Different court approaches to bankruptcy claim objections

By Wang Zhenxiang, Jingtian & Gongcheng
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To protect the legitimate rights and interests of both debtors and creditors in bankruptcy proceedings, if they disagree with any bankruptcy claim on the checklist of creditors’ rights, the Enterprise Bankruptcy Law grants the right to raise an objection and initiate a lawsuit regarding any dispute over confirmation of bankruptcy claims.

To increase the efficiency of bankruptcy trials, article 8 of the Provisions (III) on Several Issues concerning the Application of the Enterprise Bankruptcy Law stipulates that where the bankruptcy administrator has finished explaining or adjusting the claims based on the opponent’s stated reasons and legal basis, or decides not to explain or adjust, the opponent may initiate a litigation or arbitration within 15 days after the creditors’ claims are inspected at the creditors’ meeting. In practice, courts have different understandings and practices regarding an opponent’s lawsuit. This article summarises the contents and judicial opinions from court documents across China with the hope of shedding some light on the inconsistency.

DIFFERENT INTERPRETATIONS

Wang Zhenxiang, Jingtian & Gongcheng
Wang Zhenxiang
Partner
Jingtian & Gongcheng

When the clock starts ticking. In most cases, the 15-day period starts when the inspection of opposed claims by the competent creditors’ meeting concludes. However, in certain regions, the starting point is considered the day the opponent receives the written document issued by the administrator, based on the above-mentioned provisions stipulating that the administrator may offer explanations or adjustments. This opinion was upheld by the Higher People’s Court of Hebei province in Detaiquan Special Steel v Mingjun Xintai Tourism Development (2021). Both the Shanghai High People’s Court and Shenzhen Intermediate People’s Court require administrators to provide a written reply to opponents, and accord them a reasonable time of no less than 15 days from receiving the written reply, giving them ample chance to raise a lawsuit.

Roles in opposition lawsuits. According to the Beijing High People’s Court, the debtor’s declaration of opposition should be made by the debtor’s registered legal representative. If the inspected creditor’s right is guaranteed, the guarantor should be informed of the inspection in writing, and shall have the right to launch a lawsuit to confirm bankruptcy claims with the bankruptcy court if he/she believes the adjustments unlawful. The Jiangxi Higher People’s Court has made similar requirements. The Sichuan Higher People’s Court further requires that, where the debtor finds it difficult to file a lawsuit in his/her own name, a legal representative, shareholder/sponsor, director or supervisor may do so on his/her behalf, with any benefits from winning the lawsuit going to the debtor. The Shandong Higher People’s Court provides that: where the debtor opposes the bankruptcy claims listed on the checklist of creditors’ rights, the opposed creditor will be listed as the defendant; where a creditor opposes the claims of other creditors on the checklist, the opposed creditor is the defendant; where the creditor opposes its own claim, the debtor is the defendant; and where multiple parties oppose the same claim, all opponents are listed as co-plaintiffs. The Sichuan court also provides that where a creditor opposes the claims of other creditors, the debtor may be listed as a third party.

Nature of 15-day period. With regard to the 15-day limit to file an opposition lawsuit, judicial documents have yet to clearly define its legal nature, and judgment documents in various regions indicate an inconsistency in its interpretation. In Chen Hao v Wuhan Oriental Yixin Construction et al (2019), the civil judgment deems the 15-day period neither a limitation of action nor a peremption period, but a guiding requirement with adverse consequences not unlike the claim period, and a lawsuit may be filed after its expiry.

In China Chemistry Engineering No. 4 Construction v Shandong Jinshunda Group et al (2019), the court deemed the 15-day period peremptive and dismissed the opponent’s request. In the 2021 case of confirming the bankruptcy claim of Ping An Bank Taiyuan branch, the court held that as the opponent failed to file a lawsuit within 15 days, it was deemed to have consented to the inspection results at the creditors’ meeting, thus reaffirming the first and second instance decisions of dismissal.

Can 15-day period be adjusted? In Weng Xiaoxiong v Xieli Hexing Real Estate Development (Pingtan) et al (2021), the court held that the 15 days, being a statutory period for opponents to file a lawsuit, is not subject to termination, interruption or extension for any reason. However, according to the Chongqing No. 5 Intermediate People’s Court, opponents may apply to the court for an extension of the 15-day period due to force majeure or on other reasonable grounds (e.g. the administrator fails to issue a review result within the prescribed period) in accordance with article 83 of the Civil Procedure Law.

Consequences of belated lawsuit. According to the trial procedures of the higher courts of Shandong, Jiangxi and Beijing, the opponent should file the lawsuit challenging bankruptcy claims within the 15-day period, otherwise such claims are affirmed. The trial procedures of the higher courts of Chongqing, Sichuan, Yunnan and Shanghai, as well as the intermediate court of Shenzhen, indicate that if no lawsuit is launched, it would be deemed that all parties consent to, or hold no objections over, the bankruptcy claims.

LEGAL EFFECT ANALYSIS

Based on courts’ varied regulations and practice, the author believes the 15-day period to be more akin to a limitation of action. Determining it as a legal period in the sense of the procedural law veers closer to its legislative purpose, while article 83 of the Civil Procedure Law may also be applied to prevent any loss of rights of the opponent for legitimate reasons.

Given that the Enterprise Bankruptcy Law allows creditors to make supplementary declarations if missing the deadline, to deem the 15-day period as peremptive would seem to contradict such regulations. Furthermore, as it usually takes a long time for confirmed bankruptcy claims to be allocated, simply regarding the 15-day period as a guiding regulation with a slap on the hand may be insufficient to achieve the goal of urging opponents to fast-track any lawsuit and improving bankruptcy procedural efficiency.

RECOMMENDATIONS

In the absence of a consensus in both legal regulations and judicial practice, the author advises debtors and administrators to observe the practice of the Chongqing and Shanghai courts, and fully inform the creditor of the starting point of the 15-day period, the consequences of a belated objection, whether it can be extended and, if so, for what legitimate reasons, as well as other pertinent information in the course of official bankruptcy claim confirmation. The author advises that creditors attach greater emphasis to the time limits under the laws and legal interpretations, improve communicative efficiency with administrators, and file a lawsuit within the prescribed time limit.

Wang Zhenxiang is a partner atJingtian & Gongcheng

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