Legal ambiguities and enforcement constraints will remain Creditors in mainland bankruptcy cases will still face legal ambiguities and enforcement constraints even after the passage of the country's new bankruptcy law, foreign lawyers say. The law, slated for passage as early as this year, outlines bankruptcy proceedings and is intended to replace vague and outmoded early reform-era legislation, which itself competes with a jumble of conflicting edicts and rulings that have stunted development of a modern credit system in China. 'The new bankruptcy law may improve the situation,' said Simon Powell, a partner at US law firm Jones Day. 'But there are concerns that the provisos in the new legislation are so broad, that in practice it will remain very difficult if not impossible for foreign liquidators, save in the most limited of circumstances.' A draft of the new law passed the first two examination sessions of the Standing Committee of the 10th National People's Congress last year. Mainland media report it may be passed at a third and final session this year. Pleasing foreign investors is probably not at the top of Beijing's motivations in pushing the law through. The People's Bank of China has for years been the lender of last resort to mainland financial institutions. With the Chinese banking sector swinging its doors open to full foreign competition by the end of the next year, the central bank is keen to impose lending discipline on domestic players and ensure that law enables them to retrieve viable assets associated with non-performing loans. Another impetus for reforming lay in China's moribund state-owned enterprises (SOEs), noted Mr Powell. In the past, dying SOEs were often picked clean by their own management teams, who sometimes set up private companies with the assets, while the government stepped in to meet outstanding obligations to creditors and workers. Beijing announced in March that it would stop subsidising bankrupt SOEs within four years. Under the current law, foreign liquidators had great difficulty convincing local authorities that they had the right to seize the assets of an insolvent company in China, even if the firm in default was foreign, he said. 'It's a real problem for liquidators around the world when dealing with China,' Mr Powell said. 'And I remain to be convinced that the new law will grant foreign liquidators the recognition they require, as the new law appears to erect several hurdles.' For example, recognition of foreign liquidators will require judicial approval. There are also several conditions under which the new law denies such recognition, including when the government deems that foreign bankruptcy procedures would 'violate the public interest' or the 'interests and rights of the creditors of China.' Chinese authorities may therefore favour domestic creditors, which in the case of a bankrupt SOE could include thousands of laid-off workers owed wages and benefits, Mr Powell explained. 'One crucial issue that continues to haunt investors is the lack of guidance on how Chinese courts are to interpret 'social public interest' under Chinese law,' wrote Randall Peerenboom, a professor at the University of California of Los Angeles Law School, in a research paper. Local protectionism is exacerbated by the lack of independence of Chinese courts, which depend on the government for funding, wrote Mr Peerenboom. 'There have been cases where government officials have threatened to cut off funding to courts and, in one instance, intimidated a judge by threatening to have the judge's daughter transferred to a distant city.' Local officials are typically reluctant to divulge information about assets held by local companies, and Chinese banks have been known to postpone taking action on court orders until their customers, to whom they lent money, transferred their funds to another account, wrote Mr Peerenboom. 'Judges, after years of socialist education, may put more emphasis on saving jobs than the most market-friendly solution,' said Ivan Chung, managing director of Xinhua Far East China Ratings. 'China lacks legal professionals well versed in bankruptcy proceedings. Even if we assume the law will be perfectly implemented as on paper, the proceedings will take a long time as there are few precedents,' said Mr Chung. China's upcoming bankruptcy law does contain similarities to US law, which will benefit foreign creditors, says Evan Jones of the US law firm O'Melveny & Myers. One important similarity - the new law will allow a debtor to maintain control of its bankrupt estate and restructure it as a going concern, which China's current law does not permit in most cases. The new law will allow foreign investors to restructure businesses that they would otherwise liquidate. It will also apply to all types of Chinese firms - existing bankruptcy laws apply only to SOEs. However, 'the real test will be how the Chinese courts apply the statute,' said Mr Jones.