21

2020

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05

Discussion on Difficult Issues in Liquidation and Bankruptcy Practice

With the deepening of supply side structural reform in China, as a legal procedure with the functions of eliminating ineffective supply and resolving overcapacity, the institutional value and effectiveness of company liquidation procedures have become increasingly prominent.


With the deepening of supply side structural reform in China, as a legal procedure with the functions of eliminating ineffective supply and resolving overcapacity, the institutional value and effectiveness of company liquidation procedures have become increasingly prominent. At the same time, the supporting legal and regulatory documents are also gradually improving. However, it cannot be denied that the company liquidation procedure in China is still in the stage of institutional construction and cannot effectively solve a series of new problems that have emerged in current practice. In view of this, this article briefly analyzes some difficult problems encountered in practice.

1、 Tax payable due to audit reconciliation

 

According to laws and regulations such as the Bankruptcy Law and the Company Law of China, once a company enters the liquidation stage after being ruled by the people's court, the liquidation team of the company needs to entrust an audit institution to conduct financial audits of the company, in order to provide audit basis for the liquidation work. The practical problem is that when there are tax payable situations based on audit adjustments in liquidation practice, companies in the compulsory liquidation stage also have no realizable assets. How to effectively handle the tax payable problem has become a thorny issue faced by the liquidation team.

 

case introduction

 

If Company A enters the compulsory liquidation stage after being ruled by the People's Court, the auditing agency entrusted by Company A's liquidation team shall adjust the accounts receivable of Company A to 0 for other companies on the books in accordance with Chinese accounting standards; At the same time, some other payables will also be adjusted to 0. At this point, the issue of unpaid taxes and fees arises. The audit institution believes that the accounts payable adjusted to 0 according to China's accounting standards should be recognized as profits of Company A after liquidation adjustment, resulting in corresponding tax payable issues for Company A. After verification by the liquidation team of Company A, it was found that Company A does not have any realizable assets.

 

According to the provisions of the Bankruptcy Law of China, the liquidation team of Company A shall promptly notify the tax authorities of Company A to declare its debts in accordance with the liquidation procedures. If the tax authorities declare their claims to the liquidation team and Company A's assets are insufficient to repay the outstanding taxes, Company A will be transferred from the compulsory liquidation procedure to the bankruptcy liquidation procedure in accordance with the law. The problem is that Company A does not have any realizable assets, which makes it impossible for the tax authority to obtain any repayment. Therefore, there are doubts about whether to declare as a tax authority. In addition, Company A's transition to bankruptcy liquidation procedures only has regulatory significance at the legal level, and there is not much positive significance in practice.

 

Lawyer Analysis

 

The liquidation team of Company A has communicated with the auditing agency multiple times, and after coordination with the people's court, the auditing agency has decided to fuzzify the tax and fee issues arising from the audit during the compulsory liquidation process, As for the liquidation and adjustment of relevant creditor's rights and debts, as the liquidation team has not actually completed the disposal of relevant assets and liabilities, the liquidation period gains and losses involved in accordance with the Notice on Several Issues Concerning the Treatment of Enterprise Income Tax in Enterprise Liquidation Business (Finance and Taxation [2009] No. 60) have not been finally determined, so there is no expectation for the liquidation period taxes and fees this time

 

The author believes that if the accounting standards are strictly followed, the taxes and fees payable in this case objectively exist. Using the audit agency's "fuzzy technology" to handle the tax and fee issues in this case, which lacks legal theory and institutional support, will also create the possibility of the liquidation team and audit agency bearing potential legal risks. Therefore, there are significant issues in practice regarding the universality of this solution.

 

In fact, following the existing laws and regulations of our country can also solve the aforementioned problem, that is, the liquidation team fulfills the obligation to notify creditors to declare their debts in accordance with the law, and then timely requests the court to rule that the company will be transferred to bankruptcy liquidation procedures, in accordance with the provisions of the Bankruptcy Law. This approach adheres to the principle of procedural justice, protects the legitimate rights and interests of creditors and the company (in fact, there are no creditors declaring claims in this case), and is an effective means to reduce potential legal risks.

 

However, based on the situation of this case, the tax and fee issues caused by audit adjustments are no longer within the scope of regulation of the Bankruptcy Law. Based on factors such as improving liquidation efficiency and reducing liquidation costs, it is necessary for national and local tax departments to introduce relevant tax reduction policies or formulate accounting standards related to liquidation to provide necessary basis for solving this problem.

 

2、 Recognition of the source of investment for the contribution in place

 

Shareholders have a certain obligation to pay for the company's purposes based on their shareholder status, which is the capital contribution obligation of the company's shareholders. In the stage of bankruptcy liquidation of the company, if the shareholders of the company violate their investment obligations, the company manager may exercise the right to pursue their capital contributions based on the shareholder's "commitment". In practice, there are cases where audit institutions conduct audit adjustments on the grounds of inconsistent sources of capital contributions from shareholders of the company. Can the company manager file a lawsuit with the people's court regarding this matter? Is there any legal basis for this? It is worth exploring.

 

case introduction

 

Enterprise B is a collectively owned enterprise established in 1986, which was later ruled by the people's court to enter bankruptcy liquidation procedures. During the process of increasing registered capital in 1995, Company B fabricated the fact that employees raised 18 million yuan as capital increase funds for capital increase. The capital verification institution has issued a corresponding capital verification report, which includes the list of fundraising employees and the amount raised, and indicates that the above-mentioned funds are actually invested.

 

During the liquidation stage, the audit agency found that there was a discrepancy between the registered capital source recorded in the corporate capital verification report and the source disclosed in the industrial and commercial change registration materials of Company B. The company's 18 million yuan capital increase was not employee fundraising, but rather B company's own funds (capital reserves). Therefore, the auditing agency conducted a paid-in capital adjustment, adjusting the 18 million yuan to B company's "undistributed profits" and adjusting the capital increase to 0. The audit institution believes that based on relevant industrial and commercial registration materials, capital verification materials, and accounting information, it is determined that Company B has insufficient capital in the capital verification report.

 

Based on the above situation, does the cash contribution source of the capital increase in this case affect the determination of the shareholders' contribution in place, that is, does the legality of the shareholders' contribution source affect the fulfillment of the shareholders' contribution obligations?

 

Lawyer Analysis

 

According to laws and regulations such as the Bankruptcy Law and the Company Law of China, once a company enters the liquidation stage after being ruled by the people's court, the liquidation team of the company needs to entrust an audit institution to conduct financial audits of the company, in order to provide audit basis for the liquidation work. The practical problem is that when there are tax payable situations based on audit adjustments in liquidation practice, companies in the compulsory liquidation stage also have no realizable assets. How to effectively handle the tax payable problem has become a thorny issue faced by the liquidation team.

 

Company B is in the capital increase stage, and the capital verification agency has issued a capital verification report, and the capital increase is truly present in the company's accounts and comes from a legitimate source (the company's capital reserve). The only flaw is that the company explained to the capital verification agency that the source of funds is "employee fundraising", without specifying the true source of funds. But this does not affect the effectiveness of shareholder investment behavior.

 

In addition, the registered capital system is established for the purpose of protecting company creditors. The company increases its registered capital with its own funds, without any legal obstacles. Regardless of who contributes, it improves the company's debt paying ability for creditors. The audit agency in this case adjusted the capital increase from "paid in capital" to "undistributed profits" solely based on the source of the capital increase being "capital reserves". This not only resulted in the company's "paid in capital" being zero, but the manager had to consider whether to recover the capital from investors (although there were no real investors in this case), and also led to new taxes payable by the company. We believe that the audit institution's practice of adjusting accounts has objectively resulted in the consequences of evading funds and harmed the legitimate rights and interests of creditors.

 

To put it further, even if the source of the capital contribution is illegal, such as using funds obtained from illegal crimes, according to laws and regulations such as the Company Law and the Property Law of China, the company, as a bona fide relative, enjoys ownership of the currency contribution and the contribution is correspondingly converted into independent property of the company. Therefore, the illegal source of capital contribution does not affect the effectiveness of the investment behavior, nor does it affect the initial shareholder qualification obtained by the contributor based on this. However, there is a possibility that the judicial authorities may deprive the shareholders of their qualifications in this investment method, but it has not substantially caused a decrease in the registered capital of the company, so it cannot be a reason to determine that the shareholders have made false contributions.

 

In summary, from the legislative intention of China's Company Law, it regulates behaviors that violate the three principles of capital, such as false capital contributions and capital withdrawals. We believe that the issue of the source of investment does not violate the three principles of capital, and of course, it does not affect the performance of shareholders' investment obligations, regardless of whether the shareholder's source of investment is legal or not.

 

3、 Resolve objections to debt review through a "post judgment Q&A" approach

 

The so-called "post judgment Q&A" refers to the fact that after the judgment takes effect, if the parties have objections and questions about the judgment, the original trial court must explain and explain the procedural application of the judgment, evidence determination, and reasons for the judgment to the visiting parties, in order to make the parties satisfied with the judgment.

 

Taking Guangdong Province as an example, the Higher People's Court of Guangdong Province issued the "Several Opinions on Further Improving Post Judgment Q&A Work" (Yue Gao Fa Fa [2017] No. 5) and the "Detailed Rules for Post Judgment Q&A Work of Guangdong Provincial Courts" in 2017. From the above documents, we can clearly see that the post judgment Q&A system is established for parties who refuse to accept the effective judgment of the people's court and apply for retrial and representation. The purpose of its establishment is for courts at all levels to achieve the conclusion of the case by explaining the law, persuading and guiding, improving services, and enhancing judicial credibility.

 

In practice, can the administrator use "post judgment Q&A" as the basis for creditor's rights review in bankruptcy liquidation procedures, especially in cases where there is a disguised change of judgment in the "post judgment Q&A"?

 

case introduction

 

During the debt review stage of the bankruptcy liquidation case, the bankruptcy administrator of Company C received the debt declaration from creditor D and conducted a debt review based on the effective judgment documents submitted by the creditor. The interest claims declared by the creditor were reduced for the interest judgment items. However, the creditor disagreed with the judgment on interest calculation in the debt review results, and therefore filed a bankruptcy claim confirmation lawsuit with the relevant court. Later, due to the large amount of debt involved in the case, the creditor withdrew the lawsuit based on considerations of litigation costs. Afterwards, the court issued a "post judgment Q&A" opinion, which essentially changed the content of the original judgment item.

 

 

Lawyer Analysis

 

According to Article 6 of the Lawyers' Analysis of Several Opinions on Further Improving Post Judgment Question Answering Work (Yue Gao Fa Fa [2017] No. 5), "If errors are found in the original judgment during the question answering process, a written review recommendation shall be made, and after approval, it shall be handled in accordance with Article 198 of the Civil Procedure Law of the People's Republic of China." Article 198 of China's Civil Procedure Law stipulates: If the presidents of the people's courts at all levels find definite errors in legally effective judgments, rulings, or mediation documents of their own courts and believe that a retrial is necessary, they shall submit them to the judicial committee for discussion and decision. If the Supreme People's Court finds definite errors in legally effective judgments, rulings, or mediation documents of local people's courts at all levels, or if the higher people's court finds definite errors in legally effective judgments, rulings, or mediation documents of lower people's courts The Supreme People's Court has the power to bring up for trial or instruct lower level people's courts to conduct a retrial by bringing up for trial or instructing lower level people's courts to conduct a retrial

 

From the above, it can be seen that the "post judgment Q&A" system is not intended to be established for bankruptcy liquidation cases. It is only a preliminary procedure for the parties to apply for retrial, and is based on the principle of voluntary application by the parties; In the process of answering questions after the judgment, if it is found that the original judgment is indeed incorrect, a written review suggestion should be made, and the original judgment cannot be directly "revised". It is still necessary to initiate a retrial procedure in accordance with the Civil Procedure Law and make a retrial decision.

 

We believe that if there is a dispute between the bankruptcy administrator and creditors regarding the interpretation of the effective judgment of the court, the essence is that creditors have objections to the results of the bankruptcy administrator's debt review. According to the relevant provisions of China's Bankruptcy Law, the creditor should file a lawsuit for bankruptcy claim confirmation with the court, and determine the amount of the creditor's claim through a court judgment. However, the court directly solves the dispute over creditor's rights review through the method of "post judgment Q&A", which not only lacks the basis for the application of legal procedures, but also violates the original intention of the "post judgment Q&A" system by modifying or interpreting the original judgment items in the Q&A opinion (in disguised form), and also violates the legal procedures stipulated in China's Civil Procedure Law.

 

Therefore, there is no legal basis for the bankruptcy administrator to use the "post judgment Q&A" opinion as the basis for debt review. If the court discovers errors in the original effective judgment in the bankruptcy claim confirmation lawsuit and believes that a retrial is necessary, it shall submit it to the judicial committee for discussion and decision in accordance with Article 198 of China's Civil Procedure Law. The bankruptcy claim confirmation lawsuit should also be suspended, and the amount of the creditor's claim should be confirmed based on the results of the retrial case.

 

4、 Conclusion

The company liquidation system aims to terminate all legal relationships during the company's existence and eliminate the company's legal personality, thus the legal relationships involved are extremely complex. The issues mentioned in this article, such as "tax and fee issues related to audit reconciliation", "identification of contribution sources for contribution in place", and "resolving objection issues in debt review through" post judgment Q&A ", are only the tip of the iceberg, and a large number of difficult problems are increasingly prominent in practice.

 

The company liquidation procedure in our country is still in the stage of institutional construction and cannot meet the needs of practice. We believe that the fundamental solution still needs to be ensured by improving China's liquidation legal system, in order to minimize the institutional vacuum to the greatest extent. Specifically, on the one hand, summarizing experience in practice, based on the needs of China's reality, timely formulating corresponding judicial interpretations, and starting to regulate at the legislative level when the legislative conditions are met in the future; At the same time, other departments' laws supporting the liquidation system should also be legislated and improved simultaneously, such as formulating and improving corresponding accounting standards to meet the practical needs of the company's liquidation system, and so on.

 

The above are only my superficial insights, hoping to be beneficial for the practice of company liquidation.