China-Us comparison: Interactions between Bankruptcy and Company Laws

China’s new Company Law has introduced major reforms in capital systems, shareholder liability and corporate governance, significantly influencing the implementation of the Bankruptcy Law. This article adopts a comparative law perspective to examine the theoretical frameworks and practical norms of bankruptcy laws in China and the US, with a focus on the new Company Law’s impact on China’s bankruptcy filings, creditor protection, reorganisation mechanisms and liquidation procedures.

Bankruptcy filings and employee rights protection

China’s new Company Law mandates that companies filing for bankruptcy must consult trade unions and seek employees’ opinions through representative meetings or other channels. This provision enhances employees’ role in bankruptcy proceedings, reflecting a protective stance towards employees’ rights.

In contrast, chapter 11 of the US Bankruptcy Code, which generally provides for reorganisation, does not explicitly grant employees participation rights in bankruptcy filings. However, its automatic stay provision halts actions by creditors against the debtor to collect debts or seize properties immediately upon the liquidation, settlement or reorganisation proceedings, creating a stable environment for the debtor to continue operations and indirectly protecting jobs. Employee rights are primarily safeguarded through collective bargaining and union efforts, as the US framework emphasises negotiation between creditors and debtors.

From a comparative law perspective, China’s new Company Law aligns more closely with Germany’s emphasis on prioritising social interests in protecting employee rights, while the US law focuses on market mechanisms. These differences reflect the distinct economic structures and social policy orientations of the two nations.

Shareholder contribution obligations and creditor protection

China’s new Company Law imposes a five-year limit on capital contributions by shareholders of limited liability companies, and allows creditors to demand early payment if the company fails to settle due debts. This reform builds on recent judicial policy trends, breaking from traditional subscription-based rules to enhance shareholder accountability.

The US bankruptcy law does not explicitly mandate accelerated shareholder capital contributions but employs the deep rock doctrine to limit shareholder rights in bankruptcy, prioritising creditor repayment. This doctrine enables courts to redistribute interests between creditors and shareholders based on fairness. In additional to the bankruptcy proceedings, the US law also allows creditors to pursue shareholder liability through litigation.

Notably, China’s new Company Law prioritises prevention by setting a clear cap on capital contribution periods and introducing the acceleration mechanism to curb shareholder misconduct and mitigate debt risks. In contrast, the US law focuses on subsequent remedies, relying on the deep rock doctrine and litigation to grant courts significant discretion in balancing the interests of shareholders and creditors.

Reorganisation system and classified shares system

China’s new Company Law introduces the classified shares system that allows the issuance of shares with varying rights, such as preferred and subordinated shares. This enhances flexibility in corporate financing and governance, while creating new opportunities for shareholder rights adjustments and debt-to-equity swaps in bankruptcy restructuring.

Chapter 11 of the US Bankruptcy Code enables debtors to propose reorganisation plans, with the cram down rule in place to impose such plans certain conditions. It also allows creditors to convert claims into different classes of equity, offering more options for creditors and flexibility for companies to restructure their capital.

While the effectiveness of China’s new classified shares system under the Company Law in bankruptcy restructuring remains to be seen, the US cram down rule and debt-to-equity arrangements may serve as important references for improving China’s restructuring processes.

Management Liability

China’s new Company Law designates directors as liquidation obligors, outlining legal liabilities for delayed liquidation and strengthening their responsibilities in the process. It also specifies directors’ duties, such as safeguarding key assets, accounts and important documents. If negligence by directors hinders liquidation, creditors are entitled to seek compensation.

The US Bankruptcy Code safeguards creditors’ rights and interests in liquidation through court-appointed trustees, who manage bankruptcy assets and pursue claims against liable parties. It also allows creditors to seek compensation from directors and executives through litigation during the liquidation process.

In brief, China’s new Company Law prioritises preventive measures by legislating directors’ liquidation responsibilities to mitigate potential risks, while the US law ensures creditor protection through post-event accountability, employing the trustee program and litigation mechanisms to pursue claims against liable parties during liquidation.

Takeaways

China’s new Company Law is set to have a profound impact on the implementation of the Bankruptcy Law. Moving forward, improvements to China’s bankruptcy framework could draw on the US practices while tailoring them to local conditions. By refining the legal framework and judicial practices, and leveraging the new Company Law, China can develop more flexible and efficient bankruptcy mechanisms. This will help balance the interests of creditors, debtors and other stakeholders, strengthening legal support for the sustainable growth of the market economy..

Guan Yue is a partner at Guantao Law Firm. She can be contacted by phone at +86 186 1066 0085 and by email at guanyue@guantao.com