Are bankruptcy cases about to rise significantly?

By Xu Shengfeng and Li Chengwen, Zhong Lun Law Firm
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T he Supreme People’s Court on 6 February 2017 promulgated the Guiding Opinions on Several Issues concerning Enforcement Cases Referred for Bankruptcy Examination. This is a new initiative of the Supreme People’s Court to address “difficulties in enforcement”, and may also contribute to the application of the Enterprise Bankruptcy Law to a large extent. Before that, Shenzhen Intermediate People’s Court had made a trial implementation of Several Opinions Concerning Initiation of Bankruptcy Proceeding for Unenforceable Cases, in 2013. Guangdong High People’s Court also issued Several Opinions concerning Enforcement Cases Referred for Bankruptcy Examination on 17 November 2016. Therefore, successful conclusion of such cases was available in southern China before the issuance of the Supreme Court’s guiding opinions.

Xu Shengfeng-cutout
Xu Shengfeng
Senior Partner
Zhong Lun Law Firm

The Chinese court system has long been plagued by difficulties in enforcement. In the past decade, however, only 3,000 bankruptcy cases were accepted by courts at various levels throughout the country. The main reasons for such contradictions are as follows: If an enterprise subject to enforcement has no property to enforce, the enforcement case would be ruled as termination. The enterprise, however, will continue to exist as a “zombie” and relevant parties have no incentive to push such an enterprise to enter into bankruptcy proceedings. The guiding opinions were issued to that effect. It is also the realistic need of the people’s courts to follow the law of justice, improve the judiciary work mechanism, and solve remaining difficulties in enforcement.

The guiding opinions, however, cannot break through existing legal requirements since they are “guiding opinions”. In terms of initiation of bankruptcy cases, the guiding opinions impose restrictions on three aspects: (1) the subject must be an enterprise; (2) the subject must meet the substantial conditions set out in article 2 of the Enterprise Bankruptcy Law. In practice, all the parties subject to enforcement meet this requirement as enforcement against them is not likely to be made; and (3) it is conditioned on written consent from the parties subject to enforcement or the applicants of enforcement. It is a principle set out in China’s bankruptcy legislation that bankruptcy proceedings must be initiated upon application by interested parties.

In view of the different provisions of the Civil Procedure Law and the Enterprise Bankruptcy Law on territorial jurisdiction, the implementation of bankruptcy proceedings for referred cases will involve the determination of which court has jurisdiction over the referred bankruptcy cases. The guiding opinions in general apply the jurisdiction system under which “such cases must be under the jurisdiction of intermediate people’s courts in principle and basic people’s courts with exceptions”. This breaks through relevant previous provisions of the Supreme People’s Court. Of course, the court system may also transfer enforcement cases referred for bankruptcy proceedings to relevant basic people’s courts through designated jurisdiction.

It is important to note that “properties of the parties subject to enforcement, such as the bank deposit transferred to the account, actually seized movables and securities” were included into the properties of debtors in the guiding opinions, if such cases involve relevant properties of a debtor or the party subject to enforcement.

How can we prevent the enforcement proceedings of other enforcing courts during case referral? Technical processing is made in the guiding opinions in this regard. It requires that “the enforcing court must inform in writing all enforcing courts to its knowledge of its referral decision, and all enforcing courts must suspend their enforcement proceedings against the parties subject to enforcement”.

Li Chengwen-cutout
Li Chengwen
Non-equity Partner
Zhong Lun Law Firm

Undoubtedly, this requirement is one step forward from the system of “automatic suspension”, but it is conditioned on the receipt of such a notice, so that the actual effect may be compromised. In the authors’ view, it is more reasonable if the referring court makes an announcement while making a referral decision, and the announcement date must be the benchmark date for suspending enforcement of other courts. Nevertheless, it would inevitably go beyond the provisions of the existing bankruptcy law.

As for whether enforcement cases referred for bankruptcy proceedings should be understood in a broader sense, the authors believe that a part of properties of the party subject to enforcement can be reserved so that there is a possibility for the party subject to enforcement to cope with a debt crisis and survive, and that it is conducive to persuade the party subject to the enforcement to agree on the referral, since the guiding opinions do not exclude cases in which debtors have properties to be enforced.

In judicial practice of pilot handling of these kinds of cases in Shenzhen, the reorganization case of Shenzhen Shuizhi Industrial Development that the authors undertook is an enforcement case referred for bankruptcy proceedings. The parties subject to enforcement survived the reorganization procedures. At the same time, according to the guiding opinions, an enforcing court should suspend enforcement against the party subject to enforcement under the circumstance where the court accepting referral announces the bankruptcy of the party subject to enforcement, or the termination of reconciliation or reorganization procedures. Therefore, the bankruptcy proceedings here should be understood in a broader sense.

Provisions of the guiding opinions are relatively specific and operable by and large. The addition of channels for referring enforcement cases to bankruptcy proceedings will inevitably increase the number of bankruptcy cases accepted by the courts.

Whether the guiding opinions can be well applied in practice depends on solutions to bankruptcy costs for cases in which there is no property to be enforced and solutions to allocation of professional bankruptcy judges. We will have to wait and see the implementation effect of the guiding opinions other than judicial interpretation.

Xu Shengfeng is a senior partner at Zhong Lun Law Firm, the deputy director of Shenzhen Institute of Enterprise Bankruptcy and a senior researcher of the Bankruptcy Law Research Cen tre at China’s Renmin University. Li Chengwen is a non-equity partner at Zhong Lun Law Firm

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