Bankruptcy Q & A

While the economy is indeed picking up speed in China these days, some businesses were adversely affected more than others by economic uncertainties related to the Covid-19 pandemic. Unfortunately, we routinely receive inquiries from such companies about bankruptcy, liquidation, and winding down operations, so we decided to put together this brief Q & A about the process.

Q: If my company is in bad economic shape, can my company file a bankruptcy application with the appropriate court?

A: If the company is unable to pay off its due debts, its assets are not sufficient to pay off all its debts, or it is obviously insolvent, the company may file an application for bankruptcy liquidation with the appropriate court as the debtor.

Q: If my contract counterparty is in bad economic shape, can I file a bankruptcy application related to that counterparty with the appropriate court?

A: If the counterparty is unable to pay off its due debts, you may file an application for bankruptcy liquidation with the appropriate court as the creditor.

In a situation like this, you would have to provide the following documentation, which serves as proof of the counterparty/debtor’s insolvency:

1. an effective court judgement related to the contract between you and the counterparty/debtor, and
2.a court decision indicating that enforcement of the judgment is terminated due to inability to verify adequate property under the debtor’s name.

Q: With which court should I file the bankruptcy application?

A: In principle, a bankruptcy case is under the jurisdiction of the People’s Court at the place of the debtor’s domicile. However, in Shanghai, if the debtor is registered in Minhang District, Xuhui District, Huangpu District, or Yangpu District, the bankruptcy application shall be filed to Shanghai Railway Transportation Court. If the company is registered in other districts, the corresponding application shall be filed to the Bankruptcy Court of Shanghai No.3 Intermediate Court.

Q: Who is the “administrator” in a bankruptcy case?

A: The administrator is ordinarily a law firm or an accounting firm appointed by the court to perform the following functions during the case:

1.Taking custody of all of the debtor’s property, chops, accounting books, documents, and other materials;
2.Investigating the debtor’s financial position and preparing the requisite financial reports;
3.Determining the internal management affairs of the debtor;
4.Determining the daily expenses and other necessary expenses of the debtor;
5.Determining whether or not to continue the business operations of the debtor before the holding of the first creditors’ meeting;
6.Managing and disposing of the debtor’s property;
7.Participating in a lawsuit, arbitration, or other legal proceedings on behalf of the debtor;
8.Calling for the holding of the creditors’ meeting; and
9.Other functions that the People’s Court deems necessary for the administrator to perform.

Q: Can I, as the creditor or debtor, choose or designate an administrator?

A: No. The administrator shall be appointed by the People’s Court. The Court will generally appoint an administrator openly through random selection by rotation, or drawing of lots or numbers from the listings in a register of administrators.

For the random appointment of administrators in Shanghai, the Case Filing Chamber of the Shanghai High People’s Court will match each case under an application with a candidate administrator by a random computer draw.

Q: If there are multiple creditors, which will be paid first?

A: After the deduction of bankruptcy expenses and debts of common benefits (see below) from the bankruptcy property, payments will be made in the following order:

1.Salaries, medical and disability subsidies, and pension expenses due to employees by the bankrupt entity, basic pension insurance and basic medical insurance expenses due to the individual accounts of employees, and any other compensation that must be paid to employees according to relevant laws and regulations;
2.Social security expenses owed by the bankrupt entity, other than those specified in the preceding paragraph, as well as taxes owed by the bankrupt entity; and
3.Other amounts owed without preemptive rights.

Where the debtor’s property is insufficient to meet all repayment needs in the above order of priority, it shall be distributed on a pro-rata basis.

Q: What is “debt of common benefits”?

A: The following debts that generated after the People’s Court accepts the application for bankruptcy are debts of common benefits:
1.a debt that is generated on the grounds that the administrator or the debtor requests the counterparty to complete performance of a contract;
2.a debt that is generated from the voluntary service for the debtor’s property;
3.a debt that is generated from the unjust enrichment of the debtor’s property;
4.a labor remuneration or social insurance expense payable due to continuing the debtor’s business operations, and other related debts incurred;
5.a debt that is generated from damage to other persons caused by the administrator or other relevant persons in the performance of their duties; and
6.a debt that is generated from damages to other persons caused by the property of the debtor.