The Enterprise Bankruptcy Law was considered and adopted by the Standing Committee of the National People’s Congress on 27 August 2006, establishing a market entity withdrawal and rebirth mechanism in legal form for the first time, and filling in the last blank in the legal regime for the market economy. Accordingly, the Enterprise Bankruptcy Law has been seen as a milestone in China’s legal regime for the market economy.

One of the core ideas of the Enterprise Bankruptcy Law is the manager system. The term “manager” means a special entity that is designated or appointed in accordance with the law during a bankruptcy procedure to be responsible for management of the bankruptcy property and handling of bankruptcy matters.

The Enterprise Bankruptcy Law bestows wide-ranging rights on the manager, including undertaking such duties as the review of claims, management and disposal of bankruptcy property, liquidation matters, etc. As enterprise bankruptcy is an intricate and complex legal procedure involving the interests of numerous entities, whether the manager can independently, objectively and impartially handle the bankruptcy matters is the key to ensuring whether the enterprise bankruptcy procedure will operate impartially and efficiently. The establishment of a sound manager compliance system and monitoring mechanism, then, is of great importance.

At present, with the exception of a small number of economically developed provinces and municipalities that have established relatively sound manager appointment, monitoring and other such manager compliance mechanisms, the majority of regions in China have yet to establish a sound manager system. The professional level and professional capabilities of the manager team are also uneven, resulting in a not insignificant number of compliance issues arising in the performance by managers of their duties.

MAJOR COMPLIANCE ISSUES

Performing its duties in accordance with the law is the most basic requirement of a manager’s handling of bankruptcy matters, but in practice there are nonetheless instances of managers failing to perform their duties in strict accordance with the law. For example, the Enterprise Bankruptcy Law expressly states that “common claims” are all of the same tier, but some managers, while formulating the draft restructuring plan, will split off “inferior claims” from the “common claims” and place the discharge sequence of such inferior claims after the discharge in full of “non-affiliate common claims”. There is no basis in law for a manager splitting off inferior claims from common claims in this manner, an issue that is deserving of discussion.

As the mediator in an enterprise bankruptcy case of the conflicts in the interests of the various entities, the manager should independently, objectively and impartially handle bankruptcy matters and perform its duties lawfully and correctly.

However, in practice, there are numerous instances of managers failing to perform their duties independently, objectively and impartially. These are mainly manifested in the following ways: (1) the manager failing to independently review the claim filings received, instead simply turning them over to the creditors’ committee, which has a clear conflict of interest, for review and issuing its claim review conclusion on the basis of the opinion issued by the creditors’ committee; (2) the manager failing to equitably perform its duties – where the debtor’s information, financial vouchers, etc. in its possession are sufficient to confirm that the filed claims are in good order, it nonetheless refuses to accept them on the grounds that the materials provided by a claim filer are insufficient; (3) the manager colluding in bad faith with a third party in the course of disposing of and realizing the bankruptcy property, to dispose of the property at a low price to seek illegal gains.

MONITORING SYSTEM

While establishing the manager system and granting managers wide-ranging rights, the Enterprise Bankruptcy Law also provides for a bankruptcy manager monitoring system, with People’s Courts at its centre and the creditors’ meeting and creditors’ committee as auxiliaries. The law specifies that, “the manager shall perform its duties in accordance herewith, report on its work to the People’s Court and shall be subject to the supervision of the creditors’ meeting and creditors’ committee. The manager shall attend creditors’ meetings in a non-voting capacity, report on the performance of its duties to the creditors’ meeting and respond to their queries.”

However, enterprise bankruptcy is a time consuming legal procedure that involves numerous and complex matters. Strengthening the monitoring system and formulating effective monitoring measures are the basic supports for resolving the manager compliance issue.

With a view to resolving the manager compliance issue and strengthening the manager monitoring system under the current legal framework, the Shenzhen Municipal Intermediate People’s Court has issued in succession the Administrative Code for Bankruptcy Case Managers, the Tiered Administrative Measures for Bankruptcy Case Managers and the Measures for the Assessment of Bankruptcy Managers (for Trial Implementation), comprehensively addressing the receivership investigation duties, rights review duties, property management duties, meeting convening duties, restructuring procedure duties, settlement procedure duties, liquidation procedure duties, termination procedure duties, etc., of managers in their handling of bankruptcy matters, regulating the various work duties of managers, establishing a sound manager compliance system and strengthening the manager monitoring system through a promotion/demotion incentive and
removal mechanism.

This year marks the 10th anniversary of the issuance of the Enterprise Bankruptcy Law. China has made great strides from a state of no legal practice in the enterprise bankruptcy field, but the related complementary systems, manager compliance rules and monitoring system still require improvement. The establishment, as soon as possible, of a sound manager compliance system and monitoring mechanism is particularly important for the more compliant operation of the market entity withdrawal system established by the Enterprise Bankruptcy Law.

Jeffrey Yang is a senior partner and Miao Shunjin is a senior associate with AllBright Law Offices