(This paper was awarded the Third Prize for Outstanding Paper at the 2022 Annual Conference of the Bankruptcy Law Research Association of the Liaoning Provincial Law Society.)

Summary: In the past, bankruptcy law forums have tended to focus more on the technical and legal aspects of bankruptcy proceedings, while discussions on the intersection of law and politics have been relatively rare. General Secretary Xi Jinping has emphasized the importance of observing and understanding economic and social development phenomena through a political lens. The report to the 20th National Congress of the Communist Party of China prominently highlighted the Overall National Security Concept and the need to “promote the modernization of the national security system and capabilities.” In light of this, this article seeks to analyze, from the perspective of the unity between law and politics, the necessity of guiding corporate bankruptcies with political awareness, the key contents of such guidance, and the organizational implementation thereof. This analysis aims to better prepare for the upcoming new wave of corporate bankruptcies and to further refine the long-term mechanisms for coordinating development and security in corporate bankruptcy work.

Keywords Political awareness; national security outlook; the unity of law and politics; direction, scale, and pace of corporate bankruptcy; modes of corporate bankruptcy; key targets for corporate bankruptcy; joint conference on corporate bankruptcy work 。

With the combined impact of the COVID-19 pandemic, the Russia-Ukraine war, and U.S. interest-rate hikes, China’s economic development is facing tremendous downward pressure. A large number of enterprises have fallen into difficulties, struggling to stay afloat, suffering severe losses, and a new wave of bankruptcies is gradually emerging. Under these circumstances, guiding the implementation of the Enterprise Bankruptcy Law with political awareness and safeguarding the overall interests of our country’s development and security has become an important task before us.

   One The Necessity of Guiding the Implementation of the Enterprise Bankruptcy Law with Political Awareness

    (1) Guiding the implementation of the Enterprise Bankruptcy Law with political awareness is an inevitable requirement for achieving the unity of law and politics. 。

If a company is unable to pay its debts when they become due and its assets are insufficient to cover its liabilities, or if it is unable to pay its debts when they become due and clearly lacks the financial capacity to do so, it may apply to the court for acceptance of its bankruptcy petition and subsequent declaration of bankruptcy, thereby initiating the bankruptcy proceedings. Under the management of the bankruptcy administrator, the company can either shed its burdens and make a fresh start, effectively reviving itself; or it can simply dissolve and liquidate its assets, bringing its operations to an end. On the surface, corporate bankruptcy seems like a straightforward legal issue that can be handled purely according to the procedures and substantive provisions of bankruptcy law. However, in essence, corporate bankruptcy is far from being a mere legal matter—it is both a legal issue and a political one.

In his speech during the 27th collective study session of the 19th Central Political Bureau, General Secretary Xi Jinping pointed out: “Fully, accurately, and comprehensively implementing the new development philosophy is both a work requirement for economic and social development and a highly important political requirement.” Reform, development, and stability—domestic affairs, foreign relations, national defense, governance of the Party, governance of the country, and military management—all are matters of politics, and none can do without politics. Under the Party’s leadership, governing the country and administering state affairs hinges most critically on properly managing various complex political relationships and consistently maintaining the correct political direction for the development of the Party and the nation’s cause. ， General Secretary Xi Jinping’s important speech is, of course, applicable to corporate bankruptcy work. It provides a powerful ideological tool for addressing the coming wave of corporate bankruptcies, grasping the current situation facing corporate bankruptcies, revealing the essence of corporate bankruptcy work, and clearly defining the measures needed to effectively carry out such work.

Currently, corporate bankruptcy proceedings are both a legal issue and a political one, precisely because the law inherently possesses the attribute of serving politics. According to the Marxist view on the nature of law, law is a reflection of the will of the ruling class; it belongs to the superstructure, which is determined by the economic foundation that holds dominant social power, yet must, in turn, serve that very economic foundation. As a socialist country with Chinese characteristics, China’s economic foundation—holding dominant social power—is based on socialist relations of production founded on public ownership of the means of production. It is precisely this economic foundation that has given rise to the legal system of socialism with Chinese characteristics, as well as the political system of socialism with Chinese characteristics, marked by the leadership of the Communist Party of China. On the one hand, since the Party leads the people in governing the country and administering state affairs, it inevitably relies on law as its weapon. The law must play a role in consolidating the foundations, stabilizing expectations, and promoting long-term interests, and the Party’s leadership must be clearly reflected in the implementation of the law.

On the other hand, politics should be conducted within the framework of the law. The laws of our country are formulated under the leadership of the Party and reflect the will of the people. Conversely, the Party itself should take the lead by setting a good example and strictly adhering to the law, governing the country within the legal framework. This is precisely the unity between law and politics.

The unity of law and politics requires that political awareness guide corporate bankruptcy work. We must, in accordance with the Party’s major policies and guidelines and following the Party’s instructions on corporate bankruptcy, engage in coordinated planning, adopt targeted measures, and effectively carry out corporate bankruptcy work.

    (2) Guiding the implementation of the Enterprise Bankruptcy Law with political awareness is an inevitable requirement for putting the Overall National Security Concept into practice.

   On April 15, 2014, General Secretary Xi Jinping pointed out at the first meeting of the Central National Security Commission that we must adhere to the Overall National Security Concept. This concept takes people’s security as its purpose, political security as its foundation, economic security as its basis, military, cultural, and social security as its safeguards, and the promotion of international security as its support—thus forging a path of national security with Chinese characteristics. This is the fundamental essence of the Overall National Security Concept. The report to the 20th National Congress of the Party further elaborated on this idea. Promote the modernization of the national security system and capabilities, and firmly safeguard national security and social stability. the requirements. Clearly, the work of corporate bankruptcy—and indeed the implementation and enforcement of the entire “Enterprise Bankruptcy Law”—are closely linked to the overall national security outlook. Under the guidance of the overall national security outlook, we should comprehensively examine and grasp the current state of corporate bankruptcy work as well as the implementation of the entire “Enterprise Bankruptcy Law.”

First, it should be clearly recognized that the current efforts to handle corporate bankruptcies—and indeed the entire implementation of the Enterprise Bankruptcy Law—are key priorities under the overarching national security outlook and represent an important component in modernizing our national security system and capabilities. Corporate bankruptcy is a legal procedure that, while profoundly disruptive to society, is nonetheless unavoidable. It can reduce the assets of numerous creditors to virtually nothing overnight, rapidly increasing the risk of failure for financial institutions. Moreover, it can turn countless workers into unemployed individuals overnight, plunging tens of millions of families into dire straits in the process. Nevertheless, perfecting the socialist market economic system and ensuring sustained, stable economic development necessitate establishing a system of survival of the fittest. However, the negative side effects of such a system will inevitably pose risks to national security. Particularly in the context of overlapping and compounding domestic and international economic downturns, a wave of corporate bankruptcies is highly likely, and the resulting massive impact on national security will undoubtedly intensify.

Second, we should take the Overall National Security Concept as our guiding principle and clearly define the overall requirements and effective countermeasures for current corporate bankruptcy work as well as for the implementation of the Enterprise Bankruptcy Law. We must recognize that today’s corporate bankruptcies directly affect social security and economic security, and indirectly impact political security and people’s security. We should anticipate the potential impacts and manifestations of current corporate bankruptcies on social and economic security, and proactively prepare the necessary tools and countermeasures. We should also foresee any possible repercussions on political security and people’s security, and make appropriate preparations accordingly. Even if these prepared measures remain unused, they will still be far better than being caught off guard when the crisis strikes.

(3) Guiding the implementation of the Enterprise Bankruptcy Law with political awareness is an inevitable requirement for upholding the people’s position as the principal actors.

Upholding the people’s principal status is an important principle underlying the comprehensive governance of the country according to law, and it also serves as a crucial guarantee for the lawful and orderly implementation of the Enterprise Bankruptcy Law. The fundamental essence of this principle is that the people are both the main actors and the source of strength in governing the country according to law. It is essential that the people recognize that the law is not only a powerful tool for safeguarding their own rights and interests but also a set of behavioral norms that must be strictly observed. When this principle is applied to the current work on enterprise bankruptcy and to the implementation of the Enterprise Bankruptcy Law itself, it requires us to view all groups affected by bankruptcy—including creditor groups and employee groups—as both objects of and active participants in the bankruptcy process. We should patiently explain the law to these groups, clearly communicate the current situation, promptly convey their demands to the government, assist them in overcoming various difficulties encountered during bankruptcy proceedings, and make every effort to choose bankruptcy procedures that minimize losses for these groups. By doing so, we can gain their understanding and support. In this way, all relevant parties involved in enterprise bankruptcy can cooperate with one another, foster mutual understanding, and pool their strengths, thereby ensuring that the bankruptcy process proceeds smoothly and in an orderly manner.

II. The Main Implications of Guiding the Implementation of the Enterprise Bankruptcy Law with Political Awareness

(1) Guiding and steering the direction, scale, and pace of corporate bankruptcies with political awareness.

The direction of corporate bankruptcy is the primary consideration in the implementation of the Enterprise Bankruptcy Law. Corporate bankruptcy is an effective institutional mechanism for maintaining a healthy competitive order in the market. Through bankruptcy proceedings, the principle of survival of the fittest is realized: market entities that have failed in competition are either liquidated and removed from the market or restructured with the introduction of strategic investors, enabling them to start anew with a lighter burden and achieve revival. This is the only correct path for implementing the bankruptcy system. However, the author has observed that in certain regions and organizations—including some state-owned enterprises—some entities have been taking advantage of their affiliated companies or leveraging their close ties with the government to transfer or “allocate” high-quality assets in advance, while consolidating inferior assets and elderly, infirm, and disabled employees into a single entity before declaring bankruptcy. Under the guise of bankruptcy, these entities are actually evading debt repayment. This represents a counter-trend in the implementation of corporate bankruptcy that must be promptly identified and corrected; otherwise, it could lead corporate bankruptcy down the wrong path.

The scale of corporate bankruptcies is a factor of significant impact on national security. Particularly at a time when a wave of corporate bankruptcies is upon us, consciously controlling the scale of bankrupt enterprises is essential to safeguarding national security. On the one hand, the sheer number of bankrupt enterprises is by no means desirable in itself; it is certainly not the case that every enterprise meeting the bankruptcy criteria should be allowed to go bankrupt. On the other hand, we must firmly oppose using national security as an excuse to refuse or obstruct enterprises that meet bankruptcy conditions from undergoing lawful bankruptcy procedures—and even to allow large numbers of “zombie enterprises” to accumulate. The bankruptcy of enterprises in any given region, industry, or sector must never be left to chance. Rather, under the guidance of the overall national security outlook, we must strive to find the optimal balance in the number of bankrupt enterprises that meets national security requirements. First, we should examine the number of bankrupt enterprises from the perspective of economic security. The number of corporate bankruptcies in a given region over a year should be limited to a scale that the region’s economic security risks can reasonably bear. This tolerance for economic security risks should take into account factors such as financial risks and risks to industrial and supply chains within the region. Second, we should also consider the number of bankrupt enterprises from the perspective of social security. The upper limit on the number of corporate bankruptcies in a region over a year should be calculated based on the number of workers who lose their jobs as a result of these bankruptcies, thereby enabling us to gauge the potential actual unemployment rate in the local area and ensuring that this rate does not exceed the region’s officially surveyed unemployment rate for that year.

The rhythm of corporate bankruptcies refers to the frequency with which businesses go bankrupt, as well as the number of companies that go bankrupt simultaneously within the same time frame. Mastering this rhythm is an art in itself; when the rhythm is disrupted and chaotic, it can lead to social unrest. Conversely, a steady and measured rhythm can orchestrate a magnificent symphony of corporate rebirth and renewal.

(2) Guiding and determining the choice of corporate bankruptcy procedures through political awareness.

China’s Enterprise Bankruptcy Law provides for three types of bankruptcy procedures: bankruptcy liquidation, bankruptcy reorganization, and bankruptcy reconciliation. From the perspective of national security, bankruptcy liquidation—essentially the “death” of a corporate legal entity—is the bankruptcy “exit mechanism,” which can cause significant social upheaval and exert substantial impacts on social stability and economic operations. Unless absolutely necessary, this type of bankruptcy procedure should be avoided. Bankruptcy reconciliation requires the debtor to seek agreement from creditors on matters such as debt forgiveness or deferred repayment. In practice, however, creditors often refuse to accept such arrangements, making this approach quite challenging. By contrast, bankruptcy reorganization represents the core of the bankruptcy “rescue mechanism.” It involves bringing in strategic investors, thereby combining societal resources with the existing assets of the bankrupt enterprise, revitalizing high-quality assets, increasing the repayment ratio, enabling the debtor to start anew with a lighter burden, and ultimately achieving its rebirth. This bankruptcy procedure best meets national security requirements and represents the most effective use of bankruptcy tools. In particular, the conditions for bankruptcy reorganization are relatively lenient; in addition to the original two bankruptcy criteria, a third condition—“a clear likelihood of losing the ability to repay debts”—has been introduced. As a result, even enterprises that have not yet reached an absolute dead end can apply for bankruptcy reorganization as soon as they encounter liquidity difficulties. Moreover, the applicants for bankruptcy reorganization are diverse: they can include creditors, debtors themselves, or shareholders holding at least one-tenth of the debtor’s registered capital. This flexibility makes the process more adaptable and easier to implement. Therefore, we should vigorously promote and actively guide enterprises toward adopting this bankruptcy procedure whenever possible. However, it is important to note that implementing bankruptcy reorganization requires two essential preconditions: First, the bankrupt enterprise must possess high-quality assets—a material foundation that allows these assets to be revitalized; otherwise, only bankruptcy liquidation would be an appropriate option. Second, the enterprise must attract strategic investors. Only with substantial additional investment from strategic investors can bankruptcy reorganization proceed smoothly.

In practical terms, there is a strategic approach that can be adopted: first file for bankruptcy liquidation, and then, under the supervision of the administrator, transition to subsequent reorganization. The advantage of this strategic approach is that it makes it easier to persuade creditors to accept the draft bankruptcy reorganization plan. After bringing in a strategic investor—and given that the strategic investor will allocate part of its investment toward settling creditors’ claims—the repayment ratio is bound to be higher than the original repayment ratio when the bankruptcy liquidation was initially accepted. As a result, ordinary creditors are more likely to vote in favor of the draft plan when it comes up for approval.

In the process of bankruptcy reorganization, it is also important to note that, according to the Labor Law, enterprises are prohibited from making economic layoffs in five specific situations involving employees: (1) Workers engaged in operations involving occupational disease hazards who have not undergone pre-departure occupational health examinations, or individuals suspected of having an occupational disease who are undergoing diagnosis or medical observation. (2) Employees who have contracted an occupational disease or sustained work-related injuries within the enterprise and have been certified as having lost or partially lost their working capacity. (3) Employees who are ill or injured non-work-relatedly and are within the prescribed medical treatment period. (4) Female employees who are pregnant, in the postpartum period, or breastfeeding. (5) Employees who have continuously worked at the enterprise for 15 years or more and are less than 5 years away from the statutory retirement age. For these five categories of employees, appropriate arrangements must be made, and their employment relationships may not be terminated. Furthermore, efforts should be made to maintain employment stability among the workforce as much as possible, ensuring a smooth and orderly completion of the bankruptcy reorganization tasks.

(3) Use political awareness to guide and identify key targets in enterprise bankruptcy cases.

Key targets for bankruptcy This refers to bankrupt enterprises that may pose significant risks to national security. Based on historical experience, the key targets of bankruptcy primarily fall into three categories: One is Bankruptcy of financial institutions. In recent years, several high-profile cases of financial institution bankruptcies have occurred—for instance, the bankruptcy of Baoshang Bank. On November 23, 2020, the No. 1 Intermediate People’s Court in Beijing ruled to accept the bankruptcy liquidation case of Baoshang Bank. Another example is the approval on August 6, 2022, by the China Banking and Insurance Regulatory Commission in principle to initiate bankruptcy proceedings against Liaoyang Rural Commercial Bank Co., Ltd. and Liaoyang Taizihe Rural Township Bank Co., Ltd.; subsequently, the Shenyang Intermediate People’s Court issued a ruling accepting the bankruptcy liquidation applications filed by these two banks. As evidenced by the bankruptcy experiences of these three banks, the state has been extremely cautious in handling their bankruptcies, with most of them undergoing a process that includes takeover, restructuring, and finally bankruptcy. This caution stems from the fact that the bankruptcy of such institutions involves a large number of depositors and is closely linked to banking financing—a vital artery of the economy. If handled improperly, it could pose significant risks to national security. Second is The bankruptcy of special enterprises in specialized industries. For example, Evergrande Group, currently a leading developer in the real estate sector, experienced a major financial crisis in July 2021, resulting in a breakdown of its cash flow. Yet, to date, it has not declared bankruptcy. This is because the real estate development industry—being a pillar of economic growth—is now entering a transitional phase characterized by the policy of "housing is for living, not for speculation." Particularly at this critical juncture, when the central government emphasizes "ensuring timely delivery of housing and improving people's livelihoods," whether Evergrande Group should go bankrupt is no longer merely a legal issue; rather, it has become a major political question that profoundly affects national security and social stability. Therefore, any decision on Evergrande’s fate must be made only after thorough risk assessment, careful deliberation, and comprehensive preparation. Third is The bankruptcy of enterprises involving a large number of creditors and enormous debts—such as that of the Liaoning Yilishen Tianxi Group—has drawn widespread attention. This enterprise, posing as a franchise model for raising ants on behalf of farmers, defrauded residents from both within and outside the province of over 20 billion yuan in so-called security deposits, affecting 1.2 million farmers. After its bankruptcy in 2007, the incident triggered mass protests involving tens of thousands of farmers, significantly impacting social stability across the entire province.

For the three categories of key bankruptcy targets mentioned above, under the leadership of the local Party committees, all relevant parties—including government agencies, courts, enterprises, and society—should participate and, guided by the overall national security outlook, carry out precise identification and determination of these key bankruptcy targets. Subsequently, we should coordinate to develop effective response plans and, in accordance with these plans, collaborate in a well-organized, phased manner, ensuring a smooth and orderly transition for these enterprises as they undergo bankruptcy.

3. Lead the organization and implementation of enterprise bankruptcy work with political awareness.

(1) Enhance awareness and strengthen the initiative to perform corporate bankruptcy work from different perspectives. Thoughts guide action. Dispelling the vague perceptions about corporate bankruptcy is an important task for the entire society, including Party committees and government authorities, and is also an inevitable requirement for implementing the overall national security outlook.

Due to the extremely limited culture of legal protection for bankruptcy in our country, a vague understanding of corporate bankruptcy is widespread throughout society. For example, some people believe that corporate bankruptcy is solely a matter for the courts—a case-by-case legal procedure entirely unrelated to Party committees, government agencies, or other sectors of society. Others view corporate bankruptcy as an “unlucky” and “bad” event that should be avoided at all costs—indeed, the fewer bankruptcies there are, the better. Still others hold the view that even if a company has already reached the brink of bankruptcy, it’s better not to declare bankruptcy at all than to do so, and that every extra day of delay is preferable. These misconceptions pose significant obstacles to perfecting the bankruptcy legal protection system and represent major shortcomings in improving the current business environment. It is imperative that we make concerted efforts to clarify these misunderstandings.

We must fully recognize that enterprise bankruptcy work is a comprehensive reflection of both the “exit mechanism” and the “rehabilitation mechanism” within the socialist market economic system. It is an important condition for improving the business environment and attracting investment; it serves as an effective platform for promoting industrial restructuring and fostering technological advancement; and it provides a meaningful avenue for redeeming “well-intentioned but unfortunate” debtors. Far from being a “bad” thing, enterprise bankruptcy is actually a good thing. All sectors of society—including Party committees, governments, courts, and enterprises—should relearn and reassess enterprise bankruptcy work, thereby enhancing their awareness and initiative in performing this task from their respective perspectives.

(2) Strengthen leadership and establish a long-term mechanism for mutual coordination and synergy.

The Party's leadership is the fundamental guarantee for doing a good job in enterprise bankruptcy proceedings. It should be placed under the National Security Committees of Party committees at all levels. Establish a joint conference on corporate bankruptcy work, responsible for overall coordination and guidance of corporate bankruptcy proceedings. Its office operates jointly with the Office of National Security. This joint conference should be chaired by a responsible official from the Party committee and government at the same level. Members of the conference include representatives from the courts, the State-owned Assets Supervision and Administration Commission, the Commission of Economy and Information Technology, the Commission of Housing and Urban-Rural Development, the Bureau of Natural Resources, the Market Supervision Administration, the People's Bank of China, the China Banking and Insurance Regulatory Commission, the Human Resources and Social Security Bureau, the Bureau of Business Environment, the Lawyers Association, and the Federation of Industry and Commerce. The joint conference should establish a regular meeting system, holding meetings regularly as well as on an ad hoc basis, listening to reports from relevant parties, formulating plans for bankruptcy work, addressing major issues encountered in enterprise bankruptcy proceedings, studying and determining specific measures to ensure the smooth implementation of enterprise bankruptcies, and conducting annual performance evaluations of each member unit. In this way, the Party’s leadership will be reflected in all aspects and throughout the entire process of enterprise bankruptcy work, enabling each member unit to fully perform its functional roles and establishing a long-term, coordinated, and collaborative operational mechanism for enterprise bankruptcy work.

(3) Improve the administrator system and leverage the administrator’s pivotal role in bridging the gap between upper and lower levels and balancing internal and external interests.

The administrator plays a crucial role in corporate bankruptcy proceedings; both the Party’s leadership and statutory provisions must be implemented through the administrator’s actions. Therefore, whether the administrator can effectively fulfill their role is the key to determining whether the intended objectives of bankruptcy can be achieved.

One is The administrator should be granted the power to make external recommendations. Given the unique characteristics of corporate bankruptcy, it is simply impossible to complete bankruptcy proceedings solely through internal company operations; such proceedings inevitably require the support and assistance of the government and relevant authorities to ensure smooth implementation. However, the "Enterprise Bankruptcy Law" only confers upon the administrator internal functions within the bankrupt enterprise—granting them authority to manage, decide, and execute matters pertaining to the enterprise’s internal affairs—but remains silent on any role or authority regarding external matters. Even when the administrator reports issues requiring government support to the court that has approved the bankruptcy, the lack of an effective coordination mechanism between government agencies and the courts often makes it difficult to achieve the desired outcomes. Therefore, the administrator should be endowed with the power to make external recommendations: whenever encountering challenges that necessitate government support, the administrator should have the right to directly report the situation and submit recommendations to the government and its relevant departments, thereby seeking solutions to these problems.

Second is It is imperative to strengthen training for insolvency administrators. Given the current uneven quality of the administrator workforce, courts, bankruptcy administrator associations, and other relevant institutions should step up efforts to provide comprehensive training for administrators—covering both technical and professional expertise as well as knowledge related to political and national security—so as to enhance their overall competence and capabilities and better meet the demands of the heavy workload associated with corporate bankruptcy proceedings. On this basis, we should move toward developing a profession-oriented system for insolvency administrators, establishing a qualification and certification framework that places administrators on a path of specialization and professionalization.

Third is Management of the performance evaluation of administrators should be strengthened. Relevant authorities should conduct evaluations and assessments of administrators’ actual bankruptcy handling work, publicly release the assessment results, and implement a system of rewarding excellence and weeding out underperformers.

About the Author:

Chen Shaomin

A member of the Communist Party of China, senior advisor at Liaoning Tongfang Law Firm and lawyer at its Hainan branch.