Viewpoint... The nature of employee fund-raising claims in bankruptcy.

Published:

2021-11-08

At present, the legal nature of the creditor's rights of fund-raising funds for employees of bankrupt enterprises is still a controversial issue. How to correctly handle the issue of fund-raising funds for employees within the scope of the law is an important issue facing the bankruptcy administrator. Based on the historical evolution of laws, regulations and policies, this paper makes a brief analysis of the legal nature of employee fund-raising claims in bankruptcy cases. The relevant provisions of the employee fund-raising as a priority claim in bankruptcy. 1. Article 3 of the 1994 "Notice of the State Council on Issues Related to the Trial Implementation of Bankruptcy of State-owned Enterprises in Certain Cities" (Guo Fa [1994] No. 59) stipulates that "before bankruptcy, the funds borrowed from the employees in order to maintain production and operation shall be treated as the wages owed by the bankrupt enterprise." This provision applies only to pilot cities for enterprises to optimize their capital structure as determined by the State Council. 2. The first paragraph of Article 58 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases (Fa Shi [2002] No. 23) in 2002 stipulates that "the funds owed by the debtor to the employees of the enterprise shall be paid off in accordance with the order stipulated in Item (I), Paragraph 2, Article 37 of the Enterprise Bankruptcy Law, but the high interest portion that violates the law shall not be protected." (Article 37, paragraph 2, of the 1986 the People's Republic of China Enterprise Bankruptcy Law (for trial implementation) stipulates that "after the bankruptcy estate has paid the bankruptcy expenses in priority, it shall be paid off in the following order: (1) the wages and labor insurance expenses owed by the bankrupt enterprise; (II) the taxes owed by the bankrupt enterprise; and (III) the bankruptcy claims.") The judicial interpretation of the employee fund-raising funds are classified as labor claims (also known as employee claims), so it has the attribute of labor claims, that is, as the wages of employees, etc. in the first order of priority over other claims, has become an important basis for employees to claim fund-raising claims as priority claims in the current bankruptcy practice. II. Disputes over the nature of employee fund-raising claims Since the new "Enterprise Bankruptcy Law" implemented on June 1, 2007 and the subsequent three judicial interpretations have not made clear provisions on employee fund-raising claims. After the implementation of the new Enterprise Bankruptcy Law, there are different views in practice on whether the nature of employee fund-raising is recognized as a priority claim by reference to wages or as an ordinary claim. The first view is that employee fund-raising should be recognized as ordinary claims. The reason is that Article 58 of Fa Shi [2002] No. 23 is explained to Article 37 of the Bankruptcy Law (Trial), which has been repealed by the new Enterprise Bankruptcy Law implemented in 2007. The new Enterprise Bankruptcy Law has no provisions on employee fund-raising claims, which shows that employee fund-raising claims are not essentially different from ordinary private loans and should be treated as ordinary bankruptcy claims. Article 12 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (Fa Shi [2015] No. 18), which came into effect on September 1, 2015, clearly stipulates that legal persons or other organizations raise funds from employees through loans within the unit for the production and operation of the unit, and there are no circumstances stipulated in Article 52 of the Contract Law and Article 14 of these Provisions, where the parties claim that the private lending contract is valid, the people's court should support it. This further proves that employee fund-raising claims should be equivalent to ordinary claims of private lending. The second view is that employee fund-raising should be recognized as employee claims. The reason is that although the Bankruptcy Law (Trial) has been abolished, item (I) of paragraph 1 of Article 113 of the new Enterprise Bankruptcy Law is a continuation of item (I) of paragraph 2 of Article 37 of the Bankruptcy Law (Trial), and Fashi [2002]23 is still in force. In addition, from the perspective of maintaining social stability and the vital interests of employees, it is also in line with the original intent of the legislation to pay off the employees' fund-raising claims of bankrupt enterprises as the first order. Therefore, the employee fund-raising funds are settled by reference to the first order. III Tracing the concept of employee fund-raising It is generally believed that employee fund-raising refers to the loan that an enterprise needs to borrow from the employees of the unit for the purpose of production and operation or expansion of production, and the employees provide to the enterprise for the purpose of obtaining interest income. Employee fund-raising belongs to the category of borrowing, but it is different from other fund-raising behaviors in society. It has the characteristics that the lender is the employee of the enterprise, the purpose of borrowing is the production and operation of the enterprise, and the borrowing behavior is limited to the enterprise. This generalization is in line with the contents of Guo Fa [1994] No. 59 and French Interpretation [2015] No. 18, but is this the whole concept of employee fund-raising? What is the origin of employee fund-raising? Fashi [2002] No. 23 only mentions the concept of fund-raising funds for employees but does not give too much explanation. Is it just to unify the handling standards of state-owned enterprises and other enterprises, and to summarize the description of Guofa [1994] No. 59 "in order to maintain production and operation, funds raised from employees", then why is it not quoted in the original text, but a different name? Or does the name already exist? Since Guo Fa [1994] No. 59 provides for the treatment of such claims in bankruptcy, it indicates that the phenomenon of borrowing from employees should have existed before. So where on earth did it come from as a legal concept at first? Why did Fashi [2015] No. 18 put forward separately only to support the validity of the contract? Was it invalid before? Why did Fashi [2002] No. 23 give priority to protection? With these questions, the author explored. In the People's Bank of China, the "Notice on Strengthening the Management of Internal Fund-raising in Enterprises" (Yinfa [1989] No. 21) issued by the People's Bank of China in 1989 to implement the "Notice of the State Council on Strengthening the Management of Internal Bonds" (1989 No. 174), The author discovered the concept of internal fund-raising of enterprises. The notice stipulates that "internal fund-raising of enterprises refers to the behavior of enterprises raising funds from internal employees. Internal fund-raising should generally take the form of issuing internal bonds. When an enterprise conducts internal fund-raising, it must formulate a fund-raising charter or method, and submit it to the People's Bank of China for approval after examination and approval by the enterprise's account-opening financial institution. The monthly report of securities issuance statistics adds an eighth item, 'intra-enterprise fund-raising, 'and so on. In 1999, the Supreme People's Court issued the "Reply on How to Confirm the Effectiveness of Borrowing Acts between Citizens and Enterprises" (Fa Shi [1999] No. 3) [1], which pointed out that enterprises illegally raise funds from employees in the name of loans, enterprises illegally raise funds from society in the name of loans, enterprises issue loans to the public in the name of loans, and other violations of laws and administrative regulations are invalid. Although due to various reasons, the internal fund-raising of enterprises has been strictly controlled and even severely cracked down, the enterprise fund-raising in China has never completely disappeared. Regarding fund-raising, the regulatory authorities are basically in the "three noes" attitude of no approval, no accident, and no accusation, which makes fund-raising widespread "illegal" existence. Article 12 of the judicial interpretation of private lending issued in 2015 is a timely and effective way to fill this legal gap. 4 Legal analysis of employee fund-raising funds. The author thinks that the employee fund-raising as a legal concept has its important characteristics of the times. The employee fund-raising should not be defined according to the interpretation of the text and applied to the current bankruptcy practice, but should adopt historical interpretation and systematic interpretation. The laws and policies of different periods regulate the internal fund-raising of enterprises differently, and the concept of "employee fund-raising" has different connotations in different periods, the nature of fund-raising claims should also change. Yinfa [1989] No. 174 puts forward higher requirements for the legality of enterprise internal fund-raising, which is different from ordinary lending. According to the upper document "Notice of the State Council on Strengthening the Management of Enterprise Internal Bonds" (Guo Fa [1989] No. 21), it can be seen that the original intention of enterprise internal fund-raising is enterprise internal bonds. If an enterprise raises funds from internal employees to meet its strict requirements, it should naturally be protected by a higher level of law. Fashi [1999] No. 3 stipulates that "enterprises illegally raise funds from employees in the name of loans" is invalid, which also confirms that internal fund-raising in accordance with Yinfa [1989] No. 174 should be protected by law. According to the modern legislative system, Yinfa [1989] No. 174 should be a departmental normative document. After the implementation of the Contract Law on October 1, 1999, internal fund-raising in violation of Yinfa [1989] No. 174 should not be deemed as It is invalid, but it is also free from the original conditions of internal fund-raising of enterprises and turns into the characteristics of ordinary private lending relationships, and should not be subject to higher protection. Fashi [2002] No. 23 is still valid [3]. Although the reason for not abolishing it is unknown, it may be explained in a bankruptcy case of a state-owned enterprise that the author once participated in. The state-owned enterprise entered bankruptcy proceedings in 2017. During the liquidation process, it was found that a large number of employee fund-raising funds from the 1980 s to the 1990 s had not been repaid, and relevant approval documents were not found, however, in accordance with the provisions of the judicial interpretation, the administrator gave priority to the settlement of the employee fund-raising funds as labor claims, and neither the creditor nor the debtor raised any objection to this. After the abolition of Yinfa [1989] No. 174 [2], the internal employees of the enterprise voluntarily lend funds for the paid use of the enterprise for the business activities of the enterprise, which is no different in essence from the lending of funds by social personnel and the repayment of principal and interest by the enterprise on schedule. If only the employee status and the condition of the word "fund-raising" on the debit note are different from the non-employee private lending behavior, it is recognized as the employee's claim in bankruptcy, which violates the legislative purpose of the new Enterprise Bankruptcy Law to fairly clean up the creditor's rights and debts and protect the legitimate rights and interests of all creditors. Five conclusions The author believes that under the "three nos" attitude of the regulatory authorities, the definition of employee fund-raising funds should be distinguished by the implementation date of the new "Enterprise Bankruptcy Law. For employee fund-raising claims that occurred before the implementation of the Enterprise Bankruptcy Law on June 1, 2007, in accordance with the laws and regulations at that time, with reference to the wages and labor insurance expenses owed by the bankrupt enterprise, they shall be paid off in the first order; For employee fund-raising claims that occurred after the implementation of the Enterprise Bankruptcy Law on June 1, 2007, private loans should be treated as ordinary claims in principle. Note: [1] Repealed on July 20, 2019, Decision of the Supreme People's Court on Repealing Some Judicial Interpretations (Thirteenth Batch) Law Interpretation [2019] No. 11. [2] Repealed on October 26, 2010, the People's Bank of China, China Banking Regulatory Commission Announcement [2010] No. 15. [3] The national laws and regulations database (npc.gov.cn) is valid, and the last query time is November 8, 2021. References: 1. Du Hongfang's "An Analysis of the Nature of Employees' Fund-raising Claims in Bankruptcy Cases". 2. Zhang Huaxin's Legal Analysis of the Nature of Employee Fund Raising in Bankruptcy Proceedings. 3. Du Wanhua, Editor-in-Chief, Understanding and Application of Judicial Interpretation of Private Lending by the Supreme People's Court, August 2015.

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