I. The Principal Debt Should Not Be Subject to the Effect of Cessation of Interest on the Guaranteed Debt

According to Article 46[1] of the Enterprise Bankruptcy Law, paragraph 2, the accrual of interest on an interest-bearing claim ceases from the date the bankruptcy proceedings are accepted. Since the guaranteed debt is accessory to the principal debt, there is no doubt that its interest can also cease simultaneously. Specific provisions can be found in Article 22[2] of the “Interpretation of the Supreme People’s Court on the Application of the Security System of the Civil Code of the People’s Republic of China” (hereinafter referred to as the “Civil Code Security System Interpretation”). However, how to handle the claim when only the surety enters bankruptcy proceedings while the principal debtor has not yet become bankrupt remains a contentious issue in bankruptcy law and the broader civil and commercial law field. This topic involves both the interpretation of the guarantee system and the interface between bankruptcy proceedings and substantive legal norms. The author’s view is that the effect of cessation of interest on the guaranteed debt should not extend in reverse to the principal debt, and this does not violate the accessory nature of guaranty liability.

(I) Analysis from the Perspective of Legislative Purpose

First, according to Article 4 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law of the People’s Republic of China (III)” (Fa Shi [2019] No. 3), if a surety is ruled to enter bankruptcy proceedings, the creditor has the right to declare its guaranteed claim against the surety. If the principal debt has not yet matured, the guaranteed claim is deemed to have matured at the time the bankruptcy petition against the surety is accepted. If a general surety asserts the right of先诉抗辩权 (benefit of discussion), the people’s court will not support it; however, the distribution share of the creditor in the general surety’s bankruptcy proceedings shall be deposited pending determination of the surety’s guaranty liability, and then distributed according to the bankruptcy distribution ratio. If the surety is determined to bear guaranty liability, the surety’s administrator may exercise the right of recourse against the principal debtor or other debtors for the amount actually paid by the surety.

In the first-instance judgment of the financial loan contract dispute between Qujing Branch of Bank of Communications Co., Ltd. and Qujing Dawei Coal Coking Supply Co., Ltd. (2020) Yun 03 Min Chu No. 20, the court held that, considering the above Article 4, “the claim deemed to have matured at this time is the guaranteed claim, not the principal claim. The third party, Yunnan Yunwei Co., Ltd., as the surety, entered the implementation stage of the reorganization plan. Its performance of the guaranty obligation means that the unpaid portion should be continued to be performed by the principal debtor. Therefore, the defendant, as the principal debtor, should continue to perform the repayment obligation for the portion not paid by the surety.” In the financial loan contract dispute case between China Everbright Bank Co., Ltd. Shanghai Branch and Peking University Founder Material Group (Shanghai) Co., Ltd.[3] (2022) Hu Min Zhong No. 1297, the Shanghai Pudong New Area People’s Court held that “Founder Material Company is the principal debtor in this case, while Group A is the surety. The surety’s entry into bankruptcy reorganization does not affect the performance of the principal debt.” Both cases demonstrate that the principal claim is not affected by the acceleration of the guaranteed claim.

(II) Analysis from the Perspective of Statutory Application

Second, the rule of cessation of interest on bankruptcy claims, as a mandatory special provision in the Enterprise Bankruptcy Law exempting the obligation to perform debts, should have specific and strict subject applicability, scope of effect, and conditions for application. In other words, only when the debtor itself enters bankruptcy proceedings as the subject does the bankruptcy legal relationship between it and the creditor allow for the application of this cessation of interest rule. Conversely, when the surety, mortgagor, etc., become bankrupt, the creditor does not lose its substantive right to continue accruing interest, penalty interest, etc., against the principal debtor.

(III) Analysis from the Perspective of Practical Interests

Finally, the interests of the creditor are more worthy of protection than those of the surety, mortgagor, etc. In reality, the principal debtor and the surety are often related parties. If the debtor’s bankruptcy can produce the effect of cessation of interest, and the surety’s bankruptcy can also extend this effect to the debtor, it would be equivalent to allowing the debtor to eliminate or reduce the interest payable to the creditor after the acceptance of the bankruptcy petition, regardless of the circumstances. If not regulated, situations where the principal debtor and the surety collude maliciously, apply for bankruptcy, and thereby evade their obligations would inevitably become common. This would not only seriously infringe upon the legitimate rights and interests of creditors and defeat the purpose of signing the guarantee contract, but more importantly, it would undermine the credibility of the principle of good faith, contradict the legislative purpose of the guarantee system, and hinder the orderly development of the market economy.

II. The Principal Debtor’s Obligation to Repay the Balance of the Debt and Interest

Although a legal person enterprise is terminated upon the conclusion of bankruptcy proceedings, and its debts are no longer discharged due to its termination, if it is the surety (not the principal debtor) that enters bankruptcy reorganization, the bankruptcy does not necessarily lead to the absolute and complete extinguishment of the claim. In essence, it should be clarified that the initiation of bankruptcy proceedings constitutes a triggering event for the cessation of interest on the guaranteed debt, not a ground for reducing the principal debt. The risk-buffering function of guarantees should not be confused. In practice, the surety or debtor may propose debt-for-equity swaps in the bankruptcy reorganization plan. It must be understood that what is being satisfied is only the creditor’s claim against the surety, which ceased accruing interest as of the date of acceptance of the bankruptcy petition. Such a debt-for-equity swap cannot discharge all claims determined by an effective judgment, including rent, purchase price, overdue interest, attorney fees, and interest on the debt during the period of delayed performance.

In the case of Northeast Special Steel Group Dalian Precision Alloy Co., Ltd. v. Dalian Rural Commercial Bank Co., Ltd. Shandong Road Sub-branch for a financial loan contract dispute[4] (2021) Min Shen No. 6421, the court held: “Upon review, this court finds that Northeast Special Steel Group was the surety for the debt in question. Due to the conclusion of its bankruptcy proceedings, Northeast Special Steel Group was terminated, and its debt as surety was no longer discharged because of its termination. However, the appellee’s claim against the reapplicant, Northeast Special Steel Group Dalian Precision Alloy Co., Ltd., as the principal debtor, still exists. The bankruptcy of the surety is not a cause for the extinguishment of the claim. Since the appellee, when filing a bankruptcy claim against the surety, could only claim the portion of the claim calculated up to the acceptance of the bankruptcy petition, the portion of the claim not fully satisfied according to the bankruptcy proceedings has the right to seek further recovery from the debtor. The claim is not extinguished by the surety’s bankruptcy.” In the case of Northeast Special Steel Group Dalian Silver Bar Co., Ltd. v. Dalian Rural Commercial Bank Co., Ltd. Shandong Road Sub-branch[5] (2021) Min Shen No. 6420, the court held: “Upon review, this court finds that although the reapplicant, the debtor in this case, is a subsidiary of the surety, it has independent legal personality and independently enjoys civil rights and assumes civil obligations. Furthermore, the reapplicant and the surety did not undergo a consolidated reorganization in this case. Therefore, the surety’s entry into bankruptcy reorganization does not necessarily mean that the reapplicant has also entered bankruptcy reorganization proceedings. Consequently, the effect of cessation of interest on the surety’s debt due to reorganization does not extend to the reapplicant. The second-instance court’s determination that the appellee, Dalian Rural Commercial Bank, has the right to continue seeking recovery for the claim not fully realized is legally sound.” The author specifically reminds: where the creditor does not receive full satisfaction in the aforementioned debt-for-equity swap bankruptcy proceedings, unless the creditor expressly waives the claim, its claim against the principal debtor still exists, and it has the right to continue seeking recovery. If the debtor argues that its outstanding debt balance owed to the creditor is discharged because the creditor filed a bankruptcy claim against the surety, the court will reject such claim due to lack of factual and legal basis.

III. Conclusion

Through an analysis of the provisions of the Enterprise Bankruptcy Law, the Civil Code Security System Interpretation, and other legal regulations, as well as a study of various judicial practice cases, this article argues that the creditor has the right to demand that the debtor continue to bear interest and penalty interest accrued until the date of satisfaction of the claim when the surety enters bankruptcy proceedings before the principal debtor and the latter has not become bankrupt. Especially at a time when the accessory nature of guaranteed debts is being continuously strengthened by the Civil Code, the Civil Code Security System Interpretation, and the Enterprise Bankruptcy Law, it is urgent to review the exercise of guaranteed claims and the limitation of their cessation-of-interest effect within bankruptcy proceedings. This will enhance the creditor’s motivation to participate in bankruptcy proceedings, alleviate conflicts among interested parties, and ultimately maximize the interests of all stakeholders.

Notes:

[1] Article 46 of the Enterprise Bankruptcy Law of the People’s Republic of China

Claims not yet matured are deemed matured upon acceptance of the bankruptcy petition.

The accrual of interest on an interest-bearing claim ceases from the date the bankruptcy petition is accepted.

[2] Article 22 of the “Interpretation of the Supreme People’s Court on the Application of the Security System of the Civil Code of the People’s Republic of China”

After a people’s court accepts a debtor’s bankruptcy case, if the creditor requests the guarantor to bear the guaranty liability, and the guarantor claims that the guaranty debt should cease accruing interest from the date the people’s court accepts the bankruptcy petition, the people’s court shall support the guarantor’s claim.

[3] See (2022) Hu 0115 Min Chu No. 24103, first-instance civil judgment of China Everbright Bank Co., Ltd. Shanghai Branch v. Peking University Founder Material Group (Shanghai) Co., Ltd. for a financial loan contract dispute.

[4] See (2021) Liao 02 Min Zhong No. 4873, second-instance civil judgment of Northeast Special Steel Group Dalian Precision Alloy Co., Ltd. v. Dalian Rural Commercial Bank Co., Ltd. Shandong Road Sub-branch for a financial loan contract dispute.

[5] See (2021) Liao 02 Min Zhong No. 4322, second-instance civil judgment of Northeast Special Steel Group Dalian Silver Bar Co., Ltd. v. Dalian Rural Commercial Bank Co., Ltd. Shandong Road Sub-branch for a financial loan contract dispute.