Arbitration issues involving bankrupt enterprises

By Wang Chaoqi, BAC/BIAC

In bankruptcy proceedings, creditors, debtors and other persons legally responsible for the liquidation may directly apply to the court for the bankruptcy of debtors, provided that legal circumstances occur, without the need for consensus of all interested parties. While arbitration is based on party autonomy, after an arbitration agreement is reached, if the enterprise enters into bankruptcy proceedings, whether the parties should submit the bankruptcy derivative dispute to the arbitration institution, in accordance with the arbitration agreement, or file a lawsuit with the court that has accepted the bankruptcy application pursuant to bankruptcy laws, and how to deal with proper subjects and arbitration claims in such cases involving bankrupt enterprises, are problems that may be faced by practitioners.

Can an arbitration case can be accepted after a court accepts an enterprise bankruptcy application?

Article 21 of the Enterprise Bankruptcy Law provides for the centralised jurisdiction of bankruptcy court after acceptance of bankruptcy applications, but it does not specify whether the arbitration agreement shall be applicable in bankruptcy proceedings. In this regard, with reference to article 8 of the Provisions (III) of the Supreme People’s Court on Several Issues concerning the Application of the Enterprise Bankruptcy Law of the People’s Republic of China, where a party to an arbitration agreement initiates arbitration for the purpose of determining the debtor-creditor relationship, the arbitration institution shall accept the arbitration case.

However, this judicial interpretation does not stipulate whether disputes other than those involving determination of debtor-creditor relationships in bankruptcy proceedings should be submitted to arbitration. The author holds that the arbitration agreement shall be admitted in the bankruptcy procedure for the following reasons. First, according to the semantic interpretation of the article, the scope of article 21 of the Bankruptcy Law is limited to civil litigation, rather than arbitration. Some normative documents of local courts and court cases also agree with this view, that the effectiveness of the arbitration clause concerning the debtor is not affected. Second, the finality of the arbitral award is conducive to the rapid disposal of substantive disputes in bankruptcy proceedings, and the improvement of the efficiency of bankruptcy proceedings.

It is worth noting that those matters expressly provided in the Bankruptcy Law, that the debtor does not have the right of disposal, should be allowed to be uniformly settled by initiating litigation regardless of whether the parties have entered into an arbitration agreement in respect of such matters. Such matters include the exercise of the bankruptcy administrator’s right of revocation to such acts as low-price transfers and biased liquidations, confirmation of priorities in bankruptcy proceedings, confirmation of common benefit debts, etc.

Worth discussion

Subject of arbitration

According to the Bankruptcy Law, where a court accepts an application for bankruptcy, it shall designate an administrator simultaneously. One of the duties of an administrator is to represent the debtor in litigation, arbitration and other legal proceedings. Therefore, bankrupt enterprises are the parties in the litigation of debt determination, while the administrators act as “litigation representatives”.

When an arbitration institution accepts a case involving a bankrupt enterprise, the bankrupt enterprise shall be the party to the arbitration. The arbitration institution shall, pursuant to the civil ruling issued by the court for acceptance of bankruptcy application, and the decision issued by the court for appointment of the bankrupt enterprise’s administrator submitted by the parties, allow the administrator to participate in the arbitration and specify its bankruptcy administrator status in the relevant legal documents, other than the name of the bankrupt enterprise.

Types of claims

Under the Bankruptcy Law, claims regarding determination of the debtor-creditor relationship involving the bankrupt enterprise can be submitted for arbitration. However, it is not clear whether the parties to any ongoing arbitration case should, after the court accepts the bankruptcy application, modify the claim for payment of money or property from the debtor to that for determining creditors’ rights.

There are different approaches to this problem in judicial practice. Some deem that, under such circumstances, the arbitral tribunal shall inform the creditors of the bankruptcy procedure, and directly render a judgment of determination of the debtor-creditor relationship. Others hold that, after the acceptance of bankruptcy application, the arbitration shall continue, while in the determination of substantive rights and obligations of the relevant parties concerned, attention shall be paid to the co-ordination between the provisions of the Bankruptcy Law and its judicial interpretations.

Therefore, in an arbitration case involving a bankrupt enterprise, a party shall, in light of the circumstances of the case, and the practical experience of the court that has accepted the bankruptcy case, decide whether to file a claim for determination, or a claim for payment. However, the author holds that arbitration claims shall no longer include claims under an action for performance such as cessation of infringement, removal of obstruction, elimination of danger, restoration to original condition, repair, reworking, replacement or continued performance, etc.

Provisions on ceasing the calculation of interest and overdue fines regarding to arbitration claims

In accordance with paragraph 2 of article 46 of the Bankruptcy Law, the interest of the creditor’s rights shall cease to accrue from the time when the bankruptcy application is accepted. In civil activities, after the expiration of the creditor’s rights, the debtor shall not only pay off the principal, but also the interest or overdue fine. Such amount shall be calculated as of the date of occurrence of the debt until the date of performance of the debt.

However, in bankruptcy proceedings, the claims that the creditors may declare in accordance with the provisions of the Bankruptcy Law are the claims against the debtor at the time of acceptance of the bankruptcy application, namely, the bankruptcy claims. The interest or overdue fines incurred after the acceptance of a bankruptcy application are not bankruptcy claims. Therefore, claims attached with interest and overdue fines shall cease to count from the time the bankruptcy application is accepted.

During the arbitral proceedings, if a claimant claims interest and overdue fines corresponding to the claims against the bankrupt enterprise, the tribunal shall pay attention to the starting and ending time of the calculation period, to avoid the arbitral award being difficult to be enforced.

Wang Chaoqi is a case manager of Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC)