Shenzhen published China’s first personal bankruptcy draft

published on 7 July 2020 | reading time approx. 4 minutes 

by Christina Gigler

Triggered by a draft regulation published on 2 June 2020 by the city of Shenzhen China may soon have its first personal bankruptcy law. With these first "Regulations of Shenzhen Special Economic Zone on Personal Bankruptcy (Draft for Comments)" (hereinafter the "Draft") Shenzhen is taking the lead in establishing a personal bankruptcy system. 

• Background and Structure of the Draft

• Conditions for the Debtor to File for Bankruptcy

• Conditions for the Creditors to File for the Bankruptcy of the Debtor

• Restrictions on the Debtor's Conduct and Restoration of his/her Rights after Entering into Bankruptcy Proceedings

• Property Exemption System

• Relation to the Social Credit System

• Outlook

Background and structure of the draft

China enacted its Enterprise Bankruptcy Law in 1986, but it is only for the insolvency of enterprises and does not include the bankruptcy of natural persons.

 
According to a statement by Shenzhen`s legislature published alongside the Draft (hereinafter the “Statement”), debt is often regarded as the collective responsibility of families, enterprises or groups, which is reflected in specific financial practices. Due to the lack of a personal bankruptcy system, business risks are transferred to natural persons and families indefinitely, in particular as many legal entities are not covered by the Enterprise Bankruptcy Law because they are not considered to be a legal person (e.g. sole proprietorship, partnership enterprises). Therefore, with the establishment of a personal bankruptcy system “honest but unfortunate” debtors shall be given a chance to get out of their debt predicaments and make a fresh start.
In addition, based on the Statement, Shenzhen intends to learn from the experience of bankruptcy legislation in countries and regions of a relatively mature market economy, such as the United Kingdom, the United States, Germany, Japan, Hong Kong and Taiwan.

 
The Draft is comprised of 13 chapters and in total 157 articles. As a comparison, the German Insolvency Statute consists of 359 paragraphs. However, the remarkable difference is that in the German Insolvency Statute personal bankruptcy and enterprise bankruptcy are both included into the Insolvency Statute, whereas the Draft made by the city of Shenzhen focuses on personal insolvency only. 

Conditions for the debtor to file for bankruptcy

Based on Art. 2 of the Draft, it applies to natural persons who

• (1) live in the Shenzhen Special Economic Zone
• (2) have participated in the Shenzhen social insurance for three consecutive years, and
• (3) who`s assets are insufficient to pay off all his/her debts or his/her solvency is obviously lacking due to production, business operation, or living and consumption.

Such debtor shall undergo liquidation of his/her debts or a settlement agreement. If the debtor conforms to the circumstances specified in the preceding paragraph but expects future income, he/she may be reorganized.

The spouse of the debtor may simultaneously apply for bankruptcy liquidation, reconciliation or reorganization, meaning, if one spouse has entered the personal insolvency procedure in Shenzhen and his/her spouse has also filed for personal insolvency, the case can be handled jointly, without requiring the other party to meet the conditions of residence and social security payment.

Conditions for the creditors to file for the bankruptcy of the debtor

Same as in the German Insolvency Statute, under the Draft not only the debtor him-/herself can file for bankruptcy, but also a creditor may file for bankruptcy of the debtor under certain conditions.
Based on Art. 8 of the Draft, when the debtor is unable to repay the due debts, the creditors who, alone or jointly, hold debts of more than RMB 500,000 against the debtor, alone or jointly, may apply to the people's court for bankruptcy liquidation of the debtor.

Restrictions on the debtor's conduct and restoration of his/her rights after entering into bankruptcy proceedings

It is common practice worldwide to restrict the debtor during bankruptcy proceedings. Art. 19 and 20 of the Draft mainly restrict the debtor's relevant behaviors from two aspects: restricting consumption behaviors and restricting professional qualifications.

 
From the date when the people's court accepts the bankruptcy application to the date when it makes the order to release the debtor's remaining debts, the debtor shall, for instance, not purchase first class or business class plane tickets, first class or soft sleeper train tickets; reside in or consume above three star-rated hotels, nightclubs, or golf courses; purchase real estate or motor vehicles; build, expand or decorate houses; enroll his/her children in high-fee private schools; rent high-grade office buildings, hotels, apartments; pay high premiums for insurance financial products etc.

 
With regards to limiting the professional qualification, the debtor shall not serve as a director, supervisor or senior management personnel of listed companies, non-listed public companies or financial institutions.
Art. 140 of the Draft stipulates that when the inspection period for liability exemption expires, the bankrupt may apply to the people's court for cancellation of the remaining debts. The people's court shall, on the basis of the application of the bankrupt and the report of the insolvency administrator, decide whether to cancel the remaining debts and at the same time make a decision to lift the restrictions on the behavior of the bankrupt.

Property exemption system

Same as in Germany, in general all the property belonging to the debtor at the time the bankruptcy application is accepted shall be the property of the debtor. The property acquired by the debtor from the time the bankruptcy application has been accepted until the time the order exempting the debtor from liability is made shall also be used to pay off the debts.

 
However, certain property of a debtor shall not be used. The property exemption system is a crucial aspect of the personal bankruptcy system, which is also part of the German Insolvency Statute. The Draft stipulates the property exemption system from two aspects:

• First, the first paragraph of Art. 46 of the Draft clearly defines the scope of exempted property, which for instance includes necessities for living, medical treatment and study and reasonable living expenses of the debtor and his/her dependants. At the same time, for the sake of fairness, the second paragraph sets up a reverse restriction on the scope of exempted property, that is, the property, whose value is relatively large and which is not used to pay off debts, shall not be considered as exempted property.
• Second, Art. 47 of the Draft specifies the procedure for determining exempted property. First, the debtor submits the property declaration report and the list of exempted property to the administrator; Afterwards, the administrator is responsible for reviewing and making the debtor's property report, putting forward opinions on the list of the debtor's exempted property, and submitting it to the creditors' meeting for voting; At last, if the list of exempted properties is not adopted by a vote of the creditors' meeting, the people's court shall make a ruling.

Relation to the social credit system

An interesting approach of Shenzhen is that, pursuant to the Statement, the purpose of the Draft is not only to prevent and defuse financial risks, but also to improve the construction of the social credit system. Information related to personal bankruptcy will be timely forwarded and included into the public credit information system, which can be checked and used by relevant units and individuals according to law.
As we have already mentioned in previous articles, one can certainly observe a tendency that the aspect of the social credit system appears in one way or another in various new draft and revised laws in China. This fits in with the overall picture and the intention of the Chinese government to create and implement a comprehensive system of information storage in relation to companies and natural persons. Nevertheless, such a nationwide and uniform meta database including all kinds of information from different authorities into one system has not yet been implemented.

Outlook

The Draft can by all means be regarded as a milestone in the development of the personal bankruptcy law in China. To what extent and when the final regulation will actually be issued and how it will affect and accelerate a nationwide personal bankruptcy law is difficult to assess at this time. In any case, it is customary for Chinese legislators to first try out new regulations locally in one or several cities in order to make a national regulation at a later stage on the basis of compiled empirical values.