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Brooklyn Journal of International Law

First Page

102

Abstract

In recent years, China has increasingly adopted the Debtor-in-Possession (DIP) model in corporate reorganization, allowing directors to retain control of the debtor’s operations during bankruptcy proceedings. From 2019 to 2025, the use of the DIP model among listed companies rose substantially, reflecting a policy preference for efficiency, continuity of management, and the perceived advantages of director familiarity with business operations. While the DIP model may improve restructuring efficiency, it also concentrates decision-making power in directors who face limited personal accountability, thereby exposing creditors to heightened risk during insolvency. China’s existing legal framework inadequately addresses this risk. The Company Law defines directors’ duties of loyalty and diligence primarily in relation to the company, while the Bankruptcy Law offers only fragmented and indirect protections for creditors. Neither statute clearly articulates whether directors owe fiduciary duties to creditors once insolvency occurs, nor do they establish workable standards for evaluating director misconduct during reorganization. As a result, creditors often lack effective tools to monitor directors, challenge conflicted transactions, or seek redress for value-depleting decisions made under the DIP model. Weak oversight mechanisms, ambiguous liability provisions, and the absence of a business judgment rule further exacerbate these deficiencies. This Note conducts a comparative analysis of Chinese and United States bankruptcy law to evaluate how director accountability functions under the DIP model. United States law provides clearer fiduciary frameworks through state corporate law doctrines, including the Trust Fund Doctrine and the Creditors-at-Risk Theory, while preserving managerial discretion through the business judgment rule and robust institutional oversight. These mechanisms collectively balance creditor protection with the need for effective reorganization. This Note argues that China should reform its Bankruptcy Law to expressly define directors’ fiduciary duties under the DIP model, with a clear emphasis on creditor protection and asset preservation during insolvency. It further contends that incorporating a tailored business judgment rule, strengthening disclosure and approval requirements for major transactions, and enhancing creditor enforcement rights are essential to restoring balance in the reorganization process. By clarifying director obligations and improving accountability, China can better safeguard creditor interests while maintaining the efficiency goals of the DIP model.

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