Since China’s new Enterprise Bankruptcy Act came into force on June 1, 2007, the role and capacity of the newly created independent administrator has drawn broad attention among bankruptcy practitioners both in China and across borders. This is because the introduction of the independent administrator into the new bankruptcy proceedings, as the functional counterpart of the trustee under the Bankruptcy Code, is an important step towards a market economy in the insolvency area. Under China’s old law, a liquidation committee, usually composed of officials from relevant governmental departments, played this role. The new act opens business opportunities for lawyers and other professionals, who can now participate in bankruptcy proceedings as administrators.
Appointment of the Administrator
Under the Act, law firms, accounting firms and liquidation firms may be appointed as administrators,[1] but the exact details of the appointment process remains subject to Supreme People’s Court regulation. Section 22 of the new Act provides: “The people’s court shall appoint the administrator…. The Supreme People’s Court shall promulgate regulations for appointing the administrator.” [2] Accordingly, on April 4, 2007, the Supreme Court published regulations on appointing administrators in enterprise bankruptcy proceedings. Pursuant to the regulations, high courts at the provisional level and intermediate courts are responsible for making an administrators list, taking into consideration the number of law firms, accounting firms, liquidation firms, other similar organizations and bankruptcy practitioners, as well as the number of cases within their jurisdictions.[3] It further provides that, unless otherwise provided in the Enterprise Bankruptcy Act or the regulations, the people’s court shall appoint administrators from the administrators list.[4]
After meeting certain criteria, firms may enter onto the list as organization administrators and individual practitioners may enter as individual administrators. One important criterion that most jurisdictions use is the achievements of the firm or individual, based on the notion that the more successful the firm or individual is, the more capable they are of answering for liabilities, and the more likely creditors are to be protected.[5] To be fair and objective in deciding who qualifies for the list, these jurisdictions have adopted a scoring system with 100 points as the full score. After five months, some jurisdictions, like Beijing and Tianjin, have published their administrators list, while others, like Shanghai, are still in the process of making it.[6] Pursuant to the regulations, the administrators list may be modified to add new names and remove existing ones in accordance with certain procedures.[7]
Once the list has been created, courts that hear bankruptcy cases are required to appoint administrators randomly in one of three methods: waiting turns, lottery drawing or swinging numbers.[8] Because the process is open to the public, these methods of appointing administrators are convenient, effective and fair to competitors on the list. It is also effective in limiting the discretion of judges, which has been a source of corruption. The counterargument is that the ability of administrators varies even when they meet the requirements for the list. When selected randomly, they may not have the expertise needed for the case assigned, especially in reorganization cases. In such cases, the administrator who got the job may choose to sacrifice quality of their services to save money because their compensation is limited to a lump-sum figure (as will be expounded on later). Nevertheless, such simple and mechanical methods are probably still the best way to prevent unfairness and injustice at this developmental stage of bankruptcy law in China, given that judges have the sole power to appoint the administrator.
Although the court is required to appoint an administrator in every case, no matter whether it is a liquidation or reorganization case, only a limited number of firms will have the chance to be an administrator. Judging from the lists some jurisdictions have published, the majority of them are law firms. This might indicate that courts stress the legal functions of bankruptcy proceedings and consider law firms more qualified for this job.
Under China’s new Enterprise Bankruptcy Act, the court is required to appoint an administrator at the same time it has decided to hear the case[9] If the debtor applies to the court for permission to reorganize its corporation, it may do so under the supervision of an administrator during the reorganization period when such permission is obtained.[10] Automatic appointment of an administrator may be due to the presumption that once an enterprise is in financial difficulties, its current management is probably not competent to run the business and that closer supervision of an administrator is needed than that of the court hearing the case and creditors’ committee. Despite the fact that the legislature, which enacted this Act, had the benefits of the existing laws across borders, like the Bankruptcy Code, it did not provide for the position of interim trustee to cover the gap after the court has ruled to hear the case and before the appointment of an administrator. Even though the Supreme People’s Court’s regulation has adopted a relatively simple way of selecting an administrator, it is advisable to provide for such a position in case of delay or other unexpected situations.
Role and Duties
Section 23 of the Enterprise Bankruptcy Act provides, “the administrator shall perform its duties, submit work reports to the court and subject itself to the supervision of the meetings of creditors and the creditors committee in accordance with this Act….”[11] Pursuant to this provision, the administrator is accountable to the court and creditors who have the power and right to monitor its operation. The purpose of enacting the Act is to settle rights-to-payment and debts fairly, while protecting the lawful interests of creditors and the debtor.[12] It is not improper to say that the administrator represents the interests of the bankruptcy estate, though it is not clearly defined in the Act. This is similar to the role of the trustee under the Bankruptcy Code. It should be noted, however, that creditors in cases under the new Enterprise Bankruptcy Act might not have as much influence over the administrator as creditors in cases under BAPCPA over the trustee due to the fact that the administrator is not subject to election rights of creditors.
Section 25 of the new Enterprise Bankruptcy Act has provided for a list of duties that the administrator is required to perform. Pursuant to this provision, the administrator shall
(a) receive and control the property, official seals, accounting books, legal papers and
other documents of the debtor;
(b) investigate the financial affairs of the debtor and make a financial report;
(c) make decisions on the internal administrative affairs of the debtor;
(d) make decisions on the daily expenditure and other necessary expenses of the
debtor;
(e) before the first creditors’ meeting is convened, decide whether or not to continue
the operation of the debtor’s business;
(f) manage and dispose of the debtor’s property;
(g) on behalf of the debtor, appear in suits, arbitration procedures and other legal
proceedings;
(h) make proposals to convene the meetings of creditors; and
(i) perform other duties that the people’s court deems proper.
Obviously, this Act requires the administrator to be responsible for running the business of the bankrupt enterprise, at least at earlier stages of the proceeding, because it has to decide whether the company should continue its operation immediately after the court’s order for relief. Whatever decision it makes, it has to manage the internal affairs of the debtor and monitor the daily expenses of the debtor. To effectively protect the interests of relevant parties, it should have the expertise of running the type of business that the bankrupt enterprise specializes in, especially in a reorganization case.
Under the Act, however, the interests that the administrator represents might be conflicted because it is required to “appear in suits, arbitration procedures and other legal proceedings on behalf of the debtor.”[13] Pursuant to §1, one of the purposes of enacting the Act is to protect the lawful interests of creditors and the debtor as well as those of other interested parties. If the administrator is to appear in proceedings as the debtor’s representative, it is probably incapable of taking a neutral position and being fair in the proceedings as the representative of the bankruptcy estate. Such practice might defeat the goal that the Act is to achieve. Such a defect is probably due to the disagreement as to the legal status of the administrator among law makers and legal theorists in the country.
Compensation
Clause 3 of §22 of the Act provides that the Supreme People’s Court shall promulgate regulations on how to define the amount of compensation for administrators in enterprise bankruptcy proceedings.[14] Accordingly, it published Supreme People’s Court Regulation on Defining Compensation for Administrators in Enterprise Bankruptcy Proceedings on the same day as it did for appointment of administrators. Section 2 of the Regulation provides:
The people’s court shall define the amount of compensation for administrators within the following percentage limits, based on the total amounts of property value that the debtor has finally settled:
(1)12 percent or less on the first ¥1,000,000(RMB) or less;
(2) 10 percent or less on any amount in excess of ¥1,000,000 (RMB) but not in excess of ¥5,000,000(RMB);
(3) 8 percent or less on any amount in excess of ¥5,000,000 (RMB) but not in excess of ¥10,000,000(RMB);
(4) 6 percent or less on any amount in excess of ¥10,000,000(RMB) but not in excess of ¥50,000,000(RMB);
(5) 3 percent or less on any amount in excess of ¥50,000,000 (RMB) but not in excess of ¥100,000,000(RMB);
(6) 1 percent or less on any amount in excess of ¥100,000,000 (RMB) not in excess of ¥500,000,000(RMB); and
(7) 0.5 percent or less on any amount in excess of ¥500,000,000 (RMB).[15]
It should be noted that under the Enterprise Bankruptcy Act the total amounts of property value settled does not include the amount disbursed or turned over to secured creditors as priority claims,[16] though the administrator may collect money for reasonable services provided to the secured creditors in maintaining, selling and turning over their collateral.[17] Thus, the proportions of secured claims to the total allowable claims may greatly affect the administrator’s compensation.
Pursuant to the Enterprise Bankruptcy Act, the administrator gets a lump-sum figure determined by the court for whatever it needs to do in administering a case, including litigation, accounting and other necessary work. Section 28 provides that the administrator, with the permission of the court, may hire professional persons from other independent organizations to assist in its work.[18] However, §14 of the regulation provides that the professional persons hired by law firms, accounting firms to assist the administrator in its operation that falls within the firms’ field of practice, and the professional persons hired by liquidation firms to do such work will be paid out of the compensation for the administrator.[19]
These provisions reveal a tension inherent in many insolvency laws. If the fees for the administrator/trustee and other professional persons are too low, it will discourage their active and effective participation in the proceeding; on the other hand, if unchecked, the cost of bankruptcy itself will consume the very res the proceeding is designed to protect. The administrator under the Enterprise Bankruptcy Act may earn fees for services they have not provided, because the court is required to set the total amount of compensation at the start of a case, and may not have a chance to give a close look on whether certain services are necessary as long as the fees do not fall outside the limit.
Conclusion
The introduction of an independent administrator in bankruptcy proceedings is a big and important step that China has taken in the direction of following the international trend in this area. It is bound to have impact on the liquidation and reorganization of domestic corporations and cross-border corporations that are deeply involved in Chinese economy.
[1] PRC Enterprise Bankruptcy Act. §24.
[2] Id. §22.
[3] Supreme People’s Court Regulation on Appointing Administrators in Enterprise Bankruptcy Proceedings(SPCRAAEBP), §2 (April 4, 2007).
[4] Id. §1.
[5] Bankruptcy Administrators List: Chongqing Model, (July 8, 2007) http://www.chinainsol.org/.
[6] Administrators Lists Are Still Under Way In Some Jurisdictions, (October 16, 2007) http://www.chinainsol.org/Article_Show.asp?ArticleID=1402.
[7] SPCRAAEBP, §14.
[8] Id. §20.
[9] PRC Enterprise Bankruptcy Act, §13.
[10] Id. §73.
[11] PRC Enterprise Bankruptcy Act, §23.
[12] Id. §1.
[13] PRC Enterprise Bankruptcy Act, §25(g).
[14] PRC Enterprise Bankruptcy Act, §22.
[15] Supreme People’s Court Regulation on Defining Compensation for Administrators in Enterprise Bankruptcy Proceedings(SPCRDCAEBP), §2 (April 4, 2007).
[16] Id. §2.
[17] Id. §13.
[18] PRC Enterprise Bankruptcy Act, §28.
[19] SPCRHDCAEBP, §14.
Author’s Note: I would like to extend special thanks to Luis Salazar, Co-chair of the International Committee, for his valuable advice and contribution to this paper.
