"Law to Rigidity" -- Research on the Rule of Law Path of State-owned "Zombie Enterprises" under the Background of Supply-side Structural Reform

Abstract: "Zombie enterprises" have become the primary obstacle to the economic system reform of local governments at all levels, and their disposal has become the key to reducing overcapacity. In the context of supply-side reform, the disposal of state-owned "zombie enterprises", which account for a large proportion, is facing many problems and problems. The governance of state-owned "zombie enterprises" must be a process of rule of law, and the three procedures of liquidation, reconciliation and reorganization in the Enterprise Bankruptcy Law structure the main path for such enterprises to exit the market, which is the primary legal support to promote the exit of zombie enterprises under the rule of law, and bankruptcy trial is the main battlefield for the disposal of "zombie enterprises" and the optimal choice of the rule of law path.

Keywords: bankruptcy law; state-owned zombie enterprises; legalization; supply-side reform
 

    
"De-capacity" is the first of the five tasks of supply-side structural reform in 2016, and the disposal of state-owned zombie enterprises is the key to "de-capacity. Driven by my country's supply-side structural reform policy, my country's provinces and cities have successively focused their work on capacity reduction and structural adjustment. Cleaning up state-owned "zombie enterprises" and removing excess capacity are the necessary processes of my country's economic transformation. In this process, production factors such as capital, land, and labor will be released and reconfigured in the market. my country has basically formed a bankruptcy legal system based on laws and regulations such as the Enterprise Bankruptcy Law and the Civil Procedure Law, supplemented by relevant judicial interpretations, and basically achieved that there are laws to follow in the bankruptcy field. This paper is based on the supply-side structure The perspective of reform analyzes the plight of my country's state-owned zombie enterprises in order to explore the legal path of state-owned "zombie enterprises" under the background of supply-side structural reform.

1. "zombie companies"

The concept of "zombie enterprise" was first put forward by economist Peter Coy in the economic field. It means that enterprises that rely on "blood transfusion" and "die without death" refer to those debt enterprises that have no hope of recovery but are protected from bankruptcy due to the support of lenders or governments. [1] As for "zombie enterprises", there is no unified measurement standard in academic circles at present. In China, the formation of "zombie enterprises" is a reflection of the structural, institutional and institutional contradictions accumulated for a long time in the process of China's economic development, and is an enterprise that is "inefficient but not clear, mainly refers to those enterprises that are in a state of shutdown or semi-shutdown, losing money for years, insolvent, surviving on government subsidies and bank renewals. [2] According to the definition standard of zombie enterprises by the State Council in 2015: "enterprises that do not meet the national standards of energy consumption, environmental protection, quality and safety, continue to lose money for more than 3 years and do not meet the direction of industrial structure adjustment".
State-owned "zombie enterprises" account for the highest proportion of assets in all types of ownership, occupy the most resources, and have the most serious impact. Therefore, the disposal of state-owned "zombie enterprises" is particularly important in the process of supply-side structural reform.

Difficulties in the disposal of state-owned "zombie enterprises" in 2.

State-owned "zombie enterprises" as the supply side involved in a wide range of industries, with a large number of personnel and debt, with long-term, dependent and "kidnapping and extortion", the key lies in the state-owned "zombie enterprises" out of the five difficulties:
One is the difficulty of personnel placement. Old state-owned enterprises are generally large-scale and have a large number of employees. Most of them are burdened with a considerable number of on-the-job and retired employees. These employees have a strong attachment to the government. Due to long-term losses, the situation of arrears of wages and social security is complicated. With the development of social economy, the number of newly stipulated employee resettlement projects has increased and the cost standards have been continuously improved, such as the payment of long-owed social security funds and compensation for termination of labor relations; most of the old state-owned enterprises are located in a limited capacity to absorb employment, and because the long-term operating difficulties of the old state-owned enterprises do not adapt to the requirements of modern production and operation, resulting in more difficult re-employment, old state-owned enterprises staff placement and social stability and other complex situation.
Second, it is difficult to dispose of assets. Whether the assets can be disposed of in a timely manner and whether they can be realized at a high price is an important link to measure the merits of the disposal work. Old state-owned enterprises are generally in a state of shutdown or semi-shutdown, the industry in which they are located is generally overcapacity, the stock of assets is also difficult to achieve effective realization, coupled with the current economic downturn, the market value of the stock of assets space has been further compressed, the difficulty of asset disposal is quite high.
Third, the game of interest subjects in the legal relationship of bankruptcy. "The essence of the Chinese people's lack of interest in the Bankruptcy Law is the natural exclusion of market-based bankruptcy by the special economic system" [3]. Due to the lack of understanding of the nature of bankruptcy by creditors and debtors, especially banks, as creditors of old state-owned enterprises, are reluctant to give up claims that are guaranteed by the government's credibility, and hope that the government will pay the bill until bad debts are exposed and hope is completely lost. The unreasonable protection of state-owned "zombie enterprises" by individual local governments, such as unlimited financial subsidies and tax incentives, is not conducive to the smooth development of the work of "breaking the deadlock.
Fourth, the relevant bankruptcy system is not perfect and the supporting system is not perfect. On the one hand, there are two ways to clean up "zombie enterprises": administrative and market. China's current "de-capacity" policy emphasizes mergers and acquisitions rather than bankruptcy liquidation, and emphasizes "administrative methods" rather than "market methods". The government mostly negotiates behind the scenes to transfer the resettlement of employees of old state-owned enterprises and the disposal of non-performing assets to other enterprises or banks, this is a typical administrative way to dispose of state-owned "zombie enterprises", which is a mismatch of functions under government intervention and excessive protection. On the other hand, the court resources of bankruptcy trials are also insufficient. At this stage, the people's courts at all levels are not equipped with the presiding judge of bankruptcy cases, which will also affect the performance of the presiding judge's internal court assessment. Taking reorganization as an example, the workload from application acceptance to the formulation, evaluation and implementation of the reorganization plan is huge, and corresponding manpower and talents are needed for resource allocation. Coupled with the intervention of local governments in the bankruptcy cases of state-owned enterprises, the coordination and linkage mechanism between the court and the relevant judicial organs and government departments in carrying out bankruptcy work after accepting such cases is insufficient.
Fifth, the liquidation procedure is complicated and lengthy. Involving many interests, complex legal relations and high processing costs, the trial cycle of bankruptcy cases of state-owned enterprises is long, and during this period, a considerable part of the creditor's rights and debts need to be settled in litigation, which increases the disposal time and cost of bankruptcy proceedings, for example, the registered capital can not be straightened out, financial reconciliation problems, asset ownership problems, arrears and taxes, incomplete certificates and licenses, small shareholders lost contact, etc., it is difficult to achieve the legal requirements of the company's cancellation, and turn to enterprises that adopt delaying disposal tactics, which will lead to the accumulation of the volume of state-owned "zombie enterprises.

Proposals for the Rule of Law to 3. the Disposal of State-owned "Zombie Enterprises"

State-owned "zombie enterprises" should be classified and disposed of: the first category should be reorganized and reorganized, and SASAC takes the lead in a multi-pronged approach to asset restructuring. The second category is the category of insolvency, which should be distinguished according to the attributes of creditors: if the creditor is a State-owned financial institution, it should take bankruptcy liquidation proceedings to withdraw it completely from the market; if the creditor is a private legal or natural person, it should transfer property rights from "public" to "private" by allowing the creditor to take over the "debt-for-equity swap". This paper mainly analyzes the path of the rule of law for "creditors of state-owned financial institutions should take bankruptcy procedures to make them completely out of the market.
"Only reforms carried out in accordance with the law can achieve greater consensus on reforms, resolve contradictions and problems in the reform process more smoothly, and help reforms break through the shackles of the old system, old habits, and old interest patterns." [4] In the past, "policy bankruptcy" was to forcibly transfer the problems that should be borne and resolved by the government to the burden of creditors. Its essence is to implement the bankruptcy reorganization and liquidation of old state-owned enterprises in accordance with the "Enterprise Bankruptcy Law". The relationship between the government and the enterprise has been clarified, and the bankruptcy liquidation has realized the exit of state-owned "zombie enterprises" under the leadership of the market, which is currently a better way. "The center of supply-side structural reform is to provide market-oriented institutional supply." [5] Among them, the bankruptcy system is the most important, but in fact, the "Enterprise Bankruptcy Law" has not been fully and effectively implemented, and there is indeed a gap between the legislative expectations of the "Enterprise Bankruptcy Law" and judicial practice, which is related to policy soft constraints. It is also inseparable from the imperfect institutional structure of the "Enterprise Bankruptcy Law" and the lack of implementation mechanism. The process of the rule of law in the governance of state-owned "zombie enterprises" should be promoted from the fields of legislation, judicature, law enforcement and legal supervision.
First, legislation is a basic guarantee. With the reform of the bankruptcy supporting system as the center, we will promote the reform of the financial supervision system, the tax collection system, and the industrial and commercial registration and cancellation system. Department linkage, system follow-up. The clean-up of state-owned "zombie enterprises" is not only closely related to the courts, but also involves the follow-up of supporting systems of other departments such as industry and commerce, taxation, labor and social security, and enterprise supervisors. It requires various departments to "fight a combination of punches", such as formulating policies to encourage the disposal of transfer taxes and fees, reduction and exemption policies for historical arrears, etc.; it should also focus on the construction of bankruptcy security system, explore the construction of bankruptcy administrator compensation protection, bankruptcy employee claims protection, zombie enterprise governance specific promotion and other related systems.
Second, justice is the central path. The Enterprise Bankruptcy Law takes the structure of judicial procedure as the core, and the clean-up of state-owned "zombie enterprises" must take the promotion of professional trial as the central path. Explore the establishment of a special bankruptcy trial court, further refine the rules of the special bankruptcy trial court, focus on bankruptcy cases within the jurisdiction, and comprehensively promote the professionalism, concentration and efficiency of bankruptcy cases; optimize the selection and training mechanism of bankruptcy trial presiding judges, evaluate and select from excellent judges, or try to evaluate and employ from lawyers and teachers with rich judicial practice experience; innovate the evaluation mechanism of bankruptcy judges, A quality assessment system for bankruptcy cases is established by taking into account a number of relevant factors such as the number, difficulty, impact and implementation of trials.
third, law enforcement is a coordinated measure. State-owned "zombie enterprises" cannot do without the support of the government and various departments, and must focus on promoting the linkage mechanism between law enforcement and justice. Clarify the coordination obligations of the banking regulatory bureau, the economic and Information Commission, the financial office, industry and commerce, taxation, finance, public security, land and other government departments in the bankruptcy governance mechanism, and strengthen bankruptcy according to law; set up a coordination group according to the needs of the case, establish a contact meeting system between law enforcement departments and the court, and make communication and coordination arrangements for financial supervision, equity changes, employee resettlement, land disposal, fund advances, tax relief, and potential risks, and promote the smooth development of bankruptcy work.
Fourth, supervision is the ultimate guarantee. The supervision here is a comprehensive supervision of the whole process of bankruptcy proceedings, including not only the supervision of specific affairs and the work of the bankruptcy administrator, but also the supervision of the implementation of the bankruptcy law. China's Enterprise Bankruptcy Law only provides for the supervision power of the creditor committee and the court in specific cases, but the creditor committee is a non-permanent institution, and the court's function is centered on trial, so the lack of specialized bankruptcy administration is an important reason for the poor implementation of the Enterprise Bankruptcy Law. [6] Explore the establishment of a special bankruptcy administration bureau under the State Council as the national regulatory body for bankruptcy administration, with one to two levels of branches, which will be combined with the existing regulatory model to provide comprehensive supervision of the orderly conduct of bankruptcy proceedings and the effective implementation of the bankruptcy law.

References:
[1] Hu Wenfeng. On the retirement of "zombie enterprises" [J]. Legal system and society. 2016.3:196-197.
[2] Wei Xinzhang. Practical Exploration and Thinking of Bankruptcy Trial and Disposal of "Zombie Enterprises" -- Taking Quzhou Court to Increase Judicial Disposal of "Zombie Enterprises" to Boost Supply-side Reform as an Observation Point [J]. Research on the Rule of Law; 2017.2:64-74.
[3] Tan Paul. To eliminate "zombie enterprises", the Bankruptcy Law must be truly implemented [J]. Nanfengchuang, 2016.6
[4] Fu Zitang, Chen Jianhua. Using the rule of law thinking and the rule of law to promote the comprehensive deepening of reform [J]. Red Flag Manuscript, 2013,23:18.
[5] Li Shuguang. Cleaning up zombie companies: failing bankruptcy laws to come together [N]. Economic Reference, 2016.3.22.
[6] Zhao Shuwen, Wang Jiawei. Research on the Legalization Guarantee of Zombie Enterprise Governance-Taking the Improvement of Bankruptcy Law and Its Implementation Mechanism as the Research Path [J]. Hebei Jurisprudence, 2017.2:78-92.

Introduction to the author:

Lawyer Ma Shibin, Bachelor of History from Shandong University, Master of Law from China University of Political Science and Law, has been a full-time lawyer in Zhongcheng Qingtai (Jinan) Law Firm since January 2007. He is now a partner and deputy director of the legal service center for small and medium-sized enterprises.

Zhang Lixin (intern lawyer), master of law from Shandong Jianzhu University, has been practicing in the bankruptcy liquidation center of Zhongcheng Qingtai (Jinan) Law Firm since 2016.