The Enterprise Bankruptcy Law of the People's Republic of China

Unlike the regime that it replaces, the EBL attempts to establish a unified insolvency regime that is applicable to a broad spectrum of, although not all, business entities. In the PRC, a foreign investor may not directly own or manage a business. It must do so, if at all, through an entity that is identified as a foreign investment enterprise ('FIE'). FIEs include essentially four categories of enterprise: 1) a Sino-foreign entity joint venture; 2) a Sino-foreign cooperative joint venture; 3) a foreign investment enterprise limited by shares (an 'investment' or 'umbrella' company); and 4) a wholly foreign-owned enterprise ('WFOE'). The latter, the WFOE, is currently the most popular investment vehicle because it does not require the involvement of a Chinese partner or large amounts of registered capital.

Under the pre-EBL legal regime, different, often inconsistent and contradictory bankruptcy and insolvency laws applied to state-owned enterprises ('SOEs'), private enterprises and FIEs. Under the EBL, any 'enterprise with legal person status' may be a debtor, including a SOE, a private enterprise, and each of the categories of FIE that I have listed above. Moreover, certain categories of financial institution (including commercial banks, insurance companies, and securities companies) also qualify as permitted debtors under the EBL, although cases involving such entities will almost certainly involve significant levels of governmental intervention.

Under the EBL, partnerships, sole proprietorships, and individuals may not be debtors. This exclusion will almost certainly be addressed in future legislation.

The government of the PRC has exempted some 2,100 SOEs from the EBL. These entities are to be liquidated by the government prior to the end of 2008. This mandate will almost certainly provide opportunities for foreign investment in the assets and/or debts of these entities. Because the liquidation of these entities will not occur under the EBL (which has altered the priority of 'workers' compensation claims,' bringing the treatment of such claims more into line with the laws of the United States and United Kingdom), the claims of employees of these entities are likely to be paid prior to the claims of secured creditors. As I discuss more fully later in this article, the scope of workers' compensation claims under Chinese law is much broader than, and should not be confused with, American workers' compensation claims. The former includes claims for wages and salaries, medical expenses, pensions for the disabled and their survivors, and medical insurance premiums, among other items.

Forms of Relief under the EBL

Three forms of relief are available under the EBL: 1) 'settlement'; 2) reorganization; and 3) liquidation.

A settlement proceeding has many of the characteristics of a creditor composition or pre-packaged bankruptcy case in which the debtor has essentially negotiated the terms of a debt restructuring with its unsecured creditors before the commencement of the case. Consequently, only a debtor may commence a settlement proceeding. There can be no involuntary settlement proceeding.

The debtor or, in an involuntary case, its creditors may commence a liquidation or reorganization proceeding. The debtor or its shareholders may request that an involuntary liquidation case be converted to a reorganization case. The court can terminate a reorganization case if: 1) the financial condition of the debtor continues to deteriorate and there is 'no or little prospect of rescuing' the debtor; or 2) the debtor has engaged in misconduct that has depleted the value of the estate or prevented the administrator from performing his or her duties.

Qualifying Standards

To qualify as a debtor in a voluntary case, an enterprise must be insolvent from the standpoints of: 1) the inability to pays its debts as such debts become due (a 'cash flow test'); and 2) lack of sufficient assets to pay its liabilities (a 'balance sheet test'). Neither of these requirements exists under the U.S. law. Under the UK law, the debtor must satisfy one of the two tests.

To qualify as a debtor in an involuntary case, an enterprise must satisfy the cash flow test alone. This requirement partially parallels the U.S. law, which requires a showing of inability to pay maturing debts. As in the United States, under the EBL, only equitable insolvency is required and the debtor may request that an involuntary liquidation case be converted to a reorganization case.

However, there are significant differences between the EBL and U.S. law. Under the former, a single creditor (however large or small its claim may be) may initiate an involuntary case, and the petitioning creditor may hold a secured or an unsecured claim, or both.

Acceptance of the Petition

Under the EBL, the People's Court must 'take cognizance of' or accept the bankruptcy petition. The EBL does not establish a separate court system, or division of the People's Court, for bankruptcy cases. Presumably, the court will accept the petition only after it has determined that the applicable insolvency qualifications have been met. The court may apply other, currently unspecified, standards as well. The statute does not expressly indicate which, if any, additional standards or criteria are to be applied.

Moreover, the statute does not explain how, from a procedural standpoint, the court is to make its determination regarding the presence or absence of the requisite qualifications. Is the court to rely upon the petition and accompanying papers themselves? Is the court to conduct a full evidentiary hearing? Is the court to rely upon some more abbreviated 'in between' process? In this and many other areas, the EBL appears to be lacking in detail. It is especially lacking in the areas of process and procedure. If the court accepts the petition, it must provide notice of such acceptance to the debtor, creditors, and the public. The notice that is issued by the court must include, among other things, notice of the 'bar date' for filing claims, notice of the appointment of the 'administrator,' and notice of the first meeting of creditors.

The Administrator

At the time of acceptance of the application, the court must appoint a disinterested 'administrator' to take control of the debtor's property and manage the business. Lawyers, accountants, insolvency professionals, government officials, and others may serve as administrators. Notwithstanding the requirement that an administrator be appointed, management of the debtor may request permission to continue to operate the business subject to the oversight and supervision of the administrator. Moreover, the administrator may request permission to employ existing managers for this purpose. He or she may employ others to assist him or her as well.

The administrator's duties are not unlike those of a trustee and/or examiner under the U.S. law. They include the following: 1) management of the debtor's property and business affairs; 2) conduct of an investigation regarding the assets, business, and financial affairs of the of the debtor; 3) the making of a determination regarding the continued operation of the business or liquidation of the business; 4) conduct of appropriate asset sales; 5) initiation and/or supervision of litigation, including but not limited to litigation to recover assets and avoid preferences and fraudulent transfers; 6) conduct of creditors meetings; 7) reporting to creditors and the court; and 8) in a liquidation case, marshalling and liquidating estate property and paying claims.

Meetings of Creditors and Creditors Committees

After accepting the bankruptcy application, the People's Court is required, among other things, to set a date for the first meeting of creditors, which must be conducted within 15 days after the bar date. The court appoints the meeting chairperson. Unsecured creditors who have filed proofs of claim may attend this meeting and subsequent meetings, and vote. Both workers and union representatives may also attend the meetings. Secured creditors may attend the meetings, but may not vote on settlement agreements or schemes for distributing property.

The duties of creditors that participate in such creditors meetings include, without limitation, examination and verification of claims, monitoring the work of the administrator, deciding whether to continue or discontinue operations, and voting on a plan of reorganization. The creditors may also decide to establish a formal creditors committee, consisting of not more than nine members. If a formal creditors committee is established, the committee has authority to 'monitor and supervise the management, distribution, and disposal' of property.

A number of the duties assigned to the administrator, the creditors, and the creditors committee (if any) appear to overlap. The relationship, interaction, roles, and division of labor and authority between and among these persons and entities are unclear. The administrator must report to (and presumably obtain the consent of) the creditors committee when it proposes to transfer certain assets, incur debt, assume an executory contract, abandon property, or otherwise distribute or dispose of significant assets.

Automatic Stay

At the time of acceptance of the application by the People's Court, all civil proceedings and arbitrations against the debtor, as well as against property of the debtor, are stayed. When the administrator is appointed, civil proceedings and arbitrations (but not proceedings against property ' i.e., to enforce mortgages and security interests) may resume. Hence, the enforcement of secured claims are stayed while the reorganization proceeding is pending. In a reorganization case, however, the secured creditor may apply to the court for permission to enforce its security interest if the value of the collateral is at risk.

Avoiding Powers: Preferences And Fraudulent Transfers

In many respects, in the area of avoiding powers, the EBL closely mirrors the U.S. law. The EBL confers upon the administrator the power to avoid transfers that are actually or constructively fraudulent. A transfer made with actual fraud is one that involves the subjective intent to defraud. A constructively fraudulent transfer is a transfer that is made for less than adequate consideration, a transfer on account of an un-matured claim, and a guarantee that is made without consideration.

The EBL also confers upon the administrator the power to avoid preferential transfers that were made within six months before acceptance of the application by the People's Court and at a time when the debtor was insolvent.

Executory Contracts

The Administrator must elect to terminate or to continue to perform pre-bankruptcy executory contracts. The election must be made within 60 days after the court has accepted the petition or within 30 days after the non-debtor counterparty to the contract has requested that the election be made. If the administrator fails to make the election in the prescribed time period, the executory contract is deemed terminated. The contract is also deemed terminated if the administrator fails to guaranty continued performance of the contract upon request by the non-debtor counterparty.

Priority of Claims

One of the significant issues addressed, and law revisions brought, by the EBL is the treatment of 'workers' compensation claims,' including claims for wages and salaries, medical expenses, disability and survivors' pensions, medical insurance premiums, and other employee benefit claims. Under pre-EBL law and practice involving SOEs, such claims were allowed to 'prime' the claims of secured creditors, even in the context of liquidation cases. That 'super priority' status continues to apply to workers' compensation claims that arose prior to the date of adoption of the EBL, Aug. 27, 2006.

With respect to workers' compensation claims arising after that date, however, the EBL alters this practice, thereby bringing Chinese law more into line with U.S. law and UK law.

Under the EBL, in a liquidation, the secured creditor receives the full value of its collateral unless and until its claim is paid in full. The amount of any deficiency is treated as a general unsecured claim. Thereafter, unsecured claims are to be satisfied in the following order of priority:

• First: post-bankruptcy administrative costs and expenses including the cost of managing, liquidating, and distributing property, the administrator's fees and expenses, and the cost of litigation related to the case;
• Second: post-bankruptcy liability for 'common benefits,' including debts relating to previously assumed contracts, costs of labor and social insurance arising from the continued operation of the business, and personal injury claims against the estate;
• Third: pre-petition workers' compensation claims, as described above;
• Fourth: social insurance expenses that are not otherwise within workers' compensation claims, and tax claims; and
• Fifth: general unsecured claims.

Plan of Reorganization

The plan of reorganization must be filed within six months after the court has accepted the application, although the court may extend this deadline by an additional six months. If the plan is not filed within this period, the reorganization proceeding is terminated and the case is converted to a liquidation case. In circumstances in which prior management continues to operate the business, the debtor is responsible for drafting the plan. In circumstances in which the administrator is operating the business, he or she is responsible for drafting the plan. The plan must, among other things, describe the debtor's proposed business plan, classify debts, and propose a treatment of the claims of creditors.

Within 30 days of filing of the draft plan, the court must convene a creditors' meeting at which the administrator or debtor explains the elements of the plan and the creditors vote on the plan. Depending upon the effect of the plan on equity holders, they may be permitted both to attend the meeting and to vote on the plan. All classes of creditors must accept the plan. A class of creditors accepts the plan if a majority in number and two-thirds in value of the class members that attend the meeting vote in favor of the plan.

Another distinguishing feature of the plan involves 'cram downs' against a dissenting class, which are permitted in the following circumstances:

• Against secured creditors ' if their claims are paid in full and any loss occasioned by delay in payment is compensated;
• Against employee wage and benefit claimants ' if their claims are paid in full;
• Against ordinary unsecured creditors ' if the plan provides that they will receive not less than they would receive in a liquidation case; and
• Against equity holders ' if their treatment is 'fair and just' (a term for which the EBL provides no definition).

After the plan of reorganization has been accepted by creditors and, if applicable, equity holders, the debtor or administrator must apply to the People's Court for approval. Within 30 days, the court must approve the plan if it determines that the debtor's business plan is achievable and that the prescribed priority scheme has been followed.

Recognition of Foreign Proceedings

• Outbound: Under the express terms of the EBL, proceedings and orders entered under the EBL will have extra-territorial effect and will apply to property of the debtor that is situated outside the PRC.
• Inbound: Foreign orders and judgments that involve property of the debtor located within the PRC will be recognized and enforced if they are governed by a treaty to which the PRC is a party or pursuant to principles of comity and reciprocity, provided that such orders and judgments: 1) are legally valid; 2) do not offend basic PRC legal principles; 3) do not impair the security, sovereignty, and social and public interests of the PRC; and 4) do not interfere with the legitimate interests of creditors.

Conclusion

Currently, there is no applicable treaty between the PRC and either the United States or the United Kingdom. The EBL significantly advances the bankruptcy law of the PRC. It provides a uniform system for the reorganization or liquidation of most forms of business entity. It does so in a manner that is relatively consistent with comparable law in, not merely the United States and United Kingdom, but many other nations. It creates a framework for cooperation with foreign courts in cross-border insolvency cases.

Like many new statutes, however, it contains some significant omissions (including treatment of cases involving partnerships) and inconsistencies (the overlapping duties of the administrator and committees). Moreover, it will need supplementation with detailed procedural rules.

Neal L. Wolf is a Chicago-based partner in the Bankruptcy and Creditors' Rights Practice at Katten Muchin Rosenman LLP, where he concentrates in the areas of bankruptcy, business reorganizations, workouts, and commercial litigation.

In August 2006, after some 12 years of preparation, the Enterprise Bankruptcy Law ('EBL') of the People's Republic of China ('PRC') was signed into law by President Jintao Hu. The new law went into effect on June 1, 2007. The EBL supersedes the 1986 Interim Enterprise Bankruptcy Law, as well as all or a part of a variety of other regimes and statutes, including the People's Republic of China Company Law and the Foreign Invested Enterprise Liquidation Procedure. In many respects, the EBL is based upon and quite similar to the United States Bankruptcy Code ('U.S. law') and the United Kingdom Insolvency Act of 1986 ('UK law').

The following is a consolidated analysis of some of the significant features of the EBL.

Who May Be a Debtor

Unlike the regime that it replaces, the EBL attempts to establish a unified insolvency regime that is applicable to a broad spectrum of, although not all, business entities. In the PRC, a foreign investor may not directly own or manage a business. It must do so, if at all, through an entity that is identified as a foreign investment enterprise ('FIE'). FIEs include essentially four categories of enterprise: 1) a Sino-foreign entity joint venture; 2) a Sino-foreign cooperative joint venture; 3) a foreign investment enterprise limited by shares (an 'investment' or 'umbrella' company); and 4) a wholly foreign-owned enterprise ('WFOE'). The latter, the WFOE, is currently the most popular investment vehicle because it does not require the involvement of a Chinese partner or large amounts of registered capital.

Under the pre-EBL legal regime, different, often inconsistent and contradictory bankruptcy and insolvency laws applied to state-owned enterprises ('SOEs'), private enterprises and FIEs. Under the EBL, any 'enterprise with legal person status' may be a debtor, including a SOE, a private enterprise, and each of the categories of FIE that I have listed above. Moreover, certain categories of financial institution (including commercial banks, insurance companies, and securities companies) also qualify as permitted debtors under the EBL, although cases involving such entities will almost certainly involve significant levels of governmental intervention.

Under the EBL, partnerships, sole proprietorships, and individuals may not be debtors. This exclusion will almost certainly be addressed in future legislation.

The government of the PRC has exempted some 2,100 SOEs from the EBL. These entities are to be liquidated by the government prior to the end of 2008. This mandate will almost certainly provide opportunities for foreign investment in the assets and/or debts of these entities. Because the liquidation of these entities will not occur under the EBL (which has altered the priority of 'workers' compensation claims,' bringing the treatment of such claims more into line with the laws of the United States and United Kingdom), the claims of employees of these entities are likely to be paid prior to the claims of secured creditors. As I discuss more fully later in this article, the scope of workers' compensation claims under Chinese law is much broader than, and should not be confused with, American workers' compensation claims. The former includes claims for wages and salaries, medical expenses, pensions for the disabled and their survivors, and medical insurance premiums, among other items.

Forms of Relief under the EBL

Three forms of relief are available under the EBL: 1) 'settlement'; 2) reorganization; and 3) liquidation.

A settlement proceeding has many of the characteristics of a creditor composition or pre-packaged bankruptcy case in which the debtor has essentially negotiated the terms of a debt restructuring with its unsecured creditors before the commencement of the case. Consequently, only a debtor may commence a settlement proceeding. There can be no involuntary settlement proceeding.

The debtor or, in an involuntary case, its creditors may commence a liquidation or reorganization proceeding. The debtor or its shareholders may request that an involuntary liquidation case be converted to a reorganization case. The court can terminate a reorganization case if: 1) the financial condition of the debtor continues to deteriorate and there is 'no or little prospect of rescuing' the debtor; or 2) the debtor has engaged in misconduct that has depleted the value of the estate or prevented the administrator from performing his or her duties.

Qualifying Standards

To qualify as a debtor in a voluntary case, an enterprise must be insolvent from the standpoints of: 1) the inability to pays its debts as such debts become due (a 'cash flow test'); and 2) lack of sufficient assets to pay its liabilities (a 'balance sheet test'). Neither of these requirements exists under the U.S. law. Under the UK law, the debtor must satisfy one of the two tests.

To qualify as a debtor in an involuntary case, an enterprise must satisfy the cash flow test alone. This requirement partially parallels the U.S. law, which requires a showing of inability to pay maturing debts. As in the United States, under the EBL, only equitable insolvency is required and the debtor may request that an involuntary liquidation case be converted to a reorganization case.

However, there are significant differences between the EBL and U.S. law. Under the former, a single creditor (however large or small its claim may be) may initiate an involuntary case, and the petitioning creditor may hold a secured or an unsecured claim, or both.

Acceptance of the Petition

Under the EBL, the People's Court must 'take cognizance of' or accept the bankruptcy petition. The EBL does not establish a separate court system, or division of the People's Court, for bankruptcy cases. Presumably, the court will accept the petition only after it has determined that the applicable insolvency qualifications have been met. The court may apply other, currently unspecified, standards as well. The statute does not expressly indicate which, if any, additional standards or criteria are to be applied.

Moreover, the statute does not explain how, from a procedural standpoint, the court is to make its determination regarding the presence or absence of the requisite qualifications. Is the court to rely upon the petition and accompanying papers themselves? Is the court to conduct a full evidentiary hearing? Is the court to rely upon some more abbreviated 'in between' process? In this and many other areas, the EBL appears to be lacking in detail. It is especially lacking in the areas of process and procedure. If the court accepts the petition, it must provide notice of such acceptance to the debtor, creditors, and the public. The notice that is issued by the court must include, among other things, notice of the 'bar date' for filing claims, notice of the appointment of the 'administrator,' and notice of the first meeting of creditors.

The Administrator

At the time of acceptance of the application, the court must appoint a disinterested 'administrator' to take control of the debtor's property and manage the business. Lawyers, accountants, insolvency professionals, government officials, and others may serve as administrators. Notwithstanding the requirement that an administrator be appointed, management of the debtor may request permission to continue to operate the business subject to the oversight and supervision of the administrator. Moreover, the administrator may request permission to employ existing managers for this purpose. He or she may employ others to assist him or her as well.

The administrator's duties are not unlike those of a trustee and/or examiner under the U.S. law. They include the following: 1) management of the debtor's property and business affairs; 2) conduct of an investigation regarding the assets, business, and financial affairs of the of the debtor; 3) the making of a determination regarding the continued operation of the business or liquidation of the business; 4) conduct of appropriate asset sales; 5) initiation and/or supervision of litigation, including but not limited to litigation to recover assets and avoid preferences and fraudulent transfers; 6) conduct of creditors meetings; 7) reporting to creditors and the court; and 8) in a liquidation case, marshalling and liquidating estate property and paying claims.

Meetings of Creditors and Creditors Committees

After accepting the bankruptcy application, the People's Court is required, among other things, to set a date for the first meeting of creditors, which must be conducted within 15 days after the bar date. The court appoints the meeting chairperson. Unsecured creditors who have filed proofs of claim may attend this meeting and subsequent meetings, and vote. Both workers and union representatives may also attend the meetings. Secured creditors may attend the meetings, but may not vote on settlement agreements or schemes for distributing property.

The duties of creditors that participate in such creditors meetings include, without limitation, examination and verification of claims, monitoring the work of the administrator, deciding whether to continue or discontinue operations, and voting on a plan of reorganization. The creditors may also decide to establish a formal creditors committee, consisting of not more than nine members. If a formal creditors committee is established, the committee has authority to 'monitor and supervise the management, distribution, and disposal' of property.

A number of the duties assigned to the administrator, the creditors, and the creditors committee (if any) appear to overlap. The relationship, interaction, roles, and division of labor and authority between and among these persons and entities are unclear. The administrator must report to (and presumably obtain the consent of) the creditors committee when it proposes to transfer certain assets, incur debt, assume an executory contract, abandon property, or otherwise distribute or dispose of significant assets.

Automatic Stay

At the time of acceptance of the application by the People's Court, all civil proceedings and arbitrations against the debtor, as well as against property of the debtor, are stayed. When the administrator is appointed, civil proceedings and arbitrations (but not proceedings against property ' i.e., to enforce mortgages and security interests) may resume. Hence, the enforcement of secured claims are stayed while the reorganization proceeding is pending. In a reorganization case, however, the secured creditor may apply to the court for permission to enforce its security interest if the value of the collateral is at risk.

Avoiding Powers: Preferences And Fraudulent Transfers

In many respects, in the area of avoiding powers, the EBL closely mirrors the U.S. law. The EBL confers upon the administrator the power to avoid transfers that are actually or constructively fraudulent. A transfer made with actual fraud is one that involves the subjective intent to defraud. A constructively fraudulent transfer is a transfer that is made for less than adequate consideration, a transfer on account of an un-matured claim, and a guarantee that is made without consideration.

The EBL also confers upon the administrator the power to avoid preferential transfers that were made within six months before acceptance of the application by the People's Court and at a time when the debtor was insolvent.

Executory Contracts

The Administrator must elect to terminate or to continue to perform pre-bankruptcy executory contracts. The election must be made within 60 days after the court has accepted the petition or within 30 days after the non-debtor counterparty to the contract has requested that the election be made. If the administrator fails to make the election in the prescribed time period, the executory contract is deemed terminated. The contract is also deemed terminated if the administrator fails to guaranty continued performance of the contract upon request by the non-debtor counterparty.

Priority of Claims

One of the significant issues addressed, and law revisions brought, by the EBL is the treatment of 'workers' compensation claims,' including claims for wages and salaries, medical expenses, disability and survivors' pensions, medical insurance premiums, and other employee benefit claims. Under pre-EBL law and practice involving SOEs, such claims were allowed to 'prime' the claims of secured creditors, even in the context of liquidation cases. That 'super priority' status continues to apply to workers' compensation claims that arose prior to the date of adoption of the EBL, Aug. 27, 2006.

With respect to workers' compensation claims arising after that date, however, the EBL alters this practice, thereby bringing Chinese law more into line with U.S. law and UK law.

Under the EBL, in a liquidation, the secured creditor receives the full value of its collateral unless and until its claim is paid in full. The amount of any deficiency is treated as a general unsecured claim. Thereafter, unsecured claims are to be satisfied in the following order of priority:

• First: post-bankruptcy administrative costs and expenses including the cost of managing, liquidating, and distributing property, the administrator's fees and expenses, and the cost of litigation related to the case;
• Second: post-bankruptcy liability for 'common benefits,' including debts relating to previously assumed contracts, costs of labor and social insurance arising from the continued operation of the business, and personal injury claims against the estate;
• Third: pre-petition workers' compensation claims, as described above;
• Fourth: social insurance expenses that are not otherwise within workers' compensation claims, and tax claims; and
• Fifth: general unsecured claims.

Plan of Reorganization

The plan of reorganization must be filed within six months after the court has accepted the application, although the court may extend this deadline by an additional six months. If the plan is not filed within this period, the reorganization proceeding is terminated and the case is converted to a liquidation case. In circumstances in which prior management continues to operate the business, the debtor is responsible for drafting the plan. In circumstances in which the administrator is operating the business, he or she is responsible for drafting the plan. The plan must, among other things, describe the debtor's proposed business plan, classify debts, and propose a treatment of the claims of creditors.

Within 30 days of filing of the draft plan, the court must convene a creditors' meeting at which the administrator or debtor explains the elements of the plan and the creditors vote on the plan. Depending upon the effect of the plan on equity holders, they may be permitted both to attend the meeting and to vote on the plan. All classes of creditors must accept the plan. A class of creditors accepts the plan if a majority in number and two-thirds in value of the class members that attend the meeting vote in favor of the plan.

Another distinguishing feature of the plan involves 'cram downs' against a dissenting class, which are permitted in the following circumstances:

• Against secured creditors ' if their claims are paid in full and any loss occasioned by delay in payment is compensated;
• Against employee wage and benefit claimants ' if their claims are paid in full;
• Against ordinary unsecured creditors ' if the plan provides that they will receive not less than they would receive in a liquidation case; and
• Against equity holders ' if their treatment is 'fair and just' (a term for which the EBL provides no definition).

After the plan of reorganization has been accepted by creditors and, if applicable, equity holders, the debtor or administrator must apply to the People's Court for approval. Within 30 days, the court must approve the plan if it determines that the debtor's business plan is achievable and that the prescribed priority scheme has been followed.

Recognition of Foreign Proceedings

• Outbound: Under the express terms of the EBL, proceedings and orders entered under the EBL will have extra-territorial effect and will apply to property of the debtor that is situated outside the PRC.
• Inbound: Foreign orders and judgments that involve property of the debtor located within the PRC will be recognized and enforced if they are governed by a treaty to which the PRC is a party or pursuant to principles of comity and reciprocity, provided that such orders and judgments: 1) are legally valid; 2) do not offend basic PRC legal principles; 3) do not impair the security, sovereignty, and social and public interests of the PRC; and 4) do not interfere with the legitimate interests of creditors.

Conclusion

Currently, there is no applicable treaty between the PRC and either the United States or the United Kingdom. The EBL significantly advances the bankruptcy law of the PRC. It provides a uniform system for the reorganization or liquidation of most forms of business entity. It does so in a manner that is relatively consistent with comparable law in, not merely the United States and United Kingdom, but many other nations. It creates a framework for cooperation with foreign courts in cross-border insolvency cases.

Like many new statutes, however, it contains some significant omissions (including treatment of cases involving partnerships) and inconsistencies (the overlapping duties of the administrator and committees). Moreover, it will need supplementation with detailed procedural rules.

Neal L. Wolf is a Chicago-based partner in the Bankruptcy and Creditors' Rights Practice at Katten Muchin Rosenman LLP, where he concentrates in the areas of bankruptcy, business reorganizations, workouts, and commercial litigation.