Zhejiang bankruptcy procedure involving criminal and civil liabilities

By Nafisa Nihmat and Rita Yan, Zhong Lun Law Firm
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In recent years, the number of bankruptcy cases has increased significantly, and the issue of the cases involving both criminal and civil liabilities has become more prominent, especially in the case of enterprise bankruptcy, where an enterprise or its actual controller, executive or legal representative is often involved in criminal crimes. This article provides new reference ideas for the promotion of bankruptcy procedure in cases involving both criminal and civil liabilities, by reference to the relevant provisions of Zhejiang province.

HANDLING MODE FOR CASES

At present, there are mainly two handling modes – “criminal procedure paralleling civil procedure” and “criminal procedure preceding civil procedure”. Pursuant to article 130 of the Minutes of the National Working Conference on the Trial of Civil and Commercial Cases by Courts, and article 150 of the Civil Procedure Law, the test for which mode to apply is “whether civil and commercial cases must be based on the trial results of relevant criminal cases”.

bankruptcy
Nafisa Nihmat
Partner
Zhong Lun Law Firm

In bankruptcy procedure, when the bankrupt enterprise, or its actual controller or legal representative, is involved in criminal cases, it should be determined by the test of “whether the relevant procedures in bankruptcy cases need to be based on the trial results of criminal cases”.

In accordance with the relevant provisions of the Summary of Discussions on the Handling of Cases Involving Both Criminal and Civil Liabilities in the Trial of Enterprise Bankruptcy Cases Involving Fund-raising Crimes by Zhejiang High People’s Court, and the Notice of Zhejiang High People’s Court on Printing and Distributing the Opinions on Serving the Overall Situation of Financial Reform and Properly Hearing Private Lending Disputes in Accordance with Laws, the core basis of which handling mode to adopt lies in whether the property involved in a case can be distinguished from the bankruptcy property.

bankruptcy
Rita Yan
Trainee
Zhong Lun Law Firm

The “criminal procedure paralleling civil procedure” handling mode. This mode is applied: (1) when bankrupt enterprises are involved in criminal cases and the property involved in the case can be distinguished from other properties of the debtor enterprises, in which case it can be considered that the settlement of civil and commercial cases does not need to be based on the trial results of criminal cases; and (2) where, after the enterprise bankruptcy case is accepted by the court, the controlling shareholders, actual controllers, legal representative or other executives of the enterprise are suspected of committing a crime, but the authorities responsible for the investigation, prosecution and trial of the suspected criminal acts believe that the criminal procedure will not have a substantial impact on the court’s hearing of the enterprise bankruptcy case, and where the property involved in criminal cases can be distinguished from other properties of the debtor enterprise.

The “criminal procedure preceding civil procedure” handling mode. This mode is applied: (1) when the bankruptcy procedure needs to be based on the trial results of criminal cases, the specific test of which is that the property involved in the case and the bankruptcy property are highly confused and cannot be distinguished; and (2) where it is found after the enterprise bankruptcy case is accepted by the court that the controlling shareholders, actual controllers, legal representative or other executives of the enterprise are suspected of committing a crime.

PRIORITY OF COMPENSATION

The “criminal procedure preceding civil procedure” mode. The criminal victims can get prioritized compensation through the criminal restitution. In accordance with article 64 of the Criminal Law and article 10 of the Provisions of the Supreme People’s Court on Partial Execution of Criminal Judgments Involving Property, when a criminal case is adjudicated, the victim can get prioritized compensation through the criminal restitution.

The “criminal procedure paralleling civil procedure” mode. The priority of the criminal victim’s compensation depends on whether the illicit money and goods involved in the case can be separated from the bankruptcy property, or whether the illicit money and goods involved can be specified.

Criminal victims have priority in compensation:

Application: When the illicit money and goods involved in the case can be separated from the bankruptcy property, or when the illicit money and goods involved can be specified, the criminal victim will have priority in compensation.

Priority: As the property illegally possessed by the debtor, the illicit money and goods can be retrieved pursuant to the recall right stipulated in article 38 of the Bankruptcy Law.

Basis: In accordance with article 10 of the Summary of Zhejiang High People’s Court, the property not owned by the debtor, which is illegally possessed by it due to its criminal act, can be retrieved by the victim through the administrator after the criminal judgment takes effect. Article 64 of the Criminal Law defines the property obtained by criminals from victims as “illegal gains”. At this time, the illicit money and goods are not owned by the debtor but are illegally possessed by the debtor. When the illicit money and goods can be separated from the bankruptcy property, or can be specified, the victims can retrieve them through the recall right, and have priority in compensation.

Criminal victims and creditors have the same priority of repayment:

Application: When the illicit money and goods involved in the case cannot be separated from the bankruptcy property, or specified, the criminal victim and the creditor should be repaid in the same order.

How to repay in the same order: At this time, it is impossible to clearly distinguish the illicit money and goods from the bankruptcy property, and the exercise of the recall right is blocked. The best way to deal with the criminal victim’s relief is by way of declaration of claims.

Basis: Since it is impossible to distinguish the illicit money and goods from the bankruptcy property, the rights of criminal victims can be incorporated into the bankruptcy law system, so that they can be realized in the same order as ordinary creditors. In this case, the authors suggest referring to article 8 of the above-mentioned summary, under which, when the criminal procedure is not over, the administrator can retain the quota of criminal victims registered as bankruptcy claims to protect the relevant rights and interests of criminal victims.

DECLARATION OF CLAIMS

In whose name to declare claims. Article 4 of the summary provides that the name of claim declaration is based on whether creditors are classified as victims of criminal cases: (1) relevant entities and individuals not classified as victims can declare their claims in the name of private lending creditors; and (2) those who are classified as victims of fund-raising crime can declare their claims as bankruptcy creditors, and at the same time the victims are given temporary voting rights in bankruptcy proceedings.

When criminal procedure parallels civil procedure, the preservation should be relieved and the execution should be suspended. In accordance with article 4 of the Notice of Zhejiang High People’s Court on Printing and Distributing the Opinions on Serving the Overall Situation of Financial Reform and Properly Hearing Private Lending Disputes in Accordance with Law, and article 12 of the Implementation Opinions on Improving Property Rights Protection System and Protecting Property Rights According to Law, issued by the Zhejiang Provincial Committee of the CPC and Zhejiang Provincial People’s Government, after the bankruptcy application of an enterprise is accepted, the relevant property preservation measures and execution procedures shall be terminated and suspended according to law.

DISTRIBUTION OF PROPERTY

Reserve the quota of criminal victims’ claims. In accordance with article 8 of the summary, when the criminal proceedings are not over, the administrator may retain the quota of the criminal victims, which are registered as bankruptcy claims.

The summary also creatively puts forward a conditional distribution scheme for the following three types of property: (1) the property handed over to the enterprise bankruptcy procedure for distribution after the criminal sealing and freezing measures are lifted; (2) the property recovered after the end of the criminal procedure; and (3) the legal property of the debtor enterprise that is not involved in the crime of fundraising and is returned according to law.

The assets of the debtor, the shareholders and the executives of the enterprise are jointly disposed of. (1) Premise of joint disposal: The property of the enterprise is highly confused with that of the shareholders or executives of the enterprise. (2) The court should make a decision on the joint disposal: Under the premise of high confusion, the court should make a decision on the joint disposal of the property of the debtor enterprise, and the “shareholders and executives of the enterprise”, after consulting the opinions of the creditors’ meeting, or the major creditors and relevant departments. (3) Keep the necessary living expenses of relevant personnel: In the joint disposal, liquidation and distribution scheme, attention should be paid to keeping the necessary expenses of the shareholders and executives of the bankrupt enterprise and their dependents in order to maintain social stability.

Nafisa Nihmat is a partner at Zhong Lun Law Firm. She can be contacted on +21 6061 3177 or by email at naifeisha@zhonglun.com

Rita Yan is a trainee at Zhong Lun Law Firm. She can be contacted on +21 6061 3177 or by email at ritayan@zhonglun.com

Joyce Wang, a salaried partner at the firm, also contributed. She can be contacted on +21 6061 3177 or by email at wangjianqin@zhonglun.com