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Case on the Bankruptcy of Guangdong
International Trust & Investment Co., Ltd.
Applicant: Guangdong International Trust & Investment Co.,
Ltd.. domiciled in Huangshi East Road, Guangzhou
Municipality, Guangdong Province
Legal Representative: Mai Zhinan, general manager of the
Trust & Investment Co., Ltd.
On January 11, 1999, Guangdong International Trust &
Investment Co., Ltd. (hereinafter referred to as the Trust &
Investment Co., Ltd.) applied to the Higher People’s Court
of Guangdong Province for bankruptcy due to its severe
insolvency and incapacity to pay off its huge stake of
debts.
The Higher People’s Court of Guangdong Province held through
hearing that:
Guangdong International Trust & Investment Co., Ltd. is
originally named as Guandong Trust & Investment Co., Ltd.,
which was established upon registration in the
Administrative Bureau for Industry and Commerce of Guangzhou
Municipality and is a legal person enterprise as owned by
the whole people, was approved as a non-bank financial
institution by the People’s Bank in 1983 and thus enjoyed
the right to foreign exchange business. It was renamed as
Guandong International Trust & Investment Co., Ltd. upon
registration of alteration in the Administrative Bureau for
Industry and Commerce with a registered capital of 1.2
billion yuan. Since 1992, the Trust & Investment Co., Ltd.
conducted a lot of illegal operations such as allurement of
deposits by high interest rates, beyond-account operations,
unlawful borrowing and lending of funds and arbitrary
investment, thereby failing to pay off its huge debts as due
both at home and abroad, and was thus seriously insolvent.
On October 6, 1998, the People’s Bank of China decided to
close down the Trust & Investment Co., Ltd and organized a
bankruptcy liquidation group. During the period of
liquidation, the relevant financial business as well as the
related credits and debts of the Trust & Investment Co.,
Ltd. were subject to the trusteeship of the Bank of China,
the Securities Business Departments as subordinated to the
Trust & Investment Co., Ltd. were subject to the trusteeship
of Guangdong Securities Co., Ltd. and the business operation
thereof was carried on as usual. Through 3-month bankruptcy
liquidation from October 6, 1998 to January 6, 1999, the
total assets of the Trust & Investment Co., Ltd. were found
to be 21.471 billion yuan and its liabilities 36. 165
billion yuan, with an overall debt-asset ratio of 168. 23 %
and 14. 694 billion yuan of insolvency. On January 11, 1999,
the Bank of China promulgated an Announcement on Clearing
off the Credits of the Natural Persons of the Former
International Investment Co., Ltd.. As to the fact that the
Trust & Investment Co., Ltd. suffered from such severe
insolvency that it was incapable of paying off its huge
debts, the natural persons were only repaid the principals
and without any interest. After the Bank of China cleared
off the natural persons’ debts owed by the Trust &
Investment Co., Ltd., Guangdong Branch of the Bank of China
declared the creditor’s rights on behalf of the Fiscal
Department of Guangdong Province and accepted the repayment
according to the sequential order of bankruptcy liquidation
as a general creditor.
The Higher People’s Court of Guangdong Province held that,
item (1), Article 3 of the Law of the People’s Court on
Enterprise Bankruptcy (for Trial Implementation)
(hereinafter referred to as the Enterprise Bankruptcy Law)
prescribes that: “Enterprises which, owing to poor
operations and management that result in serious losses, are
unable to repay their due debts shall be declared bankrupt
in accordance with the provisions of this Law.” Article 8
prescribes that “The debtor, upon the agreement of its
superior departments in charge, may apply for the
declaration of bankruptcy.” The Trust & Investment Co., Ltd
had such extreme chaos in management, suffered from serious
insolvency and was incapable of repaying all its huge debts
as due both at home and abroad, thereby meeting the relevant
requirements for bankruptcy. Therefore, the Court
adjudicated on January 16, 1999 that:
1. The Trust & Investment Co., Ltd. shall be subject to
bankruptcy for repayment of debts.
2. A liquidation group shall be designated to take over the
bankruptcy of the Trust & Investment Co., Ltd.
After the ruling was announced, the bankruptcy liquidation
of the Trust & Investment Co., Ltd. was carried out
according to law by the following steps:
I. Declaration, Examination and Confirmation of the
Creditors’ Rights
On January 16, 1999, the Higher People’s Court of Guangdong
Province publicized an announcement on the Acceptance of
Application of the Trust & Investment Co., Ltd. for
Bankruptcy on the People’s Daily and the People’s Court
Daily, respectively, requesting the creditors to declare
their creditors’ rights within 3 months as of the day of
announcement. Where anyone fails to make declaration, it
shall be deemed as a waiver. The other civil procedures of
the Trust & Investment Co., Ltd. shall be suspended
according to law. A petitioner for enforcement may, upon the
strength of an effective legal document, declare its
creditors’ right. Any other procedure for civil litigation
against the Trust & Investment Co., Ltd. shall be suspended
or closed according to law. Within the term of announcement,
a total of 320 creditors declared their creditors’ rights,
amounting to a total of 38. 77738 billion yuan of creditors’
rights (including the 32. 01297 billion yuan as declared by
167 overseas creditors).
On April 22, 1999, the Higher People’s Court of Guangdong
Province held the first creditors’ assembly for the
bankruptcy of the Trust & Investment Co., Ltd., which was
attended by the representatives of 244 creditors at home and
abroad, 76% of the total creditors that had declared their
creditors’ rights. The Court announced the functions and
power of the creditors’ assembly and according to the amount
of creditors’ rights as respectively declared by each of the
relevant creditors, designated 9 creditors including Swiss
Bank Corp., Dai-Ichi Kangyo Bank, Ltd., Citibank, and the
Bank of China to form a President’s Commission of Creditors.
The bankruptcy liquidation group reported the declaration of
the creditors’ rights to the representatives at the
creditors’ meeting. The principles for the disposal of
insolvent assets of the Trust & Investment Co., Ltd. as set
forth by the bankruptcy liquidation group was adopted.
The bankruptcy liquidation group made registration of and
conducted examination on the creditors’ rights as declared
by the creditors and notified the results of examination to
all the parties concerned that had declared their creditors’
rights by either confirmation or rejection. Where a creditor
had no different opinion on its creditors’ rights as
confirmed by the liquidation group, the liquidation group
should submit it to the creditors’ assembly for adoption
through voting. Where a creditor had any different opinion
on the result of confirmation as reached by the liquidation
group, it should be filed with the Higher People’s Court of
Guangdong Province for ruling.
In light of the application of the creditors who had
different opinions on their creditors’ rights, the Higher
People’s Court of Guangdong Province publicly heard 62
demurrals regarding the declaration of the creditors’ rights
as involved in the bankruptcy of the Trust & Investment Co.,
Ltd. and made the following rulings as well:
1. The secured creditors’ rights as declared according to
the Console Letters shall all be denied. In the action on
confirmation of the creditors’ rights, 15 creditors against
Hong Kong subsidiaries of the Trust & Investment Co., Ltd.
required the confirmation of their secured (probable)
creditors’ rights of 2.3 billion yuan upon the strength of
the Console Letter as produced by the Trust & Investment
Co., Ltd. The Higher People’s Court of Guangdong Province
held through hearing that, as to the format of the Console
Letter, it is only an introductory letter as produced by the
Trust & Investment Co., Ltd. to a unspecified third party
rather than any agreement as concluded between the Trust &
Investment Co., Ltd. and specified creditors; as to the
contents thereof, there isn’t any expression of intent for
guaranty or any stipulation that if the debtor fails to make
repayment, any other party shall make repayment on its
behalf or assume the liabilities for clearing off the debts.
Therefore, a Console Letter could not constitute any
guaranty regarding the legal sense, had no legal force of
securing the guaranty and thus the declaration of creditors’
rights on the basis of the Console Letter shall all be
rejected.
2. The depositors of trust deposits may declare their
creditors’ rights over bankruptcy yet have no right to
withdraw their trust deposits. In an action on the
confirmation of the creditor’s rights, 17 creditors declared
their creditors' rights based on their trust deposits, up to
3. 8 billion yuan, to the liquidation group of the Trust &
Investment Co., Ltd.. Some domestic creditors deemed that
the trust deposits are trust assets featured by their
independency. Thus, the trustee, the Trust & Investment Co.,
Ltd. only has the right to the management of the trust
properties rather than the right to ownership, which shall
belong to the relevant trustors who have claimed for their
right to withdrawal. The Higher People’s Court of Guangdong
Province held through hearing that, the Trust & Investment
Co., Ltd. produced trust deposit notes to depositors,
stipulating that the depositors deposit their funds into the
Trust & Investment Co., Ltd. and may, upon expiration,
collect the relevant principles and interests, which are the
features of a deposit contract. Thus the relationship
between the depositors and the Trust & Investment Co., Ltd.
are the relationship of credits and debts rather than any
trust relationship. After the Trust & Investment Co., Ltd.
is declared bankrupt, the remnant deposits shall be regarded
as bankruptcy claims, for which the relevant depositors may
enjoy no right to withdrawal.
3. The bankruptcy claims as declared by the relevant
creditors according to the swap contracts shall be
confirmed. The relevant creditors, whose bankruptcy claims
as declared according to their swap transactions with the
Trust & Investment Co., Ltd. were rejected by the
liquidation group, filed a demurral with the court. The
Higher People’s Court of Guangdong Province held through
hearing that the swap transactions of interest rate is a
financial means widely adopted all around the world for the
purpose of lowering the costs of funding and preventing
risks incurred from interest rate fluctuations. The
confirmation of the bankruptcy claims as filed according to
the swap contracts shall focus on finding out whether the
interest rate swap transactions need a deal-by-deal
verification by the State Administration of Foreign Exchange
and making judgment on the risk-hedging or speculation
regarding the interest rate swap transactions. The Trust &
Investment Co., Ltd., upon the strength of the License for
Foreign Exchange Business as issued by the State
Administration of Foreign Exchange, covered a business scope
of self-operation as well as sale and purchase of foreign
exchange on behalf of its clients. Therefore, the Trust &
Investment Co., Ltd. is a qualified subject and may engage
in the transactions of risk-hedging financial derivatives
without being subject to any deal-by-deal approval by the
State Administration of Foreign Exchange. Where both parties
conduct the interest rate swap transactions through the
corresponding fundamental tools rather than merely based on
a forecast of the price fluctuation trend of the derivative
financial tools, it is a transaction of risk-hedging
derivative tools. Therefore, the interest rate swap
transactions as conducted between them shall be confirmed as
effective. As long as a creditor is able to certify the
losses as incurred from the advance termination of an
agreement on swap transactions as a result of the bankruptcy
of the Trust & Investment Co., Ltd. according to the price
quotation employed in the calculation of losses according to
the relevant agreement that both parties have concluded, the
bankruptcy claims of the creditors shall be confirmed.
4. The total amount of credits and debts between the
Commercial Bank as well as the sub-branches and branches
thereof and the Trust & Investment Co., Ltd. shall be
mutually offset in equal amounts before the bankruptcy
liquidation is conducted. According to Article 33 of the
Enterprise Bankruptcy Law, which prescribes that “Creditors
that owe debts to an bankrupt enterprise may offset them
before any bankruptcy liquidation is conducted.” and
according to Article 22 of the Law of the People’s Republic
of China on Commercial Banks, which prescribes that “The
branches and sub-branches of a commercial bank have no
qualification of a legal person, and shall carry out
business according to law within the scope of authorization
by the parent bank, which shall bear the civil legal
liabilities of its branches and sub-branches.” The total
amount of credits and debts between the Commercial Bank as
well as the sub-branches and branches thereof and the Trust
& Investment Co., Ltd. may be mutually offset in equal
amounts before bankruptcy liquidation is carried out. After
the relevant branches and sub-branches respectively declare
their creditors' rights, the Commercial Bank shall uniformly
exercise its right to offset. The bankruptcy liquidation
group of the Trust & Investment Co., Ltd. has conducted the
offsetting of credits and debts for such commercial banks as
the Industry and Commerce Bank of China as well as the
Construction Bank of China.
The Higher People’s Court of Guangdong Province finally
confirmed that the creditors of the Trust & Investment Co.,
Ltd. amounted to 200 in total, with 20. 22317 billion yuan
of the creditors’ rights in total.
II. Examination, Confirmation and Disposal of the Insolvent
Assets
The bankruptcy liquidation group of the Trust & Investment
Co., Ltd. confirmed, upon liquidation and confirmation, that
the total book value of the Trust & Investment Co., Ltd.
came up to 20. 93748 billion yuan when bankruptcy was
announced. Where any party concerned has any different
opinion on the confirmation of the relevant insolvent
assets, it shall be filed with the Higher People’s Court for
ruling according to law.
According to the application of the parties concerned, the
Higher People’s Court of Guangdong Province adjudicated that
the following applications for demurrals shall be accepted
according to law:
1. The registration of 100% equity of Guangdong
International Plaza Industry Co., Ltd. under the Trust Real
Estate Development Co., Ltd. (hereinafter referred to as the
Real Estate Co., Ltd.) and Guangxin Industry Co., Ltd.
(settlement) (hereinafter referred to as Guangxin) are the
insolvent assets. Guangdong International Plaza Industry
Co., Ltd. is a contractual enterprise (Hong Kong investment)
and is nominally owned by the Real Estate Co., Ltd. and
Guangxin. The bankruptcy liquidation group believed that the
Trust & Investment Co., Ltd. is in fact a company invested
by Guangdong International Plaza Industry Co., Ltd. and
therefore the equity thereof shall belong to the Trust &
Investment Co., Ltd.. So, the Real Estate Co., Ltd. and
Guangxin are required to deliver 50% of their equity
respectively. The Higher People’s Court of Guangdong
Province held through hearing that, although it is recorded
in the registration for industry and commerce that the
Chinese party in Guangdong International Plaza Industry Co.,
Ltd. is the Real Estate Co., Ltd. and the foreign party
thereof is Guangxin and that the Trust & Investment Co.,
Ltd. is only the administrative department thereof. However,
the Real Estate Co., Ltd. failed to perform its obligations
of making capital contributions and the contributions made
by Guangxi came from the Trust & Investment Co., Ltd.. In
order to enable the International Plaza Industry Co., Ltd.
to enjoy the policy preference for a Sino-foreign
contractual enterprise, the Trust & Investment Co., Ltd.
decided to establish Guangdong International Plaza Industry
Co., Ltd. to take charge of Guangdong International Plaza
and designated its wholly-funded subsidiary, the Real Estate
Co., Ltd., as well as Guangxin, which was established upon
registration in Hong Kong, to be the Chinese and foreign
shareholders of Guangdong International Plaza Industry Co.,
Ltd. respectively. As neither the Real Estate Co., Ltd. nor
Guangdong International Plaza Industry Co., Ltd. fulfilled
their basic obligations of capital contributions, neither is
a legitimate shareholder. The Trust & Investment Co., Ltd.,
as the actual capital contributor of Guangdong International
Plaza Industry Co., Ltd., shall have the ownership of the
company. Therefore, it is ruled that 100% equity of
Guangdong International Plaza Industry Co., Ltd. is owned by
the Trust & Investment Co., Ltd..
2. It is confirmed that the equities as invested by the
Trust & Investment Co., Ltd. in its wholly-funded
subsidiaries are insolvent assets. There are 29
wholly-funded subsidiaries under the Trust & Investment Co.,
Ltd. and the liquidation group has, based on the different
circumstances, defined the scope of recovering the
investment equity from the Trust & Investment Co., Ltd.. As
to any profit-making wholly-funded subsidiary under sound
management, the method of integrated transfer shall be
adopted so as to benefit from invested equities. As to any
wholly-funded subsidiary with insolvency and negative
investment equity, it shall be subject to settlement and
liquidation or application for bankruptcy according to the
relevant provisions of law. As to any equity or proceeds as
generated in the process of making external investment by
the Trust & Investment Co., Ltd., it shall be conducted
mainly through sale or transfer of equity whereas in case
the equity is negative, the relevant recovery shall be
stopped.
3. It is confirmed that the ownership of the guaranty money
of shareholders of the Securities Business Department as
subordinated to the Trust & Investment Co., Ltd belong to
the shareholders. The 4 Securities Business Departments as
subordinated to the Trust & Investment Co., Ltd. are its
branches and sub-branches. The said departments have, for a
long term, mixed the guaranty money of shareholders with
their self-owned capital, conducted rule-breaking operations
and misappropriated a large sum of guaranty money of
shareholders, thereby incurring a shortage of the position
of the guaranty money of shareholders. By January 16, 1999,
the capital gap thereof amounted to 7, 052, 000, 000 yuan.
The bankruptcy liquidation group believed that, after the
guaranty money of shareholders was illegally
misappropriated, the shareholders were only able to declare
their creditors’ rights to the liquidation group without any
right to re-collection. The Higher People’s Court of
Guangdong Province held through hearing that the guaranty
money of shareholders is the fund of settlement in the
agent-based purchase and sale of stocks conducted by the
Securities Business Departments of the Trust & Investment
Co., Ltd.. The Securities Business Departments only took
care of the guaranty money of shareholders as an agent and
the shareholders’ act of paying and depositing the guaranty
money is to grant their entrustment, which could not alter
the nature of ownership or the right to employment of the
guaranty money. The Securities Business Departments failed
to establish any separate account of guaranty money of
shareholders and thus were at fault. It therefore could not
be held that the ownership of the guaranty money has been
altered. The Securities Business Departments are branches or
sub-branches of the Trust & Investment Co., Ltd.. Upon the
bankruptcy of the Trust & Investment Co., Ltd., the relevant
shareholders may, according to law, take back their guaranty
money through the bankruptcy liquidation group. It is
therefore ruled that the shareholders may collect the
balance of their guaranty money in stock trading.
As to the assets of the Trust & Investment Co., Ltd. that
have been confirmed according to law, the Higher People’s
Court of Guangdong Province shall recover or cash them in
light of the different circumstances:
According to the creditor’s rights of the Trust & Investment
Co., Ltd. within Guangdong Province, the Higher People’s
Court of Guangdong Province ruled, according to the
Provisions of the Supreme People’s Court on Several Issues
concerning the Uniform Administration and Implementation by
the Higher People’s Court, that the 58 people’s courts where
the creditors of the Trust & Investment Co., Ltd. are
located shall implement it respectively, thereby recovering
a total of 1. 51 billion yuan.
As to the assets of the Trust & Investment Co., Ltd. within
other provinces, municipalities and autonomous regions, the
bankruptcy liquidation group shall conduct recovery
according to law, thereby recovering a total of 0. 53823
billion yuan.
As to the overseas assets of the Trust & Investment Co.,
Ltd. in the United States and the assets in the Hong Kong
Special Administrative Region, they shall be recalled by the
bankruptcy liquidation group according to the local laws,
thereby recovering a total of 0. 22984 billion yuan of
investment and loan.
As to the guaranty as provided by 69 governmental organs
within Guangdong Province for the creditors of the Trust &
Investment Co., Ltd. which was confirmed as invalid and thus
the liabilities of compensation shall be assumed, the Higher
People’s Court of Guangdong Province entrusted the
Department of Auditing of Guangdong Province to conduct
auditing of the extra-budgetary funds of these government
organs in an item-by-item manner and, according to the
result of auditing, made coercive enforcement of the
extra-budgetary funds. As to any government organ without
any extra-budgetary fund, the Court handled the formalities
for suspension, recovering 7, 625, 000, 000 yuan in total.
The insolvent assets of the Trust & Investment Co., Ltd.
shall all be cashed by the means of auction or bidding. In
particular, 100 % equity of Guangdong Commodity Exhibition
Center as held by the Trust & Investment Co., Ltd. was
successively auctioned at a price of 0. 389 billion yuan.
Through bidding, the 4 Securities Business Departments as
subordinated to the Trust & Investment Co., Ltd. were
transferred to Guangfa Securities Co., Ltd.; 75% equity of
Jiangwan New City as held by the Trust & Investment Co.,
Ltd. was successfully auctioned at a price of 0. 35 billion
yuan. 100 % equity as well as the creditors’ rights of
Guangdong International Plaza Industry Co., Ltd. as held by
the Trust & Investment Co., Ltd. was successfully auctioned
at a price of 0. 13 billion yuan.
III. Distributions of Insolvent Assets as well as the
Procedures for Bankruptcy
Where the insolvent assets of the Trust & Investment Co.,
Ltd. are recovered and cashed, the expenses for bankruptcy
liquidation shall be appropriated in priority according to
law (including the expenses for special services as provided
by intermediary agencies, expenses for appraisal as well as
other expenses for liquidation). On October 31, 2000, June
28, 2002 and February 28, 2003 a creditors’ meeting was held
respectively, at which after clearing off the defaulted
payment of wages, expenses for labor insurance as well as
defaulted taxes of the Trust & Investment Co., Ltd., the
bankruptcy claims were, for three times respectively,
cleared off according to the relevant proportions. Upon the
ruling of the Higher People’s Court of Guangdong Province,
the distribution of insolvent assets was conducted for three
times, with a total amount of 2. 534 billion yuan and at a
repayment rate of 12. 52%. The creditors’ rights of overseas
creditors were, upon the approval of the department of
foreign exchange, paid, without exception, in foreign
currencies.
After the relevant judicial procedures for bankruptcy of the
Trust & Investment Co., Ltd. was concluded, the bankruptcy
liquidation group applied for concluding the procedures for
bankruptcy according to law. The Higher People’s Court of
Guangdong held through hearing that: as to the case on the
application of the Trust & Investment Co., Ltd. for
bankruptcy, the work of confirming the creditors’ rights has
been concluded and the scope of insolvent assets has been
defined, the relevant legal measures have been adopted for
the recourse of external creditors’ rights so that the main
insolvent assets of the Trust & Investment Co., Ltd. have
been cashed through auction and have been distributed to the
relevant creditors. Therefore the case on bankruptcy of the
Trust & Investment Co., Ltd. meets the statutory
requirements for concluding bankruptcy procedures. As,
however, there may be such left-over matters as insolvent
assets yet to be recovered and additional distribution of
recovered assets requiring further settlement, the
bankruptcy liquidation group shall be sustained so as to
conclude the recovery of insolvent assets as well as the
distribution of the recovered assets. Therefore, the
bankruptcy liquidation group shall, at the same time when
its application for concluding the bankruptcy procedures is
approved, be sustained for handling the relevant left-over
matters. Accordingly, on March 8, 2003, the Higher People’s
Court of Guangdong Province adjudicated according to Article
38 of the Enterprise Bankruptcy Law as well as Article 97 of
the Provisions of the Supreme People’s Court on Several
Issues regarding the Hearing of the Cases on Enterprise
Bankruptcy that:
1. The procedures for bankruptcy of the Trust & Investment
Co., Ltd shall be concluded;
2. The bankruptcy liquidation group shall, upon the strength
of the present Ruling, handle the formalities for
registration of write-off of the Trust & Investment Co., Ltd
in the Administrative Bureau for Industry and Commerce. and
3. The bankruptcy liquidation group shall be sustained to
conclude such left-over matters as the recourse of insolvent
assets and additional distribution of the Trust & Investment
Co., Ltd..
The case acceptance fees shall be collected at a discount of
50% and shall be paid in priority from the insolvent assets. |
