HOW REAL IS IT?
Bankruptcy law in China.
By Gordon Feller

Shortly after China’s “new Enterprise Insolvency Act” came into force last month, accountancy Deloitte China polled 480 company finance officials from multinationals. The executives were optimistic: two-thirds said the mere fact of it will lead them to boost investments in the People’s Republic over the next three years.

It may seem odd that a legal structure for handling failing companies would prompt CFOs to open their wallets. Yet the law offers much to applaud. By aligning a bankruptcy code with those of Organization for Economic Cooperation and Development (OECD) nations, China allows companies that have gone bust to apply for reorganization under a court-appointed administrator rather than face certain liquidation. Important to foreign investors, the law enjoins failed enterprises to pay debts to creditors before using remaining money to pay former employees. It gives foreign investors, previously reluctant to invest in companies that might declare bankruptcy and fail to pay debts, a legal, cross-border safety net.

But experts temper their enthusiasm with caveats. No one knows how the law will stand up as cases work through China’s court system. A key feature of the law is that Chinese courts will have jurisdiction over a company’s assets even outside of China. But for US and European courts to respect this jurisdiction, China will have to affirm that its system is fair and not politically motivated. “The US has a 200-year-plus history of an independent judiciary,” says Tom Lauria, chairman of the global restructuring practice for US law firm White & Case, “and yet we struggle to maintain an independent judiciary.” He adds: “China has no such history.” Lauria says convincing the world otherwise will be “quite a challenge.”

The law bolsters creditors’ rights, and demands pari passu treatment of Chinese and foreign creditors – a clear sign that the government wants the door to foreign money to stay open. But bitter experience gives some reservations. It’s not uncommon, for example, for local police – and even courts – to block foreign creditors from searching company files after a company fails.

A lot is at stake in introducing fair practice into a rigged and chaotic system – and not just for foreign businesses. “If the law is real,” says Lauria, “there will be players and dollars to help rehabilitate companies. If not, dollars will be harder to come by.”