Guantao Xiamen’s work selected as reference case by Fujian High Court
On September 29, 2024, Fujian High People's Court released the eighth batch of reference cases. This batch includes seven cases. Guantao Xiamen’s representation in a bank Xiamen branch v. Xiamen A trading company for dispute over exemption right was selected as one of them. This representation was led by You Qilong and Zheng Yingying, who are both members of the insolvency & reorganization team of Guantao Xiamen, Mr. Li Yansheng, director of the Executive Committee of Guantao Xiamen, participated in the discussion with the team. Xiamen Branch of a bank requested the court to confirm that it enjoyed the priority of compensation for the output tax of RMB3,642,875.42 in the proceeds of disposal of 9167.63 tons of pig iron that was pledged to Xiamen Branch of the bank by Xiamen A trading company. Guantao Xiamen acted as the administrator and represented the defendant Xiamen A trading company. For this case, Xiamen Intermediate People's Court made the judgment that all claims of the plaintiff were dismissed. Xiamen Branch of the bank appealed to Fujian High Court, which eventually rejected the appeal and upheld the original judgment.
The key points of judgment established in this case are as follows: first, in the insolvency proceedings, the tax on realization of collateral is not incurred for the common interests of all creditors, and thus is not insolvency expenses, and shall not be compensated according to the same repayment sequence of common debts, but rather it shall be paid from the proceeds of auction. Second, disputes over exemption right are disputes arising from claims of priority against specific property of the debtor after the commencement of insolvency proceedings. The key difference from disputes over confirmation of insolvency claims is that the dispute is directed against the specific property of the debtor or the claims themselves. We hereby share the above case with peers and the public for the purpose of practical reference.
Reference Case No.32 of Fujian High People's Court
Xiamen Branch of a Bank v. Xiamen A Trading Company (Dispute over Exemption Right)
Adopted upon discussion by the Judicial Committee of Fujian High People's Court and released on September 29, 2024
Basic Facts
The court found out upon trial that Xiamen Branch of a bank has acceptance bill advances of RMB 74768961.52 and corresponding interests to Xiamen A trading company, and has the right to apply for auction or sell the collateral provided by Xiamen A trading company, i.e. the pig iron involved in this case, and has priority to be compensated from the proceeds.
On February 9, 2021, Xiamen Intermediate People's Court accepted the application for insolvency and liquidation of Xiamen A trading company. The Xiamen Branch of a bank declares its creditor's rights to the administrator. The administrator has reviewed and approved that the claims filed by a bank's Xiamen Branch are secured claims with a total value of RMB172929376.26, of which principal of the claims is RMB77339169.52, fruits RMB95005206.74 and other expenses RMB172929376.26.
The administrator of Xiamen A trading company held an auction of the pig iron involved in this case on the Ali insolvency property disposal platform on August 9, 2021. Both the bidding announcement and bidding notes indicate that the starting price is RMB3,384 (tax included)/ton, and that the administrator will provide the buyer with VAT special invoices equivalent to the value subject to the final settlement amount after completing tax declaration and other relevant matters. The final total price of the pig iron involved in this case was RMB 31664994.02 (tax inclusive), of which RMB 3,454 was paid by the buyer by means of refund of deposit on the Auction Platform. The administrator issued to the buyer the special VAT invoice with the total amount of price and tax of RMB 31661540.02, of which the total amount of price is RMB 28019061.47 and the total tax amount is RMB 3642478.55.
On March 28, 2022, the Report on the Realization of Retained Tax Payments of the Company issued by the administrator of Xiamen A trading company to all the creditors stated that the trading company should bear the VAT of RMB 3642875.42 for the auction of pig iron, and the turnover excluding VAT was RMB 28022118.6. As the Xiamen A trading company is entitled to excess VAT credit by the Xiamen Tong'an District Tax Bureau, the VAT of RMB 3642875.42 incurred in this transaction may be deducted against the VAT amount of RMB 3642875.42, and is not required to be actually paid. As for the VAT of RMB 3642875.42, which should be borne by the Xiamen A trading company in this transaction but is not required to be paid due to the use of excess VAT credit, the administrator believes that the property belongs to the trading company and should be distributed by all the creditors in accordance with the insolvency property distribution plan passed by the creditors' meeting and the relevant provisions of the PRC insolvency law, and that there are no creditors entitled to priority compensation for the property. Any creditor who objects to this shall raise its objection to the administrator within a specified time limit. On April 8, 2022, the Xiamen branch of a bank issued a Letter of Objection, arguing that the Xiamen branch of the bank should have priority claim for the deducted input VAT and should be compensated in priority based on the value of RMB 31664994.02 of the pig iron. The adminstrator replied maintaining the original conclusion, informing the Xiamen branch of the bank that it may file a lawsuit with the court within a specified time limit if it still has any objection to the the reply. The Xiamen branch of a bank then filed a suit, requesting that it should be confirmed that the Xiamen branch of a bank is entitled to priority compensation for the output tax of RMB 3642875.42 in the proceeds from the disposal of 9167.63 tons of pig iron that was pledged to the Xiamen branch of a bank by the Xiamen A trading company.
Results of Judgment
On December 9, 2022, Xiamen Intermediate People's Court made the Civil Judgment [2022] Min 02 Min Chu No. 1301 to dismiss the claim of the Xiamen branch of a bank. After the judgment was released, the Xiamen branch of a bank lodged an appeal. On November 27, 2023, the High People's Court of Fujian Province made the Civil Judgment [2023] Min Min Zhong No. 515 to dismiss the appeal and uphold the original judgment.
Reasons for the Judgment
In the effective judgment, the court held: (I) Issues concerning the determination of the nature of the legal relationship in this case. In this case, the parties had no objection to the nature and amount of the creditor's rights of the Xiamen branch of a bank confirmed by the administrator that the creditor's rights declared by the Xiamen branch of a bank were secured claims. The Xiamen branch of a bank filed a lawsuit for this case, claiming that it should have priority compensation for part of the tax-inclusive price obtained from the auction of the collateral involved in this case which is deducted from the overpaid tax and does not need to be actually paid for tax. The nature of the claim was that the right holder claimed pledge priority on the specific property in the insolvency proceedings of Xiamen A trading company, according to Article 109 of the PRC Enterprise Insolvency Law, which states that "the right holder who has the security right against the specific property of the insolvency has the priority of compensation from the specific property". Therefore, this case was an exemption right dispute. (II) Whether the Xiamen branch of a bank has priority compensation for the output tax of RMB3642875.42 in the disposal price of pig iron in this case. First, the Xiamen branch of a bank claimed that, according to Article 41 and Article 43 of the PRC Enterprise Inselvency Law, the taxes and fees involved in this case were insolvency expenses and should not be paid with the proceeds from auction of the collateral in priority to the pledged creditor's rights. Although the statutory taxpayer of value-added tax is the debtor, and the taxes and fees are paid from the debtor's property, the final taxes and fees are paid from the debtor's property in the insolvency proceedings when the debtor's property is insufficient to pay off all creditors. If the taxes arising from the realization of the collateral need to be paid separately from the debtor's property other than the collateral, the costs for realizing the priority of security to be borne by other general creditors are actually caused, which goes against the principles of equality of rights and obligations and fair repayment. The realization of the collateral involved in this case is for the benefit of the pledgee, rather than the common benefits of all creditors, so the value-added tax arising from such realization shall not fall under insolvency expenses. Such claim of the Xiamen branch of a bank was not established. Secondly, the Xiamen branch of a bank claimed that according to the valid judgment, it should be entitled to priority compensation with respect to the proceeds from auction of the pledged pig iron in this case as the pledgee, and the "proceeds" should be a tax-inclusive price, so the scope of priority compensation for the tax amount of RMB3642875.42 in the proceeds. However, according to Article 6 of the Provisional Regulations on Value Added Tax, "The sales amount shall be the total price and additional fees and charges collected by the taxpayer for the taxable sales activities, but shall not include the output tax collected." The transaction price of the pig iron in this case was a tax-inclusive price, and the part of tax amount did not belong to the value of the pig iron in this case or its interests. The scope of proceeds for which the Xiamen branch of the bank enjoys priority should be the proceeds from auction after deduction of the disposal tax, and it is not entitled to priority for the disputed output tax of RMB3642875.42.
