In bankruptcy liquidation cases, the court has unclear provisions for declaring debtor bankruptcy. However, the Enterprise Bankruptcy Law prescribes clear legal conditions for the court to declare bankruptcy for reorganization and settlement cases.
Simultaneously, the conditions for the declaration of debtor bankruptcy in the ‘Minutes of the National Bankruptcy Trial Work Conference of the Supreme People’s Court” (Law [2018] No. 53)’ are difficult to read
Therefore, what is the legal basis for a bankruptcy liquidation administrator to apply to the court and declare the debtor bankrupt? Below, we analyze several legal provisions to clarify the proceedings.
Legal Provisions for the Court to Declare Debtors’ Bankruptcy
Art. 107, Enterprise Bankruptcy Law of the People’s Republic of China
Under the Enterprise Bankruptcy Law, there is only one provision regarding the court’s declaration of debtor bankruptcy that applies to bankruptcy liquidation cases, except for special provisions in the reorganization and settlement chapter, that is the Article 107 which stipulates: “If the people’s court declares the debtor bankrupt in accordance with the provisions of this Law, it shall serve the judgment on the debtor and the administrator within five days from the date of making the judgment, notify known creditors within ten days from the date of making the judgment, and make a public announcement. After the debtor is declared bankrupt, the debtor is called the bankrupt, and the debtor’s property is called the bankruptcy property. The creditor’s rights enjoyed by the people’s court against the debtor when accepting the bankruptcy application are called the bankruptcy creditor’s rights
This provision is a guiding provision but doesn’t establish any special conditions or requirements for the debtor to declare bankruptcy in bankruptcy liquidation cases.
Art. 32, Provisions of the Supreme People’s Court on Issues Concerning the Hearing of Enterprise Bankruptcy Cases
Such provision stipulates that the people’s court shall, after acceptance of a case on bankruptcy of the debtor, order to announce the bankruptcy of the debtor under any of the following circumstances:
a) the debtor is unable to repay the debts and to reach a conciliation agreement with the creditors;
b) the debtor does not implement or is unable to implement the conciliation agreement;
c) the debtor is under any of the circumstances provided for in Article 21 of the Enterprise Bankruptcy Law during the rectification; or
d) the debtor is under any of the circumstances provided for in Paragraph 2 of Article 22 of the Enterprise Bankruptcy Law after expiry of the period for rectification.
Whether this clause can be applied is contentious, the principle is that the court does not set special conditions and requirements to declare debtor bankruptcy, which is consistent with Article 107 of the Enterprise Bankruptcy Law.
Art. 23, Minutes of the National Conference on Bankruptcy Trial of Courts
Article 23 stipulates that: Conditions for bankruptcy declaration. After the people’s court accepts the bankruptcy liquidation application, if no application for reorganization or settlement is made at the first creditors’ meeting, the administrator shall promptly submit an application for bankruptcy declaration to the people’s court after confirming the creditor’s rights and conducting necessary audits and asset evaluations. After the people’s court accepts the bankruptcy settlement or reorganization application, if the debtor has legal reasons for bankruptcy declaration, the people’s court shall declare the debt in accordance with the law The debtor goes bankrupt.
According to this provision, after the court accepts the debtor’s bankruptcy liquidation application, the court shall declare the debtor bankrupt and fulfill the four conditions simultaneously:
a) no application for reorganization or settlement is made at the first creditors’ meeting;
b) the creditor’s rights review and confirmation are completed;
c) the necessary review and evaluation are completed;
d) administrator applies to the court.
Several Opinions on the Court’s Declaration of Bankruptcy of Debtors
Art. 107, Enterprise Bankruptcy Law of the People’s Republic of China
Article 107 of the Enterprise Bankruptcy Law stipulates that “in accordance with the provisions of this Law”, if it involves the situation after the court accepts the debtor’s reorganization application, it should be the provisions of Article 79 (3), Article 88, and Article 93 (1) of the Enterprise Bankruptcy Law; If it involves the situation after the court accepts the debtor’s settlement application, it should be stipulated in Articles 99, 103, and 104 of the Enterprise Bankruptcy Law; When it comes to the situation after the court accepts the debtor’s bankruptcy liquidation application, only Article 2 (1) of the Enterprise Bankruptcy Law stipulates: “If an enterprise as a legal person is unable to repay its due debts and its assets are insufficient to repay all debts or there is a clear lack of solvency, the debts shall be liquidated in accordance with the provisions of this Law.”
We understand that in terms of bankruptcy liquidation cases, the conditions for the court to declare the debtor bankrupt stipulated in the Enterprise Bankruptcy Law are consistent with the conditions for the court to accept the debtor’s bankruptcy stipulated in the Enterprise Bankruptcy Law. The conditions are as follows:
a) the debtor is unable to repay the matured debt, and the assets are insufficient to repay the debt; or
b) the debtor may be unable to repay the due debt and lack the ability to repay it
When to Declare Debtor Bankruptcy
Considering the possibility of bankruptcy liquidation proceedings being converted into reorganization or settlement proceedings after the court accepts the bankruptcy liquidation application, it is more appropriate for the administrator to apply to the court to declare the debtor bankruptcy during the first creditors’ meeting or within a limited period after the first creditors’ meeting.
Applying too early may result in the debtor losing the opportunity for reorganization or settlement. Whilst applying too late is unfavourable to the bankruptcy proceedings’ progress.
Conditions to Apply and Declare Debtor Bankruptcy
There are two conditions for the administrator to apply to declare debtor bankruptcy:
a) in terms of procedure, no one applies for reorganization or settlement;
b) in terms of entity, the debtor is unable to pay off its due debts, its assets are insufficient to pay off its debts, or the debtor is unable to pay off its due debts or cannot pay off its debts.
It is sometimes difficult to determine whether the debtor can repay the matured debt or if the assets are insufficient to repay the debt. The reason is that the value of “assets” is difficult to determine, and there is no consensus on whether it should be based on the asset value recorded in the debtor’s book, audited asset value, or evaluated asset value.
For the bankruptcy liquidation administrator, the simple approach for a debtor unable to repay due debt is to not consider whether the assets are sufficient to repay the unpaid debt but whether there is a “clear lack of solvency”. The reason is that although the law does not define how to determine the value of “assets”, there are explicit provisions regarding “obvious lack of solvency”.
Article 4 of Judicial Interpretation, 1 of the Enterprise Bankruptcy Law, stipulates: “If the debtor’s book assets are more significant than their liabilities, but there are any of the following circumstances, the people’s court shall determine that they cannot repay:
a) due to insufficient severe funds or inability to realize their assets, they are unable to repay their debts;
b) the whereabouts of the legal representative is unknown and there are no other personnel responsible for managing their assets, and they are unable to repay their debts;
c) unable to repay debts due to compulsory execution by the People’s Court;
d) long-term losses and difficulties in turning around operating losses, unable to repay debts;
e) other circumstances that result in the debtor losing its ability to repay.
According to this provision, if the administrator discovers that the debtor cannot repay the debt due to compulsory execution by the People’s Court, they can determine that the debtor is “clearly lacking in solvency” and meets the statutory conditions for declaring bankruptcy.
Can Creditor’s Rights Review, Auditing and Asset Evaluation be Prerequisites to Declare Bankruptcy?
Due to the ever-changing nature of bankruptcy liquidation cases, verifying and confirming creditors’ rights is difficult. Completing the work does not entirely depend on the diligence and responsibility of the administrator. At the same time, it could be argued whether the audit and evaluation work are necessary. Therefore, if the confirmation of creditor’s rights review and necessary audit and evaluation are prerequisites for the administrator to apply to the court to declare the debtor bankrupt, it may hinder the timely realization and distribution of the bankruptcy.
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