The bustling coastal city of Shenzhen in Guangdong Province, south China, has a special place in the country's economic development. This is where the first special economic zone was established in 1980.

Now the industrial hub is poised for another signpost. The first personal bankruptcy regulations are to go on trial here this year, which may pave the way for other cities to follow suit.

The seeds of the experiment were sown in 2010, two years after the global financial crisis. Before the catastrophe, Nanling, a village in Shenzhen, had been developing at a tremendous pace since reform and opening up began. But the crisis damaged the real economy and forced an increasing number of businesses to shut down, with their owners leaving the village.

Zhang Yubiao, Secretary of the Communist Party of China in Nanling, saw rising cases of personal bankruptcy and people becoming submerged in debt for their lifetime. Zhang, also a deputy to the National People's Congress (NPC), the national legislature, submitted a proposal to the NPC annual session in 2010 for a personal bankruptcy law.

"There will be more personal debt problems. The law should give a second chance to those who are honest but unfortunate," Zhang told The Economic Observer.

A long pursuit

The Enterprise Bankruptcy Law was promulgated in China in August 2006 but to the regret of many, it didn't have any provisions for personal bankruptcy.

"Clauses concerning personal bankruptcy were excluded from the final version of the Enterprise Bankruptcy Law, and no separate personal bankruptcy law was enacted. But over the past decade, the issue remained a hot topic," Li Shuguang, one of the drafters of the Enterprise Bankruptcy Law and dean of the Graduate School of China University of Political Science and Law (CUPL), told The Economic Observer. "This is a very complicated issue, so the progress has been very slow."

But finally, the personal bankruptcy mechanism will see its first trial in Shenzhen 14 years after the corporate law was enacted.

On June 2, the draft Regulations of Personal Bankruptcy of Shenzhen was issued to solicit public opinion. With 157 articles in 13 chapters, the draft includes provisions on the principles, detailed procedures and legal responsibilities concerning personal bankruptcy.

"Shenzhen is always willing to make innovations, and the city has the legislative foundations," said Lu Lin, a partner at the Grandall Law Firm in Shenzhen, who has been handling bankruptcy-related cases since 1994.

Forestalling financial risks

The regulations aim at standardizing personal bankruptcy procedures, regulating the rights and obligations between debtors and creditors or other interested parties, and giving a second chance to honest debtors, according to Shenzhen Municipal People's Congress.

"Establishing a personal bankruptcy system will relieve entrepreneurs of their worries, stimulate the enthusiasm of market players, encourage innovation and tolerate failure, so that startups and innovation will continue to be the most fundamental driving force for Shenzhen's development," an official document explaining the regulations says.

In addition to protecting individual business owners, another important role of the personal bankruptcy system is forestalling financial risks.

"The personal bankruptcy system will help establish a social credit system, which is needed by today's business society. Absence of a social credit system will lead to various financial risks," Cao Qiyang, a judge of the bankruptcy division of Shenzhen Intermediate People's Court, told Legal Daily.

The bankruptcy division, also the first of its kind in China, was set up on January 14, 2019. The trial in liquidizing personal debts is a preparation for the city's personal bankruptcy regulations, Chen Jingshan, a professor with the Civil, Commercial and Economic Law School of CUPL, told Legal Daily. It indicates that the establishment of a personal bankruptcy system in China is imperative, Chen added.

A bird's-eye view of the Shenzhen Special Economic Zone (XINHUA)

Limited debt exemption

Under the regulations, debts are not fully exempted, only conditionally and partially, Liu Junhai, a law professor with Renmin University of China, explained.

Liu said that the debts of a natural person will not be directly exempted after declaring bankruptcy; debtors will be exempted only after a supervision period if certain conditions are met. In this period, their consumption will be strictly limited.

According to the draft regulations, a person can apply for exemption of remaining debts only three years after declaring bankruptcy. During this period, the person must report regularly to the bankruptcy administration authority his or her personal incomes, expenditures and assets.

Liu said the personal bankruptcy system will not only help creditors to be partially compensated on a fair and reasonable basis, but also free honest debtors from the real difficulties of high debts.

"The personal bankruptcy system will better help those honest but unfortunate debtors in accordance with law. These debtors abide by the principle of honesty and good faith, but become debt-ridden due to reasons such as financing failure, a break in the capital chain or fraud," Liu added.

"The absence of a personal bankruptcy system has caused serious evasion of debts, such as unknown whereabouts of debtors, which leads to instability in the social and economic orders," Chen said, adding that the personal bankruptcy system will enable all debtors to be remedied on a fair and reasonable basis, and avoid violations of justice. A reasonable personal bankruptcy system will help those starting businesses to take risks with confidence.

Nationwide practice

As the Chinese economy faces increasing downward pressure due to the novel coronavirus outbreak, the personal bankruptcy system may become part of the social security system to address possible depression. After the icebreaking Shenzhen regulations, will there be a nationwide system to declare personal bankruptcy?

Liu hopes that a separate personal bankruptcy law will be drafted to clarify issues such as the legislative goals, principles and procedures of personal bankruptcy, protection of creditors and bankruptcy reconciliation.

However, Chen feels a separate law is not necessary. Adding a section on personal bankruptcy to the current legal bankruptcy system is enough.

Regardless of whether a separate law is needed, the biggest challenge for the personal bankruptcy system is the lack of supporting systems.

Lu, who has been pushing forward personal bankruptcy legislation in Shenzhen, said inquiring about personal assets and identifying them will be a difficulty for the implementation of the personal bankruptcy system as assets have become increasingly diversified.

Liu thinks Shenzhen can provide some replicable experience for a future nationwide system. The process of legislation should be transparent and incorporate experts' and public opinions as far as possible.

He also suggests legislators should evaluate the interests of all the players in the personal bankruptcy system, from the honest but unfortunate debtors to their family members, employers and creditors.

(Print Edition Title: Matter of Life and Debt)

Copyedited by Sudeshna Sarkar

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