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China Adopts New Bankruptcy Law

China's legislature adopted a new bankruptcy law on Aug. 27 which for the first time includes private companies, not only state-owned firms, and is aimed at boosting investor confidence. The "Corporate Bankruptcy Law" will apply to foreign companies as well as Chinese firms and will protect the rights of both creditors and workers, according to officials from the standing committee of the National People's Congress.

The law, which will come into effect on June 1, 2007, allows creditors to initiate bankruptcy proceedings against companies whose management are unwilling to do so, officials said. Some unprofitable Chinese companies, including state-owned firms, have fallen into such a financial mess that they have been unable to pay workers' wages or bills.

Unlike the old bankruptcy law, which was promulgated in 1986 and only applied to state-owned companies, there were no clear guidelines on how the companies could be dissolved and the assets split among employees and creditors. The new law will also allow companies that are doing poorly to apply for reorganization.

"This law will help redeem those organizations or enterprises which are in financial difficulties and still can be revived by reorganization," said An Jian, deputy director of the standing committee's legislative affairs commission. "It will help to timely address the relationship between creditors and debtors to avoid the accumulation of debt which might trigger economic instability."

The old law was unable to keep up with the demands as China continued to march from a planned to a market-oriented economy, and allowed laid-off workers to be paid before creditors, not giving sufficient protection to creditors. Under the new law, all insolvent enterprises will pay credit guarantees to creditors first, and use other assets not earmarked as credit guarantees to pay laid-off workers.

Copyright Agence France-Presse, 2006

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