Editor's note: Insolvency expenses and co-beneficial debts arise in the course of insolvency proceedings and are different from insolvency claims arising before the commencement of insolvency proceedings. In practice, tax authorities and insolvency administrators have different views on whether the new tax and its late payment belong to insolvency expenses and co-beneficial debts, and disputes arise frequently. This article takes a judicial case as a guide, combines the relevant provisions and spirit, analyzes the qualification of the claim of new tax and late payment after the bankruptcy acceptance, and aims to provide ideas for the resolution of this kind of dispute for readers' reference.

01 Guiyang County Taxation Bureau v. A Mining Enterprise Bankruptcy Claim Confirmation Dispute

(i) Basic facts of the case

On December 19, 2018, the People's Court of Guiyang County, Hunan Province ruled to accept the application for bankruptcy and liquidation of a mining enterprise.On October 18, 2019, the Tax Bureau of Guiyang County declared the following claims to the administrator: as of the bankruptcy acceptance date of December 19, 2018, the land use tax owed was RMB 800,000, and the late payment fee was RMB 87,000 as of October 18, 2019; since December 20, 2018 to September 30, 2019, the outstanding land use tax is RMB 1.17 million (levied on an annual basis and paid in quarterly installments), property tax is RMB 100,000 (levied on a rent basis and taxed at 12% of the rental income), value-added tax is RMB 30,000 (taxed at the rate of 3% of the levy rate for construction and installation), and urban construction tax is RMB 0.1 million, totaling RMB 1.30 million, and the late payment fee is RMB 76,000 as of October 18, 2019.

On October 30, 2019, the administrator issued a Notice of Review Status of Bankruptcy Claims to Guiyang County Tax Bureau, confirming that the unpaid land use tax of RMB800,000 was a valid bankruptcy tax claim, and that the tax amount of RMB1,300,000 incurred since December 20, 2018 and the two late fees were not recognized as valid bankruptcy tax claims. The Guiyang County Tax Bureau disagreed and filed a lawsuit with the Guiyang County People's Court, requesting the court to recognize that the $1.3 million in newborn taxes and the two late fees constituted a co-beneficial debt.

The Guiyang County Court ruled in favor of the Guiyang County Taxation Bureau's claim that 1.3 million yuan of newborn taxes constituted a co-beneficial debt, and rejected the Guiyang County Taxation Bureau's claim that late payment fees constituted a co-beneficial debt. The Guiyang County Taxation Bureau appealed against the judgment to the Intermediate People's Court of Chenzhou City, Hunan Province. The Court of Second Instance rejected the appeal of the Guiyang County Taxation Bureau and upheld the original judgment.

(ii) Views of the parties

The dispute in this case centered on whether the taxes and their late payments on the business's newborn after the court accepted the bankruptcy were debt in common.

The Guiyang County Taxation Bureau held that the new taxes and their late fees incurred after the bankruptcy acceptance were valid claims, which were co-beneficial debts and should be discharged at any time.

A mining enterprise argued that the nascent tax payments after the bankruptcy acceptance did not fall within the scope of co-beneficial debts stipulated in Article 42 of the Enterprise Bankruptcy Law, and that the late payment fees arising from the unpaid tax payments could not be recognized as co-beneficial debts.

The court held that the new taxes of 1.3 million yuan in this case were incurred by the insolvent enterprise on the basis of its legal tax obligations, essentially for the purpose of maintaining the continued operation of the insolvent enterprise and for the benefit of all creditors, and could be recognized as a co-beneficial debt. The two new late payment fees were based on the bankrupt enterprise's failure to pay its taxes on time, and were in the nature of both penalties and interest, which were not necessary for the bankruptcy proceedings and were not necessarily incurred for the benefit of all creditors, and thus did not constitute bankruptcy expenses or co-beneficial debts.

02 Fresh tax may be recognized as an insolvency expense or co-beneficial debt readily discharged

The existing laws have not made clear provisions on the nature of claims for new taxes after the acceptance of an enterprise's bankruptcy, and in practice, some local normative documents classify new taxes as bankruptcy expenses and co-beneficial debts. For example, the Opinions of Sichuan Higher People's Court and Sichuan Taxation Bureau of State Administration of Taxation on the Handling of Tax-Related Issues in Enterprise Bankruptcy Procedures stipulates that "after the people's court has ruled to accept the application for bankruptcy, and with the permission of the people's court or the resolution of the creditors' meeting, the taxes (fees) that should be paid by the enterprise due to the continuation of the business of the enterprise, or due to the use, auction, or realization of bankruptcy property, shall be paid by the enterprise. The administrator shall declare and pay the taxes (fees) in the name of the enterprise in accordance with the provisions. The relevant taxes (fees) shall be liquidated by the bankruptcy estate at any time in accordance with the co-beneficial debts or bankruptcy expenses in accordance with the law, and the competent tax authorities need not declare the claims separately, and the administrator shall declare and pay them directly." Article 9 of the Operational Guidelines of Qiqihar Municipal Intermediate People's Court of the State Administration of Taxation of Qiqihar Municipal Taxation Bureau on the Handling of Tax-Related Issues in Enterprise Bankruptcy provides that "in the process of bankruptcy cases, relevant taxes and fees arising from the disposal of the debtor's property can be categorized into the bankruptcy expenses under Article 41(2) of the Enterprise Bankruptcy Law; and relevant taxes and fees arising from the continuation of operations related taxes and fees may be categorized in the co-beneficial debts under Article 42(4) of the Enterprise Bankruptcy Law."

The current Enterprise Bankruptcy Law makes separate provisions for bankruptcy costs and co-beneficial debts, with Article 41 dividing bankruptcy costs into three categories: first, litigation costs in bankruptcy cases; second, costs of administering, realizing and distributing the debtor's property; and, third, the administrator's costs of carrying out his or her duties, remuneration and the costs of hiring staff. Article 42 divides co-beneficial debts into six categories: first, debts arising from the administrator's or the debtor's request for the other party to perform a contract that has not been fulfilled by either party; second, debts arising from the debtor's property being subjected to causeless administration; third, debts arising from the debtor's unjustified profits; fourth, labor remuneration and social insurance costs payable for the continuation of the debtor's business and other debts arising therefrom; and fifth, debts arising from the administrator or related persons performing their duties. (v) Debts arising from damage caused by the administrator or related personnel in the performance of their duties; and (vi) Debts arising from damage caused to the debtor's property.

According to the interpretation of the Legal Affairs Committee of the Standing Committee of the National People's Congress, insolvency costs refer to procedural costs incurred in insolvency proceedings for the common benefit of all creditors that are necessary to ensure the smooth conduct of the insolvency proceedings. In general, bankruptcy proceedings are more efficient as a generalized and fair liquidation procedure than individual liquidation, but the bankruptcy proceedings themselves are costly, and such costs are reflected in the form of bankruptcy costs. Co-beneficial debts are non-procedural debts that are incurred after the commencement of insolvency proceedings for the common benefit of all creditors. The phrase "other debts arising therefrom" in article 42, subparagraph 4, encompasses a wide range of obligations, including utility payments for the continuation of the debtor's business, debts arising from new contracts with others and so on.

Article 43, paragraph 4, of the Enterprise Insolvency Law also provides that if the debtor's property is insufficient to cover the insolvency expenses, the administrator shall submit a request to the court to terminate the insolvency proceedings. It can be seen that the bankruptcy expenses are inevitable for the maintenance of the bankruptcy proceedings, and if the enterprise cannot even pay the bankruptcy expenses, the bankruptcy proceedings cannot continue. In this case, the newborn tax of 1.3 million yuan after the bankruptcy acceptance of a mining enterprise is not a necessary condition to maintain the bankruptcy procedure, which is inevitable regardless of whether the mining enterprise enters into the bankruptcy procedure or not, and therefore does not belong to the bankruptcy expense. According to the spirit of the provisions of the Enterprise Bankruptcy Law on co-beneficial debts, the 1.3 million yuan of taxes owed to a mining enterprise after its bankruptcy was accepted for payment of the tax period should be subject to the application of Article 42, paragraph 4, and belonged to other debts arising from the continuation of the debtor's business, which could be regarded as co-beneficial debts to be paid by the debtor at any time.

Although in practice there is a dispute as to the nature of the post-bankruptcy fresh tax, it enjoys a "super-priority", whether as an insolvency expense or a co-beneficial debt, and is readily discharged by the insolvency estate. This point has basically reached a consensus in practice. Then, how should the late payment fees arising from the new taxes be recognized?

03 Late payment of new taxes should not be recognized as an insolvency expense and co-beneficial debt

As to whether the late payment of newborn tax belongs to bankruptcy expenses and co-beneficial debts, neither the enterprise bankruptcy law nor the relevant system of the tax law has been clearly stipulated, which has led to disputes in practice and varied from place to place. The Notice of Shanwei Intermediate People's Court of Shanwei Municipal Taxation Bureau of State Administration of Taxation on the Issuance of "Several Opinions on Further Solving Tax-Related Issues in Bankruptcy Procedures (for Trial Implementation)" stipulates that, "In bankruptcy procedures, the newly generated relevant taxes (fees) and late payments due to the continuation of contracts, production and operation, or disposal of property of the insolvent enterprise and the fines generated by the tax violations are all part of the bankruptcy expenses and co-benefit debts of the Enterprise Bankruptcy Law and the tax law. The fines arising from the tax violations belong to the "expenses for management, realization and distribution of the debtor's property" stipulated in Article 41 of the Enterprise Bankruptcy Law, and the document treats the new taxes and fines as bankruptcy expenses. And the aforementioned documents of Sichuan Province, Heilongjiang Province, Qiqihar City, the document only the new tax as bankruptcy costs and co-beneficial debt treatment. In the author's opinion, the late payment of new tax after the bankruptcy acceptance does not belong to the bankruptcy expenses and co-beneficial debts.

According to the basic principle that "the tax owed by enterprises, late payment fees and interest arising from special tax adjustments shall be declared by the tax authorities in accordance with the relevant provisions of the Enterprise Bankruptcy Law" as clarified by the State Administration of Taxation (SAT) in Item (3) of Article 4 of Announcement No. 48 of 2019, the newborn tax late payment fees shall be handled in accordance with the relevant provisions of the Enterprise Bankruptcy Law. Handling. In the absence of clear provisions in the Enterprise Bankruptcy Law, the new tax late payment shall be dealt with in accordance with the spirit of the relevant judicial interpretation of the Supreme Court and the spirit of the legislation of the Bankruptcy Law.

According to Article 113 of the Enterprise Bankruptcy Law, the bankruptcy estate shall, after giving priority to the payment of bankruptcy expenses and common debts, pay off the bankruptcy claims in the order of "employees' claims - tax claims - ordinary claims". It can be seen that after the declaration of bankruptcy, the order of liquidation is to give priority to the bankruptcy expenses and common interest debts, and even to the labor, social security and taxes that have been incurred before the bankruptcy application is accepted. Under the current legal framework, the tax claim itself already enjoys the second place protection in the bankruptcy claim, in the case of other creditors' interest has ceased to accrue since the acceptance of the bankruptcy application, if the newborn tax late payment is recognized as the bankruptcy claim and co-beneficial expense, it will be given priority over the other claims, which will inevitably reduce the amount of all the creditors' compensation, harm the interests of all the creditors, and is not conducive to the realization of the principle of fair liquidation of the bankruptcy procedure. The realization of the principle of equitable liquidation.

And according to the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Enterprise Bankruptcy Law (III), "after the acceptance of the bankruptcy application, the people's court shall not confirm the late payment arising from the debtor's non-payment, including the late interest and the late payment of labor insurance premiums that should be doubled for the debtor's failure to comply with the effective legal instrument, which is declared by the creditor as a bankruptcy claim. " The late payment after the acceptance of the bankruptcy application is not even recognized as a bankruptcy claim, then, to cite the lightness of the case, of course, the late payment of newborn tax can not be recognized as a co-beneficial debt, otherwise it is not in line with the Enterprise Bankruptcy Law on the arrangement of the liquidation of the inherent logic of the arrangement of the subrogation.

As for the case in question, the late payment of new taxes after the bankruptcy of a mining enterprise was generated by the failure of the mining enterprise to pay taxes on time, which was both in the nature of penalties and interest, and was not a necessity for the bankruptcy proceedings, nor was it necessarily incurred for the benefit of all the creditors, so it could not be recognized as an insolvency expense and a co-beneficial debt.

04 Conclusion

The newborn tax payable that occurs after the bankruptcy is admitted is for the benefit of all creditors, through the preservation of the value of the bankruptcy estate and the appreciation of the value of the debtor's enterprise's continuous operation ability, which is fundamentally different from the nature of the tax claims that arose prior to the bankruptcy proceedings, and its combination with the interests of all creditors is more close. Therefore, it is reasonable to prioritize the tax payable by newborns in the bankruptcy procedure as bankruptcy expenses and co-beneficial debts. However, this approach should be optimized in practice. With regard to the legislative precedent of separating insolvency expenses and co-beneficial debts in China's insolvency legislation, it is necessary to differentiate between taxes newly generated in insolvency proceedings as a result of the administration, realization and distribution of the insolvency estate and taxes newly generated in enterprise insolvency proceedings as a result of the continued performance of a contract or the continuation of an enterprise's business.

With regard to the late payment of new taxes, the legislative purpose of the Enterprise Bankruptcy Law is to protect the fair compensation of creditors, upholding the principle that the State does not compete with the people for profits, and applying the legal interpretation method of "lightness of being" to make clear the importance of the law, which should not be recognized as insolvency expenses or co-beneficial debts. This treatment can not only urge the tax authorities to exercise their right to be compensated for the newborn tax in a timely manner, but also better protect and balance the legitimate rights and interests of the majority of ordinary creditors.