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China set to clarify bankruptcy protection
By Meng Yan (China Daily)
Updated: 2004-06-24 08:41

Haizhou Strip Mine was booming a half-century ago.

The mine, located in Fuxin of Northeast China's Liaoning Province, was the largest open coal mine in Asia when it started operation in 1953. The image of the mine, as a symbol of industrial achievements of the New China, was immortalized on a stamp published in 1954 and on a renminbi banknote issued in 1960.

A representative of the Jiangyin-based Xinhue Group raises a bidding number at a function in Nanjing, Jiangsu Province, where the bankruptcy Nanjing Meat Processing Plant was put up for auction on August 27, 2003. Xinhe Group won the bid for 68 million yuan (US$8.1 million). [newsphoto/file]

But China Central Television reported earlier this year that the mine was on the brink of bankruptcy because there is virtually no more coal to be exploited. The resettlement of over 40,000 miners is now the biggest headache for the local administration.

Around the country some 2,500 State-owned enterprises (SOEs) have encountered a similar situation, revealed Li Rongrong, director of the Commission for Supervision and Management of State-Owned Properties at the State Council.

The Standing Committee of the Sixth National People's Congress (NPC) adopted a bankruptcy law for trial implementation in 1986, when China's economic reform was still in its infancy and SOEs dominated the national economy. Only State-owned enterprises are subject to the provisional law.

But the temporary law drew harsh criticism for being too general to be practical.

Wang Liming, a leading civil law professor with the Renmin University of China, further complained that the current legislation lacks many basic and important rules for bankruptcy to concretely protect creditors and the legal interests of the workers.

For example, it does not make any specific provision concerning the restructure of firms filing for insolvency, a measure which could effectively help those medium- or large- sized companies on the brink of bankruptcy to survive, said Wang.

In addition, a variety of businesses other than SOEs have emerged in the past two decades as reforms have deepened, including Chinese-foreign equity joint ventures, Chinese-foreign co-operative joint ventures and domestic and foreign solely-invested corporations.

Currently, any bankruptcy concerning these newly emerged enterprises does not fall within the jurisdiction of any specific legal power.

"China is in urgent need of a modern bankruptcy law to accommodate its economic development, especially after it joined the World Trade Organization," Wang said.

However, disputes on the bankruptcy of SOEs obstructed the country's legislative process for a decade.

Many worried that bankruptcy of these enterprises would lead to armies of laid-off workers and breed social unrest.

Wang said the development of the country's social security network in recent years has effectively relieved part of the tension.

The light at the end of the tunnel finally appeared on Monday when a draft bill on corporate bankruptcy was submitted to the Standing Committee of the 10th NPC for preliminary review.

The draft law aims to put businesses of various ownership, whether State-owned, private or foreign, on the same footing in terms of competition.

It stipulates two ways for enterprises to withdraw from the market: merging or insolvency.

The draft law requires insolvent enterprises to pay back creditors first and then settle with employees, which is in line with international practice.

Old law to phase out gradually

As a tradeoff scheme, the draft bill authorizes the State Council to implement its own bankruptcy plan for SOEs within a specified period and range.

An official with the State-owned properties watchdog said China is ready to allow its last group of 2,000 money-losing SOEs to go bankrupt with government bail-out over the next three to five years.

The remaining SOEs are mainly military factories and mining operations in remote mountainous regions that can barely afford to pay their employees, said the official.

Under the terms of "administrative closure" - the decade-old Chinese method for SOEs to go bankrupt - money recovered from insolvent SOEs was not to pay creditors but resettle the unemployed first. Any funds left over went to creditors or State-owned banks.

The losses still have to be covered by government coffers in the end as banks are also State-owned.

"The 2,000 SOEs will be the last exception in China's market economy, and afterwards, all the 8 million companies in China will follow a unified corporate bankruptcy law if they fail," said the commission official, who declined to be identified.

Li Shuguang, a drafter of the bill and vice-president of the Graduate School of the China University of Politics and Law, attributed the final completion of the draft bill to deepened SOE reform and maturing social security system already in place.

An updated report from the Commission for Supervision and Management of State-owned Properties shows that by April of this year China had closed 3,377 insolvent SOEs through administrative intervention and resettled 6.2 million employees.

The Chinese Government has also accumulatively allocated 49.3 billion yuan (US$5.9 billion) as an SOE bankruptcy subsidy and allowed State-owned banks to write off a total of 223.8 billion yuan (US$26.9 billion) of bad loans caused by SOEs bankruptcies.

But Li said the draft bill will stimulate the bankruptcy process of some SOEs which are unable to offset debts with assets. But it will not offer a fast lane for them to quit the market, he stressed.

Wang Xinxin, a corporate law professor with the Law School of Renmin University of China, said the State Council's regulations on the bankruptcy of SOEs should be streamlined to keep them consistent with the bill when it becomes law. He also warned against the expansion of administrative closure applications in the future.

Employees' interests protected

The draft bill enshrines protection of employees' interests as one of its major tenets.

In its general principle, it clearly states that the court, in dealing with bankruptcy cases, should safeguard the legal interests of employees and fix the liabilities of corporate management according to law.

It states the insolvent properties should first pay off social security expenses and other indemnities after paying the costs for bankruptcy proceedings and the obligatory debt of common benefit.

Such stipulation was designed because of the rampant encroachment on employees' rights in practice, said Jia Zhijie, vice-director of the NPC Economics and Financial Committee.

Six years ago, a State-owned starch plant in North China's Hebei Province went bankrupt and was sold to a private entrepreneur. The contract only said the private plant would be responsible for the settlement of the original 30 employees, without giving any detail.

"For six years, no one has paid for our social security insurance, nor have we got any living allowances for compensation," said 58-year-old Wang Shuwen, one of the former employees.

Although the draft law has some specified clauses to safeguard the employees' rights and interests, Yang Xingfu, a member with the NPC Standing Committee, noted that the bill still has much to offer as employees would be heard during the bankruptcy process.

"According to the draft bill, employees are actually put in third place in recovering their salary and social insurances," said Yang.

He suggested that insolvent properties should first clear off the debts to workers and then pay back the costs for bankruptcy proceedings and other debts.

Yang made the remarks at yesterday's group discussion on the draft law.

Zhou Yuqing, another lawmaker, said although the draft bill states employees and trade union representatives can participate in the creditors' council, it still needs to have a specific clause to ensure their rights to know, participate and vote during the bankruptcy process.

He sugguested that one representative from the trade union should also be included on creditors' committee.

The creditors' committee is a supervisory body overseeing the bankruptcy process.

According to the draft bill, the committee composes no more than nine creditors, including a representative of the employees.

Current incomplete stipulations concerning the liability of bankrupt firms allow debtors to abuse the existing mechanism by transferring their assets to avoid payment of debts.

Some managers of bankrupt companies have been found negligent in their duties and infringing upon employees' rights through embezzlement.

To curb such misbehaviour the draft bill states management staff of bankrupt corporations should assume civil liabilities if they fail to fulfil their duties. They should not conduct any investment to enjoy luxury before their civil liabilities are exempted.

The draft bill also incorporates a stipulation on restructuring to ensure that failed non-State owned enterprises can, where viable, continue to trade and also better protect the interests of their creditors.

"The market economy is a competitive one in which enterprises must follow the rule that the fittest survives fierce competition," said Wang Liming.

He said a sound bankruptcy mechanism will encourage those concerned enterprises to try to survive and flourish in the face of competition.

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