In bankruptcy practice, the debtor is usually insolvent, and the creditor's debt repayment rate is generally relatively low, so the creditor cannot be fully repaid. What creditors want is an increase in the debtor's assets or, as far as possible, to include all relevant assets in the bankruptcy property to improve the repayment rate. The question is, when the bankruptcy proceedings have ended, and the shareholders of the bankrupt (i.e., the original debtor) still have unpaid capital contributions, can the creditors, through ordinary civil proceedings, require the shareholders of the bankrupt to assume supplementary liability for repayment of the bankrupt's bankruptcy debts within the scope of their unpaid capital contributions?This article reveals the answer to this question through a case of the Supreme People's Court. 

Referee gist

Bankruptcy proceedings are collective compulsory liquidation proceedings. The commencement of bankruptcy proceedings means the suspension of individual liquidation proceedings. When the bankruptcy proceedings are concluded, the individual liquidation proceedings resume. After the completion of the bankruptcy proceedings, creditors who claim recourse in the bankruptcy proceedings can still pursue false capital contributions or shareholders who have withdrawn their capital contributions from the bankrupt through ordinary civil proceedings, requiring shareholders who have made false capital contributions or withdrawn their capital contributions from the bankrupt to bear supplementary compensation responsibilities within the corresponding scope. 

Brief Introduction to the Case

1、 In 1997, Beijing University Zhongji Company was established with a registered capital of 10 million yuan. The original shareholders were Sanya Sanhe Company and Hainan Jinxia Company, each contributing 5 million yuan. After that, Beijing University Zhongji Company made capital increase and equity transfer, but the registered capital of 10 million yuan subscribed by the original shareholders was not fully paid in. 

2、 On April 24, 2006, Peking University Zhongji Company was ruled bankrupt by the Shenzhen Intermediate Court and taken over by the liquidation team. In 2007, the Shenzhen Intermediate People's Court ruled that one of the creditors, Agricultural Bank of China Shenzhen Branch, enjoyed over 60 million yuan of debt principal and interest on PKU Zhongji Company. 

3、 During the bankruptcy proceedings, the liquidation team found that some shareholders of Peking University Zhongji Company had made false capital contributions or withdrawn their capital contributions. However, at that time, the bankruptcy property of Peking University Zhongji Company had already been distributed, and a claim for compensation against the shareholders who made false capital contributions or withdrew their capital contributions required each creditor to pay the litigation expenses in proportion. As the disposal plan proposed by the liquidation team was not approved by the creditors' meeting, As a result, the liquidation team cannot pursue false capital contributions or shareholders who have withdrawn capital during the bankruptcy proceedings. In April 2008, the Shenzhen Intermediate Court ruled that the bankruptcy proceedings were ended. 

4、 On April 23, 2010, Agricultural Bank of China (ABC) Shenzhen Branch filed a lawsuit with the Shenzhen Intermediate People's Court, requesting a decree that Hainan Jinxia Company bear the liability to repay the debts of Beijing University Zhongji Company within the principal and interest range of 5 million yuan. 

5、 On November 14, 2012, the Shenzhen Intermediate Court ruled in the first instance that Hainan Jinxia Company shall be liable for compensation to the Agricultural Bank of China Shenzhen Branch for the debts owed by Peking University Zhongji Company to the Agricultural Bank of China Shenzhen Branch within the false capital contribution principal of 5 million yuan and interest. 

6、 Hainan Jinxia Company is not satisfied and has filed an appeal to the Guangdong High Court. The second instance decision of the Guangdong High Court rejected the appeal and upheld the original judgment. Later, Hainan Jinxia Company applied to the Supreme Court for retrial, and on October 31, 2014, the Supreme Court rejected its application for retrial. 

7、 Hainan Jinxia Company still refuses to accept and applies to the procuratorial organ for supervision. The Supreme People's Procuratorate lodged a protest with the Supreme Court. On June 8, 2016, after the Supreme Court brought the case to trial, it ultimately upheld the second instance judgment of the Guangdong High Court. This concludes the case. 

Analysis of key points of adjudication

The core fact of this case is that during the bankruptcy proceedings of Peking University Zhongji Company, the liquidation team discovered at the late stage of bankruptcy liquidation that some shareholders of Peking University Zhongji Company had made false capital contributions or withdrawn capital contributions. However, at that time, the bankruptcy property of Peking University Zhongji Company had been distributed and the false capital contributions had been madeThe shareholders of Peking University Zhongji Company who withdrew their capital contributions filed a claim for compensation and required each creditor to pay the litigation expenses in proportion. As the settlement plan proposed by the liquidation group was not approved by the creditors' meeting, the liquidation group was unable to pursue false capital contributions or withdrawn capital contributions in the bankruptcy proceedings. Subsequently, the bankruptcy proceedings were adjudicated to be concluded. However, since then, the creditor's rights of Agricultural Bank of China Shenzhen Branch have not been fully repaid, but it has not waived its recourse to the remaining claims. However, other creditors (including the other four creditors who agreed to pursue in the bankruptcy proceedings) have never claimed recourse. 

After the bankruptcy proceedings have ended, ABC Shenzhen Branch will file a separate ordinary civil lawsuit to request Hainan Jinxia Company, a shareholder with false capital contributions, to assume supplementary liability for the debts that the bankrupt Beijing University Zhongji Company failed to repay. Can it obtain court support?

The Supreme Court believes that it can receive support for the following reasons: 

First, according to Article 123 of the Bankruptcy Law, supplementary distribution refers to the supplementary distribution of newly discovered property belonging to the bankrupt that can be used for bankruptcy distribution by the people's court according to the bankruptcy property distribution plan to creditors who have not yet been fully paid off after the completion of bankruptcy proceedings. In this case, the liquidation team has discovered during the bankruptcy proceedings that shareholders have not paid in their capital contributions and have not waived their recourse rights, so this case does not meet the conditions for additional distribution. 

Second, Agricultural Bank of China Shenzhen Branch has actively claimed rights during the bankruptcy proceedings, while other creditors (including the other four creditors who agreed to pursue in the bankruptcy proceedings) have never claimed rights. Therefore, Agricultural Bank of China Shenzhen Branch claims rights from shareholders who have made false contributions to Beijing University Zhongji Company, and it does not harm the interests of other creditors of Beijing University Zhongji Company. 

Thirdly, bankruptcy proceedings are collective compulsory liquidation proceedings, and the commencement of bankruptcy proceedings means the suspension of individual liquidation proceedings. When the bankruptcy proceedings are concluded, the individual liquidation proceedings resume. However, the settlement plan proposed by the liquidation group in this case was not approved by a majority of creditors, but did not exempt the debtor from its debts. Instead, the shareholder's contribution was not treated in the bankruptcy proceedings. Creditors who claim compensation have the right to pursue the defective contribution shareholders after the completion of the bankruptcy proceedings. 

Summary of practical experience

Bankruptcy proceedings are collective compulsory liquidation proceedings, and the commencement of bankruptcy proceedings means the suspension of individual liquidation proceedings. After the commencement of bankruptcy proceedings, all debtors' property should be included in the bankruptcy proceedings and all creditors should be paid off together. The administrator should collect claims from the debtors' debtors according to law, as well as recover unpaid capital contributions, withdraw capital contributions, and mix up property with the debtors' contributors, in order to achieve the integrity of the debtors' property and ensure the maximization of the interests of all creditors. 

Therefore, after the acceptance of a bankruptcy application, all settlements based on the debtor's property should be resolved through bankruptcy proceedings, rather than individual settlements through individual litigation, arbitration, or enforcement. However, this case is an exception, and the most critical reason is that the liquidation team has already discovered that the shareholder's contribution was untrue during the bankruptcy proceedings, rather than newly discovered after the completion of the bankruptcy proceedings, so this case does not meet the conditions for additional distribution. Moreover, other creditors except Agricultural Bank of China (including the other four creditors who agreed to pursue the case) did not file relevant lawsuits to claim the right of recourse until the end of the retrial hearing of this case. Therefore, Agricultural Bank of China has the right to independently file a separate ordinary civil lawsuit, requiring shareholders with defective capital contributions to bear additional liability for compensation. 

It can be seen that in bankruptcy proceedings, creditors should urge the administrator to use every means to recover the debtor's property and expand the scope of the debtor's liability for property as much as possible. If it is found that the shareholders of the bankrupt have defective capital contributions or evaded capital contributions, the administrator may require the shareholders to make up their capital contributions to increase the bankruptcy property. However, after the end of the bankruptcy proceedings, if there are still circumstances such as the discovery of shareholders' unrealized capital contributions during the bankruptcy proceedings, creditors who have not waived their recourse to the remaining claims have the right to file a separate ordinary civil lawsuit, requesting shareholders who have made unrealized capital contributions to assume additional responsibility for their outstanding claims. 

Relevant laws and regulations

Enterprise Bankruptcy Law of the People's Republic of China

"Article 16 After the people's court accepts a bankruptcy application, the debtor's payment of debts to individual creditors is invalid.". 

"Article 17 After the people's court accepts a bankruptcy application, the debtor or property holder of the debtor shall pay off the debt or deliver property to the administrator.". 

"If the debtor or property holder of the debtor intentionally violates the provisions of the preceding paragraph to pay off his debts or deliver property to the debtor, causing losses to the creditor, he shall not be relieved of his obligation to pay off his debts or deliver property.". 

"Article 35 After the people's court has accepted the bankruptcy application, if the debtor's capital contributor has not fully fulfilled its capital contribution obligations, the administrator shall require the capital contributor to pay the subscribed capital contribution, regardless of the limitation of the time limit for capital contribution.". 

"Article 123 Within two years from the date when the bankruptcy proceedings are concluded in accordance with the provisions of Paragraph 4 of Article 43 or Article 120 of this Law, creditors may request the people's court to make additional distributions in accordance with the bankruptcy property distribution plan under any of the following circumstances:" 

（1） "Discovering any property that should be recovered in accordance with the provisions of Articles 31, 32, 33, or 36 of this Law;"; 

（2） It is discovered that the bankrupt has other property that should be available for distribution. 

"Under the circumstances specified in the preceding paragraph, if the amount of property is not sufficient to cover the distribution expenses, no additional distribution will be made, and the people's court shall hand it over to the national treasury.". 

"Article 124 After the conclusion of the bankruptcy proceedings, the guarantor and other joint and several debtors of the bankrupt shall continue to bear the liability for paying off the outstanding claims of creditors in accordance with the bankruptcy liquidation procedures according to law.". 

Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (3)

Article 13 Where a creditor of a company requests a shareholder who has not performed or fully performed his or her capital contribution obligations to bear supplementary compensation liability for the portion of the company's debts that cannot be repaid within the scope of the principal and interest of the non capital contribution, the people's court shall support it; "If a shareholder who has not fulfilled or fully fulfilled his obligation to contribute capital has already assumed the above responsibilities, and other creditors make the same request, the people's court will not support it.". 

Article 18 If a shareholder of a limited liability company transfers its equity without fulfilling or fully fulfilling its capital contribution obligations, and the transferee knows or should know about it, the company requests the shareholder to fulfill its capital contribution obligations, and the transferee is jointly and severally liable for it, the people's court shall support it; "If a creditor of the company brings a lawsuit against the shareholder in accordance with Paragraph 2 of Article 13 of these Regulations and requests the aforementioned assignee to bear joint and several liabilities for this, the people's court shall support it.". 

Court decisions

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

"The main focus of the retrial of this case is whether the facts and legal application of the original judgment that ABC Shenzhen Branch can claim the bankruptcy claims involved in the case through ordinary civil proceedings and judge Hainan Jinxia Company to bear corresponding legal liabilities are correct.". 

Our court believes that, first of all, based on the facts identified in the original trial, during the bankruptcy proceedings of Peking University Zhongji Company, the liquidation team had discovered that some shareholders of Peking University Zhongji Company had made false capital contributions or withdrawn their capital contributions in the late stage of bankruptcy liquidation, but at that time, the bankruptcy property of Peking University Zhongji Company had been fully distributed, and the false capital contributions had been made toThe shareholders of Peking University Zhongji Company who withdrew their capital contributions filed a claim for compensation and required each creditor to pay the litigation expenses in proportion. As the settlement plan proposed by the liquidation group was not approved by the creditors' meeting, the liquidation group was unable to pursue false capital contributions or withdrawn capital contributions in the bankruptcy proceedings. However, the liquidation team has stated in the letter to each creditor that the issue of investigating the relevant responsible persons for the untrue registered capital of PKU Zhongji Company can be raised within two years after the termination of the bankruptcy proceedings in this case. Therefore, this case does not comply with the provisions of Article 123 of the Enterprise Bankruptcy Law of the People's Republic of China. Therefore, the original trial found that it was not improper for ABC Shenzhen Branch to sue and claim its own rights and interests through ordinary civil proceedings after the completion of the bankruptcy proceedings. Secondly, in the bankruptcy proceedings of this case, Agricultural Bank of China Shenzhen Branch actively advocated recourse against the shareholders of Beijing University Zhongji Company. After the bankruptcy proceedings were concluded, it still filed a lawsuit in its own name to require the shareholders of Beijing University Zhongji Company who made false capital contributions or withdrew their capital contributions to repay them individually, which does not violate legal provisions. Moreover, by the end of the retrial hearing of this case, Other creditors of Beijing University Zhongji Company (including the other four creditors who agreed to pursue) also did not file a lawsuit, and Agricultural Bank of China Shenzhen Branch claimed rights from shareholders who made false contributions to Beijing University Zhongji Company, which did not harm the interests of other creditors of Beijing University Zhongji Company. If the other four creditors who have agreed to pursue the claim also claim the claim, it should be dealt with and resolved in other relevant procedures, not within the scope of this case. Thirdly, bankruptcy proceedings are collective compulsory liquidation proceedings, and the commencement of bankruptcy proceedings means the suspension of individual liquidation proceedings. When the bankruptcy proceedings are concluded, the individual liquidation proceedings resume. However, the settlement plan proposed by the liquidation team in this case has not been approved by a majority of creditors, but does not relieve the debtor of his debts, and only does not handle this part of the property in the bankruptcy proceedings, There is also no prohibition on creditors claiming compensation from pursuing false capital contributions or withdrawing capital contributions from shareholders of Beijing University Zhongji Company after the completion of bankruptcy proceedings. Fourth, the obligation of shareholders to make capital contributions is a legal obligation. Hainan Jinxia Company, as the original shareholder of Beijing University Zhongji Company, should have performed the obligation of making capital contributions according to law, but if it failed to do so, it should bear corresponding legal liabilities according to law. However, the obligation of making capital contributions is not exempted due to equity transfer, which has nothing to do with the transfer of equity rights. Therefore, Whether the equity of Peking University Zhongji Company held by Hainan Jinxia Company has been stolen by others does not affect Hainan Jinxia Company's assumption of responsibility in this case. "The original trial held that Agricultural Bank of China Shenzhen Branch could directly bring a lawsuit to the people's court through ordinary civil proceedings and adjudge Hainan Jinxia Company to bear corresponding legal liabilities. The facts are clear, based on the law, and there is no impropriety." 

Case Source

Hainan Jinxia Construction Co., Ltd., Agricultural Bank of China Limited Shenzhen Branch Shareholder Contribution Dispute Retrial Civil Judgment Letter [(2016) No. 279 Supreme Court Civil Judgment, Judgment Date: December 16, 2020]

Extended Reading

Rule 1: Although the effective judgment or enforcement ruling has determined that the shareholders of the company should bear supplementary compensation liability to the company's creditors for the part of the company's debts that cannot be repaid within the scope of the principal and interest of the insufficient capital contribution, the company has been ruled to enter bankruptcy proceedings before the shareholders actually assume the supplementary compensation liability, According to the provisions of Articles 16 and 35 of the Enterprise Bankruptcy Law of the People's Republic of China, shareholders should first make a supplementary contribution to the company. The supplementary contribution can only be used for fair repayment to all creditors of the company, not individual creditors. 

Case 1: Dispute over the Confirmation of Bankruptcy Claims between Shenzhen Peggy Import and Export Trade Co., Ltd. and Bank of Hubei Co., Ltd. Yichang Nanhu Sub-branch, Huacheng Investment Management Co., Ltd. [(2012) Minshen Zi No. 386, published in the Gazette of the Supreme People's Court, 2012, Issue 12 (194 in total)]

The Supreme People's Court holds that: "From the situation identified in the first and second trials of this case, both Nanhu Sub-branch and Page Company have creditor's rights against Huacheng Company, and the relationship between the two creditor's rights is the same, that is, both of them should bear the responsibility for making up the capital contribution based on the failure of Huacheng Company to make the capital contribution to Page Company. The focus of the current dispute is the ownership of the bankruptcy creditor's rights of 14 million yuan in litigation. The registered capital is the company's ownership of all the bankruptcy creditor's rights." Property protection for creditors to bear civil liability. In the event that a shareholder's capital contribution is not in place, if the company is adjudicated to enter bankruptcy proceedings, and after the people's court has accepted the bankruptcy application in accordance with Article 35 of the Enterprise Bankruptcy Law, if the debtor's capital contributor has not fully fulfilled its capital contribution obligations, the administrator shall require the capital contributor to pay the subscribed capital contribution, regardless of the restrictions on the duration of the capital contribution, As a shareholder, Huacheng Company should first make a supplementary contribution to Page Company. According to Article 30 of the Enterprise Bankruptcy Law, the supplementary capital contribution shall be a part of the bankruptcy property of Page Company, and can only be used for fair repayment to all creditors of Page Company, not to individual creditors. Otherwise, after the People's Court accepts the bankruptcy application in accordance with Article 16 of the Enterprise Bankruptcy Law, The provisions on the invalidity of debt repayment by debtors to individual creditors are inconsistent and infringe upon the legitimate interests of other creditors of Page Company. "Therefore, the second trial decision confirms that the contentious bankruptcy claims belong to Page Company, which complies with the spirit of the Enterprise Bankruptcy Law. Nanhu Sub-branch can declare its bankruptcy claims to Page Company and participate in the distribution." 

Rule 2: After the end of the bankruptcy proceedings, the creditor's rights and debts of the bankrupt have been cleared up. If their shareholders fail to fulfill their capital contribution obligations, then this portion of the capital contribution property should belong to the bankruptcy property, which should be recovered by the bankruptcy administrator according to law and distributed to all creditors, and should not be individually recovered by the creditors and used to repay their own creditor's rights. In a lawsuit filed by individual creditors based on the debtor's property, the creditors have an indirect interest rather than a direct interest in the content of their claim. Therefore, the people's court should not accept such cases. 

Case 2: Dongguan Rongwei Packaging and Printing Co., Ltd., Jiang Hai, and other civil second instance rulings on compensation disputes for damages to the interests of debtors [2021] Yue 19 Min Zhong No. 6995]

Dongguan Intermediate People's Court holds that: "In this case, Changguan Company was ruled to be bankrupt and terminated. After the bankruptcy proceedings were concluded, the creditor's rights and debts of Changguan Company have been cleared. If its shareholders fail to fulfill their capital contribution obligations, then this part of the capital contribution property should belong to the bankruptcy property of Changguan Company, which should be recovered by the bankruptcy administrator in accordance with the law and distributed to all creditors. Creditors should not individually recover and use it to repay their debts." Own claims. In a lawsuit filed by individual creditors based on the debtor's property, the creditors have an indirect interest rather than a direct interest in the content of their claim. Therefore, in accordance with Article 119 (1) of the Civil Procedure Law of the People's Republic of China, the people's court should not accept such cases. The court of first instance applied Article 13, Paragraph 2, of the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of the" Company Law of the People's Republic of China "(III) to conduct a substantive trial of this case, which was deemed to be an error in the application of the law, and this court corrected it. To sum up, the application of legal errors in the first instance judgment has led to improper handling results, and this court has corrected them in accordance with the law. In accordance with Article 119 (1) of the Civil Procedure Law of the People's Republic of China and Article 330 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, the ruling is as follows: First, revoke the civil judgment (2020) Yue 1971 Min Chu 15279 of the First People's Court of Dongguan City, Guangdong Province. 2、 "Reject the lawsuit of Dongguan Rongwei Packaging and Printing Co., Ltd."