Shenzhen court issues landmark personal bankruptcy ruling

Landmark personal bankruptcy ruling by a court in southern China’s Shenzhen city could pave the way for a nationwide rollout of a legal system that would allow individuals and private businessmen who cannot repay their loans to submit to a debt settlement or to be declared bankrupt.

Shenzhen Intermediate People’s Court approved a bankruptcy restructuring plan (link in Chinese) for Liang Wenjin, a businessman who accumulated 750,000 yuan ($ 155,544) in debt in March after a business enterprise failed, according to a statement released by the court on Monday. Liang was ordered to repay the principal to his creditors within three years, but was exempt from paying interest and late penalties.

Although a personal bankruptcy law has been in debate In China for years, the country still lacks a national legal framework to help individuals cope with debts caused by business failure or over-indebtedness while ensuring that creditors are fairly compensated. It was not until July 2019 that the government proposed a proposal establish a bankruptcy system for insolvent persons, focusing first on business-related bankruptcies and then establishing rules covering consumer debt.

Some local governments, mainly those in the more developed eastern provinces with a large proportion of small private companies, began to pilot their own personal bankruptcy systems and Shenzhen was one of them.

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The city exercised its right as a special economic zone to designate several organizations to draft local personal bankruptcy regulations after adopting a suggestion in 2014. The Supreme People’s Court issued a documentt (link in Chinese) in November 2020 to support a pilot reform of the bankruptcy system in Shenzhen. Local lawmakers approved the regulations in August 2020 and they entered into force (link in Chinese) in March of this year.

The implementation of local legislation in Shenzhen underscores the need to find solutions to the personal debt problems raised by the expansion of the private sector. Previously, without an effective exit mechanism, indebted private entrepreneurs in China often chose to simply run away, leaving creditors on the hook. It also made life difficult for the courts, which struggled to adjudicate debt disputes when they couldn’t find debtors or assets that could be used to compensate creditors.

The explosion of consumer credit and the growing number of defaulters are also pushing the government to accelerate the development of a personal bankruptcy system. Government data shows that household debt reached 62.2% of GDP at the end of 2020, up from 44.7% at the end of 2016.

Since the system came into effect in March, the Bankruptcy Court of the Shenzhen Intermediate People’s Court had received 615 requests on Friday, including 533 for bankruptcy liquidation, 48 for restructuring and 34 for conciliation, according to Cao Qixuan, president of the court. bankruptcies. . The court has started reviewing 30 cases and has so far accepted seven, including Liang’s.

Liang, 35, filed for personal bankruptcy (link in Chinese) in March after the failure of the Bluetooth headphone company he started with former colleagues in 2019 last year during the Covid-19 pandemic. Sources with knowledge of the case told Caixin that he initially applied for bankruptcy liquidation but switched to restructuring as it was a more suitable option for debtors with stable income – he now has a engineer job that earns him about 25,000 yuan per month. .

The Shenzhen court appointed Jing Tian Law Office as the bankruptcy administrator and held a creditors’ meeting in June that approved the restructuring plan that will require Liang to repay 564,216.9 yuan, the principal of total debt that the court confirmed in July, in the next three years, but will exempt it from paying interest and other fees, according to Monday’s statement.

Liang will be able to keep a certain proportion of his salary for his family’s living expenses and will use the rest to pay off his creditors who are expected to collect 88.73% of their debt, far more than the estimated 33.34% they would get in the process. under a liquidation plan, the statement said.

Commenting on Liang’s case, Cao said that debt restructuring is a “win-win” solution for both the debtor and the creditors. Without a debt repayment agreement, “the debtor may not even have enough disposable income to pay off the interest on his debt and the late payment penalties,” he said. “The debt would likely snowball, crushing the debtor and at the same time turning into bad debt for the creditors.”

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Nerys Avery (nerysavery@caixin.com)

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