The Dilemma of Reorganization of Micro and Small Enterprises in China and its Legislative Responses

Abstract

China’s current bankruptcy law has defects such as a narrow scope of application, large-enterprise-oriented reorganization rules, undiversified reorganizing approach, and deprivation of debtor’s right to operate in reorganization proceedings, which result in the inability of effective application of China’s bankruptcy law for some micro and small enterprises, insufficient institutional supply for reorganization proceedings for micro and small enterprises, and difficulties in commencing and promoting reorganization proceedings for micro and small enterprises. It has seriously affected the judicial practice of reorganization of micro and small enterprises in China. In order to break through these difficulties, literatures and judicial practices in China mainly focus on the establishment of summary procedures. However, most of the current explorations of summary procedures in China primarily focus on the external appearance of the size of the debt, thus only involve the streamline of procedural requirements of current bankruptcy law, rarely involve the reform of substantive rules. Moreover, most summary procedures are not applicable to reorganization process. Therefore, plenty of difficulties regarding to reorganization of micro and small enterprises still remain unresolved. To address the issues faced by China’s micro and small enterprises effectively with respect to reorganization, China’s future legislation should go beyond the current misconception of focusing only on the appearance of debt size and pining all the hopes on tinkering with the existing bankruptcy rules by shearing some procedural requirements. Instead, legislation in China should consider the fundamental causes of those difficulties rationally, focus on the unique legal attributes of micro and small enterprises that distinguish them from large enterprises, such as the commonality of ownership and management, the lack of liquidity of ownership and management, and the limited resources of micro and small enterprises, and explore the unique challenges and special reorganization needs arise from those legal characteristics. On this basis, legislation in China should customize tailor-made reorganization proceedings accommodate micro and small enterprises, provide special provisions with respect to the application of scope, the approach of reorganization, the proposal, voting and approval requirements of reorganization plan, meanwhile, build a mechanism for procedural coordination of linked business and individual bankruptcy proceedings, and establish a convenient and efficient reorganization proceedings that are fully responsive to the legal features of micro and small enterprises.