On 2 June 2020, the Standing Committee of the Shenzhen Municipal People’s Congress publicly solicited opinions on the 《Regulations on Personal Insolvency of the Shenzhen Special Economic Zone ( Draft for Comments, hereinafter “Draft”)》, which is the first local regulation in China to solicit opinions on individual bankruptcy.
The main purpose of the regulation is to establish a personal system of insolvency, meaning any individual whose assets are not sufficient to pay off all his or her debts or who obviously lacks liquidity, due to production, operation and consumption, may apply for personal insolvency if certain conditions are met.
Previously, on more than one occasion, the Chinese government had already proposed that “the bankruptcy system should be improved and individual bankruptcy legislation should be initiated, to achieve an orderly exit of market participants.” Meanwhile, according to the <Opinions of the Central Committee of the Communist Party of China and the State Council on Supporting Shenzhen in Building a Pilot Demonstration Zone for Socialism with Chinese characteristics> promulgated earlier, Shenzhen may undertake changes to existing laws, administrative regulations and local regulations in accordance with the authorization.
According to the statistics, by the end of January 2020, there were 1.236 million registered individual businesses in Shenzhen, in addition to a large number of self-employed commercial entities in various forms. Due to the long-term absence of a personal insolvency system, parts of the aforementioned commercial entities bear unlimited debts once they encountered market risks.
In order to provide these “honest but unfortunate” businesses with the opportunity to obtain economic regeneration and encourage innovation and entrepreneurship, the establishment of a personal insolvency system is crucial. It goes without saying that further rules need to be explored and studied. For example, the definition of non-malicious criteria, how to deal with any retroactive responsibility during the exemption period and who is in charge of monitoring, how to achieve a balance between protecting the rights of creditors and ensure a bona fide relieve for insolvent debtors etc.? Workable legal rules and regulations need to be established for all such issues and should be constantly revised in practice.
Now let’s take a look at the highlights of the Draft:
1. Debtors and creditors
Individuals who have lived in Shenzhen and participated in Shenzhen’s Social Insurance scheme for three consecutive years may go into liquidation or settle the property if their assets are insufficient to pay off all the debts or if they are facing liquidity constraints as mentioned above, or if they are clearly unable to pay off all of their debts. At the same time, creditors who hold more than 500,000 yuan of maturing claims against their debtors alone or jointly with creditors may apply to the court for bankruptcy liquidation of the debtor.
2. Inspections and restrictions
From the date of bankruptcy, the insolvent debtor faces a minimum of three years, a maximum of five years of an inspection period for exemption. In insolvency proceedings and during the inspection period, the insolvent debtor has to accept restrictions with regards to his actions and rights, including on personal consumption and the inability to serve as a senior executive of a company. The Draft also provides a variety of indefensible debts and exonerations. For example, debts such as property damages arising from malicious torts cannot be forgiven, neither significant debts incurred as a result of extravagant consumption or a significant reduction in personal assets, even if the individual is insolvent.
