CHINA'S NEW DRAFT Bankruptcy Law, presented to the National People's Congress for deliberation last summer, is expected to come into effect before the middle of next year. The legislation will offer much needed reform in an area that has failed to keep pace with the mainland's rapidly growing market economy and the formation of a modern-day and effective credit system. 'The legislation aims to draw together the fragments of bankruptcy law that exist in China and to introduce a system of bankruptcy practice that is largely in accordance with international standards,' said John Marsden, a partner at law firm Johnson Stokes & Master. At the same time, the new legislation recognises that the mainland is an emerging market with unique considerations. 'You will see in the new legislation, for example, that there is strong protection of employee rights in terms of unpaid wages and remuneration and you can understand that. In China widespread unemployment is clearly not what is wanted,' Mr Marsden said. The current bankruptcy regime is made up of a patchwork of laws, regulations and policies that often differ in application from province to province and even from company to company, depending on whether the enterprise is state-owned or not. The draft law, by contrast, applies equally to all forms of ownership, including state-owned enterprises, partnerships, sole proprietorships and private enterprises. 'This is a good attempt to put a unified bankruptcy law in place and will satisfy a lot of the concerns that international investors have had in China about the variability of approach that exists under the present system,' Mr Marsden said. 'The new law will provide a useful tool and a good level of comfort especially for those foreign investors who are acquiring distressed assets in China and have been unsure about the system that operates for the recovery or restructuring of loans.' Mr Marsden also believes the new law will serve as a tool for the continued reform of the mainland's debt-ridden state-owned enterprises and bring benefits beyond the banking sector. He said this was particularly so in the area of non-performing loans, which many foreign investors wanted to buy but were concerned about enforcement and the ability to restructure state-owned enterprises. 'While we cannot see whether there is going to be consistency in the new law's application, at least it offers a tool to aid restructuring,' he said.
