Mainland bankruptcy laws lack bite for troubled creditors

Bankruptcy laws in the mainland are woefully inadequate, with creditors hung out to dry in the event of a corporate collapse, according to a legal expert.

There is no effective legal tool for creditors to recover funds, and the legislation does not act as a deterrent to borrowers, CMS Cameron McKenna partner David Kidd said yesterday at an Amcham gathering.

The first real test of mainland bankruptcy laws on a large scale - the Guangdong International Trust and Investment (Gitic) collapse - has essentially been dubbed a failure.

Gitic collapsed in October 1998 under debts of 38.77 billion yuan (about HK$36.18 billion), and subsequently became an 'experiment' of the government by filing for bankruptcy, Mr Kidd noted.

It sent a message to the world that the mainland government will not repay debts for a financial institution.

'The Gitic bankruptcy was a state-promoted act,' Mr Kidd said. 'What we have not yet seen is the 1986 legislation used by a creditor, using bankruptcy as an effective tool to recover [funds].' He also raised questions as to whether the law would achieve a situation in the Gitic case which was fair for all.

Despite a wealth of 'well-intentioned work', he said, 'the fact is that the legislation on which it is based is very thin'.

Court bankruptcies in the mainland increased from 98 in 1988-1989 to 2,345 by 1995. By 1997, it was 4,498, rising to 6,100 the following year before dipping to 4,699 last year.

As in Hong Kong, there is no framework for court-supervised restructuring.