Tongwang Focus丨Supreme People's Court Issues 29th Batch of Guiding Cases
Time:
2021-10-11
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Supreme People's Court Judicial Case Research Institute
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Recently, the Supreme People's Court issued the 29th batch of three guiding cases, all of which are enterprise substantive consolidation bankruptcy cases, for reference by people's courts at all levels when trying similar cases.
Guiding Case No. 163, "Substantive Consolidation Bankruptcy Reorganization Case of Jiangsu Provincial Textile Industry (Group) Import and Export Co., Ltd. and Its Five Subsidiaries," clarifies that in cases where there is a high degree of commingling of legal personalities among affiliated enterprise members, the cost of distinguishing the property of each affiliated enterprise member is too high, and the interests of creditors in fair repayment are seriously damaged, the people's court may apply the substantive consolidation bankruptcy method of affiliated enterprises for trial upon application. If the substantive consolidation bankruptcy method is adopted, the debts and credits between the members of the affiliated enterprises shall be eliminated, and the property of each member shall be regarded as the unified bankruptcy property after the merger, and the creditors of each member shall be fairly compensated as a whole in the same procedure in accordance with the statutory order of compensation. This case is of positive significance for clarifying the conditions for substantive consolidation bankruptcy reorganization of affiliated enterprises and the legal application of the handling of debts and credits of affiliated enterprises after the people's court rules on substantive consolidation bankruptcy reorganization of enterprises.
Guiding Case No. 164, "Substantive Consolidation Bankruptcy Reorganization Case of Jiangsu Sucun Winery Co., Ltd. and Affiliated Companies," clarifies that in the process of bankruptcy reorganization, if the bankrupt enterprise faces risks such as loss of core high-quality assets and idle and depreciated machinery and equipment, the administrator applies for the investor to invest part of the funds for trial production first, which is conducive to protecting the interests of all parties concerned, the people's court may permit it. This case creates rules and standards for the people's court to allow investors to conduct trial production of enterprises that meet the conditions when hearing bankruptcy reorganization cases, which is in line with the concept of bankruptcy protection and has positive significance for protecting the rights and interests of all parties concerned.
Guiding Case No. 165, "Application for Substantive Consolidation Bankruptcy Liquidation by the Bankruptcy Administrator of Chongqing Jinjiang Printing and Dyeing Co., Ltd. and Chongqing Chuanjiang Knitting and Textile Co., Ltd.," clarifies that when the people's court hears bankruptcy liquidation cases of affiliated enterprises and finds that there is a high degree of commingling of legal personalities between the affiliated enterprises, the cost of distinguishing the property of each affiliated enterprise is too high, and the interests of creditors in fair repayment are seriously damaged, it may conduct substantive consolidation bankruptcy liquidation of the affiliated enterprises that have entered the bankruptcy procedure after holding a hearing upon application. This case further clarifies the basic rules for the correct application of the law, the protection of the legitimate rights and interests of all parties in liquidation in accordance with the law, and the determination of substantive consolidation bankruptcy liquidation.
Fa [2021] No. 228
Supreme People's Court
Notice on the Issuance of the 29th Batch of Guiding Cases
To the Higher People's Courts of all provinces, autonomous regions, and municipalities directly under the Central Government, the Military Court of the People's Liberation Army, and the Production and Construction Corps Branch of the Higher People's Court of Xinjiang Uygur Autonomous Region:
With the approval of the Adjudication Committee of the Supreme People's Court, the following three cases (Guiding Cases Nos. 163-165), including the Substantive Consolidation Bankruptcy Reorganization Case of Jiangsu Provincial Textile Industry (Group) Import and Export Co., Ltd. and Its Five Subsidiaries, are hereby issued as the 29th batch of guiding cases for reference in the trial of similar cases.
Supreme People's Court
September 14, 2021
Guiding Case No. 163
Substantive Consolidation Bankruptcy Reorganization Case of Jiangsu Provincial Textile Industry (Group) Import and Export Co., Ltd. and Its Five Subsidiaries
(Deliberated and approved by the Adjudication Committee of the Supreme People's Court, issued on September 18, 2021)
Keywords Civil/Bankruptcy Reorganization/Substantive Consolidation Bankruptcy/Related Enterprises/Debt-to-Equity Swap/Pre-Voting
Key Points of Judgment
1. Where a party applies for the consolidation and bankruptcy of affiliated enterprises, the people's court shall examine the necessity and legitimacy of the consolidation and bankruptcy. The bankruptcy of members of affiliated enterprises shall be subject to the principle of applying individual bankruptcy procedures. In cases where there is a high degree of commingling of legal personalities among members of affiliated enterprises, the cost of distinguishing the property of each member of affiliated enterprises is too high, and the interests of creditors in fair repayment are seriously damaged, the substantive consolidation bankruptcy method of affiliated enterprises may be applied for trial upon application as an exception.
2. If the substantive consolidation bankruptcy method is adopted, the debts and credits between the members of the affiliated enterprises shall be eliminated, and the property of each member shall be regarded as the unified bankruptcy property after the merger, and the creditors of each member shall be fairly compensated as a whole in the same procedure in accordance with the statutory order of compensation. After the merger and reorganization, the affiliated enterprises shall in principle be merged into one enterprise, but if the creditors' meeting votes for the continued existence of each affiliated enterprise and the people's court examines and believes that it is indeed necessary, it may be permitted.
3. In the merger and reorganization, the formulation of the draft reorganization plan shall comprehensively consider the assets and business advantages of the affiliated enterprises entering the merger, the repayment ratio of creditors after the merger, the adjustment of the rights and interests of investors, and other factors to protect the legitimate rights and interests of all parties; at the same time, it can flexibly design a "cash + debt-to-equity swap" and other repayment plans, solicit creditors' opinions in advance through the "pre-voting" method, and improve the reorganization plan on this basis to promote the smooth progress of the reorganization.
Relevant Legal Provisions
Articles 1 and 2 of the "Enterprise Bankruptcy Law of the People's Republic of China"
Basic Facts
Applicant: The joint administrator of Jiangsu Provincial Textile Industry (Group) Import and Export Co., Ltd., Jiangsu Provincial Textile Industry (Group) Light Textile Import and Export Co., Ltd., Jiangsu Provincial Textile Industry (Group) Knitting Import and Export Co., Ltd., Jiangsu Provincial Textile Industry (Group) Mechanical and Electrical Import and Export Co., Ltd., Wuxi New Sutex International Trade Co., Ltd., and Jiangsu Provincial Textile Industry (Group) Garment Import and Export Co., Ltd.
Respondents: Jiangsu Provincial Textile Industry (Group) Import and Export Co., Ltd., Jiangsu Provincial Textile Industry (Group) Light Textile Import and Export Co., Ltd., Jiangsu Provincial Textile Industry (Group) Knitting Import and Export Co., Ltd., Jiangsu Provincial Textile Industry (Group) Mechanical and Electrical Import and Export Co., Ltd., Wuxi New Sutex International Trade Co., Ltd., and Jiangsu Provincial Textile Industry (Group) Garment Import and Export Co., Ltd.
On January 24, 2017, the Nanjing Intermediate People's Court (hereinafter referred to as the Nanjing Intermediate Court) ruled to accept the bankruptcy reorganization case of Jiangsu Provincial Textile Industry (Group) Import and Export Co., Ltd. (hereinafter referred to as Provincial Textile Import and Export Company) based on the application of Zhenjiang Fuyuan Textile Technology Co., Ltd., and designated Jiangsu Dongheng Law Firm as the administrator on the same day. On June 14, 2017, the Nanjing Intermediate Court ruled to accept the reorganization application of Provincial Textile Import and Export Company against Jiangsu Provincial Textile Industry (Group) Light Textile Import and Export Co., Ltd. (hereinafter referred to as Provincial Light Textile Company), Jiangsu Provincial Textile Industry (Group) Knitting Import and Export Co., Ltd. (hereinafter referred to as Provincial Knitting Company), Jiangsu Provincial Textile Industry (Group) Mechanical and Electrical Import and Export Co., Ltd. (hereinafter referred to as Provincial Mechanical and Electrical Company), Wuxi New Sutex International Trade Co., Ltd. (hereinafter referred to as Wuxi New Sutex Company) and the reorganization application of Provincial Light Textile Company against Jiangsu Provincial Textile Industry (Group) Garment Import and Export Co., Ltd. (hereinafter referred to as Provincial Garment Company) (among which, the reorganization application of Provincial Textile Import and Export Company against Wuxi New Sutex Company was designated by the Nanjing Intermediate Court after requesting instructions from the Jiangsu Higher People's Court). On the same day, the Nanjing Intermediate Court designated Jiangsu Dongheng Law Firm as the administrator, and coordinated the trial of the six companies procedurally. On August 11, 2017, the administrator applied to the Nanjing Intermediate Court for substantive consolidation and reorganization of the above six companies on the grounds that the six companies, including Provincial Textile Import and Export Company, Provincial Light Textile Company, Provincial Knitting Company, Provincial Mechanical and Electrical Company, Wuxi New Sutex Company, and Provincial Garment Company, had a high degree of commingling of personalities.
The court found after trial:
1. Equity Status of the Six Companies Involved
The registered capital of the Provincial Textile Import and Export Company is 55 million yuan, of which Jiangsu Provincial Textile (Group) Corporation (hereinafter referred to as Provincial Textile Group) contributed 60.71%, and the company's labor union contributed 39.29%. The registered capital of Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electronics Company, Wuxi New Sutex Company, and Provincial Garment Company (hereinafter referred to as five subsidiaries) are 10 million yuan, 5 million yuan, 6.37 million yuan, 10 million yuan, and 10 million yuan respectively. The Provincial Textile Import and Export Company contributed 51% to each of the five subsidiaries, and the remaining shares of the five subsidiaries are held by employees.
2. Operation and Management of the Six Companies Involved
1. Except for Wuxi New Sutex Company, the remaining companies involved are registered at the same address. The legal representatives have cross-appointments, and the legal representatives of the five subsidiaries are all senior managers of the Provincial Textile Import and Export Company. The financial and administrative personnel are also shared. Among them, the five subsidiaries share financial personnel with the Provincial Textile Import and Export Company for accounting, and the final approvers for payment and reimbursement are the same.
2. There is business overlap and commingling between the Provincial Textile Import and Export Company and its five subsidiaries. The business of the five subsidiaries is specifically arranged by the Provincial Textile Import and Export Company, and there are a large number of related debts and guarantees between the Provincial Textile Import and Export Company and the five subsidiaries.
In order to prevent the arbitrary merger of related enterprises, which would damage the company's independent personality and the legitimate rights and interests of some creditors and other stakeholders, after receiving the application for merger and reorganization, the Nanjing Intermediate People's Court reviewed the matters applied for and the factual reasons put forward by the applicant. At the same time, it organized creditor representatives, debtor representatives, employee representatives, administrators, auditing institutions, etc. to conduct a comprehensive hearing, listened to the statements of all parties on whether there was a commingling of facts in the company, and comprehensively reviewed the creditor and debtor situation cleared by the administrator, the audit report, and the evidence submitted by all parties, and listened to the opinions of all parties on the merger and bankruptcy reorganization.
Judgment Result
In accordance with Articles 1 and 2 of the Enterprise Bankruptcy Law, the Nanjing Intermediate People's Court made civil rulings (2017) Su 01 Po 1, 6, 7, 8, 9, and 10 on September 29, 2017: Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electronics Company, Wuxi New Sutex Company, and Provincial Garment Company were merged and reorganized with the Provincial Textile Import and Export Company.
In accordance with the provisions of Article 86, Paragraph 2 of the Enterprise Bankruptcy Law, the Nanjing Intermediate People's Court made civil ruling (2017) Su 01 Po 1, 6, 7, 8, 9, and 10-2 on December 8, 2017: 1. Approved the merger and reorganization plan of Provincial Textile Import and Export Company, Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electronics Company, Wuxi New Sutex Company, and Provincial Garment Company; 2. Terminated the merger and reorganization procedures of Provincial Textile Import and Export Company, Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electronics Company, Wuxi New Sutex Company, and Provincial Garment Company.
Reasons for the Judgment
The court's effective judgment held that: the independence of the company's personality is the cornerstone of the company system, and the bankruptcy of members of related enterprises should also be subject to individual bankruptcy procedures in principle. However, when there is a high degree of commingling of legal personalities among members of related enterprises, the cost of distinguishing the property of each member of related enterprises is too high, and the fair repayment interests of creditors are seriously damaged, the method of substantive consolidation and bankruptcy of related enterprises can be applied for trial, so as to ensure that all creditors can be fairly compensated.
In this case, the six companies involved have a high degree of commingling of personality, which is mainly manifested in: a high degree of cross-appointment of personnel, failing to form a complete and independent organizational structure; sharing financial and approval personnel, lacking an independent financial accounting system; a high degree of business overlap and commingling, forming a highly commingled operating body, which objectively makes it difficult to properly distinguish the income of the six companies; there are a large number of related debts and guarantees between the six companies, resulting in the assets of each company not being completely independent of each other, and the clearing of debts is extremely difficult. In this case, the court believes that timely substantive consolidation of the related enterprises is in line with the principles of the bankruptcy law regarding fair clearing of debts, fair protection of the legitimate rights and interests of creditors and debtors. The legislative purpose of the Enterprise Bankruptcy Law is to regulate bankruptcy procedures, fairly clear debts, fairly protect the legitimate rights and interests of all creditors and debtors, so as to maintain the socialist market economic order. In the case of a high degree of commingling of personality and improper transfer of benefits among related enterprises, it not only seriously affects the fair compensation of creditors of each related enterprise, but also seriously affects the principle of fair competition in the socialist market economy, and fundamentally violates the substantive spirit of the Enterprise Bankruptcy Law. In this case, merging and reorganizing related enterprises with a high degree of commingling of personality, correcting illegal and irregular behaviors such as improper transfer of benefits and mutual control among related enterprises, and ensuring that creditors of each related enterprise can fairly realize their claims are in line with the provisions of the law. Specifically, for creditors, in the case of separate reorganization, the ordinary creditors of the enterprises that substantially input benefits in each related enterprise will receive additional compensation, while the ordinary creditors of the enterprises that substantially output benefits may suffer losses. Therefore, in the case of a high degree of commingling of the legal personality of related enterprises, separate reorganization may damage the right of ordinary creditors to be fairly compensated. The overall reorganization after the merger may reduce the debt repayment rate of the creditors of some related enterprises with advantageous book assets compared with separate reorganization, which superficially damages their interests, but the root cause of this difference lies in the previous improper relationship between the related enterprises, and the debt repayment through merger and reorganization is a reflection of the fair clearing of debts in the Enterprise Bankruptcy Law.
In accordance with Articles 1 and 2 of the Enterprise Bankruptcy Law, the Nanjing Intermediate People's Court made civil rulings (2017) Su 01 Po 1, 6, 7, 8, 9, and 10 on September 29, 2017: Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electronics Company, Wuxi New Sutex Company, and Provincial Garment Company were merged and reorganized with the Provincial Textile Import and Export Company.
After the merger and reorganization procedure is initiated, the administrator merges the claims of individual enterprises, and if the same creditor has both claims and debts to the six companies, the balance of the claims is confirmed after offsetting, and the claims and debts between the six related enterprises are offset in the merger, and all creditors after the merger are combined into a whole for grouping. According to the provisions of the Bankruptcy Law, creditors are divided into secured creditor groups, employee creditor groups, tax creditor groups, and ordinary creditor groups. In this case, because the labor relations of all employees continue to be retained, it does not involve the issue of employee creditor repayment, and taxes have been paid on time, so only creditors are divided into secured creditor groups and ordinary creditor groups. At the same time, an investor group is set up to vote on the investor equity adjustment plan.
Given that Provincial Textile Import and Export Company is a textile foreign trade enterprise with high influence in the province and has high-quality business qualifications and resources, and the five subsidiaries are important platforms for foreign trade enterprises, the reorganization plan takes the six companies including Provincial Textile Import and Export Company as a whole, introduces investors, and comprehensively considers the assets and operating advantages of the companies entering the merger, the repayment of creditors after the merger, the adjustment of investor equity, etc., and comprehensively designs and compiles it. The key contents include:
1. Restructuring by Introducing High-Quality Assets to Revitalize Business Operations: Prior to entering the reorganization process, the six companies involved in the case were already in a severe operational crisis. The key to the success of the reorganization lies in whether the business operations can be truly revitalized. Based on this, companies such as Soho Holdings and Provincial Textile Group were introduced as reorganization investors, using high-quality assets such as the equity of listed companies to increase the capital of Provincial Textile Import and Export Company by nearly 1.2 billion yuan. By promptly injecting high-quality assets to restructure the enterprise, new economic growth factors are formed, the overall resources of related enterprises are revitalized, the debt repayment ability is improved, and the enterprise's operating capacity is restored, laying a solid foundation for reshaping the enterprise's core competitiveness and smoothly promoting the implementation of the reorganization plan. At the same time, as a foreign trade enterprise, retaining employees is an important guarantee for the enterprise to be reborn. In the formulation of the reorganization plan, according to the characteristics of foreign trade enterprises, all employees are retained, and the joint force and guarantee of enterprise operation are formed through employee equity injection, so as to ensure that the enterprise after the reorganization can truly be reborn.
2. Adjusting the Equity of Investors, Unifying Debt Repayment through "Cash + Debt-to-Equity Swap," and Introducing a "Pre-Voting" Mechanism: The six companies involved in the case are all foreign trade companies with relatively few own assets. In terms of debt repayment methods, the source of debt repayment funds is provided by first disposing of some corporate assets. In terms of repayment methods, a unified distinction is made between creditors with property guarantees and those without property guarantees. For creditors with property guarantees, the amount of priority repayment for creditors with property guarantees is determined based on the value of the disposed collateral and the assessed value of the undisposed collateral in the reorganization process, and creditors with property guarantees are repaid in full in cash. For ordinary creditors without property guarantees, a composite repayment method of partial cash repayment and partial equity swap for debt (debt-to-equity swap) is adopted to ensure the company's ability to generate blood and rebirth, and to maximize the protection of creditors' interests. Among them, part of the equity of the shareholders who increase their capital is swapped with the creditors' claims (debt-to-equity swap part). Specifically, the reorganization investor, Provincial Textile Group, uses part of its shares in Provincial Textile Import and Export Company (the part it holds) to be handed over to the administrator to swap the creditors' claims in proportion, and Provincial Textile Group exempts Provincial Textile Import and Export Company and its five subsidiaries from the debts arising from the swap. After the repayment is completed, the creditors waive all remaining claims against Provincial Textile Import and Export Company and its five subsidiaries. Since a composite repayment method of "cash + debt-to-equity swap" is adopted, whether the creditors are willing to accept repayment in this way is the key to the success of the reorganization. Therefore, this case introduces a "pre-voting" mechanism. In the formulation of the draft reorganization plan, the administrator made a preliminary explanation on the necessity, feasibility, and specific methods of debt-to-equity swap, and the creditors expressed their opinions in writing in advance. On this basis, the draft reorganization plan was formulated and submitted to the creditors' meeting for deliberation and voting. From the effect, repaying debts through the "debt-to-equity swap" method and conducting pre-voting during the formulation of the reorganization plan better protects the creditors' right to know and choose, and allows them to express their opinions independently, so that the "debt-to-equity swap" repayment method can be carried out smoothly.
On November 22, 2017, the first creditors' meeting was held after the merger and reorganization of the six companies involved in the case. The administrator submitted a draft plan for the merger and reorganization to the creditors' meeting, and the related companies continued to exist. After voting, 100% of the creditors' group with property guarantees agreed, and 93.6% of the ordinary creditors' group also voted to approve the draft plan. The shareholders' group meeting also voted 100% to approve the plan for adjusting shareholders' equity. After review, the court held that the formulation and voting procedures of the merger and reorganization plan were legal, the content complied with the provisions of the law, treated creditors fairly, and the adjustment of shareholders' equity was fair and just, and the business plan was feasible. In accordance with the provisions of Article 86, Paragraph 2 of the "Enterprise Bankruptcy Law of the People's Republic of China", the Nanjing Intermediate People's Court made the Civil Ruling No. 2 of (2017) Su 01 Po 1, 6, 7, 8, 9, and 10 on December 8, 2017: 1. Approve the merger and reorganization plan of Provincial Textile Import and Export Company, Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electrical Company, Wuxi Xin Su Textile Company, and Provincial Garment Company; 2. Terminate the merger and reorganization procedures of Provincial Textile Import and Export Company, Provincial Light Textile Company, Provincial Knitting Company, Provincial Machinery and Electrical Company, Wuxi Xin Su Textile Company, and Provincial Garment Company.
(Effective judgment adjudicators: Yao Zhijian, Rong Yan, Jiang Wei)
Guiding Case No. 164
Substantive Merger Bankruptcy Reorganization Case of Jiangsu Sucun Liquor Industry Co., Ltd. and its Affiliated Companies
(Discussed and approved by the Adjudication Committee of the Supreme People's Court
Published on September 18, 2021)
Keywords Civil/Bankruptcy Reorganization/Substantive Merger Bankruptcy/Investor Trial Production/Balance of Interests/Supervision
Key Points of Judgment
In the process of bankruptcy reorganization, if the bankrupt enterprise faces the risk of loss of core high-quality assets such as production licenses, and idle and depreciated machinery and equipment, and the investor also hopes to fully understand the enterprise's operating strength through trial production, the administrator may apply to the people's court for the investor to invest part of the funds for trial production first. The survival of the core assets of the bankrupt enterprise directly affects the realization of the purpose of bankruptcy reorganization. The administrator's application is conducive to restoring the bankrupt enterprise's ability to continue operating and is conducive to protecting the interests of all parties involved. The trial production application complies with the concept of bankruptcy protection, and the people's court may approve it after review. At the same time, after obtaining approval for the investor's trial production, it should accept the supervision of the people's court, the administrator, and the creditors to fairly protect the legitimate rights and interests of all parties.
Relevant Legal Provisions
Article 1, Article 2, Article 26, and Article 86 of the "Enterprise Bankruptcy Law of the People's Republic of China"
Basic Facts
Jiangsu Sucun Liquor Industry Co., Ltd. (hereinafter referred to as Sucun Company) is the only enterprise in Suining County, Jiangsu Province that has an alcohol production license, which has an important impact on local economic development. Since 2013, due to the company's blind expansion and chaotic management, the capital chain has been broken, and a number of lawsuits have been triggered. Xuzhou Delong Biotechnology Co., Ltd. and Xuzhou Ruikang Food Technology Co., Ltd. are affiliated companies of Sucun Company. The three companies are all engaged in the deep processing of agricultural products. As of before the acceptance of bankruptcy reorganization, the total assets of the three companies were 125 million yuan, the total liabilities were 457 million yuan, and the asset-liability ratio reached 365.57%. On December 29, 2017, the three companies filed applications for bankruptcy reorganization with the People's Court of Suining County, Jiangsu Province (hereinafter referred to as Suining Court) on the grounds of introducing investors and revitalizing the enterprise. After review, the Suining Court held that the three companies had a good foundation and development prospects, and the alcohol production qualification was a scarce resource with reorganization value. Therefore, on January 12, 2018, it ruled to accept the bankruptcy reorganization applications of the three companies separately. Because the three companies were highly mixed in terms of operation, finance, personnel, and management, and the cost of distinguishing the property of each affiliated enterprise member was too high, in accordance with Article 32 of the "National Court Bankruptcy Trial Work Conference Minutes", based on the administrator's application, on June 25, 2018, it ruled that the three companies should be substantively merged for bankruptcy reorganization.
During the reorganization, investor Xuzhou Changqing Biotechnology Co., Ltd. proposed, after an on-site investigation of Su醇 Company's current situation, that Su醇 Company had been shut down for many years. Its core asset, the alcohol production license, was overdue for review and faced the risk of expiring. Furthermore, factors such as employee attrition, idle and depreciated machinery, and safety hazards related to fire prevention and environmental protection were affecting the reorganization. Simultaneously, the company's original management had long been paralyzed and unable to continue relevant work, and the company had no available funds for the administrator to resolve the crisis. In light of this, the administrator proposed a plan for the reorganization investor to invest some funds in advance to restore a portion of the company's production capacity.
Judgment Result
On June 25, 2018, the People's Court of Suining County, Jiangsu Province, issued Civil Ruling No. (2018) Su0324 Po1, ruling that Jiangsu Su醇 Liquor Co., Ltd., Xuzhou Delong Biotechnology Co., Ltd., and Xuzhou Ruikang Food Technology Co., Ltd. would be substantively merged for bankruptcy reorganization. On July 5, 2019, the People's Court of Suining County, Jiangsu Province, issued Decision No. (2018) Su0324 Po1 Zhi Si, approving the investor Xuzhou Changqing Biotechnology Co., Ltd.'s trial production. On November 30 and December 1, 2019, the second creditors' meeting of Jiangsu Su醇 Liquor Co., Ltd. was held, where each representative creditor group voted to approve the reorganization plan draft submitted by the bankruptcy administrator of Jiangsu Su醇 Liquor Co., Ltd. The bankruptcy administrator of Jiangsu Su醇 Liquor Co., Ltd. then submitted a request to the People's Court of Suining County, Jiangsu Province, for approval of the reorganization plan draft. In accordance with Article 86 of the Enterprise Bankruptcy Law, the People's Court of Suining County, Jiangsu Province, issued Ruling No. (2018) Su0324 Po1 Zhi Yi on December 2, 2019, which included the following: 1. Approval of the reorganization plan of Jiangsu Su醇 Liquor Co., Ltd.; 2. Termination of the reorganization procedure of Jiangsu Su醇 Liquor Co., Ltd. A two-month supervision period was also reserved in accordance with the law.
Reasons for the Judgment
The effective judgment of the court held that the relevant problems faced by the debtor raised by the bankruptcy administrator were real, such as the loss of the alcohol production license on which the enterprise depends for survival, the core assets of the enterprise will no longer exist, and the reorganization will lose its meaning. Because the debtor does not currently have sufficient funds for the administrator to use, the investor's prior investment of funds for trial production can solve the difficulties faced by the enterprise in the reorganization process, and can also preserve and increase the value of the enterprise's assets, fully protect the interests of the debtor and creditors, maintain social stability, and is more conducive to the development of the enterprise after reorganization. The bankruptcy administrator's application complies with the concept of bankruptcy protection and does not violate relevant laws and regulations, and should be approved.
Regarding whether to allow the investor to conduct trial production, the court mainly considered the following factors before making a decision:
1. Necessity of trial production
First, the bankrupt enterprise faces a severe situation: First, Su醇 Company faces the risk of its alcohol production license becoming overdue and its production qualification being revoked after the suspension of production and business. It would be difficult to obtain this qualification again if lost, rendering the reorganization meaningless. Second, the enterprise also faces external pressures such as environmental protection and fire safety inspections, as well as damage to machinery and equipment due to prolonged idleness. Third, the original internal technical personnel have suffered significant losses, and employees face hardship due to the enterprise's shutdown, making group incidents very likely. Fourth, the enterprise management is paralyzed, unable to continue relevant work, and the company has no available funds for the administrator to resolve the crisis.
Secondly, the biggest risk for investors participating in the reorganization procedure is the safety of the funds and assets invested. Investors hope to fully understand the actual situation of the enterprise and its production vitality and momentum through trial production, so as to provide guarantee for the restoration of operation after the reorganization.
Thirdly, as the original leading enterprise in the local biotechnology sector, Su醇 Company plays a pivotal role in optimizing, transforming, and developing the regional industrial chain. Under the demands of high-quality economic development, the local party committee and government urgently need the enterprise to restore production capacity, drive the development of upstream and downstream industries, solve employment problems, and maintain social stability.
In summary, if the investor is not allowed to conduct trial production, it will cause irreparable huge losses to the enterprise. Once the alcohol production license is lost, the core assets of the enterprise will no longer exist, and even if the reorganization is successful in the end, the enterprise will lose its core competitiveness. Therefore, allowing the investor to conduct trial production is necessary and urgent.
2. Balancing of interests in trial production
A mature bankruptcy reorganization system should have the following positive effects: rescuing enterprises in distress but with value through reorganization, restoring their profitability, continuing operations, ensuring the employment and survival rights of enterprise employees, reasonably repaying creditors' debts, realizing investors' returns, and fairly protecting the interests of all parties, so as to achieve social stability, economic stability and development. Therefore, in balancing interests, some core values must be fully considered during company reorganization, and these values are fairness and efficiency, flexibility and predictability. Allowing enterprises to conduct trial production can balance the interests of all parties. First, before the investor conducts trial production, the debtor's existing assets have been audited and evaluated and confirmed. According to the investment agreement reached between the administrator and the investor, the amount and source of debt repayment funds for the reorganized enterprise have also been determined, and there is no conflict between the investor's entry into trial production and the reorganized enterprise's repayment of debts; Second, the investor's investment of some funds for trial production is conducive to the investor's full understanding of the enterprise's situation and operating capacity, and lays the foundation for the enterprise's development after reorganization; Third, trial production can restore some of the production capacity of the reorganized enterprise, so that the enterprise's high-quality assets can be preserved and increased in value; Fourth, it can ensure that the creditors' debts are not depreciated and increase the repayment ratio; Fifth, the restoration of a certain scale of production by the reorganized enterprise can also solve the urgent problems of environmental protection, fire safety, and employee stability faced by the bankrupt enterprise due to the shutdown, which is beneficial and harmless to the enterprise's reorganization.
3. Legal and theoretical basis for trial production
First of all, although the Enterprise Bankruptcy Law and relevant judicial interpretations do not have specific legal provisions on whether investors can enter the enterprise in advance for trial production before taking over the enterprise, in order to realize the rescue function of the Bankruptcy Law, allowing investors to enter the enterprise for trial production in specific circumstances and rescuing distressed enterprises through market-oriented and rule-of-law means is in line with the needs of bankruptcy trials in China.
Secondly, although the investor's trial production can solve the above-mentioned problems faced by the enterprise before the investor takes over the enterprise, in order to avoid the investor's unreasonable production methods and damage the interests of other rights holders in the bankruptcy reorganization, its trial production should still be subject to the approval or consent of the court or creditors, and accept the supervision of the court, the administrator and the creditors.
Thirdly, due to the imperfection of China's current bankruptcy laws, in bankruptcy trial work, the people's courts should strengthen their awareness of serving the overall situation, consciously enhance the foresight and creativity of their work, use innovative thinking to solve new difficulties and problems encountered in the bankruptcy reorganization process, and explore providing a long-term guarantee mechanism for enterprise bankruptcy reorganization.
In summary, in order to protect the interests of all parties and ensure that the reorganized enterprise can quickly resume work and production and realize the social and economic value of the enterprise's reorganization, the Suining Court allowed the investor to enter the enterprise in advance for trial production with the consent of all parties.
4. Social value of trial production
First, the court approved the company to conduct trial production during the reorganization period. By synchronizing the bankruptcy procedure with the company's trial production, it can ensure a seamless connection and smooth transition between the reorganization and resumption of work and production, and fully protect the rebirth of companies with potential. Second, against the background of epidemic prevention and control, trial production solves problems for companies to resume work and production, enabling disinfection and epidemic prevention materials to quickly support the front line, reflecting the judicial responsibility of the people's court, creating a high-quality and efficient business environment for the development of private enterprises, especially small and medium-sized enterprises, in the jurisdiction, and providing high-quality judicial protection for enterprises to resume work and production with precise judicial services. Third, the company is a potential enterprise in the regional biotechnology field, which has a significant promoting effect on the optimization, transformation, and upgrading of the economic industrial structure, and meets the overall requirements of high-quality economic development.
(Effective judgment trial personnel: Ye Licheng, Zhang Zhiyao, Zhang Yuanyuan)
Guiding Case No. 165
Chongqing Jinjiang Printing and Dyeing Co., Ltd., Chongqing Chuanjiang Knitting and Textile Co., Ltd.
Bankruptcy Administrator's Application for Substantive Consolidation Bankruptcy Liquidation Case
(Discussed and approved by the Adjudication Committee of the Supreme People's Court
Published on September 18, 2021)
Keywords Civil/Bankruptcy Liquidation/Substantive Consolidation Bankruptcy/Related Enterprises/Hearing
Key Points of Judgment
1. When the people's court hears bankruptcy liquidation cases of related enterprises, it shall respect the independence of the legal personality of the related enterprises, and conduct separate review of whether each enterprise has bankruptcy reasons and apply the individual bankruptcy procedure as a principle. When there is a high degree of confusion in the legal personality between related enterprises, the cost of distinguishing the property of each related enterprise is too high, and the interests of fair repayment of creditors are seriously damaged, the bankruptcy administrator may apply for substantive consolidation bankruptcy liquidation of the related enterprises that have entered the bankruptcy procedure.
2. After receiving the application for substantive consolidation bankruptcy liquidation, the people's court shall promptly organize interested parties such as the applicant, the respondent, and the representatives of creditors to conduct a hearing, and comprehensively consider the degree of confusion of assets between related enterprises and its duration, the interest relationship between each enterprise, the overall repayment interests of creditors, and the possibility of increasing enterprise reorganization, and make a ruling in accordance with the law.
Relevant Legal Provisions
Articles 1 and 2 of the "Enterprise Bankruptcy Law of the People's Republic of China"
Basic Facts
On July 16, 2015, the People's Court of Jiangjin District, Chongqing City, ruled to accept the application for bankruptcy liquidation of Chongqing Jinjiang Printing and Dyeing Co., Ltd. (hereinafter referred to as Jinjiang Company), and on September 14, 2015, legally designated Chongqing Lida Law Firm as the administrator of Jinjiang Company. On June 1, 2016, the People's Court of Jiangjin District, Chongqing City, ruled to accept the application for bankruptcy liquidation of Chongqing Chuanjiang Knitting and Textile Co., Ltd. (hereinafter referred to as Chuanjiang Company), and on June 12, 2016, legally designated Chongqing Lida Law Firm as the administrator of Chuanjiang Company.
Jinjiang Company and Chuanjiang Company have the following related relationships: 1. The actual controllers are both Feng Xiuqian. The controlling shareholder of Chuanjiang Company is Feng Xiuqian, the controlling shareholder of Jinjiang Company is Chuanjiang Company, Feng Xiuqian is also a shareholder of Jinjiang Company, and the legal representatives of both companies are Feng Xiuqian. Feng Xiuqian is actually the actual controller of the two companies. 2. The production and operation sites are mixed. The production and operation site of Jinjiang Company is mainly in Guangxing Town Industrial Park, Jiangjin District. After Chuanjiang Company was transformed into a trading company in 2012, it did not have a production plant. The warehouse required for operation is also shared with Jinjiang Company, and the raw materials it purchases directly enter the warehouse of Jinjiang Company. 3. Personnel are mixed. There is overlap in the management personnel of Chuanjiang Company and Jinjiang Company, and the labor relations of all employees in the later stage of the company's development are in Jinjiang Company, but some employees still handle the affairs of Chuanjiang Company. The two companies are not completely independent in terms of personnel work arrangement and management. 4. The main business is mixed. The main business income of Jinjiang Company mainly comes from printing and dyeing processing and finished cloth sales, knitting and textile processing and product sales, and the main business income of Chuanjiang Company comes from raw materials and finished product sales of knitting wool and cloth. Most of the raw materials of Jinjiang Company are purchased through Chuanjiang Company, and the processed products are also mainly resold to third parties through Chuanjiang Company, and Chuanjiang Company earns a certain price difference from it. 5. Assets and liabilities are mixed. The two companies have a high degree of confusion in the arrangement and use of operating properties such as working capital, and they also have frequent dealings with Feng Xiuqian's personal account, which cannot be strictly distinguished. There is no clear agreement on the sharing of operating costs and the distribution of operating profits, which are often adjusted according to actual profits and tax processing needs. The two companies also have mutual guarantees for external loans.
On April 21 and November 14, 2016, the People's Court of Jiangjin District, Chongqing City, declared Jinjiang Company and Chuanjiang Company bankrupt respectively. During the trial of the two cases, the administrators of Jinjiang Company and Chuanjiang Company filed a written application for substantive consolidation bankruptcy liquidation of the two companies on the grounds that the legal personalities of the two companies were highly confused and seriously damaged the interests of creditors. On November 9, 2016, the People's Court of Jiangjin District, Chongqing City, held a hearing to hear the administrator's application. The joint agent of Jinjiang Company and Chuanjiang Company, the chairman of the creditors' meeting of Jinjiang Company, members of the creditors' committee, and the chairman of the creditors' meeting of Chuanjiang Company attended the hearing.
It was also found that the first creditors' meeting of Chuanjiang Company on August 5, 2016, and the second creditors' meeting of Jinjiang Company on November 18, 2016, both voted to approve the report submitted by the administrator on the substantive consolidation bankruptcy liquidation of Jinjiang Company and Chuanjiang Company.
Judgment Result
The People's Court of Jiangjin District, Chongqing City, made the Civil Ruling No. 4 of (2015) Jin Fa Min Po Zi No. 00001 on November 18, 2016: Substantive consolidation bankruptcy liquidation of Jinjiang Company and Chuanjiang Company. The People's Court of Jiangjin District, Chongqing City, made the Civil Ruling No. 5 of (2015) Jin Fa Min Po Zi No. 00001 on November 21, 2016: Approved the "Distribution Plan of Consolidated Liquidation Bankruptcy Property of Jinjiang Company and Chuanjiang Company". The People's Court of Jiangjin District, Chongqing City, made the Civil Ruling No. 6 of (2015) Jin Fa Min Po Zi No. 00001 on January 10, 2017: Terminated the bankruptcy procedure of Jinjiang Company and Chuanjiang Company.
Reasons for the Judgment
According to the effective judgment of the court, the company, as a legal entity, is entitled to an independent legal personality and independent legal property in accordance with the law. When hearing enterprise bankruptcy cases, the people's court shall respect the independence of the enterprise's legal personality. According to Article 2 of the Enterprise Bankruptcy Law, a corporate bankruptcy shall have the cause of bankruptcy, such as being insolvent and insufficient to pay off all debts or obviously lacking the ability to pay off debts. Therefore, the application for bankruptcy liquidation of affiliated enterprises shall generally be examined separately to determine whether they have the cause of bankruptcy before deciding whether to accept them separately. However, after accepting the bankruptcy of an enterprise, if it is found that the legal personality of the affiliated enterprise is highly confused, the debts between the affiliated enterprises are difficult to separate, and the interests of creditors' fair repayment are seriously damaged, the affiliated enterprises may be subject to substantive merger bankruptcy liquidation. In this case, because Jinjiang Company could not pay off its due debts and its assets were insufficient to pay off all debts, the court ruled to accept Jinjiang Company's bankruptcy liquidation application on July 16, 2015. Because Chuanjiang Company could not pay off its due debts and obviously lacked the ability to pay off debts, the court ruled to accept Chuanjiang Company's bankruptcy liquidation application on June 1, 2016. During the trial, it was found that since the establishment of Jinjiang Company and Chuanjiang Company in 1994 and 2002, the personnel, business operations, and assets of the two companies were actually controlled by Feng Xiuqian personally. There was a high degree of confusion in business management, main business, assets, and liabilities. Jinjiang Company and Chuanjiang Company had lost the independence of corporate property and the independence of corporate will, and it was significant, widespread, and continued until the bankruptcy liquidation period in 2016. The legal personality of the two companies was highly confused. In addition, Jinjiang Company and Chuanjiang Company cannot be completely distinguished in terms of management costs, debts, etc., and the authenticity cannot be confirmed. At the same time, Chuanjiang Company transferred 85,252,480.23 yuan of operating liabilities to Jinjiang Company and settled 21,266,615.90 yuan of external fund-raising liabilities to Jinjiang Company, which has damaged the interests of Jinjiang Company and its creditors. According to the substantive merger bankruptcy liquidation application of the administrators of Jinjiang Company and Chuanjiang Company, the court organized a hearing for interested parties such as applicants, respondents, and members of the creditors' committee, and found that the legal personality of the two companies was highly confused, the debts between the two companies could not be separated in mutual operation, and separate liquidation would seriously damage the interests of creditors' fair repayment. Therefore, the administrator's application for merger bankruptcy liquidation of Jinjiang Company and Chuanjiang Company meets the conditions for substantive merger.
(Effective judgment trial personnel: Chen Huanzhong, Cheng Song, Zhang Qian)
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