Application of ‘execution to bankruptcy’ rule

By Xia Yibin and Cai Jingjing, AnJie Law Firm
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The transfer of execution cases for bankruptcy review, referred to as “execution to bankruptcy” in judicial practice, is an effective channel for cases unable to execute to enter bankruptcy procedure through court transfer. The rule was first formally established in the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (Interpretation) implemented on 4 February 2015, and the specific operation procedures and rules were refined and clarified through the Opinions on Several Issues Concerning the Transfer of Execution Cases for Bankruptcy Review (Opinions) in January 2017.

Q: Before the rule was issued, the person subject to execution (the debtor) or its creditor could submit an application for execution of bankruptcy to courts. What is the practical significance of the issuance of the rule?

bankruptcy
Xia Yibin
AnJie Law Firm
Partner

A: Responding to reporters’ questions, the head of the Second Civil Division of the Supreme People’s Court (SPC) made it clear that the issuance of the rule is not only a sufficient judicial guarantee for China’s supply-side structural reform, but also a practical need to effectively resolve “zombie cases” in the execution field.

Before the issuance of the rule, the execution procedure and the bankruptcy procedure are implemented by the execution bureau and the trial division of courts, respectively, which are independent of each other, but occasionally intersect. For example, article 19 of the Enterprise Bankruptcy Law provides that after courts accept a bankruptcy application, the preservation measures of the debtor’s property shall be relieved, and the execution procedure shall be suspended.

bankruptcy
Cai Jingjing
AnJie Law Firm
Associate

Courts are somewhat passive in the above-mentioned procedures. Just imagine, when the execution is objectively impossible, and neither the person subject to execution nor the creditor applies for bankruptcy liquidation, what will happen to the person subject to execution and the execution case? Undoubtedly, as a new way to start the bankruptcy procedure, the rule breaks through the original passivity of the courts and provides a strong system guarantee for the transfer of execution cases to bankruptcy procedure through court.

Q: It has been more than three years since the issuance of the rule. What is the current situation with its application?

A: The authors find that since the issuance and implementation of the above-mentioned opinions, courts at all levels across the country have handled more than 3,800 cases entering bankruptcy procedures through execution, with an average of about 1,300 cases per year. Compared with the number of cases for which courts have completed the execution procedure in 2019, 2018 and 2017 – which are more than 1.8 million, 1.2 million and 1.3 million, respectively – the number of “execution to bankruptcy” cases is slightly smaller, though the number of cases in which the person subject to execution is a corporate entity only accounts for 1% of all the cases.

In practice, most of the cases ending the execution procedure are cases in which “the person subject to execution is found to have no property for execution after property investigation”, and most of these persons subject to execution are also found to be “enterprises of three no’s” – no premises, no personnel and no property, also known as zombie enterprises. The state of these enterprises basically meet the bankruptcy requirements specified in the Enterprise Bankruptcy Law and the opinions as “unable to pay due debts, and assets not sufficient to pay all debts or obviously insolvent”.

So, how can we make zombie enterprises exit the market reasonably and effectively? And how can we change “cases ending the execution procedure” to “cases completing execution”? The author believes there is still great room for development when applying the rule.

Q: Why aren’t there many cases applicable to the rule?

A: The authors believe on the one hand it is because of a case’s nature, and on the other hand it may be caused by the following practical reasons:

(1) Strict review standards. Responding to reporters’ questions, the head of the Second Civil Division of the SPC made it clear that when implementing the opinions, we should, considering the actual situation in the execution of backlog cases, adhere to the principle of “easy first, difficult later, step by step, and gradual implementation”, and pay attention to the pace of the “execution to bankruptcy”, and prevent cases from “entering and leaving” in large quantities.

In the early stage of implementing the opinions, the application of the rule is still in a bedding-in period. It is not surprising that the review standards of courts are relatively strict, which is not only conducive to controlling the number of cases, but also to improving trial quality.

(2) Subjective limitation of the parties. Article 1 of the opinions clearly specifies three requirements to be met when “execution to bankruptcy” is implemented. The authors believe that compared with other requirements, the requirement of expression of will, that is, “the written consent of the person subject to execution, or at least one applicant for execution, shall be obtained” affects the number of cases most.

In practice, the person subject to execution, or the applicant for execution, based on its own considerations, is often unwilling to apply for bankruptcy actively, and does not agree with the court’s transfer to bankruptcy. In such a case, the court’s initiative is greatly limited and the rule is actually inapplicable.

(3) The objective dilemma of execution costs. The rule mainly resolves “the cases impossible to execute”. Most of the cases have no property to be enforced, and thus no property to bear the bankruptcy costs. Courts can grant relief to bankruptcy costs, but how are administrator’s costs paid? Courts must consider these factors during the “execution to bankruptcy”.

Q: What are the prospects for the application of “execution to bankruptcy”?

A: As mentioned above, although the cases of “execution to bankruptcy” face certain practical difficulties, it is undeniable that the application of “execution to bankruptcy” still plays an obvious positive role in court cases that are “impossible to execute”, and also the withdrawal of zombie enterprises. Meanwhile, many courts are also actively exploring the implementation measures of the rule, such as Wuxi Intermediate Court’s own research and development of “a big data analysis system of the performance ability of the person subject to execution”, the establishment of a quick bankruptcy review mechanism, and the pilot development of a bankruptcy assistance fund in some regions. The authors believe that through the efforts of all parties, the rule will certainly shine brilliantly in the future.

Xia Yibin is a partner and Cai Jingjing is an associate at AnJie Law Firm

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