Bankruptcy Law Interpretation III and Potential Impact on Collateral Arrangements

On 27 March 2019, the Supreme People’s Court (the “SPC”) published its Interpretation on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People's Republic of China (III) (the “Bankruptcy Law Interpretation III”) which became effective on 28 March 2019. The Bankruptcy Law Interpretation III clarified certain aspects of the PRC Enterprise Bankruptcy Law, with the ultimate goal of improving the business environment in China by strengthening creditors’ right and the rule of law surrounding corporate insolvencies.

Amongst other issues, the SPC clarified that the courts should uphold the priority of secured creditors over security granted by a Mainland Chinese company before the commencement of bankruptcy proceedings. This is an important clarification for both offshore and onshore creditors who take security from Mainland Chinese counterparties.

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