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Perspective | Research on Issues Related to Continuing Performance of Contracts in Bankruptcy Proceedings

Published:

2024-12-31

After the People's Court accepts the bankruptcy case of a bankrupt enterprise (also known as the "debtor"), one of the primary tasks of the bankruptcy administrator (hereinafter referred to as the "administrator") is to sort through the contracts signed by the bankrupt enterprise with external parties and analyze whether to continue performing them. Article 18 of the Enterprise Bankruptcy Law states: "After the People's Court accepts the bankruptcy application, the administrator has the right to decide whether to terminate or continue performing contracts that were established before the acceptance of the bankruptcy application and that have not been fully performed by both the debtor and the other party, and must notify the other party. If the administrator does not notify the other party within two months from the date of acceptance of the bankruptcy application, or does not respond within thirty days from the date of receiving the other party's notice, it is deemed that the contract is terminated. If the administrator decides to continue performing the contract, the other party must perform; however, the other party has the right to request the administrator to provide a guarantee. If the administrator does not provide a guarantee, it is deemed that the contract is terminated." The above provisions are referred to as the "rules for unperformed contracts." The law is specific and clear, but there are still many questions and disputes in practice. This article combines legal provisions, relevant case law, and practical experience to study related issues for critical discussion.

After the People's Court accepts the bankruptcy case of a bankrupt enterprise (also known as the "debtor"), one of the primary tasks of the bankruptcy administrator (hereinafter referred to as the "administrator") is to sort out the contracts signed by the bankrupt enterprise with external parties and analyze and judge whether to continue performing them.Article 18 of the Enterprise Bankruptcy Law states: "After the People's Court accepts the bankruptcy application, the administrator has the right to decide whether to terminate or continue performing the contracts that were established before the acceptance of the bankruptcy application and that have not been fully performed by both the debtor and the other party, and to notify the other party. If the administrator does not notify the other party within two months from the date of acceptance of the bankruptcy application, or does not respond within thirty days from the date of receiving the other party's reminder, it is deemed to have terminated the contract. If the administrator decides to continue performing the contract, the other party shall perform; however, the other party has the right to request the administrator to provide a guarantee. If the administrator does not provide a guarantee, it is deemed to have terminated the contract."The above provisions are referred to as the "rules for contracts to be performed." The law is specific and clear, but there are still many questions and disputes in practice. This article combines legal provisions, relevant case law, and practical experience to study related issues for criticism and exchange.

I. Identification of Contracts to be Performed

Summarizing Article 18 of the Enterprise Bankruptcy Law, it is easy to see that contracts to be performed must meet the following conditions: 1. The contract was established before the court accepted the bankruptcy case; 2. At the time the court accepted the bankruptcy case, neither the debtor nor the counterparty had fully performed; 3. Both the debtor and the counterparty have performance obligations, that is, it is a bilateral contract.

II. Judgment on "Established Before the Court Accepted the Bankruptcy Case"

Article 18 of the Enterprise Bankruptcy Law uses the term "established" rather than "effective." Combined with Article 136 of the Civil Code, which states, "Civil legal acts take effect upon establishment, unless otherwise provided by law or agreed by the parties," the administrator should consider the special circumstances of contracts that take effect conditionally (including time conditions) when judging whether it is a contract to be performed.

III. Judgment on "Neither Party Has Fully Performed"

(1) Both theory and practice tend to believe that a contract where neither party has fully performed refers to the main contractual obligations that have not been fully performed, and there is not much dispute about this. Therefore, contracts where obligations, ancillary obligations, or secondary obligations have not been performed (such as warranty periods, delivery of equipment random accessory packages, etc.) should not be identified as contracts to be performed. However, there are more complex situations in practice, where it is difficult to require the counterparty to declare ordinary claims and bear ancillary obligations or secondary obligations. For example, in a contract for the sale of equipment between a specialized, unique, and exclusive equipment provider and the debtor, after the debtor enters bankruptcy proceedings, when requiring the counterparty to fulfill obligations under the maintenance service contract for the equipment, the counterparty often demands full or partial payment for the equipment, and the administrator faces the dilemma of whether to make individual payments. The author believes that such situations, in addition to being resolved through litigation and other legal means, may consider the provisions of the Enterprise Bankruptcy Law and relevant judicial interpretations regarding "individual payments benefiting the debtor's property" and "the administrator's individual payments to certain debtors for the purpose of protecting creditors' interests do not fall under the statutory individual payment circumstances" (reference case: (2021) Bing Min Zhong 26).

(2) Some opinions suggest that contracts where neither party has fully performed do not include contracts that should have been fully performed but were not due to breach of contract or other circumstances when entering bankruptcy proceedings. The author believes this viewpoint is debatable. On the one hand, based on literal interpretation, Article 18 of the Enterprise Bankruptcy Law only states "not fully performed" without any other restrictive expressions, and should not be expansively interpreted to include contracts that should have been fully performed but were not, as its purpose is to determine the actual state of non-performance (reference case: (2019) Jing 03 Min Zhong 16483); on the other hand, from the objective background of corporate bankruptcy, the inability to repay due debts or a clear lack of repayment ability is a necessary condition for entering bankruptcy proceedings, and it is normal for the debtor to be unable to treat the performance of contracts to be performed as agreed. If such contracts are excluded from contracts to be performed, it contradicts the purpose and original intention of the provisions on continuing performance of contracts in the Enterprise Bankruptcy Law.

IV. Issues Related to the Termination of Contracts to be Performed

Article 18 of the Enterprise Bankruptcy Law states that if the administrator does not notify or fails to respond after being reminded by the counterparty within the statutory period, the contract to be performed is deemed terminated. It is worth noting that "deemed terminated" is a legal fiction consequence, not an automatic or natural result. The Supreme Court's (2022) Supreme Court Min Zai 55 judgment pointed out: "The provisions of Article 18 of the Bankruptcy Law aim to protect the legitimate rights of the counterparty to the contract, avoiding the administrator from making a long-term decision on whether to continue performing the contract, leaving the contract in an uncertain state, which harms the interests of the counterparty. Therefore, this provision restricts the administrator's choice of contract performance, meaning that if the administrator does not notify or respond to the counterparty within the statutory period, the administrator loses the right to request the counterparty to continue performing the contract, but it cannot be directly inferred that the contract is terminated; whether the contract is terminated still needs to be determined based on specific circumstances. Therefore, even if the administrator does not notify or respond within the statutory period, if the counterparty continues to perform its contractual obligations as agreed, and the administrator or debtor does not raise objections, it should be understood as continuing to perform the contract.

In addition, under the circumstances where the contract to be performed is deemed terminated, the timing of termination also needs attention. Currently, a relatively consistent view is that the contract to be performed is terminated when the statutory period expires, that is, if the administrator does not notify the counterparty within two months from the date of acceptance of the bankruptcy application, or does not respond within thirty days from the date of receiving the counterparty's reminder. Therefore, the administrator should be aware that entering bankruptcy proceedings is not a statutory reason for contract termination, and for contracts that do not need to be continued, which will not bring value (benefit) to the debtor's assets, a termination notice should be promptly sent to the counterparty to avoid causing losses to the debtor's assets.

V. Issues Related to Reporting on Continuing Performance of Contracts

Article 69 of the Enterprise Bankruptcy Law stipulates that if the administrator performs a contract that has not been fully performed by both the debtor and the other party, they should promptly report to the creditor committee. If a creditor committee has not been established, they should report to the people's court in a timely manner. However, it is not clearly stated whether the report should be made in advance or after the fact, or whether the approval of the creditor committee or the court is required. Combining this with the expression "the administrator has the right to decide" in Article 18 of the Enterprise Bankruptcy Law, it seems that it can be inferred that under the premise that the administrator has the right to decide whether to continue performing the contract, the meaning of the report is closer to a notification. However, in practice, different courts have different handling methods and requirements. Article 130 of the Guidelines for the Trial of Enterprise Bankruptcy Cases by the Shandong Provincial High People's Court (Trial) stipulates: "The administrator shall prepare a property management or pricing plan in advance for the following acts of disposing of the debtor's significant property and submit it to the creditor meeting for voting. If the creditor meeting does not approve, the administrator shall not dispose of it. ... (7) Performing contracts that have not been fully performed by both the debtor and the other party; ... Before the administrator performs the above dispositions, they shall report to the creditor committee in writing ten days in advance. If a creditor committee has not been established, they shall report to the people's court." From the perspective of risk prevention for the administrator, I believe that regarding the continuation of contract performance, it should be reported to the creditor committee or the accepting court in advance, and communication with the court should be done in advance to confirm whether it needs to be voted on by the creditor meeting or approved by the court.

6. Regarding the nature of the part that has been performed before the court accepts the bankruptcy application

The nature of the debts arising from the contracts that the administrator decides to continue performing, which have been partially performed by the debtor's counterpart before the court accepts the bankruptcy application, is a significant controversy as to whether they should be treated as ordinary debts or as common benefit debts due to the continuation of the contract.

One viewpoint holds that from the perspective of the integrity of the contract and fair treatment of the counterpart, the continued performance of the contract should be treated as the overall and complete performance of the contract, and therefore should be treated as common benefit debts. Supporting this viewpoint is case (2020) Lu Min Zhong 603, where the court held that the contract in question has integrity and indivisibility and should be treated as a whole; the administrator's decision to continue performing the contract indicates that performing this contract is beneficial to all creditors; moreover, the price stipulated in the contract is higher before entering the bankruptcy process and lower afterward. If it cannot be treated as common benefit debts, it would be unfair to the counterpart and detrimental to the continuation of the contract.

Another viewpoint holds that according to Article 42 of the Enterprise Bankruptcy Law: "The following debts arising after the people's court accepts the bankruptcy application are common benefit debts: (1) Debts arising from the request of the administrator or the debtor for the other party to perform contracts that have not been fully performed by both parties," common benefit debts only refer to debts arising after the people's court accepts the bankruptcy application. Treating the part that has been performed before entering the bankruptcy process as common benefit debts contradicts the legal provisions and does not align with the legislative intent of the Enterprise Bankruptcy Law for fair repayment and fair treatment of all creditors. Supporting this viewpoint is case (2018) Zhe Min Zhong 421, where the court held that the contract in question has temporal divisibility, and it is inappropriate to recognize the debts owed by the debtor under the contract before the people's court accepts the bankruptcy application as common benefit debts. Furthermore, there is no evidence showing that at the time the disputed debts arose, both parties to the contract subjectively intended to benefit all creditors, thus the disputed debts were not generated for the common interest of all creditors.

Due to my limited ability, I will not evaluate the above two viewpoints but will provide reference suggestions for administrators in practice regarding such matters. First, for contracts that can be clearly segmented by time points, workload, etc., where payment time points, payment amounts, service content, etc. can be proportionally divided (such as monthly settled security service contracts, fixed-price routine inspection contracts), the cutoff should be made on the day the court accepts the bankruptcy application. The unpaid fees before entering the bankruptcy process should be treated as ordinary claims and should be declared, while subsequent fees should be treated as common benefit debts. Second, for contracts that cannot be proportionally divided (such as construction contracts, energy-saving benefit-sharing contracts with fluctuating payment amounts), or where it is necessary to treat the amounts before entering the bankruptcy process as common benefit debts, the administrator should analyze and judge the necessity of continuing the contract based on a highly prudent principle, considering whether it aligns with the common interests of all creditors and whether it can bring asset gains to the debtor.

囿于自身水平所限，对上述两种观点不做评价，仅对管理人实务中处理该等事项提供参考建议。一是，对于可按时间点、工作量等进行明确分段的合同，在合同的付款时间节点、付款金额、服务内容等可进行等量划分的情况下（如按月结算的安保服务合同、价格固定的常规例行检测合同），以法院受理破产之日进行前后划断，进入破产程序之前的欠付费用属普通债权，应进行债权申报，之后的费用按共益债务处理。二是，对于无法进行等量划分的合同（如工程施工类合同，付款金额浮动变化的节能效益分享合同），或需要将进入破产程序前的款项一并作为共益债务处理，管理人应本着高度审慎的原则，从是否符合全体债权人的共同利益、是否可为债务人带来资产增益等方面整体分析判断继续履行合同的必要性。

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