Chinese Company Law continued from page 13
This change removes longstanding barriers in bankruptcy and reorganization, particularly for debt-to-equity swaps. Under the old framework, reorganization investments recorded as capital reserves could not offset losses, discouraging creditors due to prolonged recovery timelines. The revised law shortens distribution cycles, boosting creditors’ willingness to engage in swaps and reducing reorganization investors’ cash costs.
Administrators can now optimize reserve fund use, create more attractive reorganization plans, and increase the success rate of restructurings, making this amendment a significant step forward for corporate recovery.
Enhanced Liability of Directors, Supervisors and Officers
Directors, supervisors, and officers( DSOs) now face expanded duties, including enhanced fiduciary obligations, stricter compliance requirements, and responsibilities for maintaining capital adequacy. They also bear joint or compensatory liability for failing to deliver their duties.
The new law explicitly states that directors
30 are responsible for overseeing liquidation and are liable for damages due to negligence— a shift from the previous framework, where only shareholders of limited liability companies would bear these responsibilities. This change reinforces the board of directors’ role as the company’ s operational core, ensuring better protection for shareholders and creditors.
Additionally, individuals listed as dishonest debtors are now barred from serving as DSOs. While this reduces the risk of mismanagement, it may complicate bankruptcy proceedings if such individuals are also guarantors or key stakeholders, potentially lowering the success rate of debtor-led restructurings.
Simplified Deregistration and Mandatory Liquidation
The amended law introduces a streamlined deregistration system, allowing authorities to dissolve inactive companies whose business licenses have been revoked or invalidated. This system addresses“ zombie enterprises”, thus reducing administrative burdens and improving market efficiency.
The simplified deregistration system also offers a low-cost exit option for small and microenterprises, bypassing traditional liquidation procedures and enhancing resource allocation.
Piercing the corporate veil and substantive consolidation
The first and second paragraphs of Article 23 of the new Company Law state:“ If a shareholder abuses the company ' s independent legal personality and their limited liability to evade debts and significantly harm the interests of creditors, they shall bear joint and several liability for the company ' s debts. If a shareholder uses two or more companies under their control to commit such acts, each company involved shall bear joint and several liability for the debts of any other company.”
This newly introduced horizontal corporate personality denial system provides a legal foundation for affiliated companies’ substantive consolidation and bankruptcy. The Supreme People’ s Court, China’ s highest judicial authority, has clarified that substantive consolidation is permissible in bankruptcy cases involving affiliated enterprises. In such cases, courts are expected to carefully evaluate the relationships between the entities and apply appropriate measures.
As a general principle, courts should individually assess the bankruptcy grounds of each entity and respect the independence of each company’ s legal personality. However, substantive consolidation may be warranted in exceptional circumstances where the corporate personalities of affiliated enterprises are
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