Creditor avoidance, subrogation and the common basis of the company's creditor protection system

In modern society, "creditor's rights" are no longer directly directed at the debtor's "person", but a right to property. The economic basis on which the debtor bears the obligation to repay the debt, that is, the sum of the property other than the exempted property executed by the debtor, is the debtor's "liability property". If a change in the debtor's property occurs in the ordinary course of trading or business, the creditor suffers the consequences of the change, and if the property in question is under the control of the debtor for the purpose of non-performance (reduction), the law intervenes to provide relief to the creditor. In this regard, Xu Defeng, a professor at Peking University Law School, in his article "Debtor's Liability Property - The Common Basis of Creditor's Right of Revocation, Subrogation and Corporate Creditor Protection System", uses the theory of debtor's liability property to respond to a series of difficult problems, such as the legal effect of the creditor's exercise of the right of avoidance, whether the de facto act and omission can be revoked, whether the subrogator is bound by the arbitration clause between the principal debtor and the secondary debtor, the relationship between fraudulent transfer of property and partial repayment in the bankruptcy law, and the revocation of external guarantees.

1. The focus of the creditor avoidance system is to negate fraudulent changes in property

(1) The creditor's right of revocation makes the debtor's property change not have the effect of liability property level relative to the creditor

1. Revocation of factual acts and omissions

From the perspective of protecting the debtor's liability property, even if it is a de facto act, as long as it can produce the effect of transferring the property without compensation or biased repayment, there is room for avoidance. The difference between a factual act and a legal act is only due to the difference in the causes for the legal effect in question. Since it can produce legal effects, it is necessary to evaluate it through the legal system (creditor's right of avoidance).

2. The legal effect of the creditor's right of revocation is only to negate the change of rights at the level of the property of the liability

What the creditor "revokes" is not the act itself, but the effect of the act at the property level of the liability of the act, that is, through the exercise of the right of revocation, the legal effect at the property level of the liability of the relevant act cannot occur, and it is not asked whether the legal effect is derived from the effect intention of the parties (such as legal acts) or from the provisions of the law (such as the above-mentioned factual acts). The object of the creditor's revocation is the legal effect of the act at the level of the property of the liability, and the revocation of the omission can also be better explained. Furthermore, it can also better solve the problem of whether the creditor can be compensated for the subject matter, and avoid the structure of "revocation + subrogation" (also known as the "liability theory"). The creditor's right of avoidance does not extend the effect of the claim to the third party, but allows the property acquired by the third party that originally belonged to the debtor to continue to bear the debtor's "responsibility" to the creditor. From this point of view, the creditor's right of avoidance does not break through the relevance of the debt. The Interpretation of the General Principles of Contract Codification implements the "liability theory", which enables the creditor to directly apply for enforcement against the property of the revocation counterparty (which originally belonged to the debtor), which is worthy of recognition.

3. The effect of the creditor's right of revocation in the revocation of the counterparty's bankruptcy

In the case where the creditor enjoys the right of avoidance, if the bankruptcy of the revocation counterparty is revoked, according to the fair concept that the bankruptcy debtor may not repay debts with the property of others, the rights of the revocation party are superior to the creditors of the revocation counterparty: in the case that the relevant property is distinguishable, the avoidant or even the debtor should be allowed to recover the relevant property;

(2) Most of the revocation of biased liquidation and gratuitous transfer of property involve fraudulent elements

The protection of liability property under the law is mainly focused on "fraudulent transfer of property". The legitimacy of the creditor's right of avoidance does not lie in the gratuitous assignment itself, but in the debtor's responsibility for the debtor's intention to evade the debt by transferring the property. The partial liquidation avoidance reflects another aspect of the "liability property" system: when the debtor faces two or more creditors, the concept of liability property adds a clearer time dimension or equal treatment requirement - when in distress, the debtor's control or use of its own property should be restricted, and it should not give priority to the repayment of specific creditors to the detriment of other creditors. Whether the debtor has the intention of treating a specific creditor with bias or the intention of fraudulent transfer should be comprehensively judged in light of the debtor's property status, transaction form and other factors, so that different constituent elements can be applied to provide relief to the creditor.

(3) The provision of security for a third party shall be subject to the rules for the maintenance of responsible property

The debtor's "obligation" to preserve or maintain its liability property and to avoid unusual changes in it is also reflected in secured transactions. At present, how to understand the special constituent elements of the revocation of "providing security for the debts of others" stipulated in Article 539 of the Civil Code, and whether the revocation rules for the transfer of property without compensation in Article 538 of the Civil Code and Article 31, Paragraph 1 of the Bankruptcy Law can be applied to external guarantees. In this regard, it is advisable to discuss the special attributes of secured transactions separately within the theoretical framework of the debtor's liability property.

1. Effect of revocation of external guarantee or its liability property in accordance with Article 539

(1) The guarantor's credit standing is insufficient at the time of guarantee

ObjectiveInterpreting Articles 538 and 539 of the Civil Code, "affecting the realization of creditor's rights" should take into account the debtor's future expenses, other reasonable living needs or business needs, and be appropriately higher than the total amount of the debtor's creditor's rights. In addition, consideration should be given to the prospect of changes in the debtor's assets and normal market fluctuations, and adequate risk reserves should be maintained in the event of market instability. In practice, the principal creditor will often conduct the necessary investigation into the credit status of the guarantor when selecting the guarantor, and if the guarantor has a good credit standing at the time of guarantee, it will be difficult to establish the element that the guarantee act "affects the realization of the creditor's rights", and then the third-party guarantee act cannot be revoked. The criterion for judging "affecting the realization of a claim" in U.S. law is that if the debtor is about to engage in a certain business and the assets required for the business are seriously insufficient, or if the debtor intends to borrow debts that it is unable to repay, it may constitute "affecting the realization of the claim". This is closer to the system of the mainland.

(2) The guarantor knew or should have known that the guarantor was in poor credit standing at the time of signing the guarantee contract

In the context that the external guarantee is not free of charge, Article 539 of the Civil Code shall be applied to the external guarantee, which satisfies the requirements of "the counterparty knows or should know...... affect the realization of the creditor's claim". When determining whether there is a "...... that the counterparty knew or should have known", the time of establishment of the relevant security shall prevail.

2. The effect of revoking the external guarantee act or its liability property in accordance with Article 538

When the possibility of the guarantor claiming compensation from the principal debtor is unlikely, its external guarantee will actually constitute a gratuitous transfer of property to the principal debtor or even the main creditor, and article 538 is applicable.

(1) The provision of security for others is not automatically gratuitous

After assuming the guarantee liability, the guarantor may exercise the statutory right of recovery against the principal debtor, and may also obtain the creditor's claim against the principal debtor based on the assignment of statutory creditor's rights. Then, providing security for the debts of others is actually a neutral act rather than a gratuitous act, and only after certain conditions are met, it will have the attribute of gratuitous, and then constitute a voidable act. When the counterparty provides a reciprocal guarantee, unless there is a large difference in the value of the guarantee, it should also be considered that the guarantee of the guarantor (bankruptcy debtor) as the main debtor does not constitute a gratuitous transfer of property, and there is no room for revocation. To determine whether the provision of security to others is beneficial, it is necessary to pay attention to the complexity of commercial practice, and after taking into account the actual circumstances of the case, it is not appropriate to determine as a whole that there is indeed a direct or indirect "mutual" guarantee.

(2) Special protection and necessary exceptions for the principal creditor when the guarantor provides security to a third party free of charge

If the creditor/bankruptcy administrator of the guarantor wishes to exercise the right of avoidance against the principal creditor in accordance with Article 538 of the Civil Code or Article 31, Paragraph 1 of the Enterprise Bankruptcy Law, the following two conditions shall be met at the same time: 1. the guarantor knows that the principal debtor is not in good credit standing at the time of providing the guarantee, and (2) the guarantor knows that the principal debtor is in bad credit and still provides loans to the principal debtor even though the guarantor provides the guarantee. If both the principal creditor and the guarantor know or should know that the debtor is in bad credit, the principal creditor should realize that it has in fact become an "intermediary" for the guarantor to transfer property to the principal debtor, and become a "joint tortfeasor", "accomplice" or "instrument" for the fraudulent act of the guarantor transferring the property for which the debtor evades debts, so that the principal creditor's act of providing loans to the principal debtor is not sufficient to resist the avoidance right of the guarantor creditor. A security right may also be avoided if security is provided ex post facto.

2. The essence of subrogation is the authorization of the collection of creditor's rights for the purpose of enriching the property of liability

(1) The right of subrogation is the authorization to collect creditor's rights

The right of subrogation is to temporarily grant or transfer the right to exercise or receive the creditor's right to enrich the debtor's liability property, and the right of subrogation is still different from the "statutory assignment of creditor's rights", after all, the debtor's relevant claims are not finally vested in the creditor. First, in the process of exercising the right of subrogation, the creditor is in a position similar to that of the debtor's property administrator or receiver, collecting claims on behalf of the debtor and paying off the debtor's debts. Second, the creditor's subrogation of the creditor's claim is only an increase in the debtor's property in the capacity of "administrator" or "receiver", and the creditor has not obtained a preferential position over other creditors. Third, when exercising the right of subrogation, the creditor still enjoys the rights of the debtor against the secondary debtor, and correspondingly, the secondary debtor can also assert its various defenses against the debtor against the creditor, including requiring the creditor to exercise the right of subrogation through arbitration proceedings in accordance with the arbitration agreement between the debtor and the secondary debtor. In this sense, it is inappropriate for Article 535 of the Civil Code to stipulate that the exercise of subrogation can only be exercised through the people's courts.

(2) The right of subrogation may of course be subrogated to exercise the subordinate right of creditor's rights

Subrogation is also a system used to preserve the debtor's liability property. The basic principle is that the debtor's claim against the secondary debtor is regarded as an integral part of the debtor's liability property, and the creditor collects it on behalf of the debtor when the debtor neglects to collect it from a third party. Since the right can be subrogated, there is no reason not to allow subrogation to exercise the right of subrogation. On the one hand, the claim in rem could have been subrogated in the first place; On the other hand, a "security interest" is a right that is usually inseparable from the principal claim and can be subrogated without special provisions. In addition, in comparative law, when the debtor allows the statute of limitations to elapse, it is often through the creditor's right of avoidance that the creditor provides relief to the creditor. Subrogation may not be appropriate.

3. The concept of responsible property is the theoretical core of the company's creditor protection rules

Although the corporate creditor protection system and the creditor avoidance system have their own emphasis, they have a common theoretical basis, that is, they are both based on the concept of safeguarding the debtor's liability property. The company's actions such as profit distribution, repurchase or redemption of shares, etc., to reduce debt-paying assets, or its liability property level, are subject to both the rules of the Company Law on the distribution of profits (conditions, procedures, etc.) and the Fraudulent Transfer Law. Therefore, the "difference" between the system of corporate creditor protection and the creditor's right of avoidance is only that the latter is a general system in civil law, while the former is a series of specific systems established through the norms of company law.

Fourth, the aftermath

As far as the objective of the debtor to repay its external debts is concerned, the liability property includes the sum of all kinds of property rights, creditor's rights and other rights of the debtor that can be used to repay the external debts. Liability property is a very special, legally fictitious "thing", which is always in flux, but must follow some unchanged bottom-line rules, such as the right of revocation, subrogation, biased liquidation and even the protection of corporate creditors are specific systems based on this principle. When faced with the value dilemma in a specific system, it is helpful to return to the basic theory of liability property to obtain a more appropriate answer.