Challenges posed by bankruptcy proceedings to arbitration

In the past few years, amid changes in the economic situation and accelerated adjustment of industrial structures, judicial practice of China’s insolvency laws has developed greatly, posing various challenges to arbitration proceedings. This article focuses on three specific issues, discussing potential solutions from the perspective of the arbitration tribunal.

Resumption of “automatically suspended arbitration” after commencement of bankruptcy proceedings. Article 20 of the Enterprise Bankruptcy Law stipulates that civil actions or arbitrations involving a debtor, which have begun but are not yet concluded, shall be suspended on the acceptance of a bankruptcy application. However, these actions or arbitrations can proceed once an administrator assumes control of the debtor’s property.

The question arising here is how an administrator’s takeover is to be determined? Does “takeover” only occur when the administrator takes actual possession of the debtor’s property? If so, numerous arbitration proceedings could remain at a standstill for a long period, significantly impacting the procedural and substantive rights of parties, especially claimants.

The author’s view is that arbitration proceedings can resume as long as the court appoints an administrator, and the administrator has access to the arbitration information, without waiting for the administrator to have actual possession of the bankrupt’s property.

There are three main reasons supporting this perspective. First, let’s look at the legislative purpose. The above-mentioned automatic suspension rule aims to prevent waste of legal resources and maintain procedural stability, ensuring the validity of future arbitrations.

Second, in terms of the substantive legal relationship, once the court accepts the bankruptcy application, the right to administer and dispose of the bankrupt’s property is vested in the administrator. The administrator can legally manage and dispose of the property, regardless of whether physically taking possession of it. Therefore, actual possession of the property is not a requirement for the administrator to exercise their substantive rights.

Finally, interpretations and legal precedents of the Supreme People’s Court in bankruptcy laws have consistently included “taking over the debtor’s property and litigation matters” within the definition of “taking over of the debtor’s property by the administrator”.

In summary, in arbitration proceedings, the administrator taking possession of the debtor’s property does not solely refer to physical possession. As long as the administrator can access arbitration materials, participate in the proceedings, or express their opinion to the arbitral tribunal, the tribunal should allow resumption of the arbitration procedure.

Can the applicant only make a request for confirmation – and not a request for payment – against a respondent who has entered into bankruptcy proceedings? The Arbitration Law and its judicial interpretations provide creditors with the following remedies:

• If creditors have not initiated litigation or arbitration, they should make their claims in the bankruptcy proceedings.
• If they don’t accept the claim confirmed by the administrator, they may then bring a lawsuit or initiate arbitration to request confirmation of the claim. Such arrangement ensures no preferential repayment in bankruptcy proceedings.

However, a question arises regarding how the tribunal should handle a claim for repayment that has already been filed by the claimant when the debtor enters into bankruptcy proceedings.

One common view suggests that the claimants should be required to change their request to a confirmation of the claim, or else it should be dismissed. It should be noted that this view imposes an obligation on claimants to alter their request, and may not be fair to them.

The author’s view is there is no need for the claimants to change their request as long as their claim is established.

In this case, the tribunal can consider two options. The first is to make an award for repayment. However, the tribunal must make it clear in the award that the claimant may only enforce the claim in the bankruptcy proceedings based on the award, without seeking preferential repayment.

This is because prohibition of preference repayment is a fundamental principle of bankruptcy laws, and any award, whether for repayment or confirmation, is subject to special arrangements of the bankruptcy law.

The second option is that the tribunal may make an award for confirmation. However, whether the tribunal should make an award for confirmation or repayment shall be framed as a matter of dispute in the arbitration and debated by the parties.

Almost every award for repayment inherently contains an award for confirmation. Even if the tribunal ultimately renders a confirmation award when the claimant requested repayment, it essentially upholds part of the claimant’s request and does not exceed the scope of the original request.

Furthermore, allowing parties to debate “the type of award the tribunal should render” can prevent unexpected decisions and protect procedural safeguards for the parties.

In the author’s view, the advantage of not requiring the claimants to change their requests is that it respects the principle of party autonomy while striking a balance between procedural safeguards and the legislative purpose of bankruptcy laws.

If bankruptcy proceedings have been concluded and the administrator did not complete cancellation of registration – and the debtor has no other property available for distribution – can creditors who have not declared their claims in bankruptcy proceedings confirm their claims through arbitration? Although the current law lacks clarity on this matter, the author believes that the arbitral tribunal can still render a confirmation award, or even a repayment award.

First, the purpose of bankruptcy proceedings is to ensure fair and maximal repayment to all creditors. Once bankruptcy proceedings conclude with completion of property distribution, the general collective liquidation procedure has been completed. Therefore, the exercise of the rights of creditors should no longer be bound by bankruptcy proceedings, unless the procedure for additional distribution is restarted as a result of discovering new assets.

Second, after conclusion of the bankruptcy proceedings and before cancellation of the debtor’s registration, undeclared claims of the debtors are not extinguished. Arbitration institutions taking up such cases are a defence of debtors’ substantive rights.

Third, in the face of this situation, the court has various concerns to consider when deciding whether to accept a case, such as the potential waste of judicial resources, and the necessity of judicial decisions. In arbitration, however, these issues need not be taken into account. Instead, the focus is solely on the existence of an arbitration agreement and its arbitrability.

Finally, rendering an award by the tribunal would not contravene the principle of “non-preferential repayment” in bankruptcy, as the bankruptcy proceedings have already been concluded. In cases where the debtor has no assets for enforcement, the court may terminate the enforcement process.

If new assets of the debtor are discovered, the additional distribution procedure can be restarted, and claimants can present their claims to the administrator based on the award, thereby receiving proportional repayment.

To summarise the above-mentioned issues, the author believes it is the arbitrator’s task and the tribunal’s responsibility to navigate the appropriate path between bankruptcy law and arbitration procedure, aiming to strike a balance between the interests of all parties involved.

This entails finding a middle ground that ensures the protection of all creditors in bankruptcy proceedings while safeguarding the parties’ rights in arbitration proceedings.

It also involves striking a balance between the principle of non-preferential repayment in bankruptcy proceedings and the principle of party autonomy in arbitration proceedings.

Jiang Qiang is an arbitrator at the Beijing Arbitration Commission/Beijing International Arbitration Centre (BAC/BIAC) and a Beijing-based senior counsel at Tahota Law Firm