Case Brief

On May 6, 2009, Branch Six of Hua and Company Mouyai Company signed a "Construction Contract." During the construction period, Branch Six of Hua stopped work due to the break in the capital chain of Mouyai Company, at which time Mouyai Company still owed Branch Six of Hua 19,306,500 yuan in project funds. On August 8, 2013, Branch Six of Hua and Mouyai Company signed a "House for Debt Agreement," stipulating that 5002 square meters of construction would be used to offset the 19,306,500 yuan in project funds that Mouyai Company owed Branch Six of Hua. On December 11, 2013, the Yangquan City Intermediate People's Court of Shanxi Province issued Civil Mediation Document No. 42 of Yang Shang Chu Zi (2013), confirming the above content of the "House for Debt Agreement" signed between Branch Six of Hua and Mouyai Company.

Another creditor of Mouyai Company, Wang Moushuang, applied for enforcement based on the effective judgment issued by the Yangquan City Intermediate People's Court of Shanxi Province, and sealed up the 5002 square meters of debt-offsetting construction of Branch Six of Hua. Branch Six of Hua then raised an objection to the enforcement, and the two parties filed a lawsuit in the court.

Supreme People's Court Opinion

First, regarding whether Branch Six of Hua enjoys and has exercised the priority right to compensation for project funds. In this case, Branch Six of Hua and Mouyai Company signed the "House for Debt Agreement" under the coordination of the government to offset the 19,306,500 yuan project funds with the houses of 5002 square meters in question, which complies with the method of exercising the priority right to compensation for construction project funds stipulated by law. On the other hand, the term for the two parties to sign the "House for Debt Agreement" did not exceed the exercise period of the priority right to compensation for construction project funds stipulated by law. Moreover, during the review period of this case, the court found that Branch Six of Hua and Wang Moushuang recognized that the project in question had actually been occupied and there was no dispute over the quality of the project. Therefore, it can be determined that Branch Six of Hua enjoys and has exercised the priority right to compensation for construction project funds through the method of discounting.

Second, regarding whether the claim of Branch Six of Hua to exclude compulsory enforcement has factual and legal basis. The claim of Branch Six of Hua to exclude the compulsory enforcement of Wang Moushuang is based on the enjoyment and exercise of the priority right to compensation for construction project funds. Even if Branch Six of Hua has not obtained property rights, it cannot be naturally denied that it can still claim to exclude enforcement based on other rights when it meets the statutory conditions. In addition, the priority right to compensation for construction project funds shall take precedence over ordinary claims. Wang Moushuang and Mouyai Company have a private lending relationship. Moreover, Branch Six of Hua and Mouyai Company signed the "House for Debt Agreement" and exercised the priority right to compensation for construction project funds through the method of offsetting the price of the house, which was earlier than the time when Wang Moushuang applied for compulsory enforcement of the house in question in 2018. The rights it enjoys over the debt-offsetting house in question are sufficient to exclude compulsory enforcement.

Practical Viewpoint

In bankruptcy proceedings, although enforcement measures involving the debtor's property will be suspended in accordance with the law, from a long-term perspective, when the bankruptcy proceedings are terminated, if the conditions for resuming enforcement are met, the original enforcement measures against the debtor's property may still be resumed. At that time, if the creditor's house-for-debt agreement is to be fully performed, in addition to solving the problems of whether the agreement itself is valid and whether the administrator can legally terminate or exercise the right of revocation, it may still face the risk of whether it can resist enforcement measures.

From practical experience, whether a house-for-debt agreement can exclude enforcement is related to whether the payment of the debtor's property in a bankruptcy case complies with the provisions of the law. Compulsory enforcement measures, as a kind of compulsory public power act, should protect the creditor who has applied for enforcement more than the creditor who has not applied for enforcement, but such protection is not the basis for breaking through the order of debt repayment in bankruptcy proceedings. In other words, if an ordinary claim can resist the realization of a priority claim in bankruptcy proceedings due to the application for enforcement, it deviates from the system requirements of fair repayment in bankruptcy proceedings and damages the institutional value of bankruptcy proceedings.

Returning to the case, the underlying logic of the Supreme People's Court's recognition that the claim of Branch Six of Hua can exclude enforcement lies in the fact that the original claim of Branch Six of Hua is the priority right to compensation for construction project funds, which should be given priority over Wang Moushuang's ordinary claim for compensation from the debtor's property in accordance with the law; at the same time, Branch Six of Hua exercised the priority right within the statutory time limit and before Wang Moushuang applied for enforcement, and Branch Six of Hua did not fail to exercise its rights, so its house-for-debt agreement can exclude Wang Moushuang's enforcement measures. In summary, in the case where the rights do not exceed the statute of limitations or the exclusion period, if the rights of the house-for-debt creditor are to exclude other enforcement measures, the key condition should be whether the original rights of the house-for-debt creditor are legally higher than the claim for enforcement. Specifically, if the original claim has priority and the claim for enforcement is an ordinary claim, referring to the cited case, enforcement can be excluded without worry; if the original claim and the claim for enforcement are both priority rights, according to the judicial spirit of the cited case, it should be recognized that a higher level of priority can be excluded; if they are the same type of priority rights, then the time of exercising the rights and other issues should be comprehensively considered, and the spirit of the bankruptcy law should be used as a guide to determine whether the house-for-debt agreement can exclude enforcement.

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