Arbitration issues involving bankrupt enterprises

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.