Guiding Case No. 214: Case of Bankruptcy Liquidation to Bankruptcy Reorganization for Shanghai [Redacted] Port Industrial Co., Ltd.

[Keywords]

Civil; Application for Bankruptcy Liquidation; Application for Bankruptcy Reorganization; Pollution Control; Common Benefits Debt

[Key Points of Judgment] 

1. When adjudicating bankruptcy reorganization cases involving enterprises operating port along the river basins, the People's Court shall regard environmental pollution control as an important consideration in realizing the reorganization value, and shall promptly eliminate the state of environmental pollution that affects the validity of the wharf operating licenses and qualifications.

2. Where a port operating enterprise causes environmental pollution due to the deficiencies in construction and maintenance of relevant infrastructure, and the delay in remediation will impair the value of its bankruptcy reorganization, the administrator shall undertake remediations in accordance with the law. Where the administrator requests thatthe relevant environmental-remediation costs treated as common benefits debts to be paid at any time with the debtor's asset, the People's Court shall support such request in accordance with the law.

[Legal Provisions]

1. Article 73 of the Yangtze River Protection Law of the People's Republic of China

2. Article 42 and 43 of the Enterprise Bankruptcy Law of the People's Republic of China

[Basic Facts]

Shanghai [Redacted] Port Industrial Co., Ltd. (hereinafter referred to as "Shanghai [Redacted] Port Company"), established in September 1993, is mainly engaged in wharf leasing with warehousing and stevedoring services. The company is located adjacent to the Yangtze River Estuary, adjoining Waigaoqiao Port Area and Free Trade Zone to the east, and fronting the Huangpu River on the west. In November 2019, upon application of a creditor, the Shanghai No.3 Intermediate People's Court ruled to accept the case of bankruptcy liquidation of Shanghai [Redacted] Port Company. Uponinvestigation,  the administrator found that the wharf lessee were operating in a disorderly manner, outdated and deteriorating facilities and equipment, creating significant environmental pollution risks. During the proceedings, the environmental protection department and the traffic management department jointly issued a notice of rectification, requiring the rectification of sewage and dust treatment facilities within the prescribed period, failing which the operating licenses or qualifications under the name of Shanghai [Redacted] Port Company would be revoked. 

Shanghai [Redacted] Port Company held intangible assets such as Shoreline Use Permit and Port Operation Permit, and controlled a 150-meter shoreline with a water depth of 2 (inclusive) to 5 (exclusive) meters at the front control line of the wharf, enabling an annual cargo handling capacity of approximately 2 million tons. In order to preserve the operating value of Shanghai [Redacted] Port Company and protect the interests of all creditors, the court ruled to convert the proceedings into bankruptcy reorganization in accordance with the application.

Under the guidance of the court, on one hand, the administrator communicated and coordinated urgently with the environmental protection department and the traffic management department to understand the specific rectification requirements for environmental protection; and on the other hand, the administrator promptly entrusted a third party to carry out the construction rectification. The project expanded and upgraded such installations as the sewage sedimentation tank, drainage ditches and ground surfaces, so as to ensure that surface rainwater and spraying water were collected into the sedimentation tank for treatment,, and be recycled for spraying in the port, thus greatly improving the reuse rate of the port sewage and effectively preventing direct discharge of sewage into the river. In addition, walls were erected, stockpiles of sand and gravel were better covered, and water spraying devices were added effectively controlling dust emissions from the wharf and preventing excessive atmospheric pollutants in surrounding areas.

Since the asset under administration could not cover the relevant construction and appraisal costs,, the administrator coordinated with a third party to advance CNY587,068. Upon the arrival of reorganization funds, these costs were to be paid off as common benefits debts in accordance with Article 2 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), and part of the costs was coordinated to be offset by rent deduction for the leasee to carry out rectification and bear costs at any time.

Meanwhile, in accordance with Paragraph 1 of Article 15 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), the environmental problems related to the wharf operation were fully disclosed in the form of a special resolution at the creditors' meeting. The resolution included detailed explanations of rectification costs and their proposed settlement methods, which subsequently secured the creditors' approval by vote, to effectively solve the problem of insufficient rectification funding for environmental protection, improve the efficiency of environmental improvement, and ensure the green operation of the wharf. During the investor recruitment process, particular attention was paid not only to the investor's financial strength and business background, but also to their willingness and ability in the green operation of the wharf. After two rounds of market-oriented public recruitment, investors were introduced to invest over CNY87,000,000, with particular emphasis on including subsequent environmental operation plans for the wharf in the draft reorganization plan. Following the reorganization, the enterprise will improve the operating capacity of the wharf in three dimensions: upgrade of facilities and equipment, standardized and intelligent wharf management, and environmentally friendly green operations, therby providing better supporting services for the Waigaoqiao Free Trade Zone and the port area. At the creditors' meeting, the contributories failed to reach a decision by vote after performing all the means of service and public announcement, while the secured creditors, the tax authorities and the unsecured creditors all approved the draft reorganization plan by voting. The administrator accordingly applied to the court to approve the draft reorganization plan for Shanghai [Redacted] Port Company.

[Judgment]

On August 10, 2022, the Shanghai No.3 Intermediate People's Court issued a Civil Ruling (2019) Hu 03 Po No.320-6, which held: 1. The revised Reorganization Plan (Draft) for Shanghai [Redacted] Port Industrial Co., Ltd. Was approved 2. The reorganization procedures of Shanghai [Redacted] Port Company were terminated. In the implementation of the reorganization plan, with the assistance of the court and the administrator, the company successfully solved the problems of expiration of the Business License and the Port Operation Permit.

[Judgment's Reasoning]

The effective ruling of the court held that, in reviewing and approving a draft reorganization plan, it must respect the autonomy of the will of the creditors' meeting and adhere to the principle of legality review, while also assessing whether the plan can maximize social value based on a balance of interests. In the case, the repayment rate for the unsecured creditors had improved from zero repayment under the simulated liquidation. As Shanghai [Redacted] Port Company had been seriously insolvent, the court deemed it fair and reasonable to adjust the equity of the contributories to zero in the reorganization plan, and the proposed operating plan was feasible, which effectively preserved the company's operational value and facilitated the restoration of the company's operating capacity. The application of the bankruptcy administrator conformed to legal provisions, and was conducive to the realization of sustainable development of the enterprise and ecological environmental protection, so it shall be approved. The People's Court shall give full play to the function of bankruptcy proceedings, integrate the concept of green development into the whole judicial process of reorganization, and explore and establish a flexible and efficient working mechanism on such aspects as restoration and remediation of the environment, cost arrangement, and formulation and implementation of the reorganization plan, so as to make reorganization become an effective path to the green and low-carbon transformation for enterprises in difficulties. Specifically:

1. On the liability for environmental pollution control of the reorganized enterprise and cost classification. According to the relevant laws and regulations, including the Environmental Protection Law of the People's Republic of China and the Port Law of the People's Republic of China, as well as the principle of "whoever pollutes, remedies," the responsibility of an enterprise for environmental pollution control shall continue even after it was accepted to be in bankruptcy proceedings. If the reorganized port operating enterprise causes environmental pollution due to inadequate construction and maintenance of the relevant infrastructure, the enterprise itself shall conduct rectification as the responsible entity for environmental remediation. As the executor of bankruptcy affairs, the administrator shall be responsible for carrying out specific rectification measures. These measures enable the debtor to retain the business qualifications, to maintain the going-concern value, and to enhance the payment interests of all creditors. And the expenses arising from rectification are incurred for the benefit of all creditors. Where the administrator applies to have the costs treated as common benefits debts in accordance with Article 2 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), the people's court shall support such claims.

2. On the path of environmental pollution control during the reorganization. In the case, the wharf pollution was mainly concentrated in water and air pollution. Under court guidance, the administrator coordinated to promote environmental pollution control and reorganization procedures in accordance with the law as follows. (1) Enhanced coordination. The court and the administrator visited the local sub-district office and the competent department of environmental protection administration to fully understand the environmental protection responsibility requirements of the shoreline of the wharf involved and the subsequent planning prospects. After communication and coordination, the relevant departments extended the rectification period, making time for environmental pollution control. Through the expansion and improvement of the sewage grit basin and ancillary facilities, the problem of untreated rainwater and site sewage leaking into environmental water was solved, and the sewage reuse rate was enhanced. By installing dust and noise reduction equipment, atmospheric dust pollution was reduced to ensure that air quality meets the standard, and the ecological environment quality of the Yangtze River Estuary basin was improved. (2) Early remediation. When the notification of rectification was issued, the administrator failed to take over the rent receivable and other funds. In order to complete environmental pollution control measures in a short period of time and retain the business qualifications of the enterprise, the administrator communicated with the wharf lessees to entrust a third-party professional institution to implement the standards-based rectification. (3) Funding allocation. The main costs were paid by the lessees in advance, and paid off as common benefits debts after the reorganization funds were in place to solve the problem of financing shortfall. (4) Information disclosure. The creditors' rights to information, participation, and supervision were fully respected. In accordance with Paragraph 1 of Article 15 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), the affair of environmental pollution rectification was treated as a major property disposal to be voted specially, and the environmental pollution control process and expenses bearing were disclosed in the draft reorganization plan, to seek creditors' support for reorganization.

3. On the relationship between environmental pollution control and preservation of reorganization value. In the case, environmental pollution control was closely related to the reorganization value of the enterprise, and was a decisive factor in whether the enterprise could realize its reorganization value. If an enterprise violates the laws and regulations on environmental pollution prevention and control, it will face the sanctions of revocation of administrative licenses or qualifications, and its reorganization value will be severely damaged. Thus, in bankruptcy reorganization cases of port and terminal enterprises, pollution control and reorganization value preservation must be organically integrated, promptly eliminating pollution that affects licensing, and treating pollution control as a key factor in realizing reorganization value.

4. On the formulation, approval and implementation of the reorganization plan. The formulation of the reorganization plan shall embody the principle of green development, guiding investors to incorporate environmental operation schemes and protection commitments. Attention should be given to whether the enterprise can fulfill environmental responsibilities in the future, promoting coordinated development of the economy, society, and environment. When reviewing and approving a draft reorganization plan, legal factors such as the liquidation value of the enterprise and procedural legitimacy , and social factors such as the sustainable development of the enterprise and ecological protection of the environment shall be considered comprehensively. During the implementation of a reorganization plan, obstacles to continuous operation of enterprises shall be removed in a coordinated manner. By exploring a new mechanism for the coordinated promotion of bankruptcy proceedings and judicial protection of the ecological environment, source control of pollution and carbon emissions in the Yangtze River basin will be achieved, while steering the enterprise toward a green and low-carbon transformation, and the organic unity of ecological protection, enterprise revival, and maximization of creditors' benefits will be promoted.