"When an enterprise enters bankruptcy proceedings, if both parties have not fulfilled the contract, the administrator may decide to terminate the contract or continue to perform the contract. Under certain conditions, the administrator may also decide to continue the company's business.". There is no dispute as to whether the debts incurred by the people's court in continuing to perform the contract after accepting the bankruptcy application belong to the common interest debts. However, the "Enterprise Bankruptcy Law" does not specify whether debts incurred under contracts that continue to be performed prior to the acceptance of bankruptcy applications should be recognized as co beneficial debts. Therefore, the dispute has always existed in practice. Some courts have ruled that it is a co beneficial debt, while others have not supported the opinion that it is a co beneficial debt. Based on the case undertaken by our firm, this article elaborates on our understanding of co beneficial debt, which only represents the view of Gao Peng's author.

According to Article 18 of the "Enterprise Bankruptcy Law of the People's Republic of China" (hereinafter referred to as the "Enterprise Bankruptcy Law"), after the people's court accepts a bankruptcy application, the administrator has the right to decide to terminate or continue to perform a contract that was established before the acceptance of the bankruptcy application but has not been fully performed by both the debtor and the other party. When analyzing and judging whether such contracts should continue to be performed, the administrator should consider the value of maximizing the debtor's assets and improving the repayment rate of various claims. According to the relevant provisions of the first paragraph of Article 42 of the "Enterprise Bankruptcy Law", after the people's court accepts the bankruptcy application, the debts arising from the administrator or debtor requesting the other party to perform a contract that has not been completed by both parties are undoubtedly joint beneficial debts. However, can debts incurred under contracts that continue to be performed before the bankruptcy application is accepted also be recognized as co beneficial debts? The "Enterprise Bankruptcy Law" does not make clear provisions. There are also significant differences in the understanding of this issue in the industry. In practical operations, managers are also unable to agree on whether it should be recognized as a joint beneficial debt or as an ordinary debt. Therefore, based on our own case, this article analyzes and discusses whether the debts incurred under the contract that the administrator has decided to continue performing before the bankruptcy acceptance can be recognized as joint beneficial debts, and puts forward some shallow suggestions in order to contribute to improving the legislation of the bankruptcy law.

1、 Introduction to relevant cases

In a bankruptcy liquidation case we undertook, the bankrupt enterprise was a state-owned enterprise. When the court accepted the bankruptcy application of the bankrupt enterprise, the enterprise owed millions of wages to dozens of employees (including migrant workers), which could not be paid off. As a result, the employees repeatedly petitioned, petitioned, and sat down to the higher court, even the SASAC, causing social instability and having a negative impact, and various relevant units faced enormous pressure to maintain stability.

When the administrator took over the bankrupt enterprise, he found that the enterprise's assets were small and of low value. If only the realized value of the enterprise's existing assets were used to pay off debts, the repayment rate of employee claims would be extremely low, and the repayment rate of ordinary claims would be even zero. After sorting out, the administrator found that a sewage treatment project undertaken by the bankrupt enterprise had not yet been completed. The sewage treatment project is a key benefit project promised by a local government. After learning of the bankruptcy of the construction enterprise, the project owner has repeatedly proposed to the bankrupt enterprise and its superior units and managers that the project must continue to be implemented and completed to ensure the acceptance of the project for the benefit of the people. The administrator reviewed the contract and found that the bankrupt enterprise can only meet the payment conditions if the contracted project is successfully completed and accepted. If the project is completed and accepted, the bankrupt enterprise can recover a significant amount of project funds. Not only is the employee's debt expected to be fully repaid, but ordinary debt may also be partially repaid. However, the difficulty lies in the fact that the bankrupt enterprise has no funds to support its continued operation and complete unfinished projects. It is necessary to introduce advances from the investor to help the bankrupt enterprise successfully complete subsequent projects in order to achieve the goal of payment collection. At the same time, the administrator found through investigation that the equipment and technology supplier agreed upon in the project contract was an affiliated unit of the bankrupt enterprise. When the court accepted the bankruptcy application of the bankrupt enterprise, the supplier had already provided some equipment and technical services for the bankrupt enterprise for the project, but the bankrupt enterprise had not settled with it and made corresponding payments. If the bankrupt enterprise wants to continue to implement and complete the project, either it needs the cooperation of the supplier to continue to supply, provide technical service support, continue to perform the equipment and technology procurement contracts that have not been completed by both parties, and complete the project; Alternatively, the bankrupt enterprise may re select a procurement supplier and invest additional funds to complete the project, which will undoubtedly increase project costs. Considering that in enterprise bankruptcy cases, it is an important value orientation of the bankruptcy legal system to effectively safeguard the legitimate rights and interests of employees, protect their basic survival rights, take various effective measures to maximize the value of the bankruptcy property, improve the repayment rate of various types of bankruptcy claims, and safeguard the legitimate rights and interests of various creditors and bankrupt enterprises to the greatest extent possible. In this case, after communicating and evaluating with the superior unit of the bankrupt enterprise and the bankruptcy court, the administrator decided to continue the operation of the bankrupt enterprise and to continue to perform the outstanding contracts related to the project. In order to achieve this goal, the administrator coordinates with the superior units of the bankrupt enterprise, the superior units of the suppliers, and the bankruptcy court, striving to persuade the equipment and technology suppliers of the project to comprehensively consider the situation of the case, and based on the principle of putting the overall situation first, on the one hand, continue to perform the outstanding contracts, and on the other hand, advance funds to assist the bankrupt enterprise in completing the outstanding engineering projects.

During the process of communication between the administrator and the supplier regarding the continued performance of the contract and the advancement of funds for the bankrupt enterprise to continue the unfinished project, the supplier proposed its own conditions: first, as a state-owned enterprise with an association with the bankrupt enterprise, the original contract arrears of the bankrupt enterprise have not been repaid; Secondly, the procedures for the use of funds by state-owned enterprises are very strict. If the old debts of bankrupt enterprises have not yet been repaid, and they continue to advance funds to perform contracts to generate new debts, expanding risks, they need to be reported to their superior state-owned units for approval; Third, affiliated enterprises can consider the overall situation, but this is not an obligation that an ordinary creditor must cooperate with. If they cooperate in continuing to perform the contract and need to advance money to complete subsequent projects, the supplier's superior unit requires that the amount advanced by the supplier to perform the relevant contract before the bankruptcy case is accepted be recognized as a common benefit debt, to ensure that state-owned assets are not lost and losses are not expanded. If this condition cannot be met, the supplier and its superior units do not agree to continue performing the contract, let alone advance payment for subsequent projects. Of course, the administrator has also sought the opinions of other creditors regarding the continued operation of the bankrupt enterprise. Although other creditors have no objection to the continued operation, no one is willing to advance funds to complete subsequent project projects. In this way, this poses a difficult problem for the administrator, namely, whether the debts incurred under the contract that the administrator has decided to continue to perform before the bankruptcy acceptance can be recognized as joint beneficial debts.

2、 The administrator's analysis of whether debts incurred before bankruptcy acceptance can be recognized as joint beneficial debts

Based on the administrator's understanding of the bankruptcy law and relevant work experience in bankruptcy liquidation cases, and in combination with the actual situation of this case, after careful study, the administrator believes that in this case, it should be recognized that the amount advanced by the supplier for the performance of relevant contracts prior to the acceptance of the bankruptcy case is a joint benefit debt. The specific analysis is as follows:

1. In judicial practice, there are situations where claims incurred before bankruptcy acceptance are recognized as co beneficial debts.

In judicial practice, there are also cases where claims incurred prior to bankruptcy acceptance are recognized as co beneficial debts. For example, in the second instance judgment of Jiangsu Xinwu Power Transmission Equipment Manufacturing Co., Ltd. and Taizhou Yangguang Metal Structure Co., Ltd., the Jiangsu Taizhou Intermediate Court wrote: "Our court believes that China's Enterprise Bankruptcy Law clearly stipulates that debts arising from the continued performance of contracts are joint beneficial debts, and there is no segmentation exclusion for this debt law. On March 15, 2013, there were 59 individual orders under the industrial product sales contract, and when the contract involved in the case is actually continued performance, the indivisibility of the contract should be maintained. All debts arising from the contract, whether before or after the bankruptcy liquidation case, should be "As a joint benefit debt, priority shall be paid off...". Another example: In the case of a dispute over the confirmation of bankruptcy claims between Zhejiang Asia Real Estate Development Co., Ltd. and Hangzhou Songdu Chengye Investment Management Co., Ltd., the fund advance of Hangzhou Songdu Chengye Investment Management Co., Ltd. occurred before Asia entered the bankruptcy liquidation process, However, the Hangzhou Intermediate People's Court believes that "The suspension of the Sunshine Scenery Platform Project caused by the break in the capital chain of the debtor Asia Company occurred in 2012. At that time, the reasons for the bankruptcy of Asia Company had already been met. If the bankruptcy and liquidation procedures were entered at that time, the funds needed to be paid for the resumption, continuation, and delivery of the Sunshine Scenery Platform Project, regardless of the way they were raised, were all for the common interests of creditors and were debts incurred by Asia Company's continued operation, in accordance with the Bankruptcy Law." "The provisions of Article 42 shall belong to a joint benefit obligation."

2. Identifying the amount advanced by the supplier for the performance of relevant contracts prior to bankruptcy acceptance as a co beneficial debt is conducive to maximizing the value of the bankruptcy property, benefiting all creditors, and is consistent with the nature of co beneficial debt.

From the perspective of the supplier, first of all, as a state-owned enterprise, it is highly risky to continue to perform outstanding contracts while knowing that the other party to the contract has entered bankruptcy proceedings, that its business situation has deteriorated significantly, and that it has already defaulted on its contract payments. Moreover, it is also required to advance a large amount of funds to the bankrupt enterprise until the outstanding projects are completed. Therefore, in order to avoid and reduce the loss of state-owned assets, it is reasonable and lawful to advocate the exercise of the defense right of prior performance, and to propose that the debts incurred under the contract to be continued performance before the bankruptcy acceptance be recognized as joint beneficial debts as a prerequisite; Secondly, when no other creditor is willing to advance funds, they agree to advance funds for the common interests of all creditors, and their efforts should be rewarded; Thirdly, the administrator should follow the principle of "maintaining the indivisibility of the contract" when choosing to continue performing the contract, instead of selectively continuing to perform some parts of the contract and rejecting others, otherwise it will fundamentally violate the purpose of the supplier entering into a contract with the bankrupt enterprise and agreeing to continue performing the contract.

From the perspective of all creditors, if a bankrupt enterprise is unable to continue operating due to no funds advanced, then employee claims will face an extremely low repayment rate, and the repayment rate of ordinary creditors is even zero, which is undoubtedly the worst result. In the absence of any other party willing to advance funds, the supplier is willing to advance funds to help the bankrupt enterprise continue to operate, complete unfinished projects, and recover project funds. Even if certain conditions are required, as long as the conditions are still within a reasonable range, it can increase the value of the bankruptcy property, improve the repayment rate of various types of creditor's rights, and benefit all creditors. After weighing the advantages and disadvantages, each creditor can, It is possible to reach a consensus on accepting this condition.

From the perspective of the administrator, although the administrator has the right to decide whether to continue to perform the contract, it has no right to compel the other party to continue to perform the contract if the bankrupt enterprise has suffered serious losses and has breached the contract. Since co beneficial debt is a debt generated in bankruptcy proceedings for the common benefit of all creditors, the administrator, in order to maximize the value of the bankruptcy property and the interests of creditors, in order to obtain the benefits of continuing to perform the contract, and in order to reach an agreement with the supplier to continue to perform the contract and advance subsequent project payments, Treating the expenses paid by the supplier to perform the relevant contract prior to bankruptcy acceptance as a co beneficial debt is beneficial to all creditors, conforms to the nature of co beneficial debt, and cannot be considered a violation of the provisions of the bankruptcy law. On the contrary, if the requirements of the supplier are not met, it is impossible for the supplier to continue to perform the contract, let alone continue to advance funds to help the bankrupt enterprise complete the unfinished project. This situation may be the worst outcome, and it may not be the desired situation for project owners, administrators, various creditors, bankruptcy courts, and other parties.

Based on the above analysis, the administrator recommends that the debts incurred under the contract that the supplier willing to make advances in this case continues to perform before the bankruptcy acceptance be recognized as co beneficial debts. Due to the fact that this decision of the administrator involves the disposal of significant assets of the bankrupt enterprise and the interests of all creditors, in order to be cautious, the administrator specifically submitted the matter as a proposal to the creditors' meeting for deliberation during the bankruptcy proceedings and was voted through. Finally, the bankrupt enterprise was able to continue operating, and the supplier agreed to continue performing the outstanding contracts, and advanced funds to assist the bankrupt enterprise in completing the outstanding projects, gradually recovering the project proceeds. The employees are expected to receive full repayment due to their employee claims, thus resolving the intensification of the situation, resolving the petition issue, and greatly reducing the pressure on stability maintenance. The bankruptcy court also recognized the determination of the administrator.

3、 Suggestions on Improving the Recognition of Joint Benefit Debt in Bankruptcy Law

Article 42 of the Enterprise Bankruptcy Law provides for the specific forms of the six types of co beneficial debts that occur after the people's court accepts the bankruptcy application by way of enumeration, but does not clearly define the concept of co beneficial debts. Due to the fact that the law cannot cover all situations, it is easy to generate disputes on the understanding and application of the scope of the determination of joint beneficial debt.

We believe that in the process of undertaking bankruptcy liquidation cases, it should be the common value orientation of the administrator and the people's court to adopt various effective measures to improve the repayment rate of various types of bankruptcy claims. Therefore, in practice, the understanding of co beneficial debt should not simply be based on the one-size-fits-all approach of "after the people's court accepts bankruptcy liquidation" to determine whether it belongs to co beneficial debt, and at the same time, appropriate additional cover clauses should be added to co beneficial debt. For the common interests of creditors, or in order to maximize and fairly repay creditors' claims, when necessary, the administrator, the people's court, or upon the decision of the creditors' meeting, may adopt an expanded interpretation of the types of debt that should belong to the common interest according to the minimum clauses, and create some new common interest debts. For example, when the administrator decides to continue performing the contract, based on the indivisibility of the contract, the debts generated after the acceptance of the bankruptcy case, together with the debts incurred before the acceptance of the bankruptcy case, can be included in the scope of repayment of the common interest debts with the permission of the people's court or the approval of the creditors' meeting. Of course, the decision of the administrator to determine the co beneficial debt must be based on the consideration of "maximizing the value of the bankruptcy property and the interests of creditors", which is also the ultimate goal of the administrator's participation in the bankruptcy proceedings.

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(This article is translated by software translator for reference only.)