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Bankruptcy reform in China

The introduction of a new draft bankruptcy law to China’s top legislature could mark the beginning of major changes to China’s investment climate, says Freshfields Bruckhaus Deringer. Its enactment would signal a sincere effort by the Chinese authorities to reform China’s outdated and inadequate bankruptcy system. The implications for international business are likely to be significant.

The current bankruptcy regime in China is a long way from being satisfactory. Whether managing risk, contemplating recovery, or considering China’s own aspirations, namely the development of a market economy conducive to free enterprise, foreign competition and a survival of the fittest culture, it is clear that a major overhaul and modernisation is required.

The potential benefits to China’s economy of a more efficient bankruptcy system, under which unviable economic resources can be closed down and redeployed to more viable segments of the economy, and where businesses can be reorganised and rescued, each in a way that promotes optional market activity and investment, but nevertheless safeguards employment and social stability, are obvious. What is not obvious, however, is how to achieve these goals within China’s existing legal, institutional and cultural framework.

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