Chen Yangping
Payment of debts to individual
creditors (hereinafter also referred to as “individual payoff”) refers to the
debtor’s payment to individual creditors when the debtor is already subject to
bankruptcy because of a certain reason. The P.R.C. Bankruptcy Law endows
bankruptcy administrators the right to revoke such payment to individual
creditors; in other words, after the bankruptcy proceedings begin, the
bankruptcy administrator petitions with the people’s court to revoke the
bankruptcy debtor’s acts committed within a statutory period prior to the
bankruptcy proceedings that jeopardize the creditor’s interests, and return the
property profits generated by such acts to rights over the bankruptcy
properties. The right of revocation is to ensure that all creditors will be
paid from the bankruptcy properties on a justified basis, and presents the
irreplaceable role played by the bankruptcy system. The recently promulgated
judicial interpretations add more restrictive conditions to individual payoff
made by bankruptcy administrators through judicial proceedings, which will be
covered in the following discussions:
I.Provisions on Exercising the Right to
Revoke Individual Payoff under the Bankruptcy Law
Article 32 of the P.R.C.
Enterprise Bankruptcy Law provides as follows: Within six months before the
People's Court accepts the application for bankruptcy, if the debtor is in any
of the circumstances set forth in Article 2.1 of this Law but still pays off
debts to individual creditors, the administrator is entitled to request the
People's Court to revoke the payoff unless the debtor's property benefits from
such payoff. Article 2 of the same law provides as follows: Where an enterprise
legal person is unable to pay off its debts due, and its assets are not
sufficient to pay off all its debts or such legal person is obviously insolvent,
its debts shall be liquidated in accordance with this Law.
Based on the
foregoing provisions, the administrator should meet the following four
conditions before exercising the right of revocation: (1) Timing: within six
months before the court accepts the application for bankruptcy; (2) Conditions
for the behavior: payoff to individual creditors; (3) Property conditions: the
debtor is subject to bankruptcy for a certain cause; and (4) An additional
requirement: the payoff does not benefit the debtor’s property. Since these four
conditions do not involve the debtor’s subjective conditions, i.e., legislation
does not consider whether or not the debtor or the paid-off individual creditors
have bad faith, but simply and objectively comment on whether or not the right
of revocation in bankruptcy can be exercised. Meanwhile the bankruptcy law does
not restrict the means through which the debts are paid off, i.e. it does not
matter whether such payoff is made voluntarily or compelled through judicial
proceedings; as long as payoff to individual creditors exists, the behavior
condition under the foregoing provisions will be satisfied.
II.Provisions of
the Judicial Interpretations on Exercising the Right to Revoke Individual Payoff
Caused by Judicial Proceedings
Article 15 of the Provisions of the Supreme
People's Court on Several Issues Concerning the Application of the Enterprise
Bankruptcy Law of the People's Republic of China (II) provides as follows: With
regard to debtor's payoff to individual creditors through litigation,
arbitration and enforcement procedures, if the administrator petitions for
revocation of such payoff in accordance with Article 32 of the Enterprise
Bankruptcy Law of the People's Republic of China, the people's court shall not
support such petition, unless the debtor collaborates with relevant creditors in
bad faith to jeopardize the interests of the other creditors. According to the
Supreme Court’s explanations of the provisions, the payoff herein actually
covers two aspects: (1) after the court’s civil judgment, civil mediation
decision or arbitral award comes into effect but before the enforcement
procedure is initiated, the debtor voluntarily performs the payment obligation
under such effected judgment, decision or award and thereby forms the individual
payoff; and (2) after the foregoing judgment, decision or award comes into
effect, the creditor initiated the enforcement procedure in accordance with the
law, and the debtor is therefore compelled to perform the payment obligation,
which also forms the individual payoff.
According to the foregoing judicial
interpretation provision, within the period allowing exercise of the right of
revocation set forth in Article 32 of the Bankruptcy Law, if a creditor is paid
off through the litigation, arbitration or enforcement procedure, the
administrator will not be able to exercise the right of revocation in accordance
with the same article, unless there is evidence to prove the parties have bad
faith in the payoff.
This judicial interpretation provision restricts
exercise of the right of revocation under the Bankruptcy Law: in the event of
individual payoff through judicial proceedings, whether or not the parties had
bad faith is an additional condition for determining whether the administrator
can exercise the right to revoke the payoff. Accordingly, if no evidence of bad
faith is available, neither the debtor’s voluntary payoff in accordance with the
judgment, decision or award nor the compelled payoff by the enforcement
procedure initiated by the creditor is revocable. In other words, it is likely
that the ordinary creditors can receive full payment that they cannot obtain
through the bankruptcy proceedings, which results in that creditors with equal
amounts of debt and in equal positions are not equally paid in the
end.
III.Exactly Opposite Views in the Draft Version for Comments and the
Formally Promulgated Version of the Judicial Interpretations
Article 14-1 of
the Draft for Comments of the Provisions of the Supreme People's Court on
Several Issues Concerning the Application of the Enterprise Bankruptcy Law of
the People's Republic of China (II) provides as follows: where a debtor makes an
individual payoff for the purpose of performing an effected judgment, a
mediation decision or an arbitral award, if the administrator petitions to
revoke such payoff, the people’s court shall support such petition. Article 14-2
of the Draft further provides as follows: where a debtor makes an individual
payoff compelled by the relevant enforcement action, if the administrator
petitions to revoke such payoff, the people’s court shall support such petition.
Based on the Draft for Comment, the courts used to hold that in general
circumstances individual payoff based on an effected judgment or an enforcement
action can be revoked; however, the formally promulgated version sets forth
provisions exactly opposite to the foregoing views, which was probably because a
denial of revocability of effective judgments and enforcement actions finally
prevailed. According to such a view, the right of revocation in bankruptcy
applies to civil acts between civil subjects, while the enforcement action is an
act out of public power, and consequently holding the enforcement action as the
target of the right of revocation does not conform to the conditions for
exercising such a right. Furthermore, if a civil act is confirmed in an
effective judgment or decision and has already been performed, and if a petition
is still made to revoke such an act, then the basic relationship on which the
effective judgment or decision confirming the civil act relies will be changed
and it will be difficult to determine the validity status of the effective
judgment or decision. In conclusion, it will be inappropriate, whether the
target of the revocation is a civil act or an enforcement action.
IV.The
Author’s Views
1.Since it is the act of payoff which is revoked, the
confirmation effect of the debts is not denied; consequently, the validity of
effective judgments will not be affected.
Both payoff voluntarily made by the
debtor for the purpose of performing an effective judgment and payoff compelled
in the enforcement procedure initiated by the creditor include two links: (1)
confirmation of the debt; and (2) payment of the debt. The revocation prescribed
in Article 32 of the Bankruptcy Law is targeted at payment of the debt; in other
words, the administrator does not petition to revoke the effective judgment or
decision, but instead the payoff to individual creditors. Consequently, such
revocation will not affect the finality and authority of the effective judgment
or decision, the rechtskraft and the binding power of which will remain
unchanged after the revocation. The only change lies in the means that the
enforcement power is exercised, i.e. the original individual enforcement will
become enforcement through the collective bankruptcy proceedings ; the creditor
can claim their rights through the debts declaration procedure, and include the
individual enforcement into the bankruptcy proceedings for fair
allocation.
2.The judicial interpretations restrict the administrator’s
exercise of the right of revocation, which conflicts the basic principle of fair
repayment under the bankruptcy law.
The judicial interpretations impose
restrictions on the administrator’s exercise of the right of revocation, i.e.
only when the debtor and the creditor have malicious conspiracy to jeopardize
the interests of the other creditors will the administrator be able to exercise
the right to revoke the effective judgment or decision or the enforcement
action. Nevertheless, the judicial interpretations do not provide a further
definition for the term malicious conspiracy, for example, can malicious
conspiracy be established as long as there is evidence to prove that the debtor
is already aware of the cause of bankruptcy but still repays the debt to an
individual creditor? Can malicious conspiracy be established if the creditor is
an affiliated enterprise of the debtor or has a special relationship with the
debtor? Should the evidence be produced by the debtor or the repaid creditor?
Such a lack of explicit provisions will necessarily cause difficulties for the
administrator’s exercise of the right of revocation. Furthermore, an enforcement
action taken by the court based on local protectionism or a conspiracy between
the creditor and the court can also lead to individual payoff and cause damages
to the other creditors; however, since the debtor is obviously not involved in
such malicious conspiracy, the administrator cannot exercise the right of
revocation because the precondition for exercising the right to revoke effective
judgment or decision or enforcement action under the judicial interpretations is
not satisfied.
If the administrator cannot effectively exercise the right of
revocation, it means that different proportions of repayment will be determined
in different proceedings (i.e. litigation and bankruptcy), and consequently no
impartiality can be reflected. One basic principle of the Bankruptcy Law is fair
repayment for creditors, which means that creditor’s rights of the same nature
and in the same amount should be repaid at the same proportion. Article 32 of
the Bankruptcy Law was actually formulated to ensure the creditors’ right of
fair repayment to a larger extent, and consequently there should be no
exceptional circumstance because of intervention of any public power. The
consequence caused by application of the judicial interpretations will be in
conflict with the basic principle of the Bankruptcy Law.
3.Application of the
judicial interpretations will likely cause contesting lawsuits and “bankruptcy”
of the bankruptcy mechanism.
Generally speaking, if the voluntary payoff
based on an effective judgment or the enforcement action cannot be revoked, it
will surely lead to that the creditors claim their rights by filing different
lawsuits, which will in turn quickly divide up the debtor’s property and when
actually entering the bankruptcy proceedings, no property will be available for
allocation and the creditors will lose the opportunity to fair repayment and
cannot recover the property by the right of revocation. For the creditors, now
that they can obtain excessive repayment through the litigation proceedings,
they surely will not initiate the bankruptcy proceedings, which will likely lead
to “bankruptcy” of the bankruptcy mechanism.
V.Conclusion
The most
important principle of the bankruptcy law is fair repayment, and such fairness
should more be reflected in substantive rights, i.e. the repayment proportions
of the creditors. If an individual creditor is excessively repaid through
irrevocable judicial proceedings, it will be obviously unfair to the other
creditors and will cause a massive impact on the bankruptcy mechanism. For these
reasons, the author believes that the provisions on the right to revoke
individual payoff through judicial proceedings in the judicial interpretations
are inappropriate.
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