Both the People's Republic of China (the "PRC" or "China") and the Socialist Republic of Vietnam ("Vietnam") are making the transition from a centrally planned economy to a market-based economy. An effective bankruptcy law is an integral part of the institutional framework necessary for this transition. China enacted the Law of the People's Republic of China on Enterprise Bankruptcy (Trial Implementation) on December 2, 1986, and it came into operation on October 1, 1988 (the "1986 Chinese Bankruptcy Law"). This law is applicable to State-Owned Enterprises ("SOEs"). On April 9, 1991, the PRC Civil Procedure Law was approved, with Chapter XIX applying to the bankruptcy of non-SOE enterprises with legal person status. The drafting of a bankruptcy law in Vietnam followed from Article 15 of the 1992 Constitution of the Socialist Republic of Vietnam, which institutionalized the policy to "promote the development of the multi-sector market-oriented economy with. . .State management towards socialism." The new bankruptcy law was one of the laws that the Vietnamese began drafting later that year with the goal of creating a "uniform, complete legal system." The drafting process moved quickly, and the Vietnamese Law on Enterprise Bankruptcy (the "1993 Vietnamese Bankruptcy Law") was enacted on December 30, 1993, and took effect on July 1, 1994. This law rejected the bifurcated Chinese approach of separate laws for SOEs and non-SOE legal person enterprises in favor of a single law that applied to both SOEs and non-SOE enterprises. It was also more expansive than the Chinese approach in that it applied to both legal person and non-legal person enterprises.

These laws did not live up to early expectations. By 1994, the Chinese government had already decided to begin drafting a new national bankruptcy law. From 1989 until 1994, the courts had accepted few bankruptcy cases: 98 in 1989, 32 in 1990, 117 in 1991, 428 in 1992, and 478 in 1993. In Vietnam, from July 1994 to September 2001, the number of cases was even lower: the number of bankruptcy applications per year never exceeded 30, and only 58 enterprises were adjudicated bankrupt by the courts. Of these bankruptcies in China and Vietnam, the number of cases that led to successful reorganizations was very low.

For many years, both China and Vietnam have focused on how best to improve these older laws and enact more modern insolvency regimes. The Chinese government initiated a review of the Chinese bankruptcy law in 1994, and a first draft was completed in 1995. After a hiatus that was caused in part by a concern about the high level of unemployment likely to be caused by allowing many SOEs to go into bankruptcy, the drafting process resumed in 1998. Further drafts of the law were released for comment, including drafts in 2000, 2001, 2002, and more recently, in June 2004 (respectively the "2000," "2001," "2002," or "June 2004 Draft Chinese Bankruptcy Law"). Roughly two-thirds of the 2002 draft was incorporated into the June 2004 draft. The June 2004 draft was submitted to the Standing Committee of the National People's Congress on June 21, 2004; since then an even more recent draft has emerged (the "October 2004 Draft Chinese Bankruptcy Law"). In effect, the current version is a work in process. There remains a general hope that a draft will be finalized by the middle of 2005 and come into operation in 2006, but this is dependent on agreement being reached on several issues that have proved to be intractable and which are discussed below.

By June 2002, Vietnam had completed a draft bankruptcy law (the "2002 Draft Vietnamese Bankruptcy Law"). When comparing the 2002 Vietnamese and Chinese drafts shortly after they were issued, it appeared that the Vietnamese reform process was at an earlier stage; but much progress was made in Vietnam over the next two years and a new Vietnamese bankruptcy law, the Vietnamese Law on Bankruptcy, was enacted on June 15, 2004 and came into operation on October 15, 2004 (the "2004 Vietnamese Bankruptcy Law"). The fact that Vietnam enacted its new bankruptcy law before China did is significant because during the drafting process the Vietnamese were interested in how the Chinese government was dealing with similar issues of insolvency law reform and the movement towards a market-oriented economy in the Chinese draft law. However, the Vietnamese were able to reach a consensus more quickly than the Chinese have.

An earlier article I co-authored compared the 2002 draft Chinese and Vietnamese laws and highlighted seven areas of the proposals. The present article provides an update on the insolvency reform processes in China and Vietnam since mid-2002. Part I sets out the overall insolvency framework in China and Vietnam, and Parts II to VI consider five of the areas discussed in the earlier piece - namely, the scope of the bankruptcy laws; bankruptcy administration; corporate rehabilitation; priorities in distribution and the protection of employees' interests; and cross-border insolvency. This article identifies weaknesses in the current bankruptcy law regime in China and in the former regime in Vietnam that the law reform processes in both countries have addressed. It notes where the October 2004 Draft Chinese Bankruptcy Law differs from the 2002 Chinese draft and highlights the areas that still need to be finalized. It also identifies those areas in which the new 2004 Vietnamese Bankruptcy Law differs from the 2002 Vietnamese draft and suggests where further improvements could be made. Throughout the article, I will be drawing comparisons between the Vietnamese and Chinese approaches.