Caixin
Oct 11, 2019 09:00 PM
ECONOMY

In Landmark Case, Wenzhou Court Approves China’s First De Facto Personal Bankruptcy

The need for some kind of individual bankruptcy framework has taken on added urgency amid the economic slowdown. Photo: VCG
The need for some kind of individual bankruptcy framework has taken on added urgency amid the economic slowdown. Photo: VCG

A court in eastern China has made a landmark ruling in the country’s first de facto personal bankruptcy case, setting a precedent that could support government efforts to set up a system allowing millions of indebted individuals and their creditors to resolve their financial disputes.

The Intermediate People’s Court in Wenzhou, a city renowned for its private entrepreneurship and private lending, published a statement on Wednesday saying it had approved the legality of a bankruptcy agreement between an individual surnamed Cai and his creditors. Chen Weiguo, a senior court official, said this was the first such case in the country following a guideline (link in Chinese) published in July by government bodies including the Supreme People’s Court to promote the establishment of a personal bankruptcy system.

China still doesn’t have a personal bankruptcy law and the statement referred to Cai’s case as a “personal debt clearance case” that followed the same procedure as bankruptcy. Chen said that for the first time, a case explored in an institutionalized way issues related to personal bankruptcy such as limits on a debtor’s liability, and the loss and restoration of a debtor’s rights.

There have been growing calls for a personal bankruptcy system to deal with individuals and entrepreneurs who cannot repay their debts which can run into millions or even hundreds of millions of yuan. But progress has been slow partly due to concerns that some debtors might take advantage of the system to wriggle out of their obligations. There have also been disagreements on key issues such as how much breathing room debtors should be granted.

Urgent need

The need for some kind of individual bankruptcy framework has taken on added urgency amid the economic slowdown, which has left thousands of entrepreneurs mired in debt they can’t repay, and the growing problems of individual defaults in online and peer-to-peer lending. Under Chinese law, individuals who provide personal guarantees for business-related borrowings retain liability even when their companies go bankrupt. In the 1986 Enterprise Bankruptcy Law, China set up a system for businesses to seek debt relief through restructuring and bankruptcy proceedings. However, there is no way for individuals to obtain legal relief from unaffordable debts.

Cai was a shareholder in a Wenzhou company that went bankrupt and he was liable for 2.14 million yuan ($301,500) of its debt which he couldn’t repay because of his own financial difficulties, according to the court statement (link in Chinese). A local court first accepted Cai’s case in August and Wenzhou Chengda Certified Public Accountants was appointed as an administrator to oversee the process.

Taking Cai’s current income and that of his family into account and leaving them with enough money to cover their living expenses, creditors agreed with a plan for him to repay 1.5% of the debt, or 32,000 yuan, within 18 months. Cai also pledged that if his family’s annual income exceeded 120,000 yuan within six years of repaying that portion of his liabilities, 50% of any income over that amount would be used to pay off the outstanding debts owed to the creditors.

There were other conditions attached to the agreement, including a ban on “luxury” consumption or serving as legal representative for any commercial business. His personal credit rating would be reinstated three years after paying back the 32,000 yuan.

Wu Xiaoling, a former deputy governor of China’s central bank and former vice chairwoman of the Financial and Economic Affairs Committee of the National People’s Congress, told Caixin in August that a personal bankruptcy system would not only benefit debtors, but also creditors. It would help creditors get repaid in a fair and transparent way and improve their awareness of the need to lend money “responsibly,” she said.

But establishing such a system still faces many challenges, including how to overcome the lack of a sound personal credit reporting system and lack of transparency regarding the personal assets of many entrepreneurs.

Contact reporter Guo Yingzhe (yingzheguo@caixin.com)

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