from holding such positions in any company for three years after the conclusion of the bankruptcy proceedings.

If directors or senior officers engage in criminal activities, such as hiding or transferring company assets to facilitate fraudulent bankruptcy, falsifying financial statements or engaging in bribery, and these actions result in severe consequences, directly responsible individuals may also face criminal liability in addition to the civil liability outlined above.

Setting Aside a Transaction

In a bankruptcy reorganisation or a bankruptcy liquidation proceeding, the administrator has the right to request the court to set aside certain actions involving the debtor’s property if they occurred within one year prior to the court’s acceptance of the bankruptcy petition.

The following circumstances may lead to actions being set aside:

• transfers of property without consideration;
• transactions conducted at a clearly unreasonable price;
• providing security over property for unsecured debts;
• early repayment of debts that are not yet due; and
• waiving any claims or rights.

Additionally, if the debtor, within six months before the court’s acceptance of the bankruptcy petition, makes payments to individual creditors after the debtor has entered a state of bankruptcy (as defined in 1.2 Types of Insolvency), the administrator may request the court to set aside these payments unless such payments provide a benefit to the debtor’s assets.

Annulling a Transaction

The following actions involving the debtor’s property are deemed annulled, and the administrator may file a lawsuit to annul the transactions and recover the debtor’s assets:

• concealing or transferring property to evade debts; and
• falsely creating or acknowledging non-existent debts.

Transactions that are annulled or set aside are legally unenforceable from the outset. The administrator has the right to recover the debtor’s assets. If the property cannot be returned, monetary compensation should be provided instead.

In bankruptcy reorganisation and liquidation proceedings, the administrator is entitled to file lawsuits to set aside or annul transactions and recover the debtor’s assets. If the administrator fails to initiate legal action to set aside transactions where the debtor has transferred assets without consideration, conducted transactions at a manifestly unreasonable price, or waived claims, creditors may step in and request the court to set aside such transactions on their behalf.

Once a transaction is set aside, the related assets or rights shall be restored and distributed to creditors according to the order of priority by the PRC law.