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Analysis of Bankruptcy Set-off Right

Published:

2010-07-01

Summary:Compared with the old bankruptcy law, the new bankruptcy law not only stipulates the right of bankruptcy set-off, but also makes restrictive provisions on the exercise of the right of bankruptcy set-off, so that the application of the right of bankruptcy set-off is more standardized, and on the basis of fully protecting the interests of creditors, the principle of fairness is reflected to the maximum extent, A preliminary discussion of the application of the right of set-off in bankruptcy.

Key words:Right of set-off Bankruptcy creditor's rights Bankruptcy proceedings.

The right of bankruptcy set-off refers to the creditor's right to claim mutual set-off from the bankruptcy administrator before the bankruptcy application is accepted, regardless of whether the liquidation period has been reached and whether the subject matter is the same. The system of set-off rights in the bankruptcy law is the exception that the bankruptcy claim can only be paid in accordance with the bankruptcy proceedings. The recognition of the right of set-off in insolvency proceedings is mainly based on two considerations: first, the system of set-off is to assume the function of security, through the exercise of the right of set-off, without participating in the insolvency proceedings can be paid off, in practice, there have been cases where the bankruptcy creditor's debt settlement rate to the bankrupt enterprise is zero, at the same time, the debts paid by the bankrupt creditor to the bankrupt enterprise must be paid off in full, and the difference between the benefits that can be obtained is very large. The implementation of the right of bankruptcy set-off can ensure that the creditor's bankruptcy claim can be paid off in full and in priority within the scope of set-off. It can be seen that the right of set-off stipulated in the bankruptcy law is different from the right of set-off stipulated in the general civil law, and this paper makes a brief introduction to the exercise of the right of set-off in bankruptcy, in order to throw bricks and jade.

The difference between the right of set-off in 1. bankruptcy and the right of general set-off.

1. Bankruptcy set-off right can only be exercised by bankruptcy creditors. In general civil law, as long as the conditions for the exercise of set-off right stipulated by law are met, any party can claim set-off from the other party, that is, the right of set-off is not exclusive to one party. However, in the bankruptcy law, if the bankrupt enterprise or the bankruptcy administrator is given the right of set-off, it will inevitably lead to the improper reduction of the bankruptcy property, the objective damage to the interests of other insolvency creditors is clearly inconsistent with the insolvency law that the insolvency representative should act for the common good of all debtors, and therefore, in the insolvency law, the right of set-off is a right exclusive to the insolvency creditors.

2. The scope of the exercise of the right of bankruptcy set-off is not affected by the period of performance of the claim and the type and nature of the subject matter. The right of set-off stipulated in the general civil law of our country, unless otherwise specifically agreed by the parties, must be the subject matter of the claims of the parties, the same nature, and should be the claims due. In the bankruptcy law, due to the particularity of the liquidation order and circumstances stipulated in the bankruptcy procedure and the general civil law, any creditor's rights are finally realized in the form of money, and after the commencement of the bankruptcy procedure, the unexpired creditor's rights are all regarded as due, so the exercise of the right of set-off in bankruptcy does not need to set the time limit for performance, the type of the subject matter and the nature of the subject matter.

3. The insolvency claim that may be claimed to be set off must be established before the insolvency is accepted. Article 40 of the the People's Republic of China Enterprise Bankruptcy Law (hereinafter referred to as the New 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." That is, the bankruptcy creditor can only set off the debt claim of the bankrupt enterprise before the bankruptcy application is accepted. In other words, whether it is an active claim or a passive claim, it needs to be established before the bankruptcy acceptance, and the claim that occurs after the bankruptcy acceptance cannot be claimed to be set off. There are two specific situations: first, the insolvent creditor may not set off its existing claims against the debt claims it owes to the insolvent enterprise after the declaration of bankruptcy, and second, the debtor of the insolvent enterprise may not set off the debt it has acquired against the insolvent enterprise after the declaration of bankruptcy.

Conditions for the exercise of the right of set-off in 2. insolvency.

1. Claims claiming set-off must be declared in accordance with the law. Article 45 of the new bankruptcy law stipulates: "after the people's court accepts the bankruptcy application, it shall determine the time limit for creditors to declare their claims, and the time limit for the declaration of claims shall be calculated from the date on which the people's court issues the announcement of acceptance of the bankruptcy application, and the minimum shall not be less than 30 days and the maximum shall not exceed three months." Any claim, even if secured by property, should be declared. The declaration of claims is a basic principle of the new bankruptcy law, in other words, any claim that is to be settled in insolvency proceedings must be declared, and undeclared claims cannot be settled. Since the law requires the declaration of claims secured by property, and the set-off has the nature of priority settlement from the actual result, the claims claimed to be set-off must also be declared to the bankrupt enterprise, no exception, undeclared claims, even if in line with the circumstances of set-off, can not exercise the right of set-off.

2. The claim for set-off has been confirmed. Claims that have been confirmed can only be paid in insolvency proceedings, and claims that have not been confirmed are not insolvency claims and cannot be paid in insolvency proceedings. From the provisions of the new bankruptcy law, the actual consequences of set-off and liquidation are consistent. Therefore, the claim to exercise the right of set-off should also be examined, verified and confirmed by the bankruptcy of the bankrupt enterprise and the creditors' meeting, so as not to make the interests of a few creditors override the interests of other bankruptcy creditors, so as to protect the legitimate interests of creditors fairly.

3, should be before the end of the insolvency proceedings to the administrator to claim set-off.

After the people's court accepts the bankruptcy application, the bankruptcy administrator generally receives all the property of the bankrupt enterprise and has the right to dispose of the property of the bankrupt enterprise and clear up the creditor's rights and debts. Therefore, creditors should claim set-off from the bankruptcy administrator, and according to the law, creditors exercise the right of set-off, which may be at any time before the people's court accepts the bankruptcy application and the end of the bankruptcy proceedings. After the conclusion of the bankruptcy proceedings, if the creditor claims the right of set-off again, the bankruptcy administrator shall have the right not to examine and confirm it.

The right of bankruptcy set-off 3. several types of special claims.

The so-called special claims mainly refer to claims with conditions or time limits, which are subject to conditions or time limits for performance compared with ordinary claims, so the exercise of the right of set-off is more cumbersome and requires special explanation.

1. Offset of time-bound claims

In insolvency proceedings, claims with a period of time may be claimed to be set off, and when the creditor's claim is due for a period of time, it may be set off against the claims of the insolvency without a period of time after deducting the interest that is not due. If the time-bound claim of the bankrupt enterprise is an interest-bearing claim, it shall be calculated to the time of set-off; if its claim is a non-interest-bearing claim, it shall no longer be deducted from the interest and shall be regarded as a waiver of the term interest by the creditor. In bankruptcy reorganization proceedings, in order to ensure the smooth realization of the purpose of avoiding bankruptcy of the bankrupt enterprise, it is not appropriate for creditors to grant set-off of claims that have not expired. If, as a result, the creditor's right of set-off is materially adversely affected, the parties may apply to the people's court for exemption from this provision.

2. Set-off of conditional claims

Whether a conditional claim can be set off in insolvency depends on the conditions attached to it, and for the sake of fairness, the set-off of conditional claims should be limited to a certain extent. When an insolvent creditor's claim against an insolvent enterprise is an ordinary claim and the latter has a conditional claim against the former, then, since a passive claim is a conditional claim, it may later be extinguished or become effective by the achievement of the condition. Thus, the risk of set-off is borne by the insolvency creditor. When a passive claim is a claim with a discharge condition, how to deal with it if the attached condition is fulfilled in the future, there are three views: first, in this case, the bankrupt creditor voluntarily waives the interest achieved by the discharge condition, so it cannot claim the return of unjust enrichment; second, the bankrupt creditor can claim the return of unjust enrichment within the scope of the original set-off, otherwise it is obviously unfair to it; third, the bankruptcy creditor can only claim the right of return to the extent that its bankruptcy claim is paid in accordance with the bankruptcy proceedings.

Active claims with stop conditions, because their claims have not yet taken effect, Taiwan scholars in China generally believe that bankruptcy set-off cannot be claimed. Some mainland scholars argue that indirect set-off can be carried out, that is, the bankruptcy creditor with cessation conditions can require the bankruptcy property equivalent to passive claims to be deposited when paying off its debts. After the distribution period expires, if the cessation conditions are fulfilled, the bankruptcy creditor can be paid for the amount of the deposit; if the cessation conditions are not fulfilled, the bankruptcy creditor cannot participate in the distribution of the bankruptcy property, and the bankruptcy property that has been deposited is used for distribution to other bankruptcy creditors, for now, this proposition has some operability.

Creditors on their unconditional active claims, whether they can claim with the bankrupt enterprise with the passive claims of the cessation of conditions for bankruptcy set-off, it is generally believed that the active set-off of active creditors at this time, is a voluntary waiver of passive claims stop conditions do not achieve, has not yet had the benefit of legal effect. However, some scholars believe that a certain period of exclusion can be stipulated after the distribution of the estate, and if the attached conditions are achieved within this period, the active claim can still be converted into an ordinary claim and paid.

Restrictions on the exercise of the right of set-off in 4. bankruptcy.

Since the right of set-off in bankruptcy is very beneficial to the realization of the creditor's claim, regulating the exercise of the right of set-off in bankruptcy and preventing abuse has become a common practice for national bankruptcy legislation to set restrictions on the exercise of set-off rights while determining the right of set-off in bankruptcy. Article 40 of the new bankruptcy law stipulates: "under any of the following circumstances, no set-off shall be allowed:(1) the debtor of the debtor obtains the creditor's rights of others against the debtor after the bankruptcy petition is accepted; (2) the creditor knows that the debtor is unable to pay off the debts due or the fact that the bankruptcy petition is filed, and bears the debts to the debtor; However, the creditor shall bear the debts because of the law or the bankruptcy petition one year ago;(3) The debtor's debtor obtains a claim against the debtor if it is aware of the fact that the debtor is unable to pay the debts due or the bankruptcy petition, except where the debtor's debtor obtains the claim because of the provisions of the law or for reasons that occurred one year before the bankruptcy petition."

Under the above legal provisions, in practice, there are the following types of situations in which set-off is prohibited in insolvency proceedings:

First, if the debtor of an insolvent enterprise obtains another person's claim against the insolvent enterprise after the application for bankruptcy is accepted, the exercise of the right of set-off is prohibited. Although this kind of claim was established before the bankruptcy application was accepted, it is a bankruptcy claim, but for the bankrupt enterprise, the creditor's acquisition is after the bankruptcy application was accepted by the people's court. The prohibition of set-off after the transfer of claims is due to the fact that acts to the detriment of other creditors occur in the course of the transfer of claims. Bankruptcy claims can generally only be paid off by a certain percentage of the original amount of the claim, or even not paid off, and the actual value is much lower than the nominal value. However, when it is used to set off debts, it is paid in full, which makes a huge difference between bankruptcy and set-off settlements.

Second, if the creditor knows that the bankrupt enterprise has the fact that it is unable to pay off the debts due or the bankruptcy application, the exercise of the right of set-off is prohibited to the bankrupt enterprise. However, unless the creditor is burdened by the law or for reasons that occurred one year before the bankruptcy filing. If set-off in this case is not prohibited, it may be unfair for creditors to purchase the property of the insolvent enterprise and bear the debt, but maliciously refuse to pay it off, and set it off in full with their bankruptcy claims that cannot be fully paid off, reducing the distributable property of other insolvent creditors.

Although the provisions on the exercise of the right of set-off in insolvency vary from country to country, the right of set-off of a particular creditor is treated as a security right. The creditor's claim against the bankrupt enterprise obtains a pledge based on the property of the bankrupt enterprise-the creditor's claim of the bankrupt enterprise, which in effect gives the creditor priority. This kind of right may cause damage to the interests of other creditors, and it is more likely to be abused. Therefore, the bankruptcy laws of various countries impose strict restrictions on it. For those creditors who obtain claims or debts in bad faith for the purpose of set-off, they are prohibited from exercising the right of set-off, and only protect those bona fide creditors who will cause injustice if they are not given preferential treatment.

Comments:

1. Zhang Xiaowei and Yin Zhengyou, Editor-in-Chief: Rules for the Work of Bankruptcy Administrators, Renmin University of China Press, April 2008, first edition.

2. Fu Cuiying, edited by: A Comparative Study of Bankruptcy Law, Chinese People's Public Security University Press, first edition, 2004.

3. Ding Changye, British Bankruptcy Law, Law Press, first edition, December 2003.

4. Li Fei, Contemporary Foreign Bankruptcy Law, China Legal Publishing House, July 2006, first edition.

5. Tang Weijian, Editor-in-Chief: Interpretation and Application of the New Enterprise Bankruptcy Law, China Legal Publishing House, October 2006, first edition.

6. Wang Dongmin, "Difficult Interpretation and Practical Operation of New Enterprise Bankruptcy Law (Revised Edition)", Law Press, March 2008, first edition.

(This article won the third prize of Jinan excellent lawyer paper in 2010)

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