With gradual maturity of China’s insolvency system, bankruptcy proceedings have shifted from something debtors feared and creditors resisted to a welcome tool for both parties to clear debt and rescue viable businesses.
This article examines key practical issues and recent court practice to assess how bankruptcy law is addressing practical current problems and future challenges.
Q: From “enforcement to bankruptcy” cases, to voluntary reorganisation: How do courts balance rescuing businesses with preventing debt evasion?
A: Early in a debt crisis, companies often fear entering bankruptcy proceedings, worried they will lose control of the business or end up in liquidation. Creditors, meanwhile, usually prefer individual enforcement action so they can get paid first.
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Zhong Lun Law Firm
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Cases such as Qoros Auto’s reorganisation have highlighted the timing gap between enforcement and bankruptcy. Creditors applying for enforcement may resist being bound by collective decisions in a reorganisation, and instead push to recover through enforcement, sometimes objecting to the court accepting a reorganisation case, or even trying to slow the process.
In addition, “out of court restructuring – pre-reorganisation – bankruptcy reorganisation” has become the main route that listed companies deal with debt crises, as it shortens timelines and improves chances of successful reorganisation.
In the DEA General Aviation case, the pre-reorganisation administrator prepared asset valuation and claim verification plans for use directly once the case moved into formal reorganisation, avoiding repeat valuations and loss of value.
In the Feima International case, early engagement with regulators accelerated required approvals, while introducing an investor helped address issues such as non-compliant guarantees.
The growing trend of debtors filing for bankruptcy also raises the bar for courts and creditors to spot debt evasion and “sham bankruptcies”. The Supreme People’s Court has taken a tough stance against using bankruptcy as cover to avoid repayment. In tandem, courts have moved from focusing mainly on selling individual assets to scrutinising the legality of the process as a whole.
They are also cautious about using substantive consolidation of related companies, to prevent debtors from shifting assets through related-party deals.
Q: As personal bankruptcy pilot schemes roll out, how can debtor rehabilitation balance with protecting creditors’ rights?
A: Personal bankruptcy is a key part of a well functioning “exit” mechanism in a market economy, with pilot schemes tested in Shenzhen, Xiamen and Zhejiang in recent years.
As one of the first pilot cities, Shenzhen has adhered to the principle of “prioritising reorganisation and settlement” in practice, encouraging debtors to repay debts through continued business operations or labour income, rather than simple discharge through liquidation. By the end of 2023, the Shenzhen Intermediate People’s Court had accepted 227 individual bankruptcy cases, 95% of which went to reorganization, while only 3% went to liquidation. The court received 426 new applications for individual bankruptcy liquidations, reorganisations and settlements, with reorganisation remaining the mainstream. Elsewhere, Xiamen implemented the Xiamen Special Economic Zone Individual Bankruptcy Protection Regulations in November 2025, while Zhejiang explored the “personal debt centralised clearance” model.
Draft amendments to the Enterprise Bankruptcy Law released for public consultation (the EBL amendments) for the first time also look at rescuing entrepreneurs and micro and small businesses. This reflects the close link between personal and corporate bankruptcy.
In major corporate reorganisation cases, company debts are often heavily intertwined with the entrepreneur’s personal debts. If only the company’s debts are dealt with, the entrepreneur may struggle to get back on their feet.
The EBL amendments take a middle-ground approach by recognising the effect of personal bankruptcy in a limited way. In practice, some cases already link personal debt workouts with corporate bankruptcy. For example, in the Suning reorganisation, the founders undertook to place all their personal assets into a trust plan, and creditors agreed to pause pursuing their personal guarantee liabilities.
The personal bankruptcy regime rests on good faith. It is crucial that debtors actively carry out their restructuring plan over a strict observation period when bankrupt individuals face tight spending limits, must declare assets honestly, and make genuine efforts to repay.
Creditors often worry that the process could be used to evade debts. If a debtor hides assets or transfers them in bad faith, this harms creditors and undermines the system.
As a result, current legislation takes a relatively cautious approach. On one hand, a discharge mechanism offers honest debtors a chance to restart; on the other hand, strict eligibility checks and supervision, such as administrator investigations and creditor meeting questioning, aim to reduce moral hazard.
Q: Under cross-border structures, what practical hurdles and breakthroughs are there in cross-border judicial assistance?
A: As more Chinese companies expand overseas, and offshore structures become common, cross-border bankruptcy reorganisations involving multiple jurisdictions are increasingly frequent. In these complex structures, assets are often spread across different legal systems. For example, in the Evergrande case, tycoon Hui Ka Yan held shares in Evergrande Property through CEG Holdings (BVI).
In recent years, courts in Shanghai have actively explored how to recognise and enforce overseas insolvency decisions, providing valuable practice examples for cross-border reorganisations.
In several cases where Hong Kong liquidators applied to take control of assets in the Chinese mainland, courts relying on the Enterprise Bankruptcy Law and reciprocity principles have gradually become more willing to recognise overseas insolvency proceedings.
Practice in Xiamen is also seen as a benchmark. In the Husk’s Green Technology case, Xiamen Intermediate People’s Court recognised Hong Kong insolvency proceedings and the status of the Hong Kong liquidator.
That said, even where an overseas proceeding is recognised, mainland courts may still take a cautious, case-by-case approach to asset enforcement and disposal powers. They may weigh factors such as the interests of onshore creditors, nature of assets, and broader social stability, and may issue separate directions on how enforcement should be carried out.
This trend towards more integrated cross-border reorganisations benefits both debtors and creditors. For debtors, a more unified bankruptcy process helps prevent assets being broken up and sold off, making it easier to design and implement a reorganisation plan. For creditors, cross-border judicial assistance can improve recovery and reduce risks caused by information gaps.
However, cross-border reorganisations also bring new challenges around debt evasion. For example, a debtor may exploit the confidentiality of a BVI structure, or differences between mainland and Hong Kong legal systems, to hide assets or repay selected creditors.
Experience in Xiamen suggests that a “recognition and review” approach – recognising the overseas process while also scrutinising key issues – can provide creditors a solid layer of court protection.
Nafisa Nihmat is an equity partner at Zhong Lun Law Firm. She can be contacted by phone at +86 21 6061 3177 and by email at naifeisha@zhonglun.com
