Viewpoint... On the legality of court assistance in changing frozen equity in bankruptcy reorganization cases.

Published:

2021-11-23

Presentation of 1. issues Article 19 of the Enterprise Bankruptcy Law stipulates that "after the people's court accepts the bankruptcy application, the preservation measures relating to the debtor's property shall be lifted and the enforcement procedure shall be suspended." The administrator may, in accordance with the foregoing provisions, apply for the lifting of all protective measures against the debtor's property, but it is difficult to lift the protective measures against the shareholders' equity holdings. After the reorganization plan adjusts the rights and interests of the contributors, the frozen state of equity will prevent the new and old shareholders from completing the registration of equity changes on their own, thus hindering the implementation of the reorganization plan. In order to solve this problem, the insolvency representative tries to find various ways, such as negotiation, acquisition of creditor's rights, setting settlement conditions, determining the transfer price of formal equity, auction of equity, application to the enforcement court for cancellation, and filing of enforcement objections. These methods have their own disadvantages, such as negotiation or acquisition of creditor's rights, which often increases time or money costs and is unfair to other creditors. In the reorganization plan, the lifting of the equity freeze as a condition for settlement does not necessarily lift all the freezes. Some creditors would rather not receive the payment than cooperate with the unsealing, and this method is not binding on the creditors of non-bankrupt enterprises; when the reorganization plan stipulates that the transfer price in the form of 1 yuan, 10 yuan or 100 yuan will be paid to the first cover and then apply to the enforcement court to lift the freeze on all shares. This practice not only confuses the adjustment of investors' rights and interests with the transfer of shares, but also divides the debt service funds from the transfer price of shares, and the transfer price lacks persuasiveness and basis, which has major logical defects. If the reorganization investor is determined by auction of shares, it is necessary to adjust the rights and interests of the investor before the equity auction, then it is also necessary to face the issue of the equity freeze; apply to the enforcement court to lift the seizure or file an enforcement objection, some courts have ruled to lift the seizure measures, but many courts have rejected the objection. As early as 2012, judges Zhang Yongjun and du Jun of the Supreme people's Court published a paper in the Application of Law, arguing that "the reorganization procedure takes precedence over the ordinary enforcement procedure, and the nature of equity reduction is not an intended transfer but more similar to a legal transfer. After the reorganization plan is approved by the people's court, it will have the nature of an effective legal document. The people's court and other relevant administrative organs should fully guarantee the implementation of the equity reduction in the plan, the equity freeze should be lifted." Professor Wang Xinxin published a paper in the People's Court News in 2016 and argued: "The reorganization plan approved by the court is mandatory for the change of the investor's equity, rather than the complete voluntary transfer of all parties, which is a judicial transfer of equity. Therefore, the court should issue a notice of assistance in execution in accordance with the company's regulations to ensure the implementation of the reorganization plan approved by it." And pointed out that "in the practice of the reorganization of listed companies in China in recent years, there are many cases involving the change of shareholders' equity, all of which are implemented by the court issuing a notice of assistance in execution." If the court accepting the bankruptcy case issues a notice of assistance in execution, requiring the commercial registration authority to register the change of equity under the name of the designated subject, this is the most direct and effective way to solve the problem of equity freeze. The judicial practice of changing the registration of frozen shares directly by the court accepting bankruptcy cases in 2.. Due to the imperfect provisions of the current Enterprise Bankruptcy Law, local courts have made various guidance within the legal framework to solve many practical problems encountered in bankruptcy cases. The Guangdong High Court, the Beijing Bankruptcy Court, the Guangzhou Intermediate Court, the Shenzhen Intermediate Court, and the Jiangsu High Court have made it clear that the court can assist in the implementation of the method of changing the registration of frozen shares. 1. Paragraph 2 of Article 98 of the guidelines on several issues concerning the trial of Enterprise bankruptcy cases issued by the Guangdong Provincial higher people's Court on November 29, 2019 stipulates: "when the people's court approves the reorganization plan, it shall be examined in the light of the value of the debtor's assets, liabilities, the proportion of the debtor's compensation in the reorganization plan, and the size of the retained rights and interests of the original shareholders after adjustment. After examination and approval, it shall be implemented in accordance with the provisions of the reorganization plan. If the people's court or registration authority that has taken measures to seal up the shares refuses to enforce them, the administrator may apply to the people's court for assistance in enforcement." 2. Article 132 of the "Regulations for Handling Bankruptcy Reorganization Cases (Trial)" formulated by the Beijing Bankruptcy Court on December 30, 2019 stipulates: "During the implementation of the reorganization plan, investors, creditors, etc. refuse to cooperate without justifiable reasons. If the rights and interests change procedures, the people's court may issue a notice of assistance in execution to the relevant units based on the application of the administrator and interested parties." 3. Article 10, paragraph 2, of the "Implementation Opinions on Promoting the Exit of Bankrupt Enterprises from the Market" jointly issued by Guangzhou Intermediate People's Court and Guangzhou Market Supervision Administration on May 26, 2020, No. 88 of Guangzhou Zhongfa [2020] stipulates: "Bankruptcy and reorganization enterprises need to change shareholders' matters due to the adjustment of investors' rights and interests, but the shares held by the original shareholders of the enterprise are pledged or sealed up, the administrator may go to the corresponding market supervision department for equity change registration with the case acceptance ruling, the approval of the reorganization plan ruling, the decision of the designated administrator (liquidation group), the notice of assistance in execution and other materials." 4. Article 7 of the minutes of the meeting on issues related to the cancellation of enterprises jointly issued by the Shenzhen Intermediate people's Court and the Shenzhen Municipal Market Supervision Administration on September 25, 2020 stipulates: "if a bankrupt and reorganized enterprise needs to change shareholders' matters due to the adjustment of the rights and interests of investors, but if the shares of the enterprise held by the original shareholders of the enterprise are pledged or sealed up, the people's court shall issue a notice of assistance in execution, the administrator may go to the commercial registration authority to register the change of equity with the ruling on the acceptance of the case, the ruling on the approval of the reorganization plan, the decision of the designated administrator (liquidation group) and the notice of assistance in execution issued by the people's court." 5. Article 5 of the "Implementation Opinions on Doing a Good Job in the Registration of Bankrupt Enterprises and Optimizing the Business Environment" jointly issued by the Jiangsu Provincial Higher People's Court and the Jiangsu Provincial Market Supervision Administration on November 16, 2021 stipulates: "The registration of change of shareholders of bankrupt enterprises shall be handled in accordance with the law. According to the bankruptcy reorganization plan approved by the people's court, it is necessary to change the registration of shareholders of the bankruptcy reorganization enterprise, but because the equity held by the original shareholders of the enterprise has been pledged or sealed up by the court, if the administrator is unable to apply for the registration of shareholder change, the bankruptcy court may issue a notice of assistance in execution, notify the market supervision department to assist in lifting the seal, removing the pledge, and handle the registration of equity change. After the seizure is lifted or the pledge is removed, the bankruptcy court shall promptly inform the pledgee and the court that originally took the protective measures of the situation." 3. Court Accepting Bankruptcy Cases Changes the Legality Basis of Frozen Equity Registration by Co-Enforcement It is the most effective way to solve the obstacles of equity freezing that the court accepting bankruptcy cases directly requires the commercial registration authority to complete the change registration by means of the notice of assistance in execution. In the absence of clear legal provisions, why do places such as Guangzhou and Shenzhen dare to issue the above judicial documents, and why do some areas dare to issue direct co-enforcement transfers? In addition to the admirable spirit of social responsibility, the more important support lies in the stable legal basis of this practice. The legal effect of the (I) equity freeze only extends to the autonomy of shareholders to transfer equity and the right to dividend income. According to the Civil Code, equity is one of the six property rights enjoyed by civil subjects, alongside property rights, claims, intellectual property rights and inheritance rights. Equity can be divided into self-interest and co-interest according to the purpose and manner of exercise. Self-interest rights refer to the rights enjoyed by shareholders based on their own interests, which can be exercised separately, including the right to return on assets, the right to request the distribution of surplus property, the right to transfer shares, the right to subscribe for new shares, etc. The right of common interest refers to the rights enjoyed by shareholders based on the interests of all shareholders or the company, including the right to vote at the shareholders' meeting, the right to convene the shareholders' meeting, the right to propose proposals, the right to question, the right to inquire about the articles of association and the books of account, and the right to request revocation by resolution of the shareholders' meeting. The Supreme People's Court<关于人民法院执行工作若干问题的规定>（试行）》第38条规定：“对被执行人在有限责任公司、其他法人企业中的投资权益或股权，人民法院可以采取冻结措施。冻结投资权益或股权的，应当通知有关企业不得办理被冻结投资权益或股权的转移手续，不得向被执行人支付股息或红利。被冻结的投资权益或股权，被执行人不得自行转让。”根据《最高人民法院、国家工商总局<关于加强信息合作规范执行与协助执行的通知>(October 10, 2014) Article 12 stipulates that if the shares are frozen, the shareholders shall not transfer them without authorization, and shall not set up pledges or other rights burdens. According to the aforementioned provisions, the consequence of the equity freeze is that the executed person may not transfer the frozen investment interest or equity on his own, and the enterprise may not go through the procedures for the transfer of the frozen investment interest or equity, and may not pay dividends or dividends to the executed person. The legal effect of the equity freeze only extends to the autonomy of the shareholders to transfer their shares and the right to dividend income, limiting the shareholders' right to self-interest, not the right to co-interest. The freezing of (II) shares does not affect the voting, compulsory adjudication and legal effect of the investor's equity adjustment plan. There is a fundamental difference between the transfer of equity to the reorganization investor or creditor in the adjustment plan of the investor's equity in the reorganization plan and the transfer of equity. The transfer of equity is the act of a shareholder transferring his equity to another person by means of transactions, gifts and other laws or the articles of association of the company. On the other hand, the adjustment of the rights and interests of the investors in the reorganization plan is based on the principle that creditor's rights take precedence over equity, and the rights and interests of the investors are reduced in the case of enterprise bankruptcy, so as to introduce the way of restructuring investors or debt-to-equity swap and reorganization. The acquisition of equity by investors is not based on the self-transfer of shareholders, and the investment price is not paid to individual shareholders. The shareholding freeze restriction is the shareholder's right to self-transfer and dividend of equity and investment interests. The reorganization plan investor's equity adjustment plan is not a shareholder's own transfer of equity or investment interests, nor does it involve dividends, does not belong to the restriction of equity freeze, and does not affect the voting rights of shareholders on the plan. According to Article 87 of the Enterprise Bankruptcy Law, even if the investor group does not vote to pass the capital contribution rights and interests adjustment plan, as long as the draft reorganization plan adjusts the investor's rights and interests in a fair and just manner, the court can force the decision. The freezing of equity or pledge is not an exception, and the freezing of equity does not affect the court's ruling and legal effect. (III) equity has undergone a change in the subject of rights prior to the registration of the change. According to the third paragraph of Article 32 of the Company Law, the effect of equity registration of a limited liability company is only against third parties. The industrial and commercial department is not the shareholder's equity confirmation authority, nor is it the property right registration authority, the industrial and commercial department of the limited liability company's capital contribution registration, the essential role is information publicity. Although no change registration has been made, the reorganization investor or creditor may acquire equity in accordance with the provisions of the investor's equity adjustment plan confirmed by the court ruling. (IV) the reorganization plan is an effective legal document, the people's court may complete the formalities for the transfer of property rights certificates by way of co-enforcement. The reorganization plan approved by the court has the nature of an effective legal instrument, and the reorganization plan stipulates that the change of equity to the name of the reorganization investor or creditor shall be implemented. According to Article 4 of the Enterprise Bankruptcy Law: "If the proceedings for the trial of bankruptcy cases are not provided for in this Law, the relevant provisions of the Civil Procedure Law shall apply." Article 251 of the "Civil Procedure Law" stipulates: "In the course of execution, if it is necessary to go through the procedures for the transfer of relevant property rights certificates, the people's court may issue a notice of assistance in execution to the relevant unit, and the relevant unit must go through it." In the course of the implementation of the reorganization plan, it is necessary to go through the formalities for the transfer of shares, but due to the freezing of shares, the shareholders are unable to do so on their own, so the people's court has the right to issue a notice of assistance in execution to the registration authority in accordance with the above provisions. The (V) investor's equity adjustment plan is binding on the debtor and all creditors. Article 92, paragraph 1, of the Enterprise Bankruptcy Law stipulates: "A reorganization plan approved by the People's Court shall be binding on the debtor and all creditors." If the executor applying for the freezing of equity is also a creditor of the debtor, the provisions of the investor's equity adjustment plan and the conditions for the settlement of claims shall be binding on it, and in the case of non-cooperation in the lifting of the equity freeze, the court shall rule on the basis of the reorganization plan to force the resolution of the equity freeze. The adjustment of the rights and interests of the (VI) investor and the change of the equity shall not harm the legitimate rights and interests of the applicant. In the case of the debtor's insolvency, there is no surplus to be distributed to the interests of shareholders, the adjustment of the rights and interests of the investor will not actually harm the rights and interests of the applicant for execution, and the continued freezing of the original investor's equity has no practical significance for the applicant for execution. If the enterprise goes bankrupt and liquidates due to the inability to transfer the shares, the shareholders' shares will no longer exist and the creditors will suffer greater losses. 4. epilogue As a civil preservation measure, the legal effect of the equity freeze is only to prohibit the right of shareholders to transfer their equity and investment interests and the right to dividends. The adjustment of the investor's rights and interests of the reorganization plan is the reduction and transfer of the investor's rights and interests based on the debtor's assets and liabilities in the bankruptcy reorganization proceedings of the enterprise, which is fundamentally different from the transfer of equity, and is not within the scope of the equity freeze measures. The reorganization plan is an effective legal instrument, and the adjustment of the rights and interests of the contributors determined by it has the effect of enforcement. In the case that the debtor and shareholders are unable to implement the investor's rights and interests adjustment plan on their own due to the freezing of equity, the people's court shall complete the registration of frozen equity changes by issuing a notice of assistance in execution in accordance with the provisions of the Enterprise Bankruptcy Law and the Civil Procedure Law. The practice has a sufficient legal basis and should be supported and widely applied.</关于加强信息合作规范执行与协助执行的通知></关于人民法院执行工作若干问题的规定>

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