Interest accrues on debtor bankruptcy and secured debts

Interpretation of the Civil Code on the Security System (Article 22)

Article 22 Where, after the people's court accepts the debtor's bankruptcy case, the creditor requests the guarantor to bear the guarantee liability, and the guarantor claims that the secured debt shall cease to accrue interest from the date on which the people's court accepts the bankruptcy application, the people's court shall support the guarantor's claim.

1. Interpretation of provisions

(1) Corresponding provisions

Article 46 of the Guarantee Law of the People's Republic of China (Lapsed) The scope of mortgage security includes the main claim and interest, liquidated damages, damages and the cost of realizing the mortgage right. If the mortgage contract provides otherwise, it shall be in accordance with the agreement.

Paragraph 2 of Article 46 of the Enterprise Bankruptcy Law of the People's Republic of China Interest-bearing claims shall cease to accrue interest from the time of acceptance of the bankruptcy application.

Article 92, Paragraph 3 The rights of creditors vis-à-vis the debtor's guarantor and other joint and several debtors shall not be affected by the reorganization plan.

Article 124 The guarantor of the bankrupt and other joint and several debtors shall, after the bankruptcy procedure is concluded, continue to bear the liability for repayment of the creditor's claims that have not been repaid in accordance with the bankruptcy liquidation procedure.

(2) Key interpretations

There have always been two views in judicial practice on whether the effect of the cessation of interest accrual of the principal claim as stipulated in paragraph 2 of Article 46 of the Bankruptcy Law extends to the guarantor after the bankruptcy of the main debtor, and whether the guarantee liability is reduced by the impact of the bankruptcy procedure. The first view was that the security obligation should be reduced by the impact of the insolvency proceedings. The main reason is that, based on the subordinate nature of the security liability, the scope of the security liability should not be greater than the main claim. The scope of the main claim enjoyed by the creditor is the bankruptcy claim, so the security liability as the guarantor should also be the bankruptcy claim. The second view was that the security obligation should not be diminished by the impact of insolvency proceedings. The main reason is that the second paragraph of Article 46 of the Bankruptcy Law is a special provision made by law for bankruptcy claims in bankruptcy proceedings, and the scope of responsibility of the guarantor should be determined in accordance with the guarantee contract, so interest, liquidated damages, etc. are not stopped from being calculated due to the bankruptcy of the main debtor.

The judicial interpretation of this article supports the claim that the guarantor's secured debt shall cease to accrue interest from the date on which the people's court accepts the bankruptcy application, and it is a recognition of the first view. Judging from past case judgments, most of them support the second view.

2. Typical cases

Xinhua Trust Co., Ltd. Applies for Enforcement reconsideration [Zhaoqing Intermediate People's Court (2017) Yue 12 Zhiyi No. 25, Guangdong Provincial Higher People's Court (2017) Yue Zhifu No. 344]

Zhaoqing Intermediate People's Court (hereinafter referred to as Zhaoqing Intermediate People's Court) made (2017) Yue 12 Zhi Hou No. 21 Notice in the course of executing the loan contract dispute between Xinhua Trust Co., Ltd. (hereinafter referred to as Xinhua Trust Company) and Wu Tai Group Co., Ltd. (hereinafter referred to as Wu Tai Group Company), Zhaoqing Jinwang Real Estate Co., Ltd. (hereinafter referred to as "Gengtai Jinwang Company"), Wu Min and others [(2017) Yue 12 Zheng Wei No. 21], and determined that the deadline for calculating the interest on the claims was April 5, 2017. The amount of the claim was $447,809,287.41. The judgment debtor, Gengtai Jinwang Company, was not satisfied with the notice and filed a written objection to the Zhaoqing Intermediate Court, stating that on May 16, 2017, the Zhaoqing Intermediate Court notified The Zhaoqing Intermediate Court notified the Company in the form of the (2017) Yue 12 Zhi Hou No. 21 Notice, which read: The deadline for calculating the interest on the claim is April 5, 2017, and the amount of the claim is RMB447,809,287.41. Jinwang Company did not agree with this result. (1) The guarantor shall only bear the obligation to guarantee the debt limited to the main debt. In 2016, the Ruian Municipal People's Court of Zhejiang Province (hereinafter referred to as the Ruian Court) ruled to accept the bankruptcy application against the respondent Wutai Group Company, and Xinhua Trust Company chose to participate in the bankruptcy proceedings to claim rights, and the total amount of claims claimed was 348,314,833.34 yuan, which had been confirmed by the company and two creditor meetings, so the guarantee amount of Jinwang Company should be the main claim of RMB348,314,833.34. (2) Since the main debt of Wutai Group Company has been determined and the interest is locked up until March 2, 2016, there is no basis for interest to be calculated until April 5, 2017. (3) The guarantee contract is a subordinate contract attached to the main contract, and As the guarantor, Jinwang Company shall not bear joint and several liability for repayment in excess of the amount of the main debtor's debts in accordance with the law and in accordance with the contract. In summary, whether from the provisions of the law or the agreement of the two parties or based on the principle of fairness, the claim of Xinhua Trust Company to require Gengtai Jinwang Company to pay interest from the date of acceptance of the bankruptcy application of Wutai Group Company should not be established.

After review, the Enforcement Court ascertained that in the case of a loan contract dispute between Xinhua Trust Company and Wutai Group Company, Gengtai Jinwang Company, Wu Min, etc., the Chongqing Municipal Higher People's Court (hereinafter referred to as the Chongqing Higher People's Court) rendered a (2013) Yugao Fa Min Chu Zi No. 00013 Civil Judgment on March 10, 2014, ordering Wutai Group Company to repay to Xinhua Trust Company, and on March 2, 2016, it ruled to accept the bankruptcy application. On May 20, 2016, Xinhua Trust Company made a claim declaration to the manager of Wutai Group Company, and the amount of the declared claim was 352,493,241.28 yuan, of which the principal amount was 175 million yuan. The claim was confirmed by the manager of Wutai Group Company in the first instance, and the Notice of Review of Creditor's Rights was issued to Xinhua Trust Company and served. After review of the objections, the Zhaoqing Intermediate People's Court held that the focus of the dispute in this case was how to determine the cut-off time for calculating the interest when the guarantor assumed the liquidation liability to the creditor. The court held that: from the perspective of the scope of security in the security interest, the master-subordinate relationship between the main debt contract and the guarantee contract, and the meaning and purpose of the second paragraph of article 46 of the Bankruptcy Law, the guarantee liability borne by the guarantor should not exceed the scope of the main debt, and the provisions of the second paragraph of article 46 of the Bankruptcy Law on the cessation of the calculation of the interest on the main claim after the acceptance of the bankruptcy application are effective as extended to the guarantor. Therefore, the objection raised by Jinwang Company to calculate interest up to the date of acceptance of bankruptcy of Wutai Group Company (March 2, 2016) was established, and the court supported it and issued the (2017) Yue 12 Zhiyi No. 25 Enforcement Ruling, ruling to revoke the Notice of Zhaoqing Intermediate Court (2017) Yue 12 Zhiwei No. 21, and determined that the deadline for calculating the interest on the claim was March 2, 2016.

The applicant, Xinhua Trust Company, was dissatisfied with the above objection ruling of the Zhaoqing Intermediate Court and applied to the Guangdong Higher People's Court for reconsideration, requesting that the Zhaoqing Intermediate Court's (2017) Yue 12 Zhiyi No. 25 Enforcement Ruling be revoked in accordance with the law, and the Zhaoqing Intermediate Court's (2017) Yue 12 Zhi Wei No. 21 Notice was upheld.

After review, the Higher People's Court of Guangdong Province held that the focus of the dispute in this case was whether the effect of the suspension of interest accrual of the main claim stipulated in paragraph 2 of Article 46 of the Bankruptcy Law after the bankruptcy of the main debtor extended to the guarantor, that is, whether the guarantee liability was reduced by the impact of the bankruptcy procedure. In this regard, the Guangdong Higher People's Court held that:

(1) After the bankruptcy of the main debtor, the provision in the second paragraph of Article 46 of the Bankruptcy Law that "claims with interest shall cease to accrue interest from the time of acceptance of the bankruptcy application" applies only to the main debtor who has entered the bankruptcy procedure, and is not binding on the guarantor and does not apply to the secured claim. The Bankruptcy Law regulates the legal relationship between the bankrupt debtor and the creditor, unless the Bankruptcy Law specifically provides that the guarantor's guarantee liability against the bankrupt debtor shall be governed by the provisions of the guarantee law and shall not be regulated by the Bankruptcy Law. In this case, the person subject to enforcement, Jinwang Company, was the guarantor of the main debtor, Wutai Group Company, and its guarantee liability had been confirmed by the effective judgment of the people's court. According to the third paragraph of Article 92 of the Bankruptcy Law, the security rights enjoyed by Xinhua Trust Company over the guarantor are not affected by the bankruptcy reorganization of Wutai Company. Although Xinhua Trust Company declared its claims to the administrator of the bankrupt debtor Wutai Group Company, it did not affect its application to enforce the guarantee liability borne by Jinwang Company in accordance with the effective judgment of the people's court, and the debts that the executor, Jintai Jinwang Company, should not be subject to the restriction on the time limit of the second paragraph of Article 46 of the Bankruptcy Law on the time for declaring the interest on the claims.

(b) The scope of the security liability shall be the secured claim arising from the guarantee contract and shall not be limited to the bankruptcy claim against the main debtor declared by the creditor in the bankruptcy proceedings. The purpose and function of the security system is to prevent the risk of the debtor's insolvency, and the original intention of the creditor to enter into a guarantee contract with the guarantor and provide security is also to prevent this risk, with a view to obtaining relief from the guarantor when the debtor is unable to pay. The bankruptcy of the debtor itself is a guarantee risk to be borne by the guarantor, and unless the parties expressly agree in the guarantee contract to reduce or waive the guarantee liability in the case of the bankruptcy of the main debtor, the guarantor shall bear the guarantee liability for all the debts under the contract. If the agreement of the parties is broken and the guarantee liability is limited to the scope of the bankruptcy claim, it is contrary to the purpose of the security system and the original intention of the parties. In this case, the parties' loan contract dispute was tried by the Chongqing High Court, and the debtor Wutai Group Company was ordered to repay the principal, interest and realization of the creditor's rights of Xinhua Trust Company, and Xinhua Trust Company had priority in repayment of the mortgaged property of Jinwang Company within the scope of the judgment. Therefore, the scope of the security liability in this case should be the claim arising from the guarantee contract (i.e., the claim determined by the basis of enforcement in this case), rather than limited to the claims declared by the creditor as of the date of acceptance of the debtor's bankruptcy application.

(3) The guarantor's security liability exceeds the claim declared by the creditor in the bankruptcy proceedings without prejudice to the guarantor's exercise of the right of recourse. Article 57 of the Guarantee Law stipulates: "A third party that guarantees the mortgage of the debtor has the right to recover from the debtor after the mortgagee has realized the mortgage right." "The person subject to enforcement in this case, Gengtai Jinwang Company, has the right to recover from the main debtor, Wutai Group Company, after performing the obligations determined by the effective judgment (that is, having assumed the mortgage guarantee liability). The amount of claims recovered by Jinwang Company from Wutai Group Company may be less than the actual amount of compensation, but it cannot be equated with the failure of its right of recourse, or violation of the legal provisions on the right of recourse.

(4) The amount of debt that the person subject to enforcement should be subject to enforcement shall be determined on the basis of enforcement. As mentioned above, the dispute over the guarantee of the disputed loan in this case has been decided by the Chongqing High Court and entered into compulsory enforcement procedures, and the person subject to enforcement in this case, Gentai Jinwang Company, shall pay off its debts with the proceeds from the sale of its mortgaged property, and shall calculate the amount of debts that the judgment debtor should perform in accordance with the provisions of the enforcement law and judicial interpretation, and shall not be bound by the second paragraph of Article 46 of the Bankruptcy Law. During the execution of this case, Xinhua Trust Company agreed that the interest on the debt would be calculated until April 5, 2017, and did not exceed the scope of the debt determined by the effective judgment, and the Zhaoqing Intermediate Court issued Notice No. 21 accordingly, which was in line with the provisions of the law and judicial interpretation.