(Adopted at the 18th Meeting of the Standing Committee of the Sixth National People's Congress and promulgated by Order No. 45 of the President of the People's Republic of China on December 2, 1986, for Trial Implementation Three Full Months After the Law on Industrial Enterprises with Ownership by the Whole People Comes into Effect)

Contents

Chapter I General Provisions

Chapter II The Submission and Acceptance of Bankruptcy Applications

Chapter III Creditors' Meetings

Chapter IV Settlement and Reorganization

Chapter V Bankruptcy Declarations and Bankruptcy Liquidations

Chapter VI Supplementary Provisions

Chapter I General Provisions

Article 1 This Law is formulated in order to suit the development of a planned socialist commodity economy and the needs of the reform of the economic structure, to promote the autonomous operation of enterprises owned by the whole people, to strengthen the economic responsibility system and democratic management, to improve the state of operations, to increase economic efficiency and to protect the lawful rights and interests of creditors and debtors.

Article 2 This Law applies to enterprises owned by the whole people.

Article 3 Enterprises which, owing to poor operations and management that result in serious losses, are unable to repay debts that are due shall be declared bankrupt in accordance with the provisions of this Law.

Enterprises for which creditors file for bankruptcy shall not be declared bankrupt under any of the following circumstances:

(1) public utility enterprises and enterprises that have an important relationship to the national economy and the people's livelihood, for which the relevant government departments grant subsidies or adopt other measures to assist the repayment of debts;

(2) enterprises that have obtained guarantees for the repayment of debts within six months from the date of the application for bankruptcy.

With respect to enterprises for which creditors file for bankruptcy, bankruptcy proceedings shall be suspended if the enterprise's superior departments in charge have applied for reorganization and if the enterprise and its creditors have reached a settlement agreement through consultation.

Article 4 The State through various means shall appropriately arrange for the reemployment of the staff and workers of bankrupt enterprises, and shall guarantee their basic living needs prior to reemployment; specific measures shall be separately stipulated by the State Council.

Article 5 Bankruptcy cases shall be under the jurisdiction of the people's courts in the location of the debtor.

Article 6 Where this Law has not stipulated the procedures for bankruptcy cases, the legal provisions for civil procedures shall apply.

Chapter II The Submission and Acceptance of Bankruptcy Applications

Article 7 Where the debtor is unable to repay debts that are due, the creditors may file to declare the debtor bankrupt.

When the creditor is submitting the bankruptcy application, it should provide relevant evidence relating to the amount of the claim, whether or not it is secured with property, and to the inability of the debtor to repay debts that are due.

Article 8 The debtor, upon the agreement of its superior departments in charge, may apply for the declaration of bankruptcy.

When the debtor is submitting the bankruptcy application, it shall explain the circumstances of the enterprise's losses and deliver relevant accounting statements, a detailed list of debts and a detailed list of claims.

Article 9 After the people's court has accepted a bankruptcy case, it shall notify the debtor within ten days and make a public announcement. Within ten days after receiving the detailed list of debts delivered by the debtor, the people's court shall notify known creditors. The public announcement and notice shall stipulate the date of the first convening of the creditors' meeting.

Creditors who have been notified shall, within one month after receiving the notice, and creditors who have not been notified shall, within three months after the date of the public announcement, report their claims to the people's court and explain the amount of the claims, as well as whether or not they are secured with property, and also deliver relevant materials of proof. Creditors who do not report their claims during these periods shall be deemed to have automatically abandoned their claims.

The people's court shall register separately claims that are secured with property and claims that are not secured with property.

Article 10 Where creditors have made the bankruptcy application, the debtor shall, within 15 days after receiving the notice of the people's court, deliver to the people's court the relevant materials described in the second paragraph of Article 8 of this Law.

If the debtor is a guarantor for another unit, it shall, within five days after receiving the notice of the people's court, in turn notify the relevant parties.

Article 11 After the people's court has accepted a bankruptcy case, other civil enforcement proceedings against the property of the debtor must be suspended.

Article 12 After the people's court has accepted a bankruptcy case, payment by the debtor to only some of the creditors is null and void, with the exception of payments required for the normal production and operations of the debtor.

Chapter III Creditors’ Meetings

Article 13 All creditors are members of the creditors' meeting. Members of the creditors' meeting enjoy the right to vote, with the exception of creditors with claims secured with property who have not abandoned their priority right to be repaid. Guarantors of the debtor, after having repaid debts on behalf of the debtor, may be deemed creditors, and enjoy the right to vote.

The chairman of the creditors meeting is designated by the people's court from among the creditors with the right to vote.

The legal representative of the debtor must attend the creditors' meetings and answer the creditors inquiries.

Article 14 The first creditors' meeting is called by the people's court, and shall be convened within 15 days after the expiration of the period for reporting claims. Subsequent creditors' meetings are convened at such times as the people's court or the chairman of the meeting deems them necessary, and may also be convened on the request of the liquidation committee or of creditors whose claims comprise more than one-fourth of the total amount of claims not secured with property.

Article 15 The functions and powers of the creditors' meeting are:

(1) to examine materials of proof relating to the claims, and to confirm the amount of such claims and whether or not the claims are secured with property;

(2) to discuss and adopt a draft settlement agreement; and

(3) to discuss and adopt a plan for the disposition and distribution of bankruptcy property.

Article 16 Resolutions of the creditors meeting are adopted by a majority of creditors with the right to vote present at the meeting; and the amount of their claims must comprise more than half of the total amount of claims that are not secured with property; however, with respect to a resolution adopting a draft settlement agreement, such amount must comprise more than two-thirds of the total amount of claims that are not secured with property.

Resolutions of the creditors' meeting shall have binding force on all the creditors.

Creditors who consider the resolutions of the creditors' meeting to be contrary to the provisions of law may, within seven days after the creditors' meeting has made such resolutions, apply to the people's court for judgment.

Chapter IV Settlement and Reorganization

Article 17 With respect to an enterprise for which the creditors apply for bankruptcy, the superior departments in charge of the enterprise that is the subject of the bankruptcy application may, within three months after the people's court has accepted the case, apply to carry out reorganization of the enterprise; the period of reorganization shall not exceed two years.

Article 18 After an application for reorganization is submitted, the enterprise shall propose a draft settlement agreement to the creditors' meeting.

The settlement agreement shall stipulate the period in which the enterprise shall repay the debts.

Article 19 After the enterprise and creditors' meeting have reached a settlement agreement which has been recognized by the people's court, the people's court shall make a public announcement and suspend the bankruptcy proceedings. The settlement agreement shall have legal effect from the date of the public announcement.

Article 20 The reorganization of the enterprise shall be supervised by its superior departments in charge.

The reorganization plan of the enterprise shall be discussed by the congress of the staff and workers of the enterprise. The circumstances of the reorganization of the enterprise shall be reported to the congress of the staff and workers of the enterprise and its opinion shall be heeded.

The circumstances of the reorganization of the enterprise shall be periodically reported to the creditors' meeting.

Article 21 During the period of reorganization, an enterprise in any of the following circumstances shall, upon judgement of the people's court, terminate reorganization and declare its bankruptcy:

(1) not implementing the settlement agreement;

(2) continued worsening in its financial condition, for which reason the creditors' meeting has applied for the termination of reorganization; and

(3) committing any of the acts listed in Article 35 of this Law and seriously harming the interests of creditors.

Article 22 With respect to an enterprise that has undergone reorganization and is able to repay debts in accordance with the settlement agreement, the people's court shall terminate the bankruptcy proceedings for such enterprise, and also make a public announcement thereof.

With respect to an enterprise that, on the expiration of the period of reorganization, is unable to repay debts in accordance with the settlement agreement, the people's court shall declare such enterprise bankrupt, and shall re-register the claims in accordance with the provisions of Article 9 of this Law.

Chapter V Bankruptcy Declarations and Bankruptcy Liquidations

Article 23 In any of the following circumstances, after the judgment of the people's court, an enterprise shall be declared bankrupt:

(1) if, in accordance with the provisions of Article 3 of this Law, it should be declared bankrupt;

(2) if reorganization has been terminated in accordance with the provisions of Article 21 of this Law; and

(3) if, upon the expiration of the period of reorganization, it is unable to repay debts in accordance with the settlement agreement.

Article 24 The people's court shall, within 15 days after the date the enterprise is declared bankrupt, establish a liquidation team to take over the bankrupt enterprise. The liquidation team shall be responsible for the keeping, putting into order, appraisal, disposition and distribution of the bankruptcy property. The liquidation team may carry out necessary civil actions in accordance with law.

The members of the liquidation team shall be designated by the people's court from among the superior departments in charge, government finance departments, and other relevant departments and professional personnel. The liquidation team may hire necessary work personnel.

The liquidation team is responsible to, and shall make report on its work to, the people's court.

Article 25 No unit or individual may illegally dispose of the property, account books, documents, materials, seals, etc., of a bankrupt enterprise.

The debtors of a bankrupt enterprise and persons holding the property of a bankrupt enterprise can repay debts or deliver property only to the liquidation team.

Article 26 The liquidation team may decide to terminate or to continue to perform the contracts that have not yet been performed by the bankrupt enterprise.

If the liquidation team decides to terminate a contract, and the other party to the contract suffers harm as the result of the termination of the contract, the amount of compensation for the harm constitutes a bankruptcy claim.

Article 27 Before the legal representative of the bankrupt enterprise has handled the procedures for transfer to the liquidation team, he shall be responsible for the keeping of the property, account books, documents, materials, seals, etc., of such enterprise.

Before the conclusion of the bankruptcy proceedings, the legal representative of the bankrupt enterprise shall carry out work according to the requirements of the people's court or the liquidation team, and may not leave his position without authorization.

Article 28 Bankruptcy property comprises the following property:

(1) all property that the bankrupt enterprise operated and managed at the time bankruptcy was declared;

(2) property obtained by the bankrupt enterprise during the period from the declaration of bankruptcy until the conclusion of the bankruptcy proceedings; and

(3) other property rights that the bankrupt enterprise should exercise.

Property that already constitutes security collateral is not bankruptcy property; the portion of the value of the security collateral exceeding the amount of the debt that it secures is bankruptcy property.

Article 29 Property in the bankrupt enterprise that belongs to other persons shall be retrieved by the persons with the right to such property through the means of the liquidation team.

Article 30 Claims not secured with property and claims secured with property for which the priority right to receive repayment has been abandoned, which were established before bankruptcy was declared, are bankruptcy claims.

The expenses of creditors for participating in the bankruptcy proceedings may not constitute bankruptcy claims.

Article 31 Claims that are not due when bankruptcy is declared shall be deemed to be claims that have already become due; however, the interest that is not yet due shall be deducted.

Article 32 With respect to claims secured with property that are established before bankruptcy is declared, the creditors enjoy the right to receive repayment with priority with respect to such security.

With respect to claims that are secured with property whose amount exceeds the value of the security collateral, the part that is not repaid constitutes a bankruptcy claim, and will be repaid in accordance with the bankruptcy proceedings.

Article 33 Creditors who owe debts to the bankrupt enterprise may offset them before the bankruptcy liquidation.

Article 34 Priority shall be given to saving the following bankruptcy expenses from the bankruptcy property:

(1) the expenses needed for the management, sale and distribution of the bankruptcy property, including the expenses of hiring work personnel;

(2) the litigation expenses of the bankruptcy case; and

(3) other expenses paid in the course of bankruptcy proceedings for the common interest of the creditors.

With respect to enterprises whose bankruptcy property is insufficient to cover bankruptcy expenses, the people's court should declare termination of bankruptcy proceedings.

Article 35 During the period from six months before the people's court accepts the bankruptcy case until the date that bankruptcy is declared, the following actions of a bankrupt enterprise are null and void:

(1) concealment, secret distributions or transfers of property without compensation;

(2) sale of property at abnormally depressed prices;

(3) securing with property of claims that originally were not secured by property;

(4) early repayment of claims that are not yet due; and

(5) abandonment of the enterprise's own claims.

With respect to bankrupt enterprises which have committed acts listed in the previous paragraphs, the liquidation team has the right to apply to the people's court to recover the property, which shall be added to the bankruptcy property.

Article 36 Complete sets of equipment in the bankruptcy property shall be sold as a whole, and that which cannot be sold as a whole may be sold in parts.

Article 37 The distribution plan for the bankruptcy property shall be proposed by the liquidation team, adopted by the creditors meeting and submitted to the people's court for judgment before implementation.

After the prior deduction of bankruptcy expenses from the bankruptcy property, repayment shall be made in the following order:

(1) wages of staff and workers and labour insurance expenses that are owed by the bankrupt enterprise;

(2) taxes that are owed by the bankrupt enterprise; and

(3) bankruptcy claims.

Where the bankruptcy property is insufficient to repay all the repayment needs within a single order of priority, it shall be distributed on a pro-rata basis.

Article 38 Upon the completion of the distribution of the bankruptcy property, the liquidation team shall apply to the people's court for the conclusion of the bankruptcy proceedings. After the termination of bankruptcy proceedings, claims that have not been repaid shall no longer be repaid.

Article 39 After the conclusion of the bankruptcy proceedings, the liquidation team shall handle the procedures for the cancellation of registration at the original registration authorities of the bankrupt enterprise.

Article 40 With respect to bankrupt enterprises that are discovered within one year after the date of the conclusion of the bankruptcy proceedings to have committed any of the acts listed in Article 35 of this Law, the people's court shall recover the property and order repayment in accordance with Article 37 of this Law.

Article 41 With respect to bankrupt enterprises that have committed any of the acts listed in Article 35 of this Law, the legal representative and the directly responsible personnel of the bankrupt enterprise shall be subject to administrative sanctions; where the acts of the legal representative and the directly responsible personnel of the bankrupt enterprise constitute crimes, criminal responsibility shall be investigated in accordance with the law.

Article 42 After an enterprise is declared bankrupt, the government supervisory departments and audit departments are responsible for pinpointing the responsibility for the bankruptcy of the enterprise.

Where the legal representative of the bankrupt enterprise bears the major responsibility for the bankruptcy of the enterprise, administrative sanctions shall be applied.

Where the superior departments in charge of the bankrupt enterprise bear the major responsibility for the bankruptcy of the enterprise, administrative sanctions shall be applied to the leaders of such superior departments in charge.

With respect to the legal representative of the bankrupt enterprise and the leaders of superior departments in charge of bankrupt enterprise who, owing to neglect of duty, caused the bankruptcy of the enterprise, resulting in the major loss of State property, criminal responsibility shall be investigated in accordance with Article 187 of the Criminal Law of the People's Republic of China.

Chapter VI Supplementary Provisions

Article 43 This Law is to be implemented on a trial basis three full months after the Law on Industrial Enterprises with Ownership by the Whole People comes into effect, and the specific plans and steps for the trial implementation shall be stipulated by the State Council.