The term micro and small enterprises (MSEs) generally refers to small businesses, micro businesses and home-based businesses. Because of the relatively limited funds and management capabilities, MSEs may fall into bankruptcy reorganisation as a result of difficulties in financing, excessive market competition and insolvency. This article will list the obstacles faced by MSEs in bankruptcy reorganisation, and propose countermeasures for reference.
The obstacles
Senior Partner
Lianggao Law Firm
Tel: +86 180 0115 7245
E-mail:
ruomiao918@126.com
Lack of applicable laws. China’s Enterprise Bankruptcy Law is generally known as a “half-baked bankruptcy law” because it covers only enterprise legal persons. Although article 135 of the law provides that the liquidation of organisations other than enterprise legal persons shall be governed by the liquidation procedures as prescribed by it, it cannot apply to settlements and reorganisations in principle. As a result, MSEs have no access to bankruptcy reorganisation remedies, resulting in losses to them and the larger society.
Difficulties in commencing reorganisation proceedings. The reasons are mainly as follows: (1) MSE owners are unmotivated to file for bankruptcy reorganisation; (2) the financial and legal staff of MSEs have limited expertise; and (3) in traditional Chinese culture, bankrupts are deemed “deadbeats”, and their companies’ entry into bankruptcy proceedings for relief may be considered an act of evading debts.
In fact, this problem always exists in bankruptcy trials, because the commencement procedure for enterprise bankruptcy has two steps: filing a case, and accepting the case. Chinese courts will conduct an examination when accepting bankruptcy cases. The filing registration system reform for civil lawsuits has yet to address the difficulties in accepting bankruptcy cases.
Loss of control in reorganisation. Article 73 of Enterprise Bankruptcy Law stipulates a reorganisation model with the principle of management by an administrator and the debtor’s self-management as the exception. In practice, especially in the reorganisation of MSEs, the debtor’s self-management is rarely the case.
Unlike larger businesses, MSEs are often owned and managed by individuals, leading to a close tie between business and personal affairs, as well as confusion about the personalities and assets of the enterprise and its owner. It can be said that MSEs and their owners are fused. Therefore, MSE owners are more willing to take control in their own hands.
Advice
Clarify the entities to which reorganisation applies. First, self-employed individuals. Although regarded as natural persons in the Civil Code, self-employed individuals have independent legal personality. The finance and operation of a self-employed individual’s business greatly depend on the individual, which is very similar to MSEs.
Self-employed individuals in China are MSEs in a legal nature. As for a sole proprietorship, the individual’s assets and the enterprise’s assets are so confused that there is no difference in the status of the creditors when the enterprise fails and enters bankruptcy proceedings. Therefore, when sole proprietorships are included in the scope of bankrupt MSEs, the debtor or creditor should be allowed to file for personal bankruptcy, giving the parties an option.
When it comes to partnerships, however, one or more partners may be jointly and severally liable for the enterprise’s debts, depending on the partnership mode. If the partners are unable to pay off the enterprise’s debts, the bankruptcy of the partnership may drive more natural persons into bankruptcy than in cases of sole proprietorships. Therefore, it is necessary to include the above-mentioned entities in the scope of bankrupt entities.
Shorten the duration of proceedings. Simple reorganisation proceedings are quick and time-saving, so it is necessary to shorten the duration. According to the Minutes of the National Court Work Conference on Bankruptcy Trials, issued in 2018, simple cases are eligible for expedited hearing by shortening and streamlining proceedings without breaching the statutory minimum duration.
Although the schedule for proceedings is to provide sufficient time for the parties and safeguard procedural justice, the MSEs in trouble have a more urgent need for rescue. Digital technology today allows instant data transmission, perfectly addressing the shortcomings of traditional notification and service of legal documents.
Therefore, it is necessary and feasible to legislate a shorter process in the reorganisation of MSEs. In the US, the debtor is required to submit a reorganisation plan within 120 days (or 180 days) for an ordinary reorganisation case, and the Small Business Reorganisation Act shortens this period to 90 days after the issuance of an order for relief.
The debtor should retain control over the business. The US, Japan and some other countries have given priority to the “debtor self-management + administrator” model in the reorganisation of small businesses. That is, debtor self-management is given priority, with an administrator chosen by the debtor or appointed by the court to supervise the reorganisation.
In China, generally, a neutral third-party organisation is chosen as the administrator for reorganisation, showing a lack of practice in debtor self-management. Given their business and legal characteristics, however, MSEs will be more proactive and motivated for self-management than third-party management.
While keeping the business under the control of the debtor, attention should also be paid to moral hazards and conflicts of interest. An appropriate regulatory mechanism should be in place so that professionals will be engaged to supervise and track the entire process of bankruptcy reorganisation. The administrator is not passive either, and should strengthen regulation over the debtor’s self-management.
Cheng Ruomiao is a senior partner at Lianggao Law Firm. She can be contacted on +86 180 0115 7245, or by e-mail at ruomiao918@126.com
