Beijing, August 28 :

China has enacted an updated bankruptcy law that explicitly covers private businesses for the first time.

The law passed Sunday by parliament also raises the status of commercial creditors, requiring failed companies to pay them first instead of workers, who previously had priority, the Xinhua News Agency said. The law takes effect June 1, 2007. The measure is meant to modernize a 1986 bankruptcy law in a communist system that relies heavily on private entrepreneurs to create jobs and prosperity.

Previously, Chinese bankruptcy law only mentioned state-owned companies, leading to uncertainty about how to settle the debts of private businesses that failed. “All the country’s companies and enterprises, whether state-owned or private, will have to follow a unified corporate bankruptcy law if they founder,” Xinhua said.

Rules based on the 1986 law “are widely regarded as outdated as they fail to give sufficient protection to creditors and only touch on state-owned enterprises,” Xinhua said. Officials defended the decision to give creditors priority over employees, saying it brings China into line with market economies and will reassure foreign investors.

“The provision is a compromise that aims to protect both creditors and workers of insolvent enterprises,” Xinhua quoted Cheng Siwei, deputy chairman of the parliament’s Standing Committee, as saying.