Introduction

China enacted its nationwide Enterprise Bankruptcy Law in 1986, but it is only for the insolvency of enterprises and does not cover the bankruptcy of natural persons. The Regulation of Shenzhen Special Economic Zone on Individual Bankruptcy (the “Regulation”), the first of its kind in China, was enacted on 31 August 2020 and has come into effect on 1 March 2021. The drafting of the Regulation has made reference to similar laws in jurisdictions with a relatively mature market economy, such as the United Kingdom, the United States, Germany, Japan, Hong Kong and Taiwan. The Regulation aims at constructing a complete and modern bankruptcy system and providing a way out for honest but unfortunate individuals saddled with debts they are unable to repay.

Criteria of individual bankruptcy

In accordance with Article 2 of the Regulation, it applies a natural person who:

1.        resides in the Shenzhen Special Economic Zone;

2.        has made social insurance payments for three consecutive years, and

3.        does not have sufficient assets to pay off all their debts or they are obviously insolvent due to production, business operation, or living and consumption.

Such a debtor shall undergo liquidation of their debts or reach a settlement agreement. If the debtor satisfies the criteria above but expects to have future income, they may undergo reorganisation. If a debtor has commenced personal bankruptcy proceedings pursuant to the Regulation, their spouse may also file for personal bankruptcy without meeting the criteria as to residence and social insurance payments.

A creditor may also file for bankruptcy of a debtor in accordance with Article 9 of the Regulation, which states that where a debtor is unable to pay its debts as they fall due, the creditors who, alone or jointly, hold debts of more than RMB500,000 against the debtor, may apply to the people's court for bankruptcy of the debtor.

Consequences of individual bankruptcy

Article 95 of the Regulation defines the Inspection Period as the three-year period following the declaration of a debtor’s bankruptcy by the people’s court. During the Inspection Period, the debtor will be restricted in their behaviour. Article 96 of the Regulation states that where the debtor is in breach of any condition imposed by the people’s court during the Inspection Period, such period may be extended by not more than two years.

Articles 23 and 86 of the Regulation restrict the debtor’s consumption behaviours and career options during the Inspection Period. For instance, the debtors cannot buy first-class or business-class flight tickets, or first-class or soft-sleeper train tickets. They are not allowed to visit three-star or above hotels, nightclubs or golf courses. Purchasing real estates or motor vehicles, or renting premium offices, hotels or apartments are prohibited. They cannot freely build a house, construct an annex or even decorate their house. Further, their children are not allowed to study at private schools with expensive tuition fees. In terms of career options, the debtors shall not serve as a director, supervisor or senior management personnel of listed companies, non-listed public companies or financial institutions.

In order to safeguard the basic living and rights of the debtor and their dependents during the Inspection Period, the debtor may have asset exemption of up to RMB200,000 (US$29,280) in total which may cover the exempted property and the necessities for daily life, education and medical needs of the debtor and their dependents.

The Regulation prescribes that the responsibility of administration of bankruptcy cases rest with a newly established governmental department, the Bankruptcy Affairs Administration Department. The department will be responsible for maintaining a public register of bankrupts and dealing with the custody, disposal, valuation and allocation of the assets of the bankrupts.

Bankruptcy expenses and estate debts

Bankruptcy expenses and estate debts shall be paid from the property of the debtor pursuant to Article 68. Both of them are incurred after the People’s Court has entered a ruling to accept a bankruptcy petition. “Bankruptcy expenses” means (1) court costs in the bankruptcy case, (2) expenses arising from the management, realization and distribution of property of the debtor and (3) expenses and remunerations for the trustee, an eligible individual or institution approved by the Bankruptcy Affairs Administration Department responsible for various bankruptcy administration duties specified under Article 161 such as supervising the conduct of the debtor during the observation period and taking over the property of the debtor available for distribution or, to perform its duties, whereas “estate debts” means a debt arising from (1) the request by the trustee or the debtor that the other party should perform the contract which neither party has fully performed, (2) management of the business of another with respect to property of the debtor, (3) unjust enrichment, (4) damages to another person caused by the trustee’s performance of duty or property of the debtor, (5) the provision of financing or security for the reorganization of the debtor and (6) the payment of remuneration for service and social insurance for the debtor’s continuing operations and any other resultant debt.

Debt evasion prevention measures under the Regulation

To prevent debtors from taking advantage of the Regulation to dodge their debt liabilities, the Regulations provides various measures against debt evasion.

First, Article 14 provides for four circumstances where the people’s court can enter a ruling to deny acceptance of a bankruptcy petition or to dismiss the petition:

1.        The debtor fails to comply with Article 2 of the Regulation.

2.        The petitioner files the bankruptcy petition for removing property, maliciously evading debts, defaming another person, or any other illicit purpose.

3.        The petitioner makes any false statement, provides false evidence, or otherwise obstructs the bankruptcy proceedings.

4.        The debtor was discharged from outstanding debts in accordance with this Regulation less than eight years ago.

Second, Article 103 provides that where a creditor or any other interested person discovers that the debtor is discharged from outstanding debts by fraudulent means, the creditor or other interested person may apply to the people's court for revoking the ruling for the discharge of outstanding debts.

Third, Article 130 provides that where a debtor fails, or is unable, to implement the reorganization plan, or the debtor commits fraud, a creditor may apply to the people's court for terminating the implementation of the reorganization plan and commence bankruptcy liquidation of the debtor. The people's court shall enter a ruling to terminate the implementation of the reorganization plan and declare the debtor bankrupt. Any conduct related to bankruptcy liquidation that has occurred during the reorganization shall subsist, and the reorganization trustee shall continue to serve as bankruptcy liquidation trustee.

Last but not least, Article 167 empowers the people’s court to deter debt evasion behaviour by reprimanding, summoning by force, issuing fine, or detaining a debtor or to holding the debtor criminally liable for committing certain violations, including without limitation (1) refusing to cooperate in investigation, answer question or submit relevant information; (2) providing false or altered information, (3) intentionally concealing, removing, destroying, or improperly disposing of property or an interest in property, or otherwise improperly reducing the value of property and (4) fabricating a debt, or admitting an untrue debt.

Comparison with the individual bankruptcy regime in Hong Kong

In Hong Kong, such a regime is mainly governed by the Bankruptcy Ordinance (Cap. 6 of the laws of Hong Kong) (the “Ordinance”). In terms of the criteria for bankruptcy, the Ordinance does have similar residence and insolvency requirements but does not have any requirement as to social insurance payments. Similar to the Regulation, both the debtor and the creditor may present a bankruptcy petition under the Ordinance. However, the Ordinance prescribes for a smaller threshold of debt amount for a creditor’s petition (i.e. HKD10,000, compared with RMB500,000 under the Regulation).

In Hong Kong, in terms of administration of bankruptcy cases, the Official Receiver shares a similar role with the Shenzhen Bankruptcy Administration Department. Further, the Official Receiver may appoint any qualified person as a provisional trustee if the assets of the bankrupt are unlikely to exceed $200,000.

Similar to the Regulation, bankruptcy expenses in Hong Kong, such as expenses incurred in preserving, getting in or realizing assets of the bankrupt, the Official Receiver’s fee or the trustee’s fee, are paid from the assets of the bankrupt.

The Ordinance itself does not restrict the bankrupt’s consumption behaviour but it provides that upon the making of the bankruptcy order, all the bankrupt’s assets (including interest in real estate) are vested in the trustee and will remain so after the bankrupt’s discharge from bankruptcy. The trustee has the power to administer the assets and to realise them for the benefit of the creditors. As regards the premises wherein the bankrupt normally resides, depending on the circumstances, the bankrupt may be allowed to continue living therein for a certain period of time to enable him to make other housing arrangements. The career options of a bankrupt in Hong Kong are restricted in a similar way. For instance, he may not be able to practise as a lawyer, an estate agent, an insurance agent, a securities dealer or act as a director of a limited company.

In general, for a bankrupt who has not previously been adjudged bankrupt and who has fully complied with the provisions under the Ordinance, he will be automatically discharged from bankruptcy four years from the date of the bankruptcy order (compared with three years under the Regulation).

In terms of preventing debt evasion under the Ordinance, similar to the Regulation in China, the Ordinance also criminalise different conducts in relation to debt evasion by fraudulent debtors, such as defrauding the creditors under section 132, absconding with property under section 135 or failing to discover to the trustee all his property, failing to deliver up to the trustee all property, books and records relating to his property or affairs, making material omission or misstatement in any statement relating to his affairs or fraudulently removing any part of his property under section 129(1). Where the official receiver or a trustee in bankruptcy reports to the court that in his opinion a person who has been adjudged bankrupt has been guilty of any offence under the Ordinance, or where the court is satisfied upon the representation of any creditor that there is ground to believe that the bankrupt has been guilty of any such offence, the court may order the bankrupt to be prosecuted for such offence.

It should also be noted that the Ordinance also provides for an alternative to bankruptcy – individual voluntary arrangement (the “IVA”). Under the IVA, a debtor makes a repayment proposal to the court and the creditors, which, if approved, will legally bind all creditors. The advantages of the IVA are that (i) a debtor can avoid the stigma of bankruptcy; (ii) he will be free from the legal restrictions in connection with the bankruptcy status; and (iii) he may be able to retain his job or profession.

Conclusion

With the introduction of the Regulation, honest individuals in Shenzhen saddled with debt can now opt for liquidations, reorganisations or resettlements if they do not have the ability to pay off debts or become insolvent due to production and operation or consumer consumption. This Regulation marks an important milestone in the development of the individual bankruptcy law in China, although how it may affect and accelerate a nationwide individual bankruptcy law in future remains yet to be seen.