A Brief analysis of How Bankruptcy System Provides Protection for Troubled Enterprises (Part 1)
In recent years, with the economic downturn and the impact of the epidemic, a large number of enterprises have fallen into debt crisis. The common self-rescue methods, such as extending the repayment period by pledging core assets of enterprises, selling core assets or borrowing new loans to repay old debts, are not very satisfactory, because the above-mentioned methods can only alleviate temporarily or solve a specific debt. As far as enterprises (debtors) that are caught in debt crisis or capital chain break are concerned, the difficulties they are facing are many, selling assets or new loans are often to quench their thirst, and finally even the enterprises (debtors) and their actual controllers can not save a small amount of their own funds and core assets. As far as the author is concerned, when the person in charge or the actual controller of the enterprise (debtor) knows that the capital chain of the enterprise (debtor) is broken and cannot be saved by himself alone, he should consider the bankruptcy procedure, which is also the way for all legal procedures to fully protect the enterprise (debtor).
The author discusses how the bankruptcy system can fully protect the enterprise (debtor) in debt crisis from the Angle of creditor's right and debt, litigation and execution. This paper will make a simple analysis from the perspective of creditor's rights and debts, including the performance of enterprise's (debtor's) main debt, the performance of secured debt, the repayment of debt and the recovery of accounts receivable/external claims.
一、Principal debt ceases to bear interest
Most of the companies (debtors) in debt crisis borrow money from banks or non-bank financial institutions, or even private loans with high interest rates. The interest generated by the loans will continue to drain the cash flow of the companies (debtors). If an enterprise (debtor) enters bankruptcy proceedings, in accordance with the provisions of paragraph 2 of Article 46 of the Enterprise Bankruptcy Law, the claim with interest shall cease to be interest-bearing from the time the bankruptcy application is accepted.That is, the date on which the enterprise (debtor) is ruled to accept bankruptcy by the court, all the interest and overdue liquidated damages of the enterprise (debtor) will automatically stop.
二、Interest on secured debt ceases to accede
In the process of financing, an enterprise (debtor) must be accompanied by a guarantee. One is that the enterprise (debtor) is the main debtor, and the shareholders, actual controllers or their close relatives of the enterprise (debtor) are the main guarantors and bear joint and several liability. Second, other subjects such as the shareholders, actual controllers or related parties of the enterprise (debtor) as the main debtor, and the enterprise (debtor) as the guarantee subject.
For the first case, if the enterprise (debtor) enters the bankruptcy procedure, according to the provisions of Article 46, paragraph 2 of the Enterprise Bankruptcy Law, the interest on the main debt and the overdue penalty interest cease to be calculated. For the secured debt borne by the shareholders, actual controllers or their close relatives of the enterprise (debtor) as the guarantee subject, according to the Article 22 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System of the Civil Code of the People's Republic of China [1], the secured debt will automatically stop accruing interest along with the main claim.That is, the secured debt borne by the shareholders, actual controllers or their close relatives of the enterprise (debtor) automatically ceases to bear interest after the enterprise (debtor) enters bankruptcy proceedings.
In the second case, as mentioned above, interest should automatically cease to be accrued on the secured debt incurred by the enterprise (debtor) as the guarantor subject, in accordance with Article 46, paragraph 2, of the Enterprise Insolvency Law.三、General collective settlement of all debts of the enterprise (debtor)
The bankruptcy procedure is a kind of legal procedure to solve the liquidation of the bankruptcy creditor's rights in a general way. [3] In other words, when the insolvency representative has completed the distribution of the insolvency estate in accordance with the insolvency estate distribution plan or reorganization plan, it should be considered that the claims of creditors have been fully satisfied, otherwise the objective of the insolvency proceedings will not be achieved. The general liquidation method of bankruptcy proceedings can completely solve and solve all debt problems of enterprises (debtors) in one go, including employee wages, taxes, claims secured by property, ordinary claims, and business claims.
It should be noted that the failure of some creditors to declare their claims in insolvency proceedings does not affect the effectiveness of the insolvency proceedings in respect of that claim. According to Article 56 [4] of the Enterprise Bankruptcy Law and Article 92 [5] of the Enterprise Bankruptcy Law, creditors who fail to declare their claims may make a supplementary declaration before the final distribution of the bankruptcy property; However, the distribution already made before will not be supplemented. In bankruptcy reorganization proceedings, the reorganization plan is binding on the debtor and all creditors, whether or not claims are declared.
To sum up, the bankruptcy procedure can be effective for all creditors of the enterprise (debtor), and can generally solve all the debt problems of the enterprise (debtor) at one time, so that the enterprise (debtor) can completely get rid of the situation of debt.四、Collection of accounts receivable/external claims
Before the enterprise (debtor) enters the bankruptcy procedure, there are often a large number of external claims of accounts receivable in the assets of the enterprise (debtor), and the enterprise (debtor) cannot immediately recover the money due to the inability to hire a lawyer or the litigation and execution procedure is too long, resulting in the enterprise (debtor) giving up the recovery of accounts receivable/external claims.
According to Article 73 [6] of the Provisions of the Supreme People's Court on Several Issues concerning the trial of Enterprise Bankruptcy Cases and Article 23 [7] of the Judicial Interpretation of the Bankruptcy Law II, after an enterprise (debtor) enters bankruptcy proceedings, the bankruptcy representative needs to conduct a comprehensive investigation of the debtor's property and perform the duty of property recovery.For a large number of receivables in the debtor's assets, the insolvency representative should also send a letter to the secondary debtor in time to recover.At the same time, the bankruptcy administrator is usually a law firm, with rich litigation experience, can recover accounts receivable through litigation, if the administrator refuses to recover without good reason, creditors can apply to the court to replace the administrator.
To sum up, after the enterprise (debtor) enters the bankruptcy procedure, on the one hand, the debt suspension reduces the liabilities of the enterprise (debtor); on the other hand, the insolvency representative collects external claims/receivables and increases the cash flow of the enterprise (debtor), thus improving the asset and liability situation of the enterprise (debtor).
[1] Article 22 of the Interpretation of the Supreme People's Court on the Application of the Relevant Guarantee System of the Civil Code of the People's Republic of China provides that "After the people's Court accepts the bankruptcy case of the debtor, the creditor requests the guarantor to assume the guarantee liability, and the guarantor maintains that: If the interest on the secured debt ceases from the date when the people's court accepts the bankruptcy application, the people's court shall support the guarantor's claim."
[2] Article 11 of the Notice of the Supreme People's Court on the issuance of the Minutes of the Civil and Commercial Trial Work Conference of the National Courts: "After the people's Court has accepted the bankruptcy application, the people's court shall not accept the new civil action filed by the creditor to demand the repayment of the debtor, and at the same time inform the creditor that it shall declare its creditor's rights to the administrator." After the creditor has declared his claims, if there is an objection to the list of claims prepared by the administrator, he may file an action for the confirmation of claims in accordance with Article 58 of the Enterprise Bankruptcy Law."
[3] "Types of creditor's Rights after Bankruptcy and their Rank Distinction", Peng Haibo, People's Court, March 24, 2022, edition 08
[4] Article 56 of the Enterprise Bankruptcy Law "If a creditor fails to declare his creditor's rights within the time limit for filing claims determined by the people's court, he may make a supplementary declaration before the final distribution of the bankruptcy property; However, the distribution already made before will not be supplemented. The expenses for the examination and confirmation of supplementary claims shall be borne by the supplementary claimants. A creditor that fails to declare its creditor's rights in accordance with the provisions of this Law shall not exercise its rights in accordance with the procedures provided for in this Law."
[5] Article 92 of the Enterprise Bankruptcy Law: "The reorganization plan approved by the people's court shall be binding on the debtor and all creditors." Creditors who fail to declare their creditor's rights in accordance with the provisions of this Law shall not exercise their rights during the execution of the reorganization plan; After the completion of the reorganization plan, the rights may be exercised in accordance with the repayment conditions of similar claims stipulated in the reorganization plan. The rights of creditors against the debtor's guarantors and other joint and several debtors are not affected by the reorganization plan."
[6] Article 73 of the Provisions of the Supreme People's Court on Several Issues concerning the Trial of Enterprise Bankruptcy Cases: "The liquidation group shall send a written notice to the debtors and property holders of the bankrupt enterprise, requiring the debtors and property holders to pay off debts or deliver property to the liquidation group within a specified time."
[7] Article 23 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 that: "Where the creditors, through the creditors' meeting or the creditors' committee, request the administrator to recover the debtor's property from the secondary debtor, the debtor's investor, etc., according to law, and the administrator refuses to recover the property without justifiable reasons, the creditors' meeting applies to the people's court for the replacement of the administrator in accordance with the provisions of Article 22 of the Enterprise Bankruptcy Law, the people's court shall support it."
