ABSTRACT
If the holder of a draft files a claim in the drawer’s bankruptcy reorganization proceedings, it should not only receive the debt-servicing assets specified by the reorganization plan upon the conclusion of the proceedings, but also retain the right of recourse against prior endorsers of the draft for the part of claim not actually satisfied in such proceedings. In a bankruptcy reorganization through a debt-to-equity conversion, the unpaid portion of the claim should be determined based on the actual value of theequity obtained through the debt-to-equity conversion.
FACTS
In May 2019, the plaintiff Sichuan X Shan Bank acquired an electronic bank acceptance draft (par value of RMB 20 million; drawn by Pang X Group Company (“PX Group”) on July 13, 2018; accepted by Bao X Bank; payable to Tianjin Pang X Company (“TJPX Company”); due date of July 13, 2019) via the Commercial Paper Exchange System (CPES)through inter-bank discount. After negotiation by endorsement, the draft was first discounted by a non-party to Hunan Chen X Bank (“HNCX Bank”), then rediscounted by HNCX Bank to Shanxi X Bank, and lastly discounted by Shanxi X Bank to the plaintiff. CPES records showed that the draft’s status was “dishonored upon presentation for payment (verified).”
Bao X Bank was taken over by the financial regulator in May 2019. After its due date, the draft was presented for payment by the plaintiff through the Electronic Commercial Draft System (ECDS) and was dishonored. On July 15, 2019, the plaintiff received RMB 16 million (80 percent of the draft amount) from Bao X Bank, leaving RMB 4 million unpaid.
On September 5, 2019, PX Group entered bankruptcy reorganization upon a court ruling. The plaintiff filed a claim which was admitted to be RMB 4 million. On December 9, 2019, court approved PX Group’s reorganization plan. According to the plan, the plaintiff’s claim would be repaid in full by a combination of: (1) RMB 500,000 in cash; and (2) 585,285 shares issued during the reorganization period through capitalization of PX Group’s capital reserve, covering the remaining RMB 3.5 million claim at a price of RMB 5.98 per share. The plan stated that (1) if a creditor failed to provide bank accounts for receiving the cash payment and stock payment, the cash and shares allocated to the creditor would be deposited into the escrow accounts designated by the administrator; (2) if, due to reasons attributable to the creditor, the cash and shares in escrow remained unclaimed for three years from the announcement of the full implementation of the plan, they would be deemed abandoned. In such case, the cash would be returned to PX Group to supplement working capital, and the shares would be disposed of in accordance with the effective shareholder resolution.
On December 30, 2019, court confirmed through a ruling that the reorganization plan for PX Group had been fully implemented. Because the plaintiff did not provide the receiving accounts for the allotted cash and shares, the administrator deposited them in escrow. In February 2021, Bao X Bank’s bankruptcy was declared by the court.
Having failed to recover the RMB 4 million draft amount from the prior endorsers, the plaintiff filed a lawsuit against TJPX Company, HNCX Bank, and Shanxi X Bank, seeking joint and several liability of the three defendants for the RMB 4 million payment plus accrued interest.
Calculations show that over the 30 trading days starting from December 31, 2019, PX Group stock recorded an average closing price of RMB 1.44 per share in the secondary market.
HOLDING
On May 17, 2023, the Shanghai Financial Court (“Court”) rendered civil judgment (2022) Hu 74 Min Chu No. 3257, which (1) ordered the defendants TJPX Company and HNCX Bank to be jointly and severally liable for paying the plaintiff Sichuan X Shan Bank RMB 2,657,189.60 for the draft amount, plus any corresponding interest; (2) dismissed all other claims of the plaintiff Sichuan X Shan Bank.
Both TJPX Company and HNCX Bank then appealed to the Shanghai High People’s Court, which affirmed the original judgment in (2023) Hu Min Zhong No. 593 on January 15, 2024.
REASONING
The key issues of this case were: (1) whether the plaintiff still had the right of recourse against the defendantsfor the RMB 4 million unpaid draft amount when it had already filed a claim in the drawer PX Group’s reorganization proceedings and the reorganization had been concluded; and (2) whether the plaintiff, having received partial payment from the acceptor, could seek recourse for the remaining face value.
The Shanghai Financial Court held as follows:
First, the plaintiff’s filing of claim in the drawer’s bankruptcy reorganization proceedings did not extinguish its right of recourse.Upon the conclusion of the reorganization, the plaintiff should first receive the debt-servicing assets specified in the reorganization plan, and then seek recourse from prior endorsers for the remaining payment.
This holding is based on the following reasons. (1) At the statutory level, Article 92 of the Enterprise Bankruptcy Law of the People’s Republic of China provides that after the conclusion of bankruptcy proceedings, the plaintiff’s recourse against prior endorsers would be limited to the amount not paid in the reorganization proceedings. Thus, the plaintiff should first accept the property distributed from the reorganization to determine the unpaid amount. (2) At the bankruptcy rules level, a court-approved reorganization plan is binding on all creditors. The Plaintiff’s refusal to take delivery of the debt-servicing assets would go against the bankruptcy reorganization system. (3) At the execution level, the reorganization plan set a deadline for claiming the debt-servicing assets deposited in escrow by the administrator. Because seeking recourse against successive prior parties might take more time than permitted by the deadline, which would result in the disposal of the assets, it would be impractical to ask the plaintiff to recover full payments from the defendants before requesting the administrator to transfer the debt-servicing assets. (4) At the balance-of-interests level, since the reorganization plan involved payment in shares of stock, if the plaintiff did not accept the debt-servicing assets in a timely manner, the repayment will not take effect, and the defendants would be exposed, unfairly, to the price risk of the stock and to growing interest losses.
Second, in a bankruptcy reorganization that involved debt-to-equity conversion, the actual repayment rate for creditors should be determined. In this case, the drawer executed a bankruptcy reorganization through debt-to-equity conversion. Although the reorganization plan indicated a 100 percent repayment rate for the plaintiff, this did not by itself extinguish the plaintiff’s right of recourse on the draft, as the plan neither clarified the basis for calculating the conversion price nor had the share price been assessed by a professional appraiser. It follows that the 100 percent claim payment rate should be construed to mean that, after the conversion was executed, the plaintiff as creditor no longer had the right to make claim against the bankrupt debtor regardless of the actual repayment rate, that is, the claim was extinguished vis-à-vis the debtor but remained standing against prior endorsers to the extent of any amount outstanding. The plaintiff may therefore still seek recourse for the part not actually satisfied in the reorganization.
The converted shares were issued through capitalization of PX Group’s capital reserves and were relatively illiquid. To mitigate price volatility and objectively reflect their fair market value, the Court determined their actual repayment value to be RMB 1.44 per share, which was the average closing price of the stock in the secondary market within 30 trading days following the listing of the shares resulting from the capitalization. This put the plaintiff’s remaining claim at RMB 2,657,189.60.
Third, even if the plaintiff had accepted partial payment from the acceptor, it may still seek recourse for the remaining amount of the draft. No legal provisions prohibit partial acceptance payments or partial recourse against the draft amount. Because the plaintiff, as holder of the electronic draft in question, enjoyed all the rights on the draft (none of which was ever divided or transferred to other parties), there was no obstacle for the plaintiff to deliver the draft through ECDS to the parties against whom recourse was sought. Accordingly, the Court supported the plaintiff’s recovery of the remaining RMB 4 million.
Lastly, as a party to the Master Agreement for Trading of Drafts, the plaintiff had waived the right of recourse against Shanxi X Bank, and thus seeking recovery from Shanxi X Bank was without merit.
SIGNIFICANCE
This case represents the first elevated-jurisdiction case heard by the Shanghai Financial Court. After both the drawer Pang X Group Company and the acceptor Bao X Bank went into bankruptcy proceedings, partial payment was made, by arrangement of regulators, on many of the drafts previously accepted by Bao X Bank. This unintentionally gave rise to a series of recourse-related disputes nationwide, which involved application of the law at the intersection of negotiable instruments law and bankruptcy law. These disputes were perceived and handled variously.
This case establishes judicial rules that substantially facilitate the uniform, efficient, and proper resolution of these disputes over negotiable instruments, thus improving the synergy between financial judiciary and financial regulation in the risk resolution of major financial institutions. Additionally, this case actively addresses how to determine the validity of split recourse for electronic negotiable instruments and partial waiver of the right of recourse by holders under the Master Agreement for Trading of Drafts, offering guidance that aligns with today’s digital, electronic transformation of the negotiable instrument market within the existing framework of the negotiable instrument law, and is of significant contemporary relevance.
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