China's top legislature, the Standing Committee of the National People's Congress, on Sunday adopted a corporate bankruptcy law, aiming to protect both creditors of bankrupt enterprises and the people who work in them.

The law will come into effect on June 1, 2007. The current enterprise bankruptcy law will be abolished at the same time.

The current bankruptcy rules, promulgated in 1986 on a test basis, are widely regarded as outdated as they fail to give sufficient protection to creditors and only touch on State-owned enterprises (SOE). The rules allow laid-off workers to be paid before creditors.

The new corporate bankruptcy law will apply to all kinds of enterprises and financial institutions. All the country's companies and enterprises, whether state owned or private, will have to follow a unified corporate bankruptcy law if they founder.

The new law stipulates that from June 1, 2007, all insolvent enterprises will pay credit guarantees to creditors first, and use other assets not earmarked as credit guarantees to pay laid-off workers.

"The provision is a compromise that aims to protect both creditors and workers of insolvent enterprises," said Cheng Siwei, vice-chairman of the NPC Standing Committee.

"The new law embodies the notion of putting people first, as it fully considers worker's interests. At the same time it accords with standard international practice in better protecting lenders' interests," said Jia Zhijie, member of the NPC Standing Committee.

Wang Xin, a law professor at Renmin University said paying creditors first in insolvency cases is common practice in market economies and will help boost foreign investors' confidence in investing in China.

The new law makes an exception for around 2,000 SOEs. The State Council stipulated that SOEs that announce bankruptcy before June 2007 can be closed down with the aid of government bailouts and could pay laid-off workers first.

From 1994 to 2005, China allowed 3,658 moribund state enterprises to close with government subsidy support. In 2006, the central government set aside 33.8 billion yuan to help bankrupt SOEs settle with laid-off workers.

Experts called for the establishment of an effective social insurance and wage payment system that would eradicate the phenomenon of workers remaining unpaid when a company goes bankrupt.

The new law also provides a bankruptcy restructuring system complete with liquidators, as well as rules on the prevention of cheating during the bankruptcy process.

The new law stipulated that financial supervision institutions could apply for bankruptcy for financial institutions.

To make special regulation on the bankruptcy of financial institutions in China's Corporate Bankruptcy Law marks that China began to standardize the bankruptcy of financial institutions on the legal level, said experts in law.

According to the law, China's financial supervision institution under the State Council could apply to the people's courts for reshuffle and bankruptcy of financial institutions including commercial banks, insurance and securities companies when they cannot pay off debts due or meet solvency.

The corporate bankruptcy law will also apply to foreign companies.

The new law will also allow companies that are doing poorly to apply for reorganization.

"This law will help redeem those organizations or enterprises which are in financial difficulties and still can be revived by reorganization," said An Jian, deputy director of the standing committee's legislative affairs commission.

Editor: Yan