Analysis of the Right of Revocation and Set-Off in Bankruptcy Proceedings - From the Perspective of Individual Liquidation
Tu Yang, Lawyer
Abstract: The bankruptcy reorganization system is essentially an economic protection system. On November 14, 2019, the Supreme People’s Court issued the “Summary of the National Court’s Civil and Commercial Trial Work Conference”. The conference believed that the bankruptcy reorganization system balances the interests of creditors, debtors, investors, employees and other stakeholders to achieve social overall value maximization. Chapter X of the summary “Research on the Trial of Bankruptcy Disputes” combed through many problems encountered in current practice and also explained that although various bankruptcy reorganization systems have been established since the implementation of the Enterprise Bankruptcy Law, due to the involvement of many subjects and dispersed interests, it is necessary to continuously interpret and study bankruptcy laws based on legislative intent. This article takes individual liquidation issues in bankruptcy proceedings as a clue to analyze the exercise of revocation rights and set-off rights in bankruptcy.
Keywords: Bankruptcy Law; Revocation Right; Set-Off Right; Preferential Payment Behavior
(I) Exercise of Bankruptcy Revocation Right
From the perspective of the subject of the exercise of bankruptcy revocation rights, bankruptcy revocation rights are generally exercised by the administrator. However, if the administrator fails to perform his duties, creditors can exercise their revocation rights in accordance with the provisions of the Contract Law. However, the scope of the effectiveness of acts that creditors can revoke under the law is smaller than that of the revocation rights of administrators specified in the Enterprise Bankruptcy Law. Creditors can only revoke acts that debtors have carried out within one year before bankruptcy acceptance and have caused damage through unreasonably low-priced transfers or transactions or preferential payment behaviors that are known to the transferee and have caused harm.
From the perspective of the exercise method, bankruptcy revocation rights are usually exercised through litigation. The administrator can also notify the relative person in writing. After the relative person explicitly refuses to revoke the administrator’s request, litigation can be used to resolve it. The legal nature of bankruptcy revocation rights should be a combination of filing a lawsuit and paying a lawsuit. The legal consequences of exercising revocation rights are that acts that harm creditors’ interests implemented by debtors lose their effectiveness after being revoked and return to their original state. The administrator recovers disposed property or restores disposed rights, and the relative person loses revoked rights and restores original rights (if any). Once a court rules to revoke an act, any revocable act carried out by a debtor during the critical period before bankruptcy declaration becomes invalid. Therefore, if a debtor has not yet paid off his debts, he will not pay them anymore; if a relative person has obtained property and benefits due to revocable acts, it should be recovered by the administrator and included in bankruptcy property; if property received by a relative person is lost, it should be compensated at a discounted price and included in bankruptcy property. For relative persons, if they have treated enough property for payment and still exist in debtor’s property, they have the right to exercise their right to recover; if this benefit no longer exists after being included in bankruptcy property or if treated payment exceeds existing benefits, relative persons can participate in distribution by declaring claims.
From the perspective of exercise time, there is no time limit for bankruptcy revocation rights under Enterprise Bankruptcy Law. Therefore, general provisions on statutory limitation periods and exclusion periods do not apply. Administrators have the right to exercise revocation rights at any stage until the end of bankruptcy proceedings.
(II) Exercise of Bankruptcy Set-Off Rights
According to the provisions of Enterprise Bankruptcy Law, the elements required for bankruptcy set-off include: both parties owe each other valid debts (creditor’s rights are mutual); debts existed before bankruptcy acceptance; both debts do not belong to non-set-off debts. The design purpose of civil law set-off right is to avoid repeated performance, shorten repayment time and reduce repayment costs, focusing on pursuing efficiency value. However, bankruptcy set-off rights apply in bankruptcy proceedings with value orientation consistent with bankruptcy law while pursuing efficiency value. Therefore, while pursuing efficiency value, it emphasizes fairness value more strongly, that is, ensuring that all creditors can be paid fairly as much as possible. As an exception to fair payment principle, laws impose many restrictions on exercising bankruptcy set-off rights mainly reflected in restrictions on exercise subjects, exercise time limits and time and methods for forming offsetting claims.
(IV) Individual Payment and Bankruptcy Set-Off Rights
The exercise of bankruptcy revocation rights is limited to revocable acts that occurred during the critical period before bankruptcy acceptance. From the perspective of time division of the critical period, it can be divided into acts that occurred within one year before the court accepted bankruptcy and acts that occurred within six months before acceptance; from the perspective of behavior nature, it can be divided into fraudulent behavior and preferential payment behavior. Among them, preferential payment behavior refers to debtors using methods such as paying off debts in advance, providing property guarantees for debts that were originally unsecured, and individual payments during the statutory period before bankruptcy application acceptance to enable specific creditors to obtain priority payment status or more payments than they originally had. [4] The three types of preferential payment behaviors generally recognized are: the third and fourth items specified in Article 31 and Article 32.
Article 40 of Enterprise Bankruptcy Law stipulates that debtors’ exercise of set-off rights when facing bankruptcy is different from general civil law set-off rights. The purpose is to implement regulations on preferential payment behaviors in Enterprise Bankruptcy Law. Interpretation II of Enterprise Bankruptcy Law further excludes the legal effect of exercising civil law set-off rights by actors before bankruptcy application acceptance within six months.
Individual payment behaviors between debtors and individual creditors within six months before people’s courts accept bankruptcy applications are also subject to restrictions under bankruptcy law. At this time, debtors are already on the verge of bankruptcy. To prevent them from using set-off rights to infringe on other creditors’ legitimate rights and interests, bankruptcy law has made restrictive provisions on such set-offs. According to Article 44 of Interpretation II of Enterprise Bankruptcy Law, strict interpretation of Article 40 of Enterprise Bankruptcy Law further excludes the legal effect of exercising civil law set-off rights by actors within six months before people’s courts accept bankruptcy applications.
From the perspective of value orientation of bankruptcy system and legislative and judicial interpretations, the application of set-off system in bankruptcy proceedings is strictly limited.
(V) Conclusion
Early bankruptcy law was entirely from the perspective of protecting creditors’ interests to solve the problem of repayment when debtors lose their repayment ability. Subsequently, with the development of society, the concept of bankruptcy law has gradually changed. From the perspective of legislative origin, we can say that bankruptcy law has undergone changes and development from the perspective of creditor orientation - balance of interests between creditors and debtors - to social interests and equal emphasis on creditor and debtor interests. Therefore, its exercise of revocation rights and set-off rights must inevitably sacrifice the protection of debtors’ and actors’ transaction freedom to a certain extent. By revoking debtors’ unremunerated transfers, non-normal transactions, preferential payment behaviors that are valid acts in civil law when debtors have repayment ability in bankruptcy law, it maintains the substantive equality between debtors and creditors and among creditors and realizes justice in bankruptcy property distribution. Therefore, the exercise of revocation rights inevitably conflicts with principles such as freedom of contract in civil law. People need to re-understand the values of fairness, justice, and equality in special situations where debtors go bankrupt and make choices between protecting overall creditor interests and individual interests.
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Tu Yang, Lawyer
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