Earth Research | System Review and Problem Analysis of the Confirmation of Bankruptcy Claims

Authors: Zhao Jingyu Gu Tianchen

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In judicial practice, there are still problems such as inconsistent standards for creditor review by bankruptcy administrators and limited effectiveness of creditor meetings in verifying claims. This article analyzes the system of bankruptcy claim confirmation lawsuits and existing problems, explores methods to further improve the system of bankruptcy claim confirmation lawsuits, and provides practical references.

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Bankruptcy claim confirmation is the basis of the right of claim for bankruptcy creditors to realize distribution, that is, bankruptcy claims need to be confirmed, and any claims that have not been confirmed cannot participate in the distribution of bankruptcy property. It can be seen that claim confirmation plays a crucial role in protecting the interests of creditors. The "Enterprise Bankruptcy Law of the People's Republic of China" (hereinafter referred to as the "Enterprise Bankruptcy Law") Articles 48 and 58 establish China's bankruptcy claim confirmation lawsuit system, but do not specify the specific implementation procedures for confirmation lawsuits.

Later, the Supreme People's Court promulgated and implemented the "Several Provisions on the Application of the Enterprise Bankruptcy Law of the People's Republic of China (III)" (hereinafter referred to as "Interpretation (III) of the Bankruptcy Law") Articles 8 and 9 of which provide for the applicable issues of parties, preliminary procedures, litigation periods, and jurisdiction in bankruptcy claim confirmation lawsuits, but in practice, there are still problems such as inconsistent standards for creditor review by bankruptcy administrators and limited effectiveness of creditor meetings in verifying claims. The author analyzes the system of bankruptcy claim confirmation lawsuits and existing problems, exploring methods to further improve the system of bankruptcy claim confirmation lawsuits.

Systematization of Bankruptcy Claim Confirmation Lawsuits

(I) Concept of Bankruptcy Claim Confirmation Lawsuits

Based on Articles 57 and 58 of China's Bankruptcy Law, the so-called bankruptcy claim confirmation lawsuit refers to a lawsuit filed with the people's court that accepted the bankruptcy application by the debtor or creditor if they have objections to the creditor list recorded and reviewed by the bankruptcy administrator. The main content of the lawsuit includes the existence, nature, and amount of the claim, etc., and the court confirms the bankruptcy claim in the form of a substantive judgment.

There is also a broad and narrow interpretation of bankruptcy claim confirmation in the industry. In the narrow sense, bankruptcy claim confirmation refers to the confirmation of bankruptcy claims by the people's court in the form of a ruling, referring only to the unilateral confirmation action of the people's court. Broadly speaking, bankruptcy claim confirmation refers to the confirmation actions involving multiple subjects, such as the creditor's claim application by the debtor, registration and filing by the administrator, preparation of the creditor list, verification by the creditor's meeting without objection, and court ruling confirmation of the claim, as well as the entire process derived from the above actions, including bankruptcy claim confirmation lawsuits.

(II) Development of Bankruptcy Claim Confirmation Lawsuits in China

1. Initial Proposal, Not Yet Systematic

Article 16 of the "Enterprise Bankruptcy Law of the People's Republic of China (Trial Implementation)" promulgated by the National People's Congress in 1986 stipulates that "if a creditor believes that the resolution of the creditor's meeting violates the law, it may request the people's court to make a ruling within 7 days after the creditor's meeting makes the resolution." Article 18 of the Supreme People's Court's "Opinions on Several Issues Concerning the Implementation of the Enterprise Bankruptcy Law of the People's Republic of China (Trial Implementation)" in 1991 stipulates that "the people's court should assign a special person to be responsible for registration and filing of the declared claims." As can be seen from the above, the bankruptcy administrator system had not yet been introduced at that time, and the bankruptcy claim confirmation lawsuit was only roughly regulated.

2. System Supplement, Scattered Provisions

Article 43 of the Supreme People's Court's "Several Provisions on the Trial of Enterprise Bankruptcy Cases" on July 30, 2002, stipulates that "if a creditor believes that the resolution of the creditor's meeting violates the law or infringes on its legitimate rights and interests, it may submit it to the people's court within 7 days after the creditor's meeting makes the resolution, and the people's court shall make a ruling according to the law." Article 63 stipulates that "if a creditor has objections to the claims confirmed or denied by the liquidation group, it may submit them to the liquidation group; if the creditor still has objections to the handling by the liquidation group, it may submit them to the people's court, and the people's court shall make a ruling according to the law based on the facts." It can be found that although the bankruptcy claim confirmation lawsuit system has been supplemented accordingly, it still relies on the "liquidation group" and "creditor's meeting" systems and is scattered in them.

3. Bankruptcy Law Provisions, Judicial Interpretation Regulations

Article 57 of the revised "Enterprise Bankruptcy Law" in 2007 stipulates that "after receiving the claim application materials, the administrator shall register and file them, review the declared claims, and prepare a creditor list. The creditor list and claim application materials shall be kept by the administrator for review by interested parties." Article 58 stipulates that "the creditor list prepared in accordance with Article 57 of this Law shall be submitted to the first creditor's meeting for verification. If the debtor and creditor have no objections to the claims recorded in the creditor list, the people's court shall make a ruling to confirm them. If the debtor and creditor have objections to the claims recorded in the creditor list, they may file a lawsuit with the people's court that accepted the bankruptcy application."

Articles 8 and 9 of the subsequent "Interpretation (III) of the Bankruptcy Law" provide for the applicable issues of parties, preliminary procedures, litigation periods, and jurisdiction in bankruptcy claim confirmation lawsuits. The bankruptcy claim confirmation lawsuit system has been improved compared to the 1986 "Enterprise Bankruptcy Law (Trial Implementation)."

(III) Significance of Bankruptcy Claim Confirmation Lawsuits

First, the confirmation of bankruptcy claims is a preliminary procedure for creditors to exercise their rights smoothly. Only after being legally confirmed as a bankruptcy claim can creditors obtain the qualification to participate in the distribution of bankruptcy property and exercise their voting rights at the creditor's meeting.

Secondly, the confirmation of bankruptcy claims plays a crucial role in the smooth progress of bankruptcy proceedings. In bankruptcy proceedings, the creditor's meeting votes on major matters such as the operation, management, and disposal of the debtor, and the basis for calculating the creditor's voting rights is the amount of its claim. In case of disputes over claims, creditors cannot effectively exercise their rights, and if the disputed amount is large, it will inevitably affect the progress of bankruptcy proceedings.

Therefore, in order to achieve fair protection of bankruptcy claims and the smooth progress of bankruptcy proceedings, it is necessary to seek redress through bankruptcy claim confirmation lawsuits.

Existing Problems in the Bankruptcy Claim Confirmation Lawsuit System

The bankruptcy claim confirmation lawsuit procedure can be roughly divided into two parts: the first part is the confirmation of bankruptcy claims by bankruptcy creditors, mainly involving the review of claims by the bankruptcy administrator and the verification of claims by the creditor's meeting; the second part is the filing of a confirmation lawsuit for disputed claims, mainly the confirmation of claims by the court. The author points out the existing problems and reasons for each procedure according to the procedural process.

(I) Inconsistent Standards for Bankruptcy Administrator's Claim Review

The methods for bankruptcy administrators to review claims are divided into formal review and substantive review. Formal review content includes the claim declaration subject, claim type, claim nature, and relevant supporting materials. Substantive review content includes whether the claim truly exists, whether it has exceeded the statute of limitations, whether it has collateral, and whether the amount is correct. However, practice is not rote; there are no unified standards for how administrators review claims, mainly due to the following reasons:

1. Lack of clear provisions in laws and regulations: Although relevant laws and regulations put forward some requirements for bankruptcy administrators to review claims, they do not make clear provisions for specific review standards, leading to certain situations in the actual operation of bankruptcy administrators.

2. Complexity and diversity of bankruptcy cases: Different bankruptcy cases may involve variations in claim types, creditor identities, and claim amounts, thus requiring different review standards to be formulated according to actual circumstances, leading to inconsistent standards.

3. Level and experience of bankruptcy administrators: The review standards of bankruptcy administrators may be affected by individual skill levels and experience, leading to different biases and standards when different bankruptcy administrators review claims.

4. Creditors' claims and disputes: In bankruptcy cases, creditors often raise different claims and disputes regarding their debts, and bankruptcy administrators need to review them according to different circumstances, which then leads to inconsistent review standards.

In summary, the reasons for inconsistent standards in bankruptcy administrators' claim review are relatively complex and need to be analyzed and addressed from multiple perspectives.

(II) Limited Role of Creditors' Meeting in Verifying Claims

The newly revised "Bankruptcy Law" separates the power to examine claims to the administrator, the power to verify to the creditors' meeting, and the power to confirm to the court. The administrator responsible for examination reviews the declared claims, prepares a claims table, and submits it to the creditors' meeting for verification. Creditors can object to or agree with the confirmation of claims, and finally, the court rules on the confirmation. The purpose of establishing this three-tiered claim confirmation system is to ensure the legality and validity of claims, protect the interests of multiple parties, prevent debtors from bearing groundless claims, and ensure creditors receive fair repayment. The drawback is that current creditors' meetings' verification of claims is often merely formal, failing to achieve the purpose of substantive verification, mainly due to:

1. Large number of creditors: In bankruptcy proceedings, the number of creditors is often large. Some creditors may not be present at the creditors' meeting, or there may be disagreements among creditors, making it impossible for the meeting to verify claims in a timely and effective manner. Furthermore, time constraints also prevent the creditors' meeting from meticulously verifying and carefully distinguishing among the claims of numerous creditors.

2. Diverse types of claims: In bankruptcy proceedings, there are numerous types of claims, including various bonds, loans, and equity. Even administrators require a significant amount of time and professional expertise for review. For the numerous creditors, a detailed substantive verification in just one meeting is inevitably superficial.

3. Inaccurate data: In creditors' meetings, the claim information submitted by creditors may sometimes be inaccurate or contradictory, such as incorrect claim amount statistics or conflicts in claim declarations. This can prevent the bankruptcy administrator from smoothly confirming claims.

(III) Nature of the 15-day period not clarified

Article 8 of the "Judicial Interpretation (III) of the Bankruptcy Law" stipulates the time limit for initiating a lawsuit for bankruptcy claim confirmation, namely: "If a debtor or creditor objects to the entry in the claim table, they shall state the reasons and legal basis. If, after explanation or adjustment by the administrator, the objector remains dissatisfied, or if the administrator does not provide explanation or adjustment, the objector shall file a lawsuit for claim confirmation with the People's Court within fifteen days after the creditors' meeting's verification ends." However, it is not explicitly stipulated whether this 15-day period for filing a lawsuit is a statute of limitations, a preclusive period, or simply a filing deadline, and there are no more detailed provisions. Local courts also have not reached a consensus on the filing deadline.

In the case of bankruptcy claim confirmation dispute between Sha Qiying and Tanier Biotechnology (Shangqiu) Co., Ltd. et al., both the first-instance and second-instance courts held that Sha Qiying failed to file a lawsuit for claim confirmation with the People's Court within fifteen days after the creditors' meeting's verification, thus exceeding the time limit for filing a bankruptcy claim confirmation lawsuit. Sha Qiying appealed, applying to the Supreme People's Court for retrial. The Supreme People's Court, however, held that the 15-day period stipulated in Article 8 of "Judicial Interpretation III of the Bankruptcy Law" is not a statute of limitations, a preclusive period, or a filing deadline, and the expiration of this 15-day period does not lead to the legal consequence of the objector's substantive rights or litigation rights being extinguished. The first-instance and second-instance courts dismissed the lawsuit on the grounds that Sha Qiying exceeded the fifteen-day filing deadline, which was an incorrect application of the law.

In this case, the Supreme People's Court held that the 15-day period is not a forfeiture period, and even if the 15-day period expires, it does not affect the creditor's right to file a lawsuit regarding the disputed claim; the court cannot dismiss the lawsuit due to the 15-day deadline.

Improvement of the Bankruptcy Claim Confirmation Lawsuit System

"He who tied the bell must untie it." Improving the procedures of the bankruptcy claim confirmation lawsuit system, reducing problems encountered by bankruptcy administrators in reviewing claims, strengthening the role of creditors' meetings in verifying claims, and perfecting the conditions for filing claim confirmation lawsuits can minimize litigation and save judicial resources to the greatest extent possible.

(I) Formulating Bankruptcy Administrator's Claim Review Standards

Claim review is a core aspect of the entire bankruptcy proceeding, related to the protection of all creditors' interests. Bankruptcy administrators bear significant responsibility, and claims are complex and numerous, leading to high work intensity. The reasons for inconsistent standards in bankruptcy administrators' claim review were analyzed above, thus the author believes improvements can be made in the following aspects:

1. Formulate unified review standards. Given the numerous bankruptcy claims and their diverse natures, specifying different review standards for claims of different natures is an urgent matter. Simultaneously, the review responsibilities of bankruptcy administrators should be stipulated to ensure consistency and fairness in review work.

2. Establish a review and supervision mechanism. Establish and improve a supervision mechanism for bankruptcy administrators' claim review, where the court supervises and coordinates claim review in bankruptcy proceedings during the review stage to ensure uniformity of review standards.

3. Strengthen training for bankruptcy administrators. The bankruptcy administrator plays a crucial role in the process of reviewing creditors' claims. Training on the standards for reviewing creditors' claims will improve the administrator's ability to review claims and minimize inconsistencies in standards due to professional skill differences.

(II) Strengthening the role of the creditors' meeting in verifying claims

The limited and perfunctory role of the creditors' meeting in verifying claims is due to the short duration, low attendance, and heavy workload of the first creditors' meeting. (Specific reasons are detailed above.) 。

In addressing these pain points, the author has found, through reviewing relevant materials, that some scholars, considering the "low attendance" aspect, suggest establishing an independent institution separate from the creditors' meeting. All stakeholders in the bankruptcy proceedings can join this institution, which would assume the function of verifying claims at the first creditors' meeting. The People's Court would then preside over the meeting, with stakeholders verifying claims one by one, ensuring "one certificate, one verification".

Other scholars, considering the "short time and heavy workload" aspect, suggest establishing a creditors' committee or having the creditors' meeting entrust a professional institution to verify claims after the first creditors' meeting, and to raise written objections to the administrator within 30 days regarding disputed portions of the creditor's list.

Both approaches have their merits. The author believes the latter is more feasible, as the proposed independent institution in the former approach might render the already limited creditors' meeting pointless. To strengthen the role of the creditors' meeting in claim verification, establishing a creditors' committee, electing its members, and having it conduct verification within a set timeframe after the first creditors' meeting can effectively address the pain points of "short time, low attendance, and heavy workload".

(III) Clarifying the conditions for filing a lawsuit

Article 8 of the "Judicial Interpretation (III) of the Bankruptcy Law" has created two urgent problems in practice:

First, If a creditor does not express any opinion within 15 days after the verification at the first creditors' meeting, but later files a lawsuit for confirmation of the claim, can the court dismiss the lawsuit on the grounds of "overdue"?

Second, If the court accepts the case, will the overdue filing affect the final settlement?

First, regarding the first question, in the case of Sha Qiying v. Tani'er Biotechnology (Shangqiu) Co., Ltd. et al. concerning the confirmation of bankruptcy claims, the Supreme People's Court provided guidance, stating that the 15-day period is not a statute of limitations, a period of exclusion, or a filing deadline. The expiration of this 15-day period does not result in the legal consequence of extinguishing the objector's substantive rights or right to sue; the People's Court should not dismiss the lawsuit on the grounds of "overdue." In other words, if the creditor does not express an opinion within the 15-day period, it is not presumed that they agree to the claims reviewed in the creditor's list; the creditor can still file a lawsuit for confirmation with the court. The main role of the 15-day deadline may be to urge creditors, and it does not lead to the extinction of substantive rights. However, without clarifying its nature in a normative document, it will inevitably affect the progress of bankruptcy proceedings. The author suggests extending the 15-day period to a 30-day filing period, i.e., the objector should file a lawsuit for confirmation of the claim with the People's Court within 30 days after the verification at the creditors' meeting; otherwise, the People's Court may dismiss the lawsuit on the grounds of "overdue." This would urge creditors to actively protect their rights while ensuring the stability of the bankruptcy proceedings.

As for the second question, the "Guide to the Handling of Bankruptcy Cases by the Civil Division II of the Jiangsu Provincial Higher People's Court" stipulates: "If a creditor fails to file a lawsuit regarding their claim within the 15-day period, the distribution already completed before the lawsuit will not be supplemented for them; if the lawsuit is filed later, the corresponding amount of the disputed claim should be set aside." It can be seen that although the objector does not lose the right to sue after the 15-day period, the consequence is that the distribution already completed before the lawsuit will not be supplemented for the appellant. The author believes that this provision is reasonable, protecting the objector's substantive rights while urging creditors, making it a viable option.

As mentioned earlier, the confirmation of bankruptcy claims is the basis for bankruptcy creditors' right to claim distribution. Those whose claims have not been confirmed cannot participate in the distribution of bankruptcy assets. Its importance to bankruptcy creditors is self-evident. The bankruptcy claim confirmation system provides procedural safeguards for the realization of bankruptcy claims, forming the basis and prerequisite for claim realization. Claim confirmation requires a series of procedures, including claim filing, administrator review, creditor verification, and court confirmation. Each of these procedures will affect the occurrence and outcome of bankruptcy claim confirmation lawsuits. Establishing standards for the bankruptcy administrator's review of claims, strengthening the role of the creditors' meeting in claim verification, and clarifying the conditions for filing lawsuits can effectively reduce bankruptcy claim confirmation lawsuits and ensure the smooth operation of bankruptcy proceedings.

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