China’s First Personal Bankruptcy Laws Being Drafted in Shenzhen

On June 2, the Standing Committee of Shenzhen Municipal People's Congress published the full text of regulations on personal bankruptcy of Shenzhen Special Economic Zone (Draft for comments) (hereinafter referred to as the draft for comments) on its official website. 

Shenzhen is the first city in China to explore the establishment of an individual bankruptcy system where honest and unfortunate debtors may be "rescued" from massive debts.

If an enterprise is insolvent, it may reorganize or withdraw from the market through bankruptcy proceedings. For those who are honest but unfortunately fall into debt crisis and have no property to execute, how can they help them to get out of debt crisis, participate in social and economic activities again, and protect the legitimate rights and interests of creditors to the greatest extent?

In a sense, personal bankruptcy system provides an expectable and reliable guarantee for honest and unfortunate debtors.

"The personal bankruptcy system is a relief exit mechanism in a mature market economy." Zhao guangqun, deputy of Shenzhen Municipal People's Congress, said in an interview. The explanation of the draft also pointed out that Shenzhen, taking the lead in establishing the personal bankruptcy system, would be conducive to improving the market exit mechanism, stimulating the competitiveness and creativity of commercial subjects, and promoting and improving the establishment of the social credit system.

The personal bankruptcy system refers to a legal system in which a person is declared bankrupt through legal procedures when he / she is unable to pay off the debts due, and his / her remaining assets are equally distributed to the creditors. For the claims that have not been paid off, the natural person is exempted from the liability of continuing to pay off. The draft is divided into 13 chapters, which design terms of application for bankruptcy conditions, avoidance of malicious debt evasion, bankruptcy exemption and inspection period, exemption of property system, etc.

Regulations highlights

Who can file for bankruptcy?

The debtor can apply for bankruptcy if the creditor holds more than 500,000 yuan

The draft provides the conditions for the debtor to apply for bankruptcy and the creditor to apply for the debtor's bankruptcy. According to the draft for comments, natural persons who have lived in Shenzhen Special Economic Zone and have participated in Shenzhen social insurance for three consecutive years, whose assets are not enough to pay off all debts or obviously lack of solvency due to production, operation and living consumption, shall go through bankruptcy liquidation or reconciliation in accordance with these regulations. At the same time, it is stipulated that creditors who individually or jointly hold creditor's rights of more than 500,000 yuan due to the debtor may apply to the people's court for bankruptcy liquidation of the debtor.

How to avoid the debtor's "false bankruptcy and real debt evasion"?

The debtor shall not consume too much and shall not serve as a director or supervisor

Many people are worried that after the introduction of the personal bankruptcy system, some people may apply for bankruptcy to avoid debts.

In fact, exemption is conditional. According to the notes of the draft, only honest and trustworthy debtors can obtain the protection of personal bankruptcy system when they are unfortunately in debt crisis. The debtors who evade debts maliciously or commit bankruptcy fraud will be prevented and punished by legal means.

The draft also uses a series of institutional designs to avoid malicious debt evasion. For example, it provides the system of non exempt debt, non exempt behavior, extension of exemption period, cancellation of exemption, etc., and stipulates that the debtor will face the limitation of bankruptcy and loss of rights, etc.

For example, the draft provides that from the date when the People's Court accepts the bankruptcy application to the date when the People's Court makes a decision to release the debtor's remaining debts,

• The debtor shall not choose business class, first class, soft sleeper class, second class or above class of ship, g-head high-speed EMU passenger train and first class or above seats of other EMU trains;

• No consumption is allowed in hotels, hotels, nightclubs, golf courses and other places above three-star level;

• No real estate or motor vehicle shall be purchased;

• No travel;

• Children are not allowed to attend high fee private schools, etc.

Additionally, the debtor shall not hold the post of director, supervisor and senior manager of a listed company, non listed public company or financial institution.

How long is the restriction period?

3 year exemption period

According to the draft, the exemption period is three years, starting from the date when the People's Court declares the debtor bankrupt. In the bankruptcy proceedings and during the exemption period, the bankrupt shall abide by the decision of the People's Court to restrict the relevant behaviors of the debtor made in accordance with these regulations. In case of violation of the decision, the People's Court may decide to extend the period of exemption for investigation, but the extension shall not exceed two years.

The draft also makes incentive provisions. If the bankrupt pays off the remaining debts voluntarily to a certain proportion, he can apply in advance to end the period of exemption and investigation and remove the restrictions on relevant behaviors. At the same time, the retroactive system is provided, that is, if the creditor or other interested parties find that the bankrupt obtains the relief of residual debts by fraudulent means, they may apply to the People's Court to cancel the relief ruling.

The draft also stipulates that the remaining debts shall not be exempted in case of concealment, transfer, damage, improper disposal or other improper reduction of the value of the property, exemption from bankruptcy and liquidation within eight years, or exemption from reorganization or reconciliation within four years.

Corresponding to the debtor's loss of rights is the restoration of rights. According to the draft for comments, the bankrupt may apply to the people's court for cancellation of the remaining debts at the expiration of the exemption period. The people's court shall, on the basis of the application of the bankrupt and the report of the administrator, decide whether to exempt the remaining debts, and at the same time make a decision to lift the restrictions on the bankrupt's behavior.

How to protect the debtor after bankruptcy?

Medical care, study necessities and reasonable living expenses may not be used to pay off debts

According to the draft, the property acquired by the debtor from the acceptance of the bankruptcy application to the time of obtaining the exemption from liability shall also be used to pay off debts. In addition, there are also obligations that cannot be forgiven.

At the same time, however, the draft also provides for the scope of exemption from property, including

• The necessities and reasonable living expenses for the life, medical treatment and study of the debtor and his dependants;

• Articles or reasonable expenses that must be kept for the purpose of career development;
  

• Personal injury compensation, social insurance and minimum living security, etc. exclusively belonging to the debtor,

• All belong to exempt property, that is, the debtor's property not used to pay off debts.

But at the same time, for the sake of fairness, the draft has made a reverse restriction on the scope of exempt property. If the above exempt property is of great value and is not used to pay off debts, which obviously violates the principle of fairness, it will not be deemed as exempt property.

As for the bankruptcy liquidation and reorganization procedures, compared with the enterprise bankruptcy procedures stipulated by the enterprise bankruptcy law, the personal bankruptcy procedures designed in the draft for comments differ in the following two ways:

One is to give the debtor the right to choose the procedure. The debtor can apply to start the bankruptcy liquidation procedure or the reorganization procedure. The debtor may also apply to the people's court for reorganization after the people's court has accepted the application for bankruptcy liquidation of the debtor and before it is declared bankrupt.

The second is to set legal standards for the draft reorganization plan, including the liquidation period of no more than three years, and each liquidation interval of no more than three months.

Shenzhen takes the lead in exploring the establishment of personal bankruptcy system in China.

Shenzhen is the forerunner of China's bankruptcy system. In 1993, the Standing Committee of Shenzhen Municipal People's Congress took the lead in formulating the regulations on enterprise bankruptcy in Shenzhen Special Economic Zone, which accumulated experience for the adoption of enterprise bankruptcy law by the National People's Congress in 2006.

By the end of January 2020, 3.298 million commercial entities had been registered in Shenzhen, including 1.236 million individual businesses, accounting for 37.5%. Shenzhen's entrepreneurial density ranks first in large and medium-sized cities, and the number of small and medium-sized board and gem commercial enterprises ranks first in China for 13 consecutive years. In the list of key tasks of optimizing business environment reform in Shenzhen in 2020, it is mentioned that "strive for state authorization and carry out individual bankruptcy system pilot".

It is expected that the regulations of Shenzhen Special Economic Zone on personal bankruptcy will be promulgated as soon as possible, which will relieve the worries of innovative entrepreneurs to the greatest extent, stimulate the enthusiasm of market subjects for entrepreneurship, and make innovation a strong driving force for Shenzhen's economic development.

Relevant opinions can be directly sent, emailed or faxed to the office of the legal working committee of the Standing Committee of the Shenzhen Municipal People's Congress, and the deadline is June 18, 2020.

Office of law working committee of Standing Committee of Shenzhen Municipal People's Congress
深圳市人大常委会法工委办公室

• Address: Room 211, Zone A, Civic Center, Futian District
  深圳市福田区市民中心A区211室
  

• Postcode: 518035

• Office Tel.: [phone]

• Fax: [phone]

• mail box: [e-mail]

Source: 重磅！个人破产法真的要来了！欠债50万可申请破产！

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