What can a landlord do when the tenant is bankrupt?
In a financial lease, if the lessee goes bankrupt or goes into receivership due to insolvency, the lessor is certain to be harmed. To defend its own interests, the lessor must carefully assess the status of the tenant and the lease, and take the initiative if necessary
Iin recent years, due to macroeconomic trends, national policies and increased legal awareness, courts have accepted a significantly increasing number of business bankruptcy cases. At the same time, the likelihood that finance and leasing companies (lessors) will face tenant bankruptcy during the term of the lease has also increased. Based on the authors’ legal practice experience, we have summarized the following key tips for landlords when reorganizing tenant bankruptcy.
If there is a risk of the lessee’s bankruptcy, strengthen post-lease management, keep abreast of the status of the lessee and the lease and, if necessary, resort to litigation without delay. If the tenant is found to have paid late rent, misappropriated assets, sought debt restructuring advice, changed location of registration without reasonable cause, been involved in a large number of legal disputes or had a negative public opinion on its solvency, they indicate that the legal risks of default or even bankruptcy of the tenant accumulate rapidly.
The lessor is advised, in the first place, to intensify the post-lease management, to inspect the lease, to ensure that its title is made public and that the lessee has not assigned the lease of his own volition. . The lessor must also check whether the information on the leased property specified in the leasing contract is consistent with its actual condition, as well as any defects in the specialization of the leased property. In the event of a problem, the lessor must remedy it as far as possible.
Additionally, the landlord should consider taking legal action against the tenant and guarantor, if litigation was the specified method of resolution. In accordance with Articles 20 and 21 of the Commercial Bankruptcy Act, if the lessor brings an action in the agreed competent court before the lessee’s application for bankruptcy has been accepted, to determine the legal relationship, the amount of the claim and vesting of the lease, it would be able to avoid subsequent litigation in the tenant’s local court, thereby reducing uncertainty.
Timely and accurately declare the rights of creditors, monitor the use of the lease and consider exercising the right of collection. If the lessee has been ordered to reorganize, the lessor must promptly and accurately declare the rights of its creditors, submit the required documents evidencing the claim, and actively communicate with the administrator regarding the amount and nature of the claim, as well as assignment of the lease.
The lessor must continue to monitor the use of the lease. If the administrator decides to continue to use the lease to support the lessee’s basic production and operating activities, for debts arising from such continued use, the lessor may consider claiming them as collective debts in accordance with the first or third paragraph of article 42 of the law on commercial bankruptcy, which is likely to advance the claim in terms of priority.
Pursuant to Article 42 of the Commercial Bankruptcy Act, the following debts incurred after the court has accepted an application for bankruptcy are considered collective debts: (1) debts arising from a contract which the two parties concerned do not execute at the request for execution raised by the administrator of the bankruptcy or the debtor against the opposing party; (2) the debts generated by the negotiation management (business management) of the debtor’s assets; (3) debts generated by ill-gotten gains; (4) the cost of labor for the continuation of business activities, social insurance premiums and other liabilities incurred; (5) debts arising from damages incurred in the performance of the functions and duties of a bankruptcy administrator or other relevant personnel; and (6) debts generated by any damage caused to the property of the debtor.
If the administrator decides to discontinue use of the lease, although the lessor may consider having the administrator dispose of the lease during bankruptcy proceedings, this process may be quite lengthy and the lease may be exposed to risk of depreciation and impairment if not eliminated promptly. The lessor must consider the possibility of exercising its right of recovery as soon as possible and assess the leased property to contain the losses.
In addition, with respect to dismantling, transport, appraisal, auction and other costs incurred in the recovery and transfer of the leased property, the lessor must consult the leasing contract and determine whether the lessee may be required to bear these costs and claim them as bankruptcy costs or collective debts thereafter.
In addition to its own creditor rights, the lessor must examine the claims of other major creditors. Pursuant to Sections 57 and 58 of the Commercial Bankruptcy Act, the administrator shall register, bind and review claims declared by creditors, prepare a creditors’ rights form and submit it to the first meeting of creditors for verification. When checking claims, the lessor should pay attention not only to the administrator’s examination of his own claim, but also to the results of the inspection of other creditors, including the amount, nature and security. The lessor must immediately raise any objection it may have, or even take legal action, so as not to affect the solvency of its creditor rights.
Maintain the necessary contacts with the other creditors of the same category during the formulation and the vote of the reorganization plan. During the development of the recovery plan by the administrator, the lessor, as a financial institution with a relatively strong capacity to bear losses, may suffer some damage to its interests. Consequently, it is imperative that the lessor maintain the necessary contacts with the creditors of the same voting class for the draft reorganization plan. The parties must strive for common interests and prevent the adoption of a reorganization plan that seriously impairs their legitimate rights and interests.
Chen Zhuo is a partner at Tian Yuan Law Firm. He can be contacted at +86 138 1041 7260 or email [email protected]
Wang Hao is a partner at the Tian Yuan law firm. He can be contacted at +86 136 5118 1449 or email [email protected]