An Anatomy of the First Personal Bankruptcy Legislation in China.

• Author: Ou, Fuyong

Abstract: The city of Shenzhen enacted the first personal bankruptcy legislation in China, setting up a regional experiment for future national legislation. This article presents the structure and the history of the Regulations of Shenzhen Special Economic Zone on Personal Bankruptcy and analyzes the legislation's content under the fabric of the World Bank's Report on the Treatment of the Insolvency of Natural Persons.

The Shenzhen Regulation adopts many universally accepted practices, but its mechanisms reflect tailoring of some mechanisms to reflect special needs arising from its unique local background. While the Shenzhen Regulation advances China towards a salient personal bankruptcy system, it still is too early to determine whether any national bankruptcy legislation in China will adopt its principles offramework in whole or in part.

INTRODUCTION

The Regulations of Shenzhen Special Economic Zone on Personal Bankruptcy (Shenzhen Regulation) (1) became law in 2020. (2) As of its March 1, 2021 effective date, (3) the Shenzhen Regulation stands as the first enacted personal bankruptcy legislation in China. (4)

This significant advance in Chinese law has yet to receive the same academic attention as enterprise bankruptcy in China, (5) but merits just as much --and perhaps more--study because of the potential implications arising from the establishment of a personal bankruptcy system in one of the industrial centers of the most populous country on earth. (6)

The Shenzhen Regulation's legislative background and its structure relative to existing bankruptcy systems place it in a unique position as a new statute and system in an established commercial power with citizens ranging from workers in a primarily agrarian setting (7) to titans of industry. As the Shenzhen Regulation's implementation occurs, salient questions remain about its structure, operation and ultimate effect, both within Shenzhen and within the Chinese nation.

This article asks those questions and provides potential answers to resolve them and permit wider adoption of personal bankruptcy throughout China. This article begins by illustrating the history and backdrop of the first personal bankruptcy legislation in China, followed by a general outline of the Shenzhen Regulation. Next, this Article unfolds the main pillars of that Regulation in light of the six existing international insolvency practices elaborated in the World Bank's Report on the Treatment of the Insolvency of Natural Persons (World Bank Report). (8) This article concludes by examining the impact that the Shenzhen Regulation might have on future national personal bankruptcy legislation in China.

1. LEGISLATIVE BACKGROUND OF THE SHENZHEN PERSONAL BANKRUPTCY REGULATION

   1. PERSONAL BANKRUPTCY IN CHINA

      Unlike England, where discharge of debts dates back over three centuries, (9) or the United States, where early national documents address bankruptcy, (10) China lacks a national personal bankruptcy law or a lengthy history of any similar processes for individuals: (11) China maintains its distance from personal bankruptcy, even as it continues as an important global economic participant in past decades.

      Understanding China's economic, cultural, and legal background comprises an essential prerequisite to appreciating the historical repellence of personal bankruptcy in China. (12) First, China experienced decades of planned national economy, leaving scarce room not only for personal loans, but also for personal bankruptcy. (13) Second, Chinese culture lacks the more ubiquitous recognition of debt relief methods present in other nations. (14) Third, historically, none of the prior attempts to enact personal bankruptcy legislation in China succeeded. (15) All of these factors placed hurdles in the legislation's path.

      China first considered enacting a personal bankruptcy law in 2004, when the drafters of the Bankruptcy Law of the People's Republic of China (Draft Version) evaluated including provisions regarding personal bankruptcy for both businesspeople and consumers in legislation. (16) However, after tedious yet furious debates, it was deleted completely. (17) Six years later, in 2010, the deputy to the National People's Congress proposed national personal bankruptcy legislation. (18) This attempt to legislate the process also was in vain. (19)

   2. SHENZHEN'S COMMERCIAL AND JUDICIAL ENVIRONMENT

      With unique economic conditions and meaningful legal and judicial resources, Shenzhen's position as the forerunner in Chinese personal bankruptcy legislation comes as no surprise. For example, Shenzhen provides fertile ground for commercial innovation in China. Shenzhen's gross domestic product ranked third in China in 2019, just behind Shanghai and Beijing. (20) Shenzhen's high rate of entrepreneurship results in it having the highest company density in China. (21) While successful companies like Huawei and Tencent gather international recognition, (22) substantial numbers of individuals engage in business activities in Shenzhen. The Market Supervision Authority of Shenzhen reported over 3.43 million business entities in Shenzhen as of the end of July, 2020, with over 1.27 million entities--approximately 37-2 percent of the total--comprising individually owned businesses. (23) In addition, many people participate in business as self-employed proprietors or freelancers. (24) This individual business participation rate significantly exceeds that in most of China.

      Shenzhen also presents a beneficial forum for implementation of China's first individual bankruptcy law by offering judicial resources suited to the task because of Shenzhen's bankruptcy experience in the past few years. For example, on January 22, 2016, the Shenzhen Intermediate Court presented its pioneering bankruptcy information disclosure platform to the public. (25) This platform offers information including case data, related regulations and the list of recognized bankruptcy trustees. (26) On January 14, 2019, China's first bankruptcy court was established in Shenzhen, with all bankruptcy cases in Shenzhen and cross-border bankruptcy cases under its jurisdiction. (27) The assignment of professional judges with rich experience in corporate bankruptcy to that court resulted in the firm growth of bankruptcy case volume in Shenzhen since then.

   3. LEGISLATIVE HISTORY OF THE SHENZHEN REGULATION

      As a pioneer in enterprise bankruptcy practice, (28) Shenzhen also sought to lead in the development of personal bankruptcy. In November 2014, the Standing Committee of Shenzhen People's Congress held a meeting to discuss the feasibility of personal bankruptcy legislation. In that meeting, they agreed to consider drafts from lawyers, judges, and scholars. Practitioners submitted their works with enthusiasm, but the process paused without explanation. (29)

      Undeterred, lawyers published their proposed draft version of what they called the Shenzhen Special Economic Zone Personal Bankruptcy Bill in 2016; (30) fifteen deputies of the Shenzhen People's Congress proposed a bill on personal bankruptcy legislation during its two sessions that year. (31) The intermediate court in Shenzhen finished provincial research on personal bankruptcy in 2017 (32) and the Shenzhen Intermediate Court submitted its Report on Pioneering of Regulating Personal Bankruptcy in Shenzhen at the end of 2018. (33)

      Progress on personal bankruptcy legislation seemed imminent by the end of 2019 when several national documents issued that year mentioned the topic of individual insolvency. (34) That year witnessed a major transition as the Central Committee of the Communist Party of China and the State Council promulgated the Guidelines on Supporting Shenzhen in Building a Pilot Demonstration Area of Socialism with Chinese Characteristics. (35) Those Guidelines explicitly asked Shenzhen to "make full use of its legislative power as a special economic zone" and allowed it to "make adaptions to laws, administrative laws and regulations, and local laws and regulations in accordance with authorization for reform and innovation practices." (36)

      With the Guidelines' framework providing legitimacy for an individual bankruptcy law, Shenzhen reinitiated its personal bankruptcy legislation process in 2020 (37) and the first formal draft of the Shenzhen Regulation reached the Standing Committee of Shenzhen People's Congress in April of that year. (38) After making several revisions, the final Shenzhen Special Economic Zone Personal Bankruptcy Regulation passed on August 26, 2020, marking the enactment of the first personal bankruptcy legislation in China and inaugurating a new opportunity for distressed debtors. (39)

2. AN ANALYTICAL OVERVIEW OF THE SHENZHEN REGULATION

   1. REGULATION STRUCTURE

      The Shenzhen Regulation contains 173 articles, divided into thirteen chapters. (40) Article One of the Regulation states its objectives, including (1) regulating personal bankruptcy procedures, (2) adjusting rights and obligations among debtors, creditors and other stakeholders, (3) promoting honest debtors' rehabilitation and (4) perfecting the socialist market economy. (41) Notably, the legislative objective of rehabilitation diverges from China's Enterprise Bankruptcy Law (42) by offering individual debtors the opportunity for full discharge of debts after liquidation, restructuring, or reconciliation. (43) This difference takes into account variations between debtors' particular circumstances and characteristics. While a company's existence ends after its liquidation, an individual continues living after bankruptcy. As a result, the bankruptcy procedure for natural persons places more emphasis on facilitating the debtor's rehabilitation than its corporate counterpart.

      Notably, the Shenzhen Regulation extends its protection to all Shenzhen residents, including business individuals and natural persons: Article Two of the Regulation allows not only permanent residents, but also people working in...