If the debtor is unable to pay off its due debts, can the creditor directly apply to the people's court for bankruptcy liquidation of the debtor for this reason? What other conditions must the debtor meet before the people's court can accept the bankruptcy liquidation application, thereby declaring the debtor bankrupt and entering the liquidation process? This article answers the above questions through a case of the Supreme People's Court, and attempts to interpret the bankruptcy cause system for readers' reference.

 

Referee gist

 

"If the debtor is unable to repay its debts as they fall due, the creditor has the right to apply to the people's court for bankruptcy liquidation of the debtor. However, whether to declare the debtor bankrupt and enter liquidation procedures requires the people's court to determine whether the debtor has bankruptcy reasons.". "When a creditor has a legally determined claim against the debtor, but there is another pending lawsuit between the two parties, so that the outcome of the trial of the case will directly affect the creditor's debt relationship between the two parties, and directly affect the determination of the debtor's solvency, the people's court should not make a determination that the debtor's assets are insufficient to pay off all of its debts or there is a significant lack of solvency, and should not accept the bankruptcy liquidation application against the debtor.".

 

Brief Introduction to the Case

 

1、 On July 26, 2018, Baoye Company applied for the enforcement of its construction project debt to Guangke Company in accordance with the civil judgments issued by Xining Intermediate People's Court and Qinghai Provincial High People's Court (2017) Qing 01 Min Chu No. 11 and (2018) Qing Min Zhong No. 63, but no property was enforced.

 

2、 On October 24, 2019, due to quality issues in construction projects, Guangke Company sued Baoye Company in the Xining Intermediate People's Court, requesting: 1. Order Baoye Company to bear the loss of 20000000 yuan caused to Guangke Company due to quality issues in the production line; 2. Order Baoye Company to pay a penalty of 6000000 yuan to Guangke Company.

 

3、 While the construction project quality litigation case is still in the process of being heard, and the responsibilities of both parties for the construction project contract dispute have not yet been clarified, Baoye Company submitted an application for bankruptcy liquidation of Guangke Company to the Xining Intermediate People's Court in 2020.

 

4、 After examination, the Xining Intermediate People's Court ruled that it would not accept the bankruptcy liquidation application of the applicant Baoye Company against the respondent Guangke Company.

 

5、 Baoye Company refuses to accept the ruling of the first instance and appeals to the Qinghai Provincial High People's Court, requesting the cancellation of Xining Intermediate People's Court's (2020) Qing 01 Bo Shen No. 22 civil ruling, and sending it back for reexamination or accepting the applicant's application according to law. After hearing, the Qinghai Provincial Higher People's Court rejected the appeal and upheld the original ruling.

 

6、 Baoye Company still refuses to accept and applies to the Supreme People's Court for retrial. After examination, the Supreme People's Court finally ruled to reject its retrial application.

 

Key points of adjudication

 

The core fact of this case is that although Baoye Company has a legitimate creditor's right due to Guangke Company, Guangke Company has filed a separate lawsuit against Baoye Company, which has resulted in the final determination of the creditor's right and debt relationship between the two parties. On this premise, Baoye Company, as a creditor, applies to the People's Court for bankruptcy liquidation of Guangke Company.

So, from a legal professional perspective, can the application of Baoye Company be accepted by the court?

 

According to Article 2 of the Bankruptcy Law, the debtor's inability to pay off its debts as they fall due is not sufficient to constitute a cause for bankruptcy for the debtor. In addition, the following conditions must be met: the debtor's assets are insufficient to pay off all of its debts, or there is a significant lack of solvency.

 

According to Article 7, Paragraph 2, of the Judicial Interpretation of the Bankruptcy Law (I), if the debtor is unable to pay off its debts as they fall due, the creditor has the right to directly apply to the people's court for bankruptcy liquidation of the debtor. However, whether to decide to accept the bankruptcy liquidation application requires the people's court to determine whether the debtor has bankruptcy reasons, that is, to determine that the debtor's assets are insufficient to pay off all of its debts, or to determine that the debtor clearly lacks solvency.

 

In this case, as the "Balance Sheet" and other written materials submitted by Optics Corporation can preliminarily prove that the asset liability ratio of Optics Corporation is 87.53%, it cannot be proved that the assets of Optics Corporation are insufficient to repay all debts. Therefore, the only possible or necessary condition for the court to determine that Guangke Company has a cause for bankruptcy and thus accept the bankruptcy liquidation application of Baoye Company is that Guangke Company obviously lacks solvency.

 

However, while the construction project quality case has not yet been resolved, there is a pending lawsuit between Baoye Company and Guangke Company, and the outcome of the case will directly affect the creditor's rights and debt relationship between Guangke Company and Baoye Company, as well as the recognition of the solvency of Guangke Company. Therefore, in this case, although Guangke Company was unable to repay its due debts, it was not sufficient to determine that Guangke Company's assets were not sufficient to repay all its debts, nor could it prove that Guangke Company was obviously lacking in solvency. Therefore, the three-level court did not accept the bankruptcy liquidation application against Guangke Company.

 

Summary of practical experience

 

China's bankruptcy legislation adopts a generalist legislative approach to the causes of bankruptcy. According to Article 2 of the Enterprise Bankruptcy Law, the reason for bankruptcy is that the enterprise legal person is unable to pay off its debts as they fall due, and its assets are insufficient to pay off all its debts or it is obviously lacking in solvency.

 

In terms of context, the causes of bankruptcy can be divided into two situations: first, the debtor cannot pay off its debts as they fall due, and the assets are insufficient to pay off all of its debts. Secondly, the debtor is unable to pay off debts as they fall due, and clearly lacks solvency. The former is mainly applicable to cases where debtors file bankruptcy liquidation applications, as well as cases where insolvency is evident and can be judged without evaluation and audit; The latter is mainly applicable to cases where creditors file bankruptcy liquidation applications and debtors file bankruptcy applications, and the phenomenon of insolvency is difficult to judge.

 

Regarding "non repayment", the debtor is unable to repay debts that have reached the repayment deadline, have made a demand for repayment, and have no reasonable disputes or have been determined by effective legal documents. If there is a reasonable dispute between the two parties regarding the debt to be repaid, an effective judgment should be made by a court or arbitration institution to confirm the relationship between rights and obligations, and give the debt a legally determined name and enforcement effect. Then, it can be judged whether the debtor is unable to repay the debt. At present, in our country, creditors who believe that the debtor will not be able to repay when the debt matures, or the debtor's request for postponing the repayment of the undue debt, cannot be regarded as insolvency in the bankruptcy law, because the repayment obligation has not yet occurred at this time.

 

With regard to "insolvency", creditors can apply for bankruptcy liquidation when the debtor is unable to pay off due debts, but there is no need to prove that the debtor has become insolvent when applying, as this exceeds the scope of the creditor's possible evidentiary ability. Article 7 (2) of the Enterprise Bankruptcy Law explicitly excludes the factor of "insolvency" in terms of the conditions for creditors to apply for bankruptcy liquidation. Therefore, when the debtor is unable to pay off its due debts, although the creditor has the right to apply for bankruptcy, it is also necessary to submit materials to prove that the debtor's assets are insufficient to pay off all of its debts or there is a significant lack of solvency, otherwise the people's court will not accept the bankruptcy application.

 

Regarding the "apparent lack of solvency", it is mainly aimed at the situation where the debtor's book assets are greater than its liabilities. In response, Article 4 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 (I) stipulates that although the debtor's book assets are greater than its liabilities, there are any of the following circumstances:, The people's court shall determine that it clearly lacks the ability to repay its debts: (1) it is unable to repay its debts due to reasons such as a serious shortage of funds or inability to realize its assets; （2） The legal representative's whereabouts are unknown and there are no other personnel responsible for managing the property, unable to pay off debts; （3） Unable to repay debts due to compulsory execution by the people's court; （4） Long-term losses and difficulties in turning around operating losses, unable to repay debts; （5） Other circumstances that cause the debtor to lose its solvency.

 

Relevant laws and regulations

 

Enterprise Bankruptcy Law of the People's Republic of China

 

"Article 2 If an enterprise as a legal person is unable to repay its debts as they fall due, and its assets are insufficient to repay all its debts, or it is obviously lacking in solvency, its debts shall be liquidated in accordance with the provisions of this Law.".

 

"An enterprise as a legal person may undergo reorganization in accordance with the provisions of this Law if it is under the circumstances specified in the preceding paragraph, or if it is likely to become significantly insolvent.".

 

"Article 7 If a debtor falls under the circumstances specified in Article 2 of this Law, it may apply to the people's court for reorganization, settlement, or bankruptcy liquidation.".

 

"If the debtor is unable to repay its debts as they fall due, the creditor may apply to the people's court for reorganization or bankruptcy liquidation of the debtor.".

 

 

 

Article 10 If a creditor files a bankruptcy application, the people's court shall notify the debtor within five days from the date of receiving the application. "If the debtor has objections to the application, it shall file a complaint with the people's court within seven days from the date of receiving the notice from the people's court.". The people's court shall decide whether to accept the objection within 10 days from the date of expiration of the objection period.

 

Except for the circumstances specified in the preceding paragraph, the people's court shall decide whether to accept the bankruptcy application within 15 days from the date of receiving it.

 

"If there are special circumstances that require an extension of the time limit for accepting a ruling as prescribed in the preceding two paragraphs, an extension of 15 days may be granted with the approval of the people's court at the next higher level.".

 

"Article 12 If the people's court decides not to accept a bankruptcy application, it shall serve the decision on the applicant and explain the reasons within five days from the date of making the decision.". "If the applicant is not satisfied with the ruling, he may file an appeal with the people's court at the next higher level within 10 days from the date of service of the ruling.".

 

"After accepting a bankruptcy application and before the bankruptcy declaration, the people's court may, if it is found through examination that the debtor does not meet the circumstances specified in Article 2 of this Law, rule to reject the application.". "If the applicant is not satisfied with the ruling, he may file an appeal with the people's court at the next higher level within 10 days from the date of service of the ruling.".

 

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" (1)

 

Article 1 If a debtor is unable to pay off its debts as they fall due and falls under any of the following circumstances, the people's court shall determine that it has bankruptcy reasons: (1) its assets are insufficient to pay off all its debts; （2） There is a clear lack of liquidity.

 

"If a relevant party claims that the debtor does not have the cause for bankruptcy on the ground that the person jointly and severally liable for the debtor's debts has not lost the ability to pay off, the people's court shall not support it.".

 

Article 2 Where the following circumstances exist simultaneously, the people's court shall determine that the debtor is unable to pay off its debts as they fall due: (1) The creditor's right debt relationship is established in accordance with law; （2） The debt performance period has expired; （3） The debtor has not fully paid off its debts.

 

"Article 3 If the balance sheet, audit report, asset evaluation report, etc. of the debtor indicate that all of its assets are insufficient to pay off all of its liabilities, the people's court shall determine that the debtor's assets are insufficient to pay off all of its liabilities, except where there is evidence to the contrary that the debtor's assets are able to pay off all of its liabilities.".

 

Article 4 Where a debtor's book assets are greater than its liabilities, but there are any of the following circumstances, the people's court shall determine that it is obviously lacking in solvency: (1) Due to serious shortage of funds or inability to realize its assets, it is unable to repay its debts; （2） The legal representative's whereabouts are unknown and there are no other personnel responsible for managing the property, unable to pay off debts; （3） Unable to repay debts due to compulsory execution by the people's court; （4） Long-term losses and difficulties in turning around operating losses, unable to repay debts; （5） Other circumstances that cause the debtor to lose its solvency.

 

Article 7 When receiving a bankruptcy application, the people's court shall provide the applicant with written evidence of receipt of the application and the accompanying evidence.

 

After receiving a bankruptcy application, the people's court shall promptly review the applicant's main qualifications, the debtor's main qualifications, the reasons for bankruptcy, as well as relevant materials and evidence, and make a decision on whether to accept it in accordance with Article 10 of the Enterprise Bankruptcy Law.

 

"If the people's court believes that the applicant should supplement or correct relevant materials, it shall notify the applicant within five days from the date of receiving the bankruptcy application.". The period for the parties to supplement and correct relevant materials shall not be included in the period specified in Article 10 of the Enterprise Bankruptcy Law.

 

Court decisions

 

After examination, the Supreme People's Court stated in the "Opinions of the Court" section:

 

（1） There are situations where there is a lack of evidence to prove the basic facts identified in the original ruling, the main evidence for determining the facts is falsified, and there are indeed errors in the application of the law. Article 7, paragraph 2, of the Enterprise Bankruptcy Law of the People's Republic of China stipulates: "If the debtor is unable to pay off its debts as they fall due, the creditor may apply to the people's court for reorganization or bankruptcy liquidation of the debtor." Article 2, paragraph 1, stipulates: "If an enterprise as a legal person is unable to pay off its debts as they fall due, and its assets are insufficient to pay off all its debts or it is obviously lacking in solvency, the debts shall be liquidated in accordance with the provisions of this Law.", "If the debtor is unable to repay its due debts, the creditor has the right to apply to the people's court for bankruptcy liquidation of the debtor. However, whether to declare the debtor bankrupt and enter liquidation procedures requires the people's court to determine whether the debtor has bankruptcy reasons.". In this case, the creditor's right enjoyed by Baoye Company to Guangke Company is the (2018) Qing Min Zhong No. 63 civil judgment ordering Guangke Company to pay for the construction of photovoltaic glass calendering production line to Baoye Company. However, due to the objections raised by Optics Technology Co., Ltd. to the quality of the project, it has filed a separate lawsuit, with the case number of (2019) Qing 01 Min Chu No. 665, requiring Baoye Company to bear the losses and liquidated damages caused to Optics Technology Co., Ltd. due to the quality issues of the project. The case is currently under trial. There is a pending lawsuit between Baoye Company and Guangke Company, and the trial result of this case will directly affect the creditor's rights and debt relationship between Guangke Company and Baoye Company, and directly affect the determination of the solvency of Guangke Company. In addition, the "Balance Sheet" and other written materials submitted by Optics Corporation can preliminarily prove that the current asset liability ratio of Optics Corporation is 87.53%. Baoye Company only claimed that the evidence submitted by Guangke Company was unilateral evidence and failed to provide evidence to prove that the evidence was forged. Therefore, the existing evidence cannot prove that the assets of Guangke Company are insufficient to pay off all debts. The original ruling determined that Guangke Company did not meet the conditions for bankruptcy and did not improperly accept Baoye Company's application for bankruptcy liquidation of Guangke Company. "If the basic facts determined in the original ruling by Baoye Company lack evidence to prove, the main evidence for determining the facts is falsified, and there is indeed an error in the applicable law, the application for retrial cannot be established.".

 

（2） The question of whether the main evidence for determining the facts in the original ruling has not been cross-examined. Article 10, Paragraph 1, of the Enterprise Bankruptcy Law of the People's Republic of China stipulates: "If a creditor files a bankruptcy application, the people's court shall notify the debtor within five days from the date of receiving the application. If the debtor has objections to the application, it shall file them with the people's court within seven days from the date of receiving the notice from the people's court. The people's court shall decide whether to accept the application within ten days from the date of expiration of the objection." Article 7 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" (I) stipulates that: "When receiving a bankruptcy application, the people's court shall provide the applicant with written evidence of receipt of the application and the accompanying evidence. After receiving the bankruptcy application, the people's court shall promptly review the applicant's main qualifications, the debtor's main qualifications, the reasons for bankruptcy, as well as relevant materials and evidence, and make a decision on whether to accept the application in accordance with Article 10 of the Enterprise Bankruptcy Law. The people's court believes that the applicant should supplement and correct relevant materials." The applicant shall be notified within five days from the date of receiving the bankruptcy application. "The period for the parties to supplement and correct relevant materials shall not be included in the period specified in Article 10 of the Enterprise Bankruptcy Law." Holding hearings and cross-examination is not a necessary procedure for the people's court to decide whether to accept the bankruptcy liquidation application stage. The (2019) Qing 01 Min Chu No. 665 contract dispute case between Baoye Company and Guangke Company is in the first instance trial process, which is an objective fact. Baoye Company has not raised any objection to this. Therefore, the application of Baoye Company for retrial of the court of first and second instance that violates the requirements of the bankruptcy liquidation case review procedure and the main evidence for determining the facts in the original ruling has not been cross-examined cannot be established.

 

Case source: Shanghai Baoye Group Co., Ltd., Qinghai Guangke Photovoltaic Glass Co., Ltd. Apply for Bankruptcy Liquidation and Other Civil Rulings [Supreme People's Court, (2021) Supreme Court Minshen No. 4917]