Q&A: An American in China

Deryck Palmer on updating the nation's bankruptcy laws

Published in Corporate Counsel Edition® - 2009 — March 2009

In its quest to become a full-fledged member of the World Trade Organization, China assembled a group of foreign experts to democratize its finance and commerce laws. In 1999, Deryck Palmer of New York's Cadwalader Wickersham & Taft was asked to join the coalition as an American bankruptcy expert, and subsequently made several trips to Beijing and other Chinese cities. He details his experience in his latest book, The PRC Enterprise Bankruptcy Law: The People's Work in Progress, co-authored with firm partner John Rapisardi. The new law took effect June 1, 2007, but Palmer notes that only time—and maybe a worldwide recession—will reveal its impact.


Super Lawyers: Can you discuss your observations on the interplay between the previous bankruptcy laws in China and the ones that you were involved with?

Deryck Palmer: There is a reorganization provision in the new bankruptcy code that did not previously exist. By reorganization provision I'm talking about non-liquidation provisions. The new code also adopts a number of the comments and prevalent provisions such as debt financing. It allows for the debtor in possession to remain in control of the operations; it allows for the use of creditors committees in a more effective way; and those changes I think are very and clearly traceable to what I would, for lack of a better word, call a U.S.-based system.

 

Do you see those revisions to the Chinese laws having any impact on business interests here in the United States?

For a U.S. investor or lender, it is now more familiar in some respects. People understand those provisions because they have seen them in our code. So, in that respect, assuming the provisions are implemented and interpreted the same way they are in the U.S., I don't think it would be unusual for an American to look at it and say, "Oh, I understand how that works. I understand the risks that are involved in that investment or in making that loan."

 

Have you had any word on how the Chinese courts have been interpreting the new code?

We've seen two cases so far, and I think it is still too early to call one way or another. The courts are still feeling their way through the implementation of the new code.

 

Could you briefly explain how the law may apply differently for the state-owned enterprises versus non-state-owned enterprises?

Some state-owned enterprises are exempt by the provisions of the code because there's some policy bankruptcy that applies to those entities. Those entities will continue to be administered under the policy bankruptcy, and when the policy bankruptcy law expires, we have two choices. They can either be incorporated under the new bankruptcy code, or the policy bankruptcy statute can be extended. I suspect they will eventually be incorporated under the new bankruptcy code.

 

Do you see that harbor provision and the possibility of eventually including the state-owned enterprises into the entire framework of the current bankruptcy provision as a step by the Chinese away from the socialist-market economy, or how do you see them trying to negotiate that balance?

The balance is a delicate one because the state-owned enterprises tend to be the larger corporate entities in China and one has to recognize that there is tremendous national interest in how those entities are dealt with. So, from my point of view, one has to be mindful that because they hold such a prominent place in the Chinese economy and the Chinese have such a strong interest in their restructuring that those entities, when they are restructured under the new bankruptcy code, it will probably help us truly test and define whether the new law is being implemented as we anticipated.

 

What was the Chinese legal culture like?

The draftspersons that we dealt with were extremely international in their outlook. I thought they had done their work in studying the U.S. system, the German system, the British system, the Australian system, and several others. I think they were trying to find elements of each of the international bankruptcy systems that worked and incorporate the best of each into their own bankruptcy code. It is a process that I thought was very thorough in how they went about it.

 

Has being involved in that process informed your own practice and how you approach bankruptcy solutions here in the U.S.?

You can never go through this process and not recognize the profound impact it has on giving you a more universal approach to problems because you clearly understand how different systems can deal with the same problem in different ways. What it also does, quite frankly, is make you examine the principles of why we do things [the way] we do in the United States. For example, in the United States, we have a relatively modest priority for wage earners. But in other countries, those priorities get satisfied before you even pay secured debt. So if I'm an investor or a lender in a country that gives a 100 percent priority to wage and employee claims, I'm going to think long and hard about how that impacts the loan I'm about to make or the investment I'm about to make because it will be subordinated to both claims. Someone made a policy decision that those claims should get such a senior priority and should have in some cases unlimited amounts, whereas in the U.S. we capped it by dollar amount and we capped it by time-frame-only claims during a certain period and up to a certain dollar amount. It was an American solution to what was perceived as an American problem but it's really a global problem and dealt with very differently by other systems.

 

What are some of the biggest challenges facing the Chinese now as they work on implementing this new code and moving forward in their inclusion in the WTO, and their growing importance on the global economic scale?

The true test will come during the first recession in China because it is in those situations where you have a large volume of debtors that you truly understand how the courts across the land are going to interpret the statute and implement it. That has not occurred yet in China, so we are still in the early stages of implementation. I am however very optimistic that China is committed to having a uniform bankruptcy law that makes clear to creditors as well as investors what their rights are and what the downsides are. I am equally clear that China will protect the rights of its employees because it believes that is a priority. In their culture, the worker is a very important component, and they will continue to stress how important by the laws that are fabricated to protect their rights.

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