A Milestone in the Evolution of China’s Bankruptcy Law: Brief Comments on the EBL Draft 2025

On 12 September 2025, China’s long-debated bankruptcy law reform reached a significant milestone when the Legislative Affairs Commission released the Enterprise Bankruptcy Law (Draft Revision) 2025 (Draft 2025) for public consultation, following its first reading at the 17th Session of the Standing Committee of the 14th National People’s Congress.

In this post, I will outline the background to the proposed reform and highlight its key features.

Historical Background

The Draft 2025 will mark China’s fifth bankruptcy law in the past 120 years, and the third since 1949. Its evolution reflects the country’s transformation from an agrarian society to a market-oriented economy, alongside a profound shift in attitudes toward debt. Where debtors were once criminalized and no culture of discharge existed, concepts such as forgiveness, corporate rescue, and alignment with international standards are now broadly accepted.

The EBL 1986, introduced under a centrally planned economy, primarily served as a punitive tool against failing state-owned enterprises (SOEs). Cases were handled by liquidation committees formed by local governments, relying heavily on administrative power. With the growth of the market economy in the 1990s, it soon became obsolete. Driven by China’s WTO accession, the EBL 2006 introduced modern procedures—liquidation, settlement, and reorganization—and diverse case administration models, including professional administrators and allowing for the possibility of the debtor remaining in possession (‘DIP’). It marked a decisive shift toward international norms and greater reliance on market forces. Yet eighteen years of practice have exposed its limits, particularly during the supply-side reforms of 2015, which tasked bankruptcy law with addressing ‘zombie enterprises’. The surge in cases highlighted gaps in clarity and tools. The Draft 2025 is designed as a comprehensive response to these challenges.

Key Features of the Draft 2025

The Draft 2025 explicitly emphasizes the role of bankruptcy law in supporting China’s market economy. Article 1 now states the Law’s purpose as ‘promoting the survival of the fittest and the optimal allocation of resources among market entities, and preventing and mitigating major risks’. This addition highlights a growing recognition that effective economic governance depends on robust debt management.

• Establishment of a Quasi-Consumer Bankruptcy Regime

For decades, there has been strong public demand in China for a nationwide consumer bankruptcy law. In practice, it is common for shareholders and directors to personally guarantee their companies’ debts, yet under the EBL 2006 no mechanism existed to discharge such liabilities. Likewise, non-commercial individuals caught in debt have long sought relief through a personal insolvency regime. The absence of such a system has created major difficulties in judgment enforcement when natural persons are insolvent—a problem widely referred to as the ‘enforcement dilemma’.

In response, the Supreme People’s Court has taken the lead in promoting personal bankruptcy reform, an initiative supported by local pilot programs in several southern provinces. However, the public has also expressed concern that personal bankruptcy could be misused as a means of debt evasion.

The Draft 2025 introduces a quasi-consumer bankruptcy framework, most notably by defining the category of ‘enterprise-related individual debtor’ and creating a mechanism for debt discharge within enterprise bankruptcy proceedings. While limited in scope, this development represents an important milestone on China’s path toward a comprehensive personal bankruptcy regime in the future.

• Improvement of Reorganization

Reorganization was one of the core innovations of the EBL 2006, yet over the past decade courts and practitioners identified numerous gaps and ambiguities. A notable feature of the Draft 2025 is its willingness to incorporate these practical lessons directly into the law. Key reforms include: 

1. Priority for new finance – Reorganization financing now ranks immediately below bankruptcy expenses. Practitioner expenses for investigating and administering the estate are expressly included as bankruptcy costs.
2. Public hearings – Optional hearings may be held before case acceptance and before plan confirmation, allowing stakeholders to voice their views.
3. Pre-filing restructuring – Out-of-court restructuring negotiations are encouraged, and resulting agreements may be recognized as part of the reorganization plan.
4. New debtor-in-possession (DIP) disclosure rules – The DIP (or administrator) must disclose information to stakeholders. The draft also specifies conditions for terminating the DIP model.
5. Investor participation – The rights and confidentiality obligations of outside investors are more clearly defined.
6. Shareholder voting – Shareholders’ votes are treated only as reference points for the court, rather than as determinative in relation to the outcome, so that shareholders will lose the chance to veto the plan.
7. Plan supervision – Administrators are formally entrusted with detailed oversight duties during implementation.
8. Tax treatment – Discharged debt will not be treated as taxable income, thereby avoiding the paradoxical result that greater relief through debt discharge would otherwise increase the debtor’s tax burden.

• Creation of Specialized Regimes

Driven by urgent practical needs and the goal of aligning with international standards, the Draft 2025 introduces specialized regimes tailored to different subjects, including simplified procedures for SMEs, group enterprises, financial institutions, and cross-border insolvency. In what follows, I will provide a more detailed discussion of two of these areas: group companies and cross-border insolvency.

1. Group insolvency.  Under the Draft 2025, group companies may be subject to substantive consolidation where, for example, corporate personalities are so commingled that they cannot be distinguished, impairing creditors’ rights, or where affiliated enterprises are created for fraudulent purposes. Applications may be filed by the debtor, its shareholders, creditors, or an administrator of an affiliated enterprise. Jurisdiction lies with the court at the domicile of the enterprise exercising core control. The court must notify stakeholders, hold a public hearing, and decide within two months whether consolidation should proceed. If granted, substantive consolidation extinguishes inter-company debts, pools the assets of all affiliated enterprises into a common estate, and distributes proceeds to all creditors on a pari passu basis. The acceptance date fixes the reference point for all procedural effects, and any reorganization or debt-adjustment plan applies uniformly across the group.

   Where the criteria are not satisfied, procedural consolidation remains available, enabling coordinated proceedings without eliminating inter-company debts or merging estates.

   The draft also extends these mechanisms to the quasi-consumer bankruptcy regime, allowing individual debtors’ liabilities to be consolidated within enterprise procedures.

2. Cross-border insolvency. Under the EBL 2006, cross-border insolvency was confined to a single, declaratory rule in Article 5, which proved inadequate to address the complexity of global insolvency cases. 

   The Draft 2025 makes a major leap forward by transforming this single provision into an entire Chapter 14, comprising five articles. These provisions cover: (i) the scope and objectives of cross-border insolvency; (ii) jurisdictional rules; (iii) recognition and judicial assistance in relation to foreign judgments and proceedings, including creditor ranking; (iv) coordination of distributions between parallel domestic and foreign cases; and (v) the primacy of international treaties.

   Although the draft draws inspiration from the UNCITRAL Model Law on Cross-Border Insolvency, it stops short of adoption. Instead, it offers a more pragmatic, restrictive framework. For example, financial institutions are excluded, reciprocity is explicitly required, and recognition of foreign proceedings is conditioned on the absence of discriminatory provisions against Chinese creditors. The draft also excludes foreign tax and social claims from recognition, and builds in domestic priority rules to ensure statutory claims within China are satisfied before distributions are made to foreign creditors.

   At the same time, key similarities with the Model Law remain: foreign creditors can participate in domestic cases, foreign insolvency representatives may be recognized, public policy exceptions are preserved, and mechanisms exist to prevent double recovery.

Looking Ahead

The EBL Draft 2025 represents the most ambitious reform of China’s bankruptcy regime since 2006. While retaining the overall structure of the EBL 2006, it introduces major innovations—such as quasi-consumer bankruptcy, group insolvency, and cross-border rules—that reflect both the growing sophistication of China’s market economy and the pressing needs of practice.

The legislative process remains ongoing: the draft will undergo public consultation and review by the NPC Standing Committee before potential adoption. If enacted, it will reshape China’s debt-resolution landscape, offering clearer mechanisms for corporate restructuring, fairer outcomes for creditors, and stronger alignment with international standards. The reform carries wide implications for enterprises, investors, and creditors, both within China and across global markets.

Xiahong Chen is Academic Visitor at the Faculty of Law, University of Oxford, and Fellow of the Research Center of Bankruptcy Law and Enterprise Restructuring, China University of Political Science and Law. The author was an academic member of the drafting panel under the NPC Financial and Economic Affairs Committee, which contributed to the preliminary research underpinning this reform and participated in the drafting process