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.