Practical issues of lawsuits confirming bankruptcy claims

By Xu Yu and Sun Hao, Hylands Law Firm
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The lawsuit confirming bankruptcy claims is the final procedure in which the debtor and creditor raise objections to the determination of claims by the administrator in bankruptcy proceedings.

Before the promulgation 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 (III) (interpretation III), there were certain differences in the provisions concerning the scope of plaintiffs, contents of claims, pre-procedure and time limit for litigation, all of which caused trouble for courts, administrators, creditors and debtors. This article, in combination with article 8 of interpretation III, analyzes the relevant key contents.

PLAINTIFF QUALIFICATION

Interpretation III clearly provides that the debtor and creditor have the right to object to the claims recorded in the list of claims and bring a lawsuit to the court after a certain pre-procedure has been carried out. That is, in the process of handling bankruptcy cases, only the debtor and the creditor have the right to object to the determination of the claims, and have the right of action derived from this.

bankruptcy
Xu Yu
Partner
Hylands Law Firm

There is no clear provision as to whether the debtor can send another person selected by its legal representative to participate in the lawsuit. The authors believe that although the Bankruptcy Law provides that the administrator decides the debtor’s internal management affairs, and represents the debtor in litigation and arbitration externally, based on the neutral position of the administrator and the consideration of eliminating reasonable doubt, the legal representative of the debtor or the entrusted agent ad litem should be allowed to appear in court to participate in the litigation, and the administrator should also participate in the litigation as the litigation representative.

SCOPE OF CLAIMS

bankruptcy
Sun Hao
Partner
Hylands Law Firm

The reason why a creditor brings the lawsuit of confirming the bankruptcy claims is that it does not recognize the amount of its claim determined by the administrator. In recent years, with the increasing complexity of bankruptcy cases, there is an increasing number of lawsuits of confirming the bankruptcy claims filed by the creditor due to the nature of the claims, whether there is security, and the confirmation of others’ claims. The following content focuses on the analysis of disputes over others’ claims.

The nature of others’ claims. Such disputes mostly exist in bankruptcy cases of real estate enterprises, and creditors as plaintiffs are usually creditors with mortgage rights on specific properties. According to the Bankruptcy Law, and the relevant approval of the Supreme People’s Court (SPC), after consumers have delivered all or most of the money for the purchase of commercial housing, they will enjoy the priority of compensation over the construction project price in bankruptcy liquidation, and will have priority over creditors enjoying general mortgage rights.

Based on this, creditors of construction project costs and creditors enjoying general mortgage rights often pay close attention to the determination of consumers’ claims. If a lawsuit of confirming the bankruptcy claims is filed for this reason, according to the judicial interpretation of the SPC, the motives of housing buyers, the payment, and whether there is a house under the buyer’s name are all the focus of court review.

The amount of others’ claims and whether they are secured. In accordance with the Bankruptcy Law, one of the basic principles for creditors to be repaid in bankruptcy proceedings is the equal proportion for claims of the same rank and nature. Therefore, the amount of money recognized by the administrator for other creditors, and whether there is any security or not, are directly related to the repayment amount of creditors. Therefore, in practice, creditors also pay more attention to the determination of the claims of other creditors.

THE PRE-PROCEDURE

The greatest advantage of settling disputes over the determination of claims through litigation lies in fairness, but there is no denying that a large number of disputes over the determination of claims are caused by poor communication. Therefore, interpretation III clearly provides that the lawsuit of confirming the bankruptcy claims shall be subject to pre-procedure, that is, the administrator shall first explain the reasons for the objection, and make explanation or adjustment.

If the dissenter still refuses to accept this, or the administrator refuses to explain or adjust it, it can be basically concluded that there is no possibility of settlement through communication between the dissenter and the creditor, and then the dissenter can bring a lawsuit to the court, after completing the pre-procedure.

TIME LIMIT FOR LITIGATION

Interpretation III confirms that the dissenter should file a lawsuit of confirming the bankruptcy claims within 15 days of completion of the verification of the creditors’ meeting. This solves the previous misunderstanding of the national courts on the time for filing a lawsuit of confirming the bankruptcy claims. However, the authors believe that there are still some disputes in practice, and it cannot be simply understood that the date of the conclusion of the creditors’ meeting is the starting date for the claims.

The creditor knows that the administrator’s determination of the claims declared by other creditors usually comes from the materials of the creditors’ meeting on the day and the meeting materials received. If any objection is found to the confirmed claims, even if it is raised on the same day, the possibility that the administrator will make an explanation or adjustment immediately is very slim.

Therefore, if “within 15 days after the completion of the verification of the creditors’ meeting” is understood as “within 15 days from the date when the administrator makes adjustment or explanation on the objection”, this provision will be more operable.

The provisions of article 8 of interpretation III not only effectively promote the resolution of difficult problems encountered by the courts in handling lawsuits of confirming the bankruptcy claims, but also strive to improve the “creditor participation index” in the “bankruptcy handling” indicator, the “bankruptcy framework strength index”, in the Global Business Environment Report issued by World Bank.

However, there are still some outstanding problems, including the failure to specify the charging standard for accepting lawsuits of confirming the claims, and the failure to specify how lawsuits objecting to the claims and bankruptcy proceedings should be linked up. The authors expect courts, administrators and enterprises to work together to improve this in future practices.

Xu Yu is a partner at Hylands Law Firm. He can be contacted on +8610 6502 8912 or by email at xuyu@hylandslaw.com

Sun Hao is a partner at Hylands Law Firm. He can be contacted on +8610 6502 8715 or by email at sunhao@hylandslaw.com