New Bankruptcy Law Puts Power in the Hands of Creditors

China's long-awaited bankruptcy law finally came into effect on June 1 2007. Secured creditors no longer take a back seat to a failing company's employees under the new PRC Enterprise Bankruptcy Law(中华人民共和国企业破产法). (See China Law & Practice's analysis and full-text translation of the legislation in the October 2006 issue.)

The law, promulgated on August 27 2006 and effective June 1 2007, applies to all companies, including state-owned enterprises, but not to individuals, partnerships, representative offices or branch offices. However, PricewaterhouseCoopers partner Rainier Lam says future legislation is expected to cover those areas. The law unifies what was a confusing collection of different bankruptcy laws for different types of enterprises, and is seen as the latest step in China's transition to a socialist market economy.

"Under the old law, employees enjoyed priority over all other creditors, including secured creditors," Lam tells China Law & Practice. "For a lot of jurisdictions, that's almost unthinkable, but that was the system in China."