Which Entity Can Go Bankrupt in China?
Enterprises can all go bankrupt. In a few places, like Shenzhen, natural persons can go bankrupt. Chinese central and local governments and public institutions cannot go bankrupt. In addition, law firms cannot go bankrupt, either.
1. Entities that can go bankrupt
(1) Limited liability companies and companies limited by shares
Limited liability companies and companies limited by shares are companies established in China under Chinese Company Law for which the shareholders are liable to the extent of their capital contributions or the shares they subscribe.
Most Chinese enterprises, especially those engaged in international trade, fall into these two categories and can therefore go bankrupt.
(2) Listed companies
Companies listed in China, which are one type of companies limited by shares, can go bankrupt. However, as the bankruptcy of a listed company is more complex, the court seized shall report the case to the Supreme People’s Court (SPC).
(3) Financial institutions
If commercial banks, securities companies, insurance companies, and other financial institutions are under bankruptcy circumstances, the financial regulatory authority under the State Council can apply for bankruptcy of the financial institution, but such bankruptcy proceedings are subject to the supervision of the financial regulatory authority under the State Council.
(4) Enterprises owned by the whole people (state-owned enterprises)
Most Chinese state-owned enterprises are limited liability companies and companies limited by shares, but a small number of state-owned enterprises with a relatively long history are the so-called enterprises owned by the whole people, a special organization form. They can also go bankrupt.
(5) Joint-stock cooperative companies
The joint-stock cooperative system is an organization form that is based on the cooperative system, absorbs some practices of the shareholding system, and combines labor unions and capital alliances of workers. The shares are usually held jointly by the state-owned enterprises and the workers. They can also go bankrupt.
(6) Partnerships
Partnerships can go bankrupt and their bankruptcy proceedings are the same as those for companies.
(7) “Three-no” enterprises
In practice, some bankrupt enterprises have ceased operations for many years and are in fact in a state of having no capital, no premises, and no organization, known as “three-no” enterprises. Such enterprises can also go bankrupt.
2. Entities that can only go bankrupt in some places
Natural persons can go bankrupt in Shenzhen. This is the first (and the only by far) pilot of personal bankruptcy in China since 2021. Before that, China did not have any mechanism for the bankruptcy of natural persons.
We presume that the mechanism will spread in China in the future.
3. Entities that cannot go bankrupt
(1) Government
Chinese law does not provide for government bankruptcy, either for local or central governments. This means that the government has unlimited liability for its debts.
However, in some places like Hegang, a small northeastern city, “fiscal reorganization” has occurred, which is similar to government bankruptcy. It appears not unlikely that some local governments in China will enter substantial bankruptcy proceedings in the future.
(2) Public institutions
Public institutions cannot go bankrupt.
Public institutions are usually managed by the government or its departments. In China, a large number of public services or semi-public services are completed by public institutions, which employ up to 50 million people.
Before a public institution is dissolved, even if it qualifies for bankruptcy, it cannot go bankrupt or have its debts assumed by the government in charge.
However, when it is dissolved, the government in charge will assume the debts.
(3) Law firms
The SPC has stated in a case that law firms are not enterprises and cannot go bankrupt.
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