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Closing Business in China: BankruptcyThe economic crises of the 1990s in emerging markets—from East Asia to Latin America, from Russiato Mexico—raised concerns about the design of bankruptcy systems and the ability of such systems tohelp reorganize viable companies and close down unviable ones. In countries where bankruptcy isinefficient, unviable businesses linger for years, keeping assets and human capital from being reallocatedto more productive uses.The Doing Business indicators identify weaknesses in the bankruptcy law as well as the main proceduraland administrative bottlenecks in the bankruptcy process. In many developing countries bankruptcy is soinefficient that creditors hardly ever use it. In countries such as these, reform would best focus onimproving contract enforcement outside bankruptcy.The data on closing a business are developed using a standard set of case assumptions to track acompany going through the step-by-step procedures of the bankruptcy process. It is assumed that thecompany is a domestically owned, limited liability corporation operating a hotel in the country’s mostpopulous city. The company has 201 employees, 1 main secured creditor and 50 unsecured creditors.Assumptions are also made about the debt structure and future cash flows. The case is designed so thatthe company has a higher value as a going concern—that is, the efficient outcome is eitherreorganization or sale as a going concern, not piecemeal liquidation. The data are derived fromquestionnaires answered by attorneys at private law firms.Three measures are constructed from the survey responses: the time to go through the insolvencyprocess, the cost to go through the process and the recovery rate—how much of the insolvency estate isrecovered by stakeholders, taking into account the time, cost, depreciation of assets and the outcome ofthe insolvency proceeding.Bottlenecks in bankruptcy cut into the amount claimants can recover. In countries where bankruptcy isused, this is a strong deterrent to investment. Access to credit shrinks, and nonperforming loans andfinancial risk grow because creditors cannot recover overdue loans. Conversely, efficient bankruptcylaws can encourage entrepreneurs. The freedom to fail, and to do so through an efficient process, putspeople and capital to their most effective use. The result is more productive businesses and more jobs.48
1. Historical data: Closing Business in ChinaClosing a Business dataDoing Business2006Doing Business2007Doing Business2008Rank 76 57Time (years) 2.4 2.4 1.7Cost (% of estate) 22 22 22Recovery rate (cents on the dollar) 31 31 35.92. The following graph illustrates the Closing Business indicators in China over the past 3 years:2.42.41.7222222313135.9Recovery rate (cents on thedollar)Time (years)2005 2006 2007Cost (% of estate)49
Page 1 and 2: China
Page 3 and 4: © 2007 The International Bank for
Page 5: IntroductionDoing Business 2008 is
Page 8 and 9: 9. In China, a new property law put
Page 10 and 11: Summary of Indicators - ChinaStarti
Page 12 and 13: Starting a Business in China: Entry
Page 14 and 15: 3. Steps to Starting a Business in
Page 16 and 17: The following table shows Starting
Page 18 and 19: 1. Historical data: Dealing with Li
Page 20 and 21: 13. Review of construction drawings
Page 22 and 23: The following table shows Dealing w
Page 24 and 25: 1. Historical data: Employing Worke
Page 26 and 27: The following table shows Employing
Page 28 and 29: 1. Historical data: Registering Pro
Page 30 and 31: 4. Benchmarking Registering Propert
Page 32 and 33: Getting Credit in China: Legal Righ
Page 34 and 35: 3. Benchmarking Getting Credit Regu
Page 36 and 37: Protecting Investors in ChinaOffici
Page 38 and 39: 3. Benchmarking Protecting Investor
Page 40 and 41: Paying Taxes: Tax Payable and Compl
Page 42 and 43: 3. Benchmarking Paying Taxes Regula
Page 44 and 45: Trading Across Borders: Importing a
Page 46 and 47: 3. Benchmarking Trading Across Bord
Page 48 and 49: Enforcing Contracts: Court Efficien
Page 50 and 51: 3. Benchmarking Enforcing Contracts
Page 54 and 55: 3. Benchmarking Closing Business Re
Page 56 and 57: APPENDICESStarting a Business in Ch
Page 58 and 59: - Appointment documents and identif
Page 60 and 61: Cost to complete:Comment:no chargeA
Page 62 and 63: 14 *Receive review of building draw
Page 64 and 65: Procedure1Request and obtain approv
Page 66 and 67: Comment:Procedure6The Shanghai Hous
Page 68 and 69: Procedure14Receive review of buildi
Page 70 and 71: Comment:No time limits apply for in
Page 72 and 73: 建建建建建建建建建
Page 74 and 75: Employing Workers in ChinaEmploying
Page 76 and 77: Registering Property in ChinaThis t
Page 78 and 79: Procedure3(v) Photocopy of the iden
Page 80 and 81: Protecting Investors in ChinaThe ta
Page 82 and 83: Paying Taxes in ChinaThe table belo
Page 84 and 85: Trading Across Borders in ChinaThes

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