Bankruptcy Filing Obligation of Directors in Distressed Enterprises

Abstract

In practice, when a company falls into financial distress and reaches a state of de facto bankruptcy, some directors may continue business operations, leading to a continuous deterioration of the company’s financial condition and an unreasonable reduction in creditors’ repayment ratios. China’s current legal system lacks an effective regulatory mechanism to address this issue. In contrast, Germany’s mandatory bankruptcy filing system and the UK’s wrongful trading regime have proven effective in safeguarding creditors’ repayment rights, offering valuable insights for China to critically reference. When establishing a mandatory bankruptcy filing obligation system for directors of distressed enterprises in the future, China should clearly define directors’ duty to file for bankruptcy during a company’s de facto insolvency, establish a legal liability framework for violations of this obligation, grant bankruptcy administrators the right to claim damages, and permit directors to defend their actions by demonstrating compliance with the business judgment rule.