[Direct answer]The corporate debt crisis should be handled in four steps: "sorting out—negotiating—restructuring—liquidation". First, conduct a comprehensive inventory of debt lists, external guarantees, and realizable assets, and sort them by maturity date. Actively negotiate with creditors for debt repayment extensions, installment payments, or debt settlement with assets as collateral to strive for an enforcement settlement. For operations that still have value but face short-term liquidity crises, they can apply for reorganization according to Article 2 of the Enterprise Bankruptcy Law of the People's Republic of China to resolve debts in a comprehensive manner and maintain operations. For those with no salvage value, they should apply for bankruptcy liquidation in a timely manner and pay off debts in accordance with the legal order of priority. Special attention: Individual repayments within six months before bankruptcy acceptance may be revoked by the administrator, and blindly "repaying debts to acquaintances first" may instead increase risks. Beijing Henglue Law Firm\nCreditor-debtor enforcement teamWe can assist in formulating a comprehensive solution. For more details, please refer to the following document.Beijing Henglu Law Firm.

I. Legal basis and interpretation of provisions

1. Article 2 of the Enterprise Bankruptcy Law of the People's Republic of China (effective June 1, 2007)

When a corporate legal person is unable to repay its due debts, and its assets are insufficient to repay all debts or clearly lack the ability to repay, it shall liquidate its debts in accordance with the provisions of this Law; where an enterprise is likely to clearly lose its ability to repay, it may proceed with restructuring in accordance with the law. This article defines the causes of bankruptcy and also regards "restructuring" as a statutory rescue channel for enterprises in distress: restructuring does not mean closing down and liquidating, but under the guidance of the administrator or the debtor, it uses methods such as debt-for-equity swaps, deferred repayment, and introducing investors to resolve debts in a comprehensive manner while preserving the operational value of the enterprise. When an enterprise is in crisis, the earlier it assesses whether it meets the causes of bankruptcy and actively uses the restructuring procedure, the more likely it is to avoid having its property being divided up by individual executions and losing its bargaining chips in negotiations.

2. Article 577 of the Civil Code of the People's Republic of China (effective as of January 1, 2021)

If a party fails to fulfill its contractual obligations or performs in a manner inconsistent with the agreement, it shall bear contractual liabilities such as continuing to perform the contract, taking remedial measures, or compensating for losses. This is the basic norm for enterprises to handle operational arrears: for supplier payments, bank loans, and unpaid lease fees, etc., enterprises can reach amendment agreements with creditors such as extending the repayment period, making installment payments, or reducing or waiving interest, to achieve debt restructuring in the form of "continuing to perform the contract". If no agreement can be reached through negotiation, the enterprise can still strive for litigation mediation or enforcement settlement after the creditor sues. Enterprises that actively communicate and offer feasible solutions are usually more likely to gain concessions from creditors than those that passively evade their responsibilities, and can also significantly reduce the probability of being sued in batches or subject to preservation measures.

3. Practical judicial interpretation (restructuring value and individual liquidation)

When reviewing the restructuring application, the court focuses on two points: first, the "restructuring value", that is, whether the enterprise's products, qualifications, and channels still have market value; second, the "feasibility of restructuring", that is, whether investors, funds, and plans can be implemented. Pure shell companies with no possibility of rescue are unlikely to be approved. Another high-frequency rule is Article 32 of the Enterprise Bankruptcy Law: within six months before the court accepts the bankruptcy application, if the debtor already has bankruptcy grounds but still repays individual creditors, the administrator has the right to request the repudiation of such payments. Therefore, the practice of "repaying related parties first and then suppliers" during the crisis period may face the risk of being repudiated. The repayment priority of employee claims, taxes, and guaranteed claims is the core framework of the restructuring plan. Negotiations with creditors must be designed within the statutory priority, otherwise the plan is unlikely to be approved by the court.

II. Practical Experience of Henglue Law Firm

Based on Henglue's practical observations in handling corporate debt cases, there are four common forms of debt crises for SMEs: First, the breakdown of the guarantee chain, where SMEs are forced to bear joint and several liabilities after providing guarantees for related enterprises or upstream and downstream companies; Second, the delayed collection of accounts receivable leading to a chain of defaults, with suppliers suing en masse and accounts being frozen one after another; Third, the intertwining of private lending and bank loans, where high-interest financing accelerates the collapse of the capital chain; Fourth, the failure of shareholders to make genuine contributions, which prompts creditors to hold shareholders accountable when the company is unable to repay debts. Disputes often revolve around the confirmation of debt amounts, the effectiveness of guarantees, and the boundaries of shareholders' responsibilities. The order of handling and the preservation of evidence often determine the overall outcome.

The general tendency of judges and enforcement judges is to support honest operators in reviving enterprises through mediation and enforcement settlements, and they are more likely to approve of installment plans that gain the consent of the majority of creditors. However, they maintain a high-pressure stance against asset transfer, false litigation, and individual settlements. Once clues are found, they may transfer the case for further handling or impose additional responsibilities. The most common pitfalls for parties include: using shareholders' personal accounts to receive and pay for the company's payments in the early stages of the crisis, resulting in property commingling and shareholders being added as jointly liable parties; individual settlements to "maintain credit" by transferring funds from one account to another; issuing guarantee letters at will; and failing to respond to court notifications, resulting in default judgments and asset freezes. The standard practice is to immediately sort out assets and liabilities, stop issuing new guarantees, negotiate with major creditors under the guidance of lawyers, and decisively initiate reorganization procedures when necessary to secure a breathing space for valuable enterprises. For risk prevention and control of contracts and accounts receivable in daily operations, reference can be made to the following:Legal services for disputes over commercial contracts in enterprises, or throughCorporate long-term legal advisorEstablish a debt early warning mechanism.

III. Frequently Asked Questions

Q1: If a company can't pay off its debts, will the person in charge be sent to prison?

The inability to repay debts due to pure operational losses constitutes a civil dispute, and the legal representatives and shareholders generally do not bear criminal responsibility for this. However, the following circumstances significantly increase the risk: transferring or concealing assets to evade enforcement may involve the crime of refusing to execute judgments and rulings; concealing or destroying account books or privately dividing assets during bankruptcy proceedings may lead to corresponding responsibilities; evading debts by fabricating debts or filing false lawsuits also involves criminal charges. In addition, after the company is listed on the credit blacklist, the legal representatives will face indirect impacts such as restrictions on high-consumption activities. The compliance bottom line is to truthfully declare assets, cooperate with enforcement, and focus on reconciliation and restructuring plans rather than evasive measures.

Q2: What is the difference between corporate debt restructuring and bankruptcy reorganization?

Debt restructuring is an arrangement reached through voluntary negotiation between enterprises and creditors out of court, including debt extension, debt relief, and debt settlement with assets. It is flexible, confidential, and low-cost, but lacks enforceability. Individual creditors can sue and apply for preservation at any time, which makes it easy to collapse. Bankruptcy reorganization is a statutory procedure after the court's acceptance of the application. The approved reorganization plan is binding on all creditors and can suspend individual enforcement and freeze the exercise of security rights, providing a time window for the enterprise to seek an overall solution. For enterprises with a large number of creditors, significant differences among them, or those that have been sued collectively, the binding advantage of reorganization is obvious; for enterprises with simple debt relationships and cooperative creditors, they can first proceed with out-of-court restructuring.

Q3: Can the company still save itself after its account is frozen and its assets are seized?

Yes, but the available space will gradually decrease over time. After the account is frozen, you should immediately check whether the basis for the freeze and the amount exceed the scope of the request. For cases of over-standard seizure, you can apply for lifting the freeze or replacing the guarantee; at the same time, verify the principal and interest of the disputed debts item by item, and strive for mediation, enforcement settlement, or installment payment plans. If you meet the criteria for bankruptcy and have operational value, you can handle the disposal of the seized assets in the reorganization process to avoid selling them at low prices. The key is to stop adding new defaults and guarantees, protect core operating assets and teams, and present the repayment path to major creditors in a written plan to seek support for suspending lawsuits and lifting the freeze.

Q4: What should I do if the legal representative is subject to a restriction on high-end consumption?

If the company fails to fulfill its obligations according to the enforcement notice, the court may impose a high-consumption restriction on the company and its legal representatives and principal responsible persons. There are three main ways to lift the restriction: the company completes its obligations or reaches an enforcement settlement with the applicant and fulfills it; provides a truly effective guarantee or obtains the applicant's consent to lift the restriction; if it is necessary to make consumption for business operations, it can apply to the court for approval (such as conducting commercial activities with the company's own property). It is strictly prohibited to evade the restriction by changing the legal representative. The court may continue to take measures against the original responsible person. The standard practice is to actively negotiate with the applicant to exchange a phased payment plan for the lifting or suspension of the high-consumption restriction.

Q5: How long does it generally take to apply for bankruptcy reorganization?

The court shall, within 15 days from the date of receipt of the restructuring application, decide whether to accept it, and may extend the time limit by 15 days if there are justifiable reasons; the maximum duration of the restructuring period shall not exceed the time limit prescribed by the Enterprise Bankruptcy Law. The draft restructuring plan shall be submitted within six months after the decision on acceptance, and may be extended by three months if there are justifiable reasons. The court shall make a decision on whether to approve the restructuring plan within 30 days. Generally, it usually takes several months to a year from the application to the approval of the restructuring plan, which specifically depends on the scale of the creditor's claims, the negotiations between investors and the voting situation at the creditors' meeting. For enterprises with mature plans and sufficient communication, the process will be significantly shorter.

IV. Suggestions for Protecting Rights and Interests

  • Establish a debt ledger at the early stage of the crisis: register each debt item by creditor, maturity date, guarantee, and penalty clause, and prioritize dealing with the rigid debts that affect operations.
  • Stop using personal accounts to handle the company's receipts and payments, and stop issuing guarantees at will to avoid property confusion and liability expansion.
  • Negotiate with the main creditors as a whole, form a written installment plan and keep a record of it to prevent secondary recourse after the individual settlement is revoked.
  • After assessing the value of the enterprise's restructuring, apply for restructuring as soon as possible or discuss a preliminary plan with a lawyer. Don't wait until all assets have been executed before taking action.

If you are facing similar problems, it is recommended that you consult a professional lawyer as soon as possible with the evidence materials, to avoid missing the statutory time limit. →Legal services for creditor-debtor disputes·Beijing Henglu Law Firm