Perspective | Protection of Creditor Rights in Bankruptcy Reorganization Procedures

Bankruptcy reorganization is a "restoration and reconstruction" system established in bankruptcy law to rescue enterprises on the verge of bankruptcy. Its rules are designed to enable debtor enterprises to overcome difficulties and resume normal production and operation. To a certain extent, the bankruptcy reorganization system greatly breaks through the traditional concept of bankruptcy, further enriches the bankruptcy law legal system, makes up for the limitations of the bankruptcy liquidation system, and provides more balanced and comprehensive protection for the legitimate rights and interests of both creditors and debtors.
 

There are mainly two situations for applying for bankruptcy reorganization. One is that when a debtor enterprise has grounds for bankruptcy, both the debtor enterprise or its creditors can apply to the court for reorganization of the debtor enterprise; the other is that during the period from the court's acceptance of the bankruptcy liquidation application of the enterprise creditors to the declaration of bankruptcy of the enterprise, the debtor enterprise or the investors who reach the legally required proportion of investment have the right to apply to the court for reorganization.
 

Within six months of the commencement of the reorganization period, the debtor enterprise or the bankruptcy administrator shall formulate a reorganization plan draft and submit it to the court and the creditors' meeting. After the reorganization plan draft is passed by the creditors' meeting, or approved by the applying court, the court approves the execution of the reorganization plan draft. Otherwise, the court will rule to terminate the reorganization procedure and declare the debtor enterprise bankrupt.
 

After the reorganization plan is approved by the court, the debtor will be responsible for executing the plan. If the administrator takes over, the administrator needs to transfer to the debtor. During the execution of the reorganization plan, the administrator has the obligation of supervision. After the supervision period expires and the administrator submits a written supervision report to the court, the supervision responsibility terminates.
 

Whether creditors enjoy secured rights over specific property, whether such secured rights comply with relevant laws and regulations, whether secured creditors have asserted their rights during the secured period, whether they are protected by law, whether they have declared their claims within the statutory period, etc., are all of concern to other creditors. Because before the debtor enterprise enters the bankruptcy procedure, it often sets up collateral for most of its property to obtain financing to maintain normal production and operation. Since most of the property of the bankrupt enterprise has been secured, and secured creditors can be preferentially repaid from specific property, the more secured property, the lower the repayment ratio that other creditors may obtain, so it is not surprising that other creditors easily disagree with the determination of secured creditors.
 

The legality of employee claims is also a frequently disputed issue among creditors. Many privately owned enterprises do not sign formal labor contracts when employing staff, nor do they pay social insurance for them. Some employment is seasonal, and workers do not require the enterprise to pay social insurance for them. Once these enterprises enter bankruptcy proceedings, the bankrupt enterprise may treat the claims of these workers differently, some are publicized as employee claims, some are listed as labor costs, and some are not included in bankruptcy claims, resulting in workers paying the same labor but receiving completely different repayment treatments. Creditors whose related claims are included in ordinary claims may raise objections to the wages of employees included in employee claims, such as contractors of construction projects, who may believe that their claims should be employee claims and require repayment in the first place, thus leading to disputes.
 

Whether ordinary claims are legal and valid is also a concern for ordinary creditors. In judicial practice, some family businesses have related-party transactions. After one of them enters bankruptcy proceedings, in order to obtain a high pass rate for the vote on the reorganization plan draft or transfer bankruptcy property, other related enterprises have filed claims, reducing the already low repayment rate of other ordinary creditors, at which time other ordinary creditors will object to the confirmation of the related-party ordinary claims. In addition, the maximum interest rate of private lending protected by China's current laws and regulations is as high as 24%. After four years of overdue repayment, the borrower can claim interest from the bankrupt enterprise that is close to the principal, while other creditors can obtain lower liquidated damages due to the overdue payment of the bankrupt enterprise, which also easily leads to disputes between ordinary creditors and debtors or administrators over the determination of relevant claims.
 

The "Enterprise Bankruptcy Law" does not stipulate the repayment priority of the priority right to pay for construction projects, but according to Article 807 of the "Civil Code", and the "Supreme People's Court's Reply on the issue of priority right to pay for construction projects" and the "Supreme People's Court's Interpretation (II) on Several Issues Concerning the Application of Law in Hearing Cases of Construction Contract Disputes", the contractor's priority right to pay for construction projects takes precedence over the mortgage right, and its priority is limited to the actual expenses paid by the contractor for the construction project, such as the remuneration of personnel and materials, and does not include the losses caused by the developer's breach of contract; and the time limit for the exercise of statutory priority rights is six months, calculated from the date when the developer should pay for the construction project. In judicial practice, many contractors of construction projects do not have the legal awareness of asserting priority rights. When filing a lawsuit, they only claim the project payment and do not claim the priority right to pay for the construction project. When they claim statutory priority rights in the bankruptcy reorganization procedure, they often exceed the six-month exclusion period stipulated by law, and at this time, they can no longer claim the priority right to pay for the construction project.
 

1. Credit registration
 

Creditors participating in the voting on the bankruptcy reorganization plan must declare their claims in accordance with the law. Failure to declare claims on time will not be able to exercise rights in the reorganization plan. The court announcement will clearly specify the time window for the declaration of claims.

2. Voting on the reorganization plan

In enterprise bankruptcy proceedings, the creditors' meeting is the highest authority. Creditors participate in the creditors' meeting and vote on the reorganization plan draft in accordance with the law. At the meeting, creditors can discuss the debtor's financial status, reorganization plan, etc., to guarantee their right to know and participate. Different types of creditors vote according to relevant regulations to ensure that their opinions can affect whether the reorganization plan is passed or not.

3. Right to access information

In corporate bankruptcy cases, the administrator is appointed by the court. During the execution phase of the reorganization plan, the administrator fulfills the responsibilities of managing the company, supervises the execution of the reorganization plan, and submits a supervision report to the people's court. Creditors have the right to review the supervision report afterwards.

In the broad sense, litigation procedures include not only judicial trial procedures but also enforcement procedures after adjudication. Creditors can initiate judicial relief through litigation, preservation measures, etc.
 

On the one hand, creditors can legally sue to revoke improper reorganization plans or use litigation to require guarantors outside the reorganization procedure to fulfill their guarantee responsibilities. If a secured creditor has the right to priority repayment of specific property according to the law, they can obtain priority repayment in the reorganization plan through judicial procedures. On the other hand, to ensure the effective execution of judicial decisions and the smooth progress of bankruptcy reorganization, creditors can adopt preservation measures in three aspects: property, evidence, and behavior. For example, if fraud or malicious transfer of assets is found, preservation measures can be adopted to prohibit the debtor from transferring property and rights or signing contracts; or they can use subrogation rights to preserve and execute the debtor's claims against third parties, effectively preventing the debtor's malicious evasion of debt.

The role of the administrator is crucial in the bankruptcy reorganization process. They are not only responsible for the execution of the reorganization plan but also a key link in information disclosure and creditor interest protection. Therefore, strengthening the responsibility and supervision mechanism of the administrator is crucial. First, the scope of responsibilities and work standards of the administrator should be clarified to ensure that they can act in the best interests of the creditors and perform their duties faithfully and diligently. At the same time, an assessment mechanism should be established for the administrator to regularly evaluate their work performance to ensure their work efficiency and quality. Second, supervision of the administrator should be strengthened. This includes establishing an independent supervisory body to track and review the work of the administrator in real-time to ensure the compliance and effectiveness of their actions. Finally, the creditors' meeting should also play a supervisory role, deliberating on the administrator's work reports and providing opinions and suggestions on their work. Through these measures, we can ensure that the administrator gives full play to their professional abilities and responsibilities in the reorganization process, effectively protecting the interests of creditors.
 

In cases where the main operating property of a bankrupt enterprise is mortgaged, if secured creditors are allowed to arbitrarily dispose of assets to repay their own debts, the bankruptcy reorganization procedure will inevitably become unsustainable. Based on this consideration, Article 75 of the "Enterprise Bankruptcy Law" restricts the exercise of secured rights by secured creditors, that is, during the reorganization period, the exercise of secured rights over the debtor's specific property is suspended. To achieve successful reorganization and win-win results for all parties, secured creditors should make concessions.
 

In the bankruptcy reorganization procedure, while the "Enterprise Bankruptcy Law" restricts secured rights, it also provides certain compensation. For example, in the voting procedure for the draft reorganization plan, secured creditors are considered a separate group to vote on the draft reorganization plan. It is stipulated that the passage of the draft reorganization plan requires the approval of all voting groups. Afterwards, one of the conditions for the people's court to approve the draft reorganization plan is that the secured creditor will receive full repayment for the specific property, the losses suffered due to delayed repayment will be fairly compensated, and their secured rights will not be substantially damaged.

In the reorganization procedure, in terms of control over the secured assets, firstly, for mortgages, they are under the control of the debtor. After Enter the bankruptcy reorganization procedure, they are taken over by the administrator, relevant preservation measures are lifted, and enforcement procedures are suspended, basically truly realizing the suspension of the exercise of secured rights. Secondly, for pledged property and property subject to liens, because they are often under the control of the creditor, and the debtor may not report the situation of the secured property to the administrator for various reasons, the administrator actually finds it difficult to control the above-mentioned secured property. Therefore, the "Enterprise Bankruptcy Law" should make special provisions for the above situations, restricting creditors from disposing of pledged property and property subject to liens. For example, it stipulates that if a creditor disposes of secured property, they should bear the corresponding responsibilities, and their actions to realize their claims can be deemed invalid and dealt with as individual repayment. At the same time, when receiving creditor claims, the administrator can require creditors to report the situation of their secured rights at the same time, making it easier for the administrator to understand the situation of the secured property. If necessary, the administrator can take preservation measures to avoid losses of bankruptcy property.