China’s Bankruptcy Law overhaul sets a new
direction for cross-border insolvency
📅 16/01/2026
The year 2026 is set to become a critical year in determining how China reshapes the cross border insolvency landscape.
The release of a Draft Revision to the Enterprise Bankruptcy Law in September 2025 has set the stage for the most significant overhaul of its corporate insolvency framework since the Enterprise Insolvency Law came into force in 2007.
The Draft expands the existing law from 12 chapters to 16 and more than 200 articles. If enacted largely in its current form, the reform would have far-reaching implications—not only for domestic corporate restructuring, but also for foreign creditors, global investors and courts increasingly involved in Chinese corporate distress.
The reform package signals a decisive shift towards a more coherent, modern, and internationally engaged insolvency framework. It also underscores the government’s recognition that insolvency law is no longer treated as a purely domestic tool for liquidation, but as a strategic instrument of economic governance – one closely linked to employment stability, fiscal sustainability and China’s integration into global markets.
As the reforms progress through deliberation in 2026, this article highlights several most important proposed changes and their implications, providing cross-border businesses, insolvency practitioners and legal advisors with the context needed to prepare for the sweeping changes expected in 2026 and beyond.
A response to economic reality
China’s economy today looks very different from that of 2007. Corporate groups have become larger and more complex, small and micro enterprises account for the vast majority of business entities and employment, and Chinese companies increasingly operate, and borrow, across borders.
Against a backdrop of slowing growth and sectoral stress, particularly in real estate and manufacturing, courts have been encouraged to use insolvency proceedings not merely to liquidate failing firms, but to preserve value, stabilise employment, and secure local tax revenue through restructuring. In recent years, insolvency has become an important policy tool rather than a last resort.
Yet the existing legal framework has struggled to keep up. Many important practices, such as corporate group insolvency, debtor-led restructuring and cross-border coordination, have developed through judicial guidance and court-led pilot programmes, rather than statute. The Draft Revision seeks to bring these practices formally into law.
Cross-border insolvency: a major step forward
The most internationally significant reform is the introduction of a dedicated chapter on cross-border insolvency. Under the current law, cross-border issues are governed by a single, highly general provision (Article 5) that provides little procedural guidance. As a result, recognition of foreign insolvency proceedings in China has historically been rare and unpredictable.
The Draft changes this by establishing a structured framework for judicial cooperation, recognition of foreign proceedings and coordination of parallel cases. It adopts a moderated form of “modified universalism” -- the idea that insolvency proceedings should have cross-border effect, while allowing courts to protect domestic interests.
Crucially, the Draft also expressly authorises Chinese insolvency administrators to seek recognition of Chinese proceedings abroad. This outbound recognition mechanism strengthens their ability to recover overseas assets and aligns China more closely with global practice under regimes such as the UNCITRAL Model Law and the US Chapter 15 system.
For foreign creditors, the reforms offer clearer procedural entry points into Chinese insolvency proceedings. However, recognition does not override domestic priority rules. Even after recognition, certain claims must be paid first, including secured claims, employee wages, consumer claims, personal injury compensation, and social insurance and tax obligations owed in China. This ranking system, while consistent with longstanding domestic priorities, may materially dilute recoveries for foreign creditors and add complexity to multinational restructurings involving parallel proceedings.
Forum shopping and the global restructuring landscape
These reforms unfold against a backdrop of growing international competition among insolvency and restructuring forums. In Europe, companies have long engaged in forum shopping. For example, German debtors seeking restructuring proceedings in the UK, based on perceived flexibility and predictability.
In Asia, Hong Kong has increasingly positioned itself as a hub for China-related insolvency and restructuring, leveraging its common law system and cross-border cooperation arrangements with Mainland courts. Against this landscape, the Draft signals China’s intention to retain greater influence over cases involving Chinese debtors and assets, while engaging more openly with international insolvency practice.
Managing complex corporate groups
Another major reform addresses the insolvency of corporate groups. High-profile restructurings in recent years have exposed the limitations of entity-by-entity insolvency when companies operate as deeply integrated groups with shared financing, management and assets.
The Draft introduces a formal regime for “consolidated insolvency”, allowing courts to coordinate proceedings across group entities and, in limited circumstances, to consolidate assets and liabilities into a single estate. This approach prioritises economic reality over strict corporate separateness -- a notable departure from European practice, but one that reflects the structure of many Chinese enterprise groups.
While the new framework improves efficiency, it also raises questions for creditors, particularly those relying on entity-specific guarantees or offshore structures. Much will depend on how courts apply consolidation standards in practice.
A streamlined track for small and micro enterprises
The Draft also introduces special insolvency procedures for small and micro enterprises, aiming to reduce cost, shorten timelines and make formal restructuring more accessible. These procedures include simplified adjudication, faster statutory deadlines and greater reliance on debtor-in-possession management.
For policymakers, this reflects a recognition that informal shutdowns and abandoned businesses are economically wasteful. For creditors, the new regime may improve recovery prospects, but it also introduces new risks, particularly where disclosure and oversight are limited.
Limited personal bankruptcy: cautious experimentation
For the first time at the national level, the Draft introduces a narrow form of personal bankruptcy, but only for natural-person shareholders who bear joint liability for corporate debts. This is not a general consumer bankruptcy regime, and relief is strictly limited to liabilities connected with the corporate insolvency.
The provision reflects a cautious policy approach. While pilot personal bankruptcy programmes exist in some regions, national lawmakers remain wary of moral hazard and broader social impact. Even so, the reform acknowledges that effective corporate restructuring often requires addressing the personal liabilities of business owners.
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Key contacts / Authors
Yuhua YANG: yuhua.yang@thornhill-legal.com
April XIAO: april.xiao@thornhill-legal.com
Rhea YU: rhea.yu@thornhill-legal.com
The Draft Revision remains subject to further legislative deliberation. Based on past practice for major commercial legislation, enactment in 2026 appears feasible, although the final text may evolve following consultation and subsequent readings.
Even so, the direction is clear. China is building a more modern, internationally intelligible insolvency system -- one that recognises the realities of globalised business while retaining strong domestic safeguards.
For global investors and creditors, the message is equally clear: China’s insolvency framework is evolving, and understanding these changes will be increasingly important in managing risk and navigating cross-border corporate distress.