Viewpoint... The application of bankruptcy claims set-off rights and legal analysis.

Published:

2023-03-22

The application of the right of set-off of 1. bankruptcy claims. The debt claimed by the (I) must be established before the bankruptcy petition is accepted. Article 40 of the Enterprise Bankruptcy Law stipulates: "If a creditor has a debt to the debtor before the bankruptcy petition is accepted, it may claim set-off from the administrator". When creditors learn that their debtors are on the verge of bankruptcy or have filed for bankruptcy, most creditors will try to pre-empt individual settlement. Therefore, Article 40 of the Enterprise Bankruptcy Law strictly stipulates the time of establishment of the debt claimed by the bankruptcy set-off right, and the debt established before the bankruptcy application is accepted can exercise the right of bankruptcy set-off. (II) claims for set-off are subject to confirmation in insolvency proceedings According to the basic principle of set-off, the parties claim that set-off should be based on the clear and undisputed amount of mutual negative claims and debts. Specifically, in bankruptcy set-off, the active creditor's rights claimed by the parties must also be the bankruptcy creditor's rights confirmed by bankruptcy procedures. Otherwise, the preconditions for bankruptcy set-off are not met. Even if the parties apply to the administrator for bankruptcy set-off, the set-off claim is not established, thus the issue of whether and when bankruptcy set-off takes effect is not involved. (III) insolvency set-off rights do not have a prohibition of set-off. Article 40 of the Enterprise Bankruptcy Law stipulates: "...... shall not be set off under any of the following circumstances: (1) the debtor of the debtor obtains the creditor's rights of others against the debtor after the bankruptcy petition is accepted; (II) the creditor is aware of the fact that the debtor is unable to pay off the debts due or the bankruptcy petition and is liable to the debtor; however, except for the creditor who bears the debt because of the law or the reasons that occurred one year before the bankruptcy application; (III) the debtor of the debtor knows that the debtor is unable to pay off the debts due or the bankruptcy application, he obtains the creditor's rights against the debtor; however, the debtor of the debtor obtains the creditor's rights because of the law or the reasons that occurred one year before the bankruptcy application. Article 40, paragraph 1, of the Enterprise Bankruptcy Law once again clarifies the issue of the time of establishment of the debt in paragraph 1, and the debt that can be set off in bankruptcy is limited to the amount established before the bankruptcy petition is accepted. After the bankruptcy of the debtor, some creditors can only be partially paid off or even unable to be paid off. If the debtor of the bankrupt enterprise buys the creditor's rights from other creditors of the bankrupt enterprise at a relatively low price at this time, and then eliminates its obligation to pay off the bankrupt enterprise by claiming the right of set-off, it will damage the fair compensation rights of other creditors. Article 40, paragraph 2, of the Enterprise Bankruptcy Law makes it clear that the malicious liabilities of creditors cannot be offset. If it is known that the bankrupt enterprise is unable to pay off the debts due or has filed an application for bankruptcy, it is still liable to the debtor, and it is presumed in law that the creditor intends to exercise the right of set-off and in bad faith to bear the debt to the debtor, which shall not be set off. There is an exception to this paragraph, I .e., if a creditor is burdened with a debt for reasons specified by law or for reasons that occurred one year before the application for bankruptcy, it may be considered that the creditor is not in bad faith and is not prohibited by law. Article 40, paragraph 3, of the Enterprise Bankruptcy Law makes it clear that claims acquired in bad faith by the debtor's debtor cannot be set off. If the debtor of the debtor's business is allowed to offset the creditor's rights obtained against the debtor's debts with the debtor's debts when he knows that the debtor is unable to pay off the debts due or has filed an application for bankruptcy, it means that the debtor of the debtor's business is relieved of its debt service obligations, and its claims are paid off in priority, thus damaging the fair compensation rights of other creditors. Article 44 of the (II) Provisions of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Enterprise Bankruptcy Law stipulates that if, within six months before the bankruptcy application is accepted, the debtor is unable to pay off its due debts, is insolvent or obviously lacks solvency, but still pays off individual creditors under the circumstances of paragraphs 2 and 3 of Article 40 of the Enterprise Bankruptcy Law, if the administrator files a lawsuit with the people's court within three months from the date of acceptance of the bankruptcy application, the set-off shall be invalid. The right of set-off of (IV) bankruptcy is not limited by the maturity of the debt, the type of the subject matter, etc. According to the provisions of Article 43 of the (II) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Enterprise Bankruptcy Law, the exercise of the right of set-off in bankruptcy is different from the exercise of the right of set-off in civil law, and the set-off of bankruptcy claims is not subject to the restriction of whether the debt is due or not, nor does it require the same type and quality of the subject matter of the debt. 2. guidance case The retrial applicant Sichuan Jiaxin Trading Co., Ltd. (Jiaxin Company) and the respondent Minfa Securities Co., Ltd. (Minfa Securities), the third party in the first instance, Shanghai Hante Enterprise Development Co., Ltd. (Hante Company), and the third party in the first instance, Shanghai Feige Industrial Co., Ltd. (Feige Company). Case No. (2016) Supreme Famin No. 404 (I) basic case On September 26, 2003, Feige and Schwab signed a "Transfer Agreement", agreeing that Feige will transfer 8983 standard natural rubber warehouse receipts to Schwab at a transfer price of $808470000, and Schwab will compensate Feige's warehouse receipts for an expected return of $205935275, totaling $1014405275. Later, from October 23 to November 6, 2003, Hante Company transferred 1014405275 yuan to Schwab Company in 16 times. Schwab Company transferred all the funds to Feige Company on the same day, and Feige Company transferred the warehouse receipts to Schwab Company. The above-mentioned transactions after investigation, confirmed that the above-mentioned transactions are false transactions, the flow of funds and water system cycle reverse account formation, the transaction of Hante Company, Feige Company are the actual wholly-owned holding company of Minfa Securities. Later, Carlson disposed of all warehouse receipts and received a price of $575947704.97. In addition, there is a real financial exchange between Schwab and Minfa Securities, which owes Schwab 425500000 yuan and interest. After the risk of Minfa Securities broke out, the state set up a working group to carry out the administrative clean-up of custody; on July 8, 2008, the Fuzhou Intermediate people's Court ruled to accept the bankruptcy case of Minfa Securities and transferred it to bankruptcy liquidation. On January 8, 2009, the manager of Minfa Securities sued Jiaxin Company in order to collect foreign claims, requiring Jiaxin Company to pay 1014405275 yuan for the transfer of warehouse receipts to Minfa Securities, and 698905275 yuan and interest on the arrears after the exchange of 315500000 yuan between the two parties. After the judgment of the Fuzhou Intermediate Court of the first instance, both parties appealed. The second instance revoked the original judgment and sent it back for retrial. In the first instance, the application for change of Minfa Securities was retried, requiring Jiaxin to return the warehouse receipt. If it cannot be returned, it will compensate for the loss at the market price. After the first trial of the retrial, it was decided that the contract between the two parties was invalid due to violation of the law. Jiaxin Company paid Minfa Securities warehouse receipt disposal amount of 575947704.97 yuan and interest. Schwab appealed to the Fujian High Court against the judgment of the first instance, demanding that the difference between the two parties' financial transactions be offset by 425500000 yuan in the return of the warehouse receipt disposal. After hearing, the court of second instance held that there was no evidence to prove that Schwab had declared creditor's rights to the manager of Minfa securities, and there was no evidence to prove that Schwab had issued a notice of claiming offset to the manager of Minfa securities. Moreover, both parties still had disputes over the amount of creditor's rights of capital exchange, which did not belong to the same legal relationship as the case and did not belong to the trial court of the case. Therefore, the first instance. Schwab refused to accept the judgment of the second instance and applied to the Supreme Court for a retrial. The retrial of Jiaxin Company held that Jiaxin Company had already issued a notice of set-off to Minfa Securities, and in the first instance, Minfa Securities took the initiative to request set-off in the application. Both parties carried out reconciliation in the first instance, and the non-objection part was confirmed. Minfa Securities replied that the creditor's rights and debts of the capital exchange between the two parties have nothing to do with this case and should be dealt with separately. Minfa Securities has never agreed to Schwab's claim of offset. Moreover, Schwab's liabilities to Minfa Securities occurred only after the court determined that the contract was invalid. After the court accepted the bankruptcy of Minfa Securities, they shall not be offset according to the provisions of the Enterprise Bankruptcy Law. Moreover, Minfa, no bankruptcy set-off claims were received either. (II) focus of controversy The focus of the dispute in the retrial of this case is: Should Schwab's claim of 425500000 yuan to Minfa Securities be supported by its claim to offset the amount payable to Minfa Securities? (III) judicial viewpoint The retrial court, in combination with the actual situation of the case, divided the focus of the dispute as follows: 1) As to whether Schwab has declared claims and claims of set-off? The retrial court held that the bankruptcy liquidation of Minfa Securities has gone through two stages of administrative liquidation and bankruptcy liquidation, which should be treated as an organic whole. The expressions of intent of both parties in each stage can be regarded as the handling of the relationship between creditor's rights and debts, and its litigation claims and reasons also reflect that Minfa Securities has objections to the amount of offset claimed by Jiaxin. It can therefore be concluded that Schwab has claimed a claim against Minfa Securities and claimed an offset. 2) Is the claim that Schwab claims to set off a claim that cannot be set off? According to article 40 of the Enterprise Bankruptcy Law, the debts allowed to be set off in insolvency proceedings shall be debts already incurred prior to the acceptance of insolvency and shall not be the three non-set-off circumstances provided for in paragraph 2. In this case, the debts claimed by Schwab Company to be offset occurred between 2001 and 2005, while the bankruptcy case of Minfa Securities was accepted on July 8, 2008, which is in line with the creditor's rights that can be offset under the bankruptcy law. 3) Can different types of claims claim bankruptcy set-off? In this case, the claims claimed by Minfa Securities to Jiaxin Company are based on the legal relationship of return compensation after the transfer agreement is invalid, and the liabilities of Minfa Securities to Jiaxin Company are based on the legal relationship of the exchange of funds between the two parties, not the creditor's rights and debts arising from the same legal relationship. However, according to article 43 of the Judicial Interpretation II of the Bankruptcy Law, the claims and debts set off in bankruptcy need not be of the same type and the same legal relationship. Therefore, in this case, the creditor's rights and debts between Schwab and Minfa Securities are not based on the same legal relationship and do not affect the bankruptcy set-off. 4) Does this case constitute an initiative by the administrator to set off? Article 41, paragraph 2, of the Judicial Interpretation II of the Bankruptcy Law stipulates that the administrator shall not voluntarily claim to set off claims and debts. The legislative purpose is to consider the right of set-off as a right of creditors and can be allowed to exercise or give up. However, the administrator's initiative to claim set-off will benefit individual creditors, reduce the bankruptcy property, objectively disadvantage the majority of bankruptcy creditors, and is inconsistent with the administrator's duty to act for the common interests of rights creditors. In this case, Minfa Securities filed a lawsuit after the outbreak of securities risk, the task force intervened in the reconciliation with Jiaxin Company, and the manager of Minfa Securities filed a lawsuit to collect external claims and increase the debtor's property, which should not be identified as constituting the administrator's active exercise of the right of bankruptcy set-off. 5) Does not set-off in this case lead to obvious unfair consequences? The normative intent of the bankruptcy set-off system is to simplify the mutual payment relationship between the parties and prevent non-objection litigation, and to prevent the unfairness of the creditor's debt to the bankrupt enterprise after the debtor's enterprise has been declared bankrupt, and the claim can only be paid in proportion. In this case, the trial court asked Schwab to claim its rights separately not only violated the normative intent of the bankruptcy set-off right system, but even the unjust result that Schwab could not be paid off at the same time as the full repayment of the warehouse receipts involved in the case. To sum up, the Supreme Court retrial judgment: in support of Schwab's claim to exercise the right of bankruptcy set-off, Schwab paid 150447704.97 yuan and interest payable after set-off to Minfa Securities. 3. relevant legal provisions the People's Republic of China Enterprise Bankruptcy Law Article 4 Where a creditor claims the set-off of claims and debts, it shall comply with the circumstances stipulated in Article 40 of the Enterprise Bankruptcy Law, except for those that have been set-off in accordance with the relevant laws before the implementation of the Enterprise Bankruptcy Law. Article 40 If a creditor has a debt to the debtor before the bankruptcy petition is accepted, it may claim set-off with the administrator. However, no set-off shall be allowed under any of the following circumstances: The debtor of the (I) debtor obtains the creditor's rights of others against the debtor after the bankruptcy petition is accepted; (II) the creditor is aware of the fact that the debtor is unable to pay off the debts due or the bankruptcy application, it is liable to the debtor; however, the creditor is liable for the debt because of the law or for reasons that occurred one year before the bankruptcy application; (III) the debtor's debtor acquires a claim against the debtor if it is aware of the fact that the debtor is unable to pay its debts as they fall due or that the bankruptcy petition is filed; except where the debtor's debtor acquires the claim because of the provisions of the law or for reasons that occurred one year before the bankruptcy petition. (II) of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Enterprise Bankruptcy Law Article 41 When a creditor exercises the right of set-off in accordance with the provisions of Article 40 of the Enterprise Bankruptcy Law, it shall make a claim of set-off to the administrator. The administrator shall not take the initiative to set off the mutual liabilities of the debtor and creditors, except to the extent that the set-off benefits the debtor's property. Article 42 After the administrator receives the notice from the creditor claiming the debt set-off, if there is no objection after examination, the set-off shall take effect from the date of receipt of the notice by the administrator. If the administrator has an objection to the claim of set-off, it shall file a lawsuit in the people's court within the agreed time limit for the objection or within three months from the date of receiving the notice of claiming the debt set-off. If it is filed within the time limit without justifiable reasons, the people's court shall not support it. If the people's court decides to reject the invalid set-off claim brought by the administrator, the set-off shall take effect from the date on which the administrator receives the notice claiming the set-off of the debt. Article 43 The people's court shall not support the creditor's claim for set-off and the administrator raises objection for the following reasons: (1) when the bankruptcy application is accepted, the debt owed by the debtor to the creditor has not yet expired; When the (II) bankruptcy application is accepted, the debt owed by the creditor to the debtor has not yet expired; The (III) parties have different types and qualities of the subject matter of mutual liabilities. Article 44 Within six months before the acceptance of the bankruptcy application, the debtor has the circumstances specified in the first paragraph of Article 2 of the Enterprise Bankruptcy Law, and the debtor and individual creditors pay off the individual creditors by offset, and the offset claims and debts belong to one of the circumstances specified in items (2) and (III) of Article 40 of the Enterprise Bankruptcy Law. The administrator shall file a lawsuit with the people's court within three months from the date of acceptance of the bankruptcy application, claiming that the offset, the people's court should support it.

Key words: