CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) and PRC law, as long as the award does not fall within the grounds of refusal of enforcement specified in the New York Convention (eg, invalid arbitration agree- ment, improper arbitration procedure, exceeding the scope of arbitration), Chinese courts only conduct a procedural review without a retrial of the merits. After the review is approved, enforcement of the judgment can be carried out. 6.4 A Foreign Lender’s Ability to Enforce Its Rights Cross-Border Capital Flow Supervision Principal, interest and other proceeds recovered by foreign lenders must be settled or remitted through designated foreign exchange banks. Failure to com- plete foreign debt registration or fund use verification under the Foreign Exchange Administration Regula- tions may cause remittance delays or restrictions. Data Compliance Requirements Under the Data Security Law, if customer informa- tion and transaction data related to loans/securi- ties are considered to be “important data”, cross- border transfer requires a security assessment. The unauthorised transfer of data may restrict data use and hinder access to information during enforce- ment. Sovereign Immunity and Special Entity Restrictions If the guarantor is a state-owned enterprise or govern- ment-related entity, its core assets for public services may be subject to sovereign immunity or administra- tive control. Disposal requires additional approval, potentially delaying enforcement. 7. Bankruptcy and Insolvency 7.1 Impact of Insolvency Processes Automatic Stay and Enforcement Restrictions Under the Enterprise Bankruptcy Law of the PRC and related judicial interpretations, once a debtor enters bankruptcy proceedings, the court assumes unified management of the debtor’s assets and generally imposes an automatic stay of enforcement against individual creditors. For secured creditors, this means
that even if the debtor defaults, they cannot immedi- ately pursue independent recovery through auction or disposition of the collateral. The court may restrict any separate enforcement actions to protect the interests of all creditors and maintain the ongoing operations of the debtor’s business. Priority Rights of Secured Creditors Although enforcement may be temporarily restrict- ed during bankruptcy proceedings, the law grants secured creditors priority rights over bankruptcy assets. Specifically, properly registered or perfected mortgages, pledges, receivables pledges, and equity pledges allow secured creditors to recover from the proceeds of the relevant collateral before unsecured creditors. However, the exercise of these priority rights remains subject to supervision by the bankruptcy administrator and the court. Any proceeds exceeding the debt amount are generally required to be returned to the bankruptcy estate and distributed according to the bankruptcy process. 7.2 Waterfall of Payments Bankruptcy Expenses and Administrative Claims The debts that are paid first in a company’s insolvency are bankruptcy expenses and administrative claims. These include the remuneration of the bankruptcy administrator, costs for preservation and disposal of assets, and litigation or arbitration expenses. These claims have the highest priority because they are directly related to the proper conduct of the bank- ruptcy proceedings. Employee Wages and Social Security Claims Next in priority are employee claims, including wag- es, social insurance contributions, housing provident fund, and other statutorily mandated employee ben- efits. These claims are specially protected by law to safeguard employees’ basic livelihood and maintain social stability. Taxes and Government Claims The third priority is given to taxes and other govern- ment claims that are legally payable. This includes national taxes such as value-added tax, corporate income tax, and stamp duties, as well as legally imposed fees or fines payable to local authorities.
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