Enterprise Bankruptcy Law | Bankruptcy Reconciliation System

Pursuant to the Enterprise Bankruptcy Law, a debtor may directly apply to the People’s Court for reconciliation, or may apply for reconciliation to the People’s Court after the court has accepted the bankruptcy application but before declaring the debtor bankrupt. Only the debtor may file an application for reconciliation; no other interested party may submit such an application, nor may the court initiate the reconciliation procedure ex officio. II. Adjudication and Initiation of the Reconciliation Procedure If the People’s Court, upon examination, finds that the reconciliation application complies with statutory requirements, it shall issue a ruling approving reconciliation, make a public announcement thereof, and convene a creditors’ meeting to discuss the draft reconciliation agreement. Because the draft reconciliation agreement involves creditors’ significant rights, a special voting procedure applies: a resolution approving the reconciliation agreement requires the affirmative vote of more than half of the creditors present at the meeting who hold voting rights, and the aggregate amount of claims represented by those approving creditors must exceed two-thirds of the total amount of unsecured claims. If the creditors’ meeting approves the reconciliation agreement, the People’s Court shall rule to recognize it, thereby terminating the reconciliation procedure and making a public announcement. If the creditors’ meeting rejects the reconciliation agreement—or if an approved agreement fails to obtain judicial recognition—the People’s Court shall rule to terminate the reconciliation procedure and declare the debtor bankrupt. In addition to the court-supervised reconciliation procedure described above, after accepting a bankruptcy application, the People’s Court may permit the debtor and all creditors to voluntarily negotiate the handling of their respective rights and obligations and reach a self-initiated reconciliation. Upon reaching such an agreement, the People’s Court may, upon request by the parties, rule to recognize it and terminate the bankruptcy proceedings. III. Legal Effect of the Reconciliation Agreement Fundamentally, a reconciliation agreement is a contract concluded between the debtor and reconciling creditors. Once recognized by a ruling of the People’s Court, the reconciliation agreement binds both the debtor and all reconciling creditors; its contents, as determined by the court’s ruling, may not be altered except through statutory procedures. A court-recognized reconciliation agreement binds only the reconciling creditors and does not affect the rights exercised by creditors outside the reconciliation agreement. A reconciling creditor who fails to declare its claim in accordance with this Law may not exercise its rights during the execution period of the reconciliation agreement; however, upon completion of the agreement’s execution, such creditor may exercise its rights under the repayment terms stipulated therein.

Quick Read! Bankruptcy Reconciliation, Bankruptcy Reorganization, and Bankruptcy Liquidation (I)

The primary objective of reconciliation is to avert bankruptcy and afford the debtor an opportunity to restructure its business. Unlike ordinary civil reconciliation, bankruptcy reconciliation is mandatory: once approved by the requisite majority of the creditors’ meeting, the reconciliation agreement is legally binding even on dissenting minority creditors. III. Legal Characteristics 1. Application to a competent court by the parties is a prerequisite for applying the reconciliation system. Absent such an application, the court may not initiate reconciliation ex officio. 2. Although reconciliation possesses contractual attributes, its formation requires consent from only a portion of the creditors—not unanimous consent from all creditors acting as one party. Once effective, the reconciliation agreement is legally binding upon all creditors. 3. The establishment of reconciliation must be approved by a court ruling. 4. The reconciliation procedure takes precedence over bankruptcy proceedings. In common-law jurisdictions adopting the ‘reconciliation-first principle’—such as England and the United States—the reconciliation procedure enjoys absolute priority over bankruptcy proceedings: whether voluntary or involuntary bankruptcy is sought, reconciliation must first be attempted; only upon failure of reconciliation may the case proceed to bankruptcy. 5. The reconciliation agreement itself lacks coercive legal force; prior to full performance by the debtor, it does not definitively establish or modify the underlying creditor-debtor relationship. IV. Procedure 1. Initiation of Reconciliation Bankruptcy reconciliation may occur either before or after commencement of bankruptcy proceedings. Pre-bankruptcy reconciliation refers to reconciliation initiated by the debtor upon emergence of bankruptcy grounds—i.e., filed with the court prior to any bankruptcy petition—or filed after the court dismisses a bankruptcy application or the applicant lawfully withdraws it. Where both bankruptcy and reconciliation applications are simultaneously filed by creditors and debtors, the court may accept only the reconciliation application, because under the ‘reconciliation-first principle,’ such reconciliation proceedings supersede bankruptcy proceedings. Once the court grants the reconciliation application, creditors may no longer petition the court for the debtor’s bankruptcy declaration, and all creditors must participate in the reconciliation process. 2. Commencement of Reconciliation Reconciliation may be initiated only upon application by the parties—not ex officio by the court. Upon receiving a reconciliation application, the court generally conducts formal and substantive reviews within the statutory time limit. Formal review includes assessing whether the court has jurisdiction over the reconciliation case and whether the applicant or respondent is properly qualified. Substantive review covers whether the debtor satisfies the grounds for reconciliation (i.e., bankruptcy grounds) and whether any reconciliation obstacles exist—for example, whether the reconciliation application was filed after submission of a bankruptcy application or after bankruptcy declaration, beyond the prescribed application deadline, or concurrently with a reorganization application—in which cases the court may rule to reject the application. 3. Legal Effect of Reconciliation Once the court grants the reconciliation application, the reconciliation procedure commences, producing procedural and substantive restrictions on the rights of the debtor, creditors, and other interested parties. The effect of reconciliation commencement lasts from the start of the reconciliation procedure until its successful conclusion or failure. Upon the court’s ruling granting the reconciliation application, the debtor retains authority over its assets and business operations, albeit subject to certain limitations on the exercise of such authority. Following court approval of the reconciliation application, the exercise of creditors’ rights acquires contractual effect.

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