A bankruptcy case involving nearly 3,800 buyers and more than 300 creditors caused a storm: the only investor with reorganization intention supported by most creditors and debtors was "kicked out" by the "review committee" by secret ballot.
The judging meeting site. Photo courtesy of respondents
The incident originated from Chongqing Tianxianhu Real Estate Co., Ltd. (hereinafter referred to as Tianxianhu Company) being filed for bankruptcy liquidation by a creditor. After the relevant documents of Chongqing municipal government explicitly supported the bankruptcy reorganization of Tianxianhu Company, the Wanzhou District People’s Court of Chongqing agreed that the bankruptcy administrator Daxin Certified Public Accountants Chongqing Branch (hereinafter referred to as the administrator or Chongqing Daxin Firm) would recruit and reorganize investors.
In the recruitment process, Chongqing Lancheng Lanyue Construction Project Management Co., Ltd. (hereinafter referred to as "Lancheng Lanyue Company") became the only intended investor and submitted the reorganization investment plan to the manager. On November 3, 2020, the jury set up by the administrator voted on the reorganization plan submitted by Lancheng Lanyue Company, and more than half of the votes were "No", so Lancheng Lanyue Company failed to become a formal investor.
Civil Ruling made by Wanzhou District Court (part). WeChat public map of Tianxianhu real estate bankruptcy information publicity platform
However, several creditors of Tianxianhu Company filed written objections, saying that the Wanzhou District Court agreed that the review committee set up by the administrator was not a statutory body stipulated in the Enterprise Bankruptcy Law, nor was it authorized by the creditors, so it could not make a decision on behalf of the creditors, and some judges reflected that it was coerced to vote, so the review results had no legal effect and could not be used as the basis for ruling liquidation.
In this regard, the administrator made a "reply" on November 19, 2020, saying that the selection of the evaluation Committee members was determined by the administrator after absorbing the debtor’s views and suggestions, and the people’s court supervised and examined the suitability of the nominees. This review is to evaluate whether the intended investor can become a reorganization investor, not to decide whether Tianxianhu Company will be reorganized, nor to vote on the draft reorganization plan.
Although the administrator said in the Reply that "(review) is not to decide whether Tianxianhu Company is reorganized", based on the above review results, Wanzhou District Court made a civil ruling on December 14, 2020, arguing that Tianxianhu Company was insolvent and declared Tianxianhu Company bankrupt.
Xie Yong, chairman of the creditors’ meeting of Tianxianhu Company, said that Tianxianhu Company has nearly 2 million square meters of undeveloped land, which has the value of reorganization. However, if Tianxianhu Company is declared bankrupt, creditors will suffer huge losses. Recently, the creditors of Tianxianhu Company refused to accept the bankruptcy ruling made by Wanzhou District Court and applied to Chongqing No.2 Intermediate People’s Court for supervision.
Expert argumentation opinion (part). Photo courtesy of respondents
Unfinished property, bankruptcy and reorganization of developers
According to the national enterprise credit information publicity system, Tianxianhu Company was established in Wanzhou District of Chongqing in 2004 with a registered capital of 300 million yuan and its business scope is real estate development. Investment, operation and management of water environment comprehensive management project in Zhuxi River Basin.
According to the relevant person in charge of Tianxianhu Company, the company is the core enterprise of Chongqing Yinxing Zhiye (Group) Co., Ltd. (hereinafter referred to as Yinxing Group), a local veteran housing enterprise in Chongqing. Influenced by many internal and external factors, Tianxianhu Company is in trouble. More than 1,400 households in the "Gold Coast" community developed by the company in Wanzhou have not yet been handed over, and more than 2,300 households are in the process of applying for real estate licenses.
In December 2018, Wanzhou District Court accepted the application of creditors of the company for bankruptcy liquidation of Tianxianhu Company. After being appointed by Chongqing Higher People’s Court, Chongqing Daxin Office became the bankruptcy administrator of Tianxianhu Company. In October 2019, Wanzhou District Court appointed Xie Yong as the chairman of the creditors’ meeting. In the same month, the shareholders of Tianxianhu Company applied to Wanzhou District Court to convert the bankruptcy liquidation procedure of the company into bankruptcy reorganization.
The announcement of Chongqing Tianxianhu Real Estate Co., Ltd. (hereinafter referred to as the "Announcement of Recruitment") issued by the administrator in May 2020 shows that after the administrator’s investigation of the debtor’s historical operating conditions, assets and creditor’s rights and debts, it is believed that the operating value of the debtor’s assets can only be realized under the condition of introducing investors, and the debtor has the greatest possibility of restructuring. In order to safeguard the legitimate rights and interests of creditors and debtors and realize the effective integration of resources, the Wanzhou District Court agreed to carry out the intentional investor.
The only intended investor was rejected by the jury by secret ballot.
After paying a deposit of 20 million yuan, Lancheng Lanyue Company became the only intended investor who entered the fourth stage of the recruitment process and submitted a letter of intent and the Reorganization Investment Plan of Chongqing Tianxianhu Real Estate Co., Ltd. (hereinafter referred to as the "Investment Plan") to the manager.
According to the Investment Plan, Lancheng Lanyue Company intends to acquire Tianxianhu Company by accepting 75% equity, and reorganize the original board of directors and management team to be fully responsible for the subsequent development and construction of the company. At the same time, it promises to give priority to ensuring that the projects that have not been handed over are handed over within one year. Xie Yong, the chairman of creditors, said that the scheme was supported by major creditors, debtors and property buyers.
On October 19, 2020, after receiving the Investment Plan, the administrator issued a notice saying: "The administrator will set up an evaluation committee under the guidance of the people’s court to evaluate the Investment Plan submitted by Lancheng Lanyue Company."
Since then, the administrator has made the Appraisal Scheme of the Prospective Investor Selection Appraisal Committee (hereinafter referred to as the Appraisal Scheme), and determined that the Appraisal Committee consists of 13 members. After the intended investors explain the Investment Plan and answer the questions of the judges, 13 judges will vote by secret ballot. If more than half of the votes are agreed, it will be passed, otherwise it will not be passed.
On November 3, 2020, the administrator presided over the review meeting. Before the meeting, Xie Yong, chairman of the creditors’ meeting, learned that some members were "intimidated" and "unable to vote according to their own wishes". At the meeting, Xie Yong submitted a statement saying that the review committee had no legal authority and could not take the place of creditors to "decide the life and death of prospective investors", and some members were coerced, unable to guarantee the fairness of the voting results, and requested to terminate the review and hand over the decision to all creditors’ meetings for resolution.
After a short recess, the administrator did not adopt this request and continued to vote by 13 judges. The voting results on that day were: 5 votes for "Agree" and 8 votes for "Disagree".
A week later, the administrator announced the voting result: "After legal review, the review committee did not agree that Lancheng Lanyue Company would become a formal reorganization investor."
The court declared Tianxianhu Company bankrupt according to the evaluation results.
This evaluation result attracted the dissatisfaction of some creditors, some employees and prospective investors of Tianxianhu Company.
A number of creditors claimed that from the Announcement of Recruitment to the convening of the review meeting, there was no communication between the administrator and the creditors on the establishment, authorization, personnel composition, authority and other details of the "review Committee", and no written documents were issued.
In this regard, the reply made by the administrator on November 19, 2020 stated that the selection of the investor review committee of Tianxianhu Company was determined after the administrator nominated the debtor’s views and suggestions, and the people’s court supervised and examined the suitability of the nominee.
The "Reply" also said that this review is a review of whether the intended investor can become a reorganization investor, not to decide whether Tianxianhu Company will be reorganized, nor to vote on the draft reorganization plan.
Regarding the content of the Reply, the creditors of Tianxianhu Company raised a written objection that the creditors’ meeting is the highest decision-making body in the Enterprise Bankruptcy Law, but most creditors didn’t know that the review meeting was held until the review results were announced. The administrator’s "Reply" also admitted that the creditor’s authorization was not obtained.
Although the administrator once said in the aforementioned written reply that "(review) is not to decide whether Tianxianhu Company is reorganized", based on the aforementioned review results, Wanzhou District Court made a civil ruling on December 14, 2020, declaring Tianxianhu Company bankrupt.
According to the ruling, the court found that on March 31, 2020, the administrator issued an inventory report on the debtor’s property status. As of April 30, 2019, the debtor’s total assets were 3.57 billion yuan, the total liabilities were 3.914 billion yuan, and the asset-liability ratio was 109.63%, which was insolvent. With the consent of the institute, the administrator issued the Announcement of Recruitment, which made it clear that the determination of the intended investors of Tianxianhu Company as reorganization investors must be reviewed by a specially established review committee. On November 3, 2020, Lancheng Lanyue Company failed to pass the evaluation of the intended investors as reorganization investors. The Wanzhou District Court held that Tianxianhu Company, as an enterprise legal person, could not pay off the debts due, and its assets were not enough to pay off all the debts. The ruling declared Tianxianhu Company bankrupt.
Xie Yong, chairman of the creditors’ meeting of Tianxianhu Company, said that the relevant documents of Chongqing Municipal Government and Wanzhou District Government (Wanzhou Government Letter [2020] No.36) clearly support the legal reorganization of Tianxianhu Company, and the company has nearly 2 million square meters of undeveloped land, which obviously has the value of reorganization, but if Tianxianhu Company is declared bankrupt, it will make creditors suffer huge losses. Therefore, the creditors of Tianxianhu Company recently applied to Chongqing No.2 Intermediate People’s Court for supervision.
On April 16th, Chen Huamao, the relevant person in charge of Chongqing Daxin Office, told The Paper that the announcement by the administrator to recruit intended investors did not mean the completion of the bankruptcy liquidation to bankruptcy reorganization. "There is also a review process, and only after the review (the court) will the liquidation be reorganized."
Expert: "Deliberating" non-"resolutions"
In response to this matter, Xie Yong, chairman of the creditors’ meeting, some creditors and debtors entrusted relevant experts from Southwest University of Political Science and Law to make an Expert Demonstration Opinion.
The submission points out that the review committee is not a clear statutory body in the Enterprise Bankruptcy Law, nor does it have the statutory authority to make decisions and reorganize investors. The rights of the evaluation committee come from the entrustment of the bankruptcy administrator, and its scope of rights should be limited to the evaluation of investors’ economic strength, investment value and other matters and give professional advice according to the Recruitment Announcement, rather than simply voting against investors and their Investment Plan.
Experts believe that the question of whether investors are qualified is a key issue that substantially affects the smooth implementation of the debtor’s enterprise reorganization, and it is also a decisive issue that whether the overall interests of creditors can be maximized and whether the proportion of compensation can be improved. Therefore, the review of the Investment Plan submitted by the sole intended investor should belong to the deliberation of the review committee rather than the resolution. Therefore, the review committee has no right to exercise the veto power on behalf of the debtor’s enterprises and creditors, and the voting conclusion of the review committee should not constitute a legal obstacle to the start of the reorganization procedure.
Experts also believe that the reorganization of the investor selection mechanism must first solve the problem of who chooses, the bankruptcy procedure is centered on creditors, and the investor’s right to choose should be exercised by creditors. In this case, the administrator directly appointed 13 members to form the evaluation Committee as the subject of the right to choose. From the structure of the Committee, it can not fully express the interests of debtors and all creditors, nor can it guarantee the fairness and justice of the selection process. The selection rules formulated by the administrator and the failure to perform due diligence in the process of selecting investors.