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BCI & BIMC Ascertainment Cases ▍Whether a bankruptcy trustee of a U.S. company is entitled to appoint or remove a member of the board or representative of the company

Come from:BCI&BIMC    Date:2019.04.10 Hits:53 

I. Facts

On March 31, 1999, Bullet Environmental Systems, Inc. was incorporated in accordance with the Delaware Corporation Law of the United States and changed its name several times. On December 13, 2005, it altered its name to China Natural Gas Inc.(Plaintiff in this case). On December 20, 2005, Ji Qin'an signed the Articles of Association of Shanxi Xilan Natural Gas Equipment Co. Ltd., which states that, the aforesaid articles were hereby formulated in accordance with the "PRC Law on the Application of Laws to Foreign-Related Civil Relationships" and other concerning laws, decrees and regulations. China Natural Gas Inc. requested for establishing Shanxi Xilan Natural Gas Equipment Co., Ltd (defendant in this case) in Shanxi Province, as its wholly owned subsidiary, and therefore the investor of the latter is China National Natural Gas Corporation (Ji Qin'an as legal representative of the defendant). On April 11, 2014, the legal representative of the defendant was changed from Ji Qin'an to Fan Xin.

In June 2013, China Natural Gas Inc. submitted a report to the U.S. Securities and Exchange Commission (SEC), revealing that Ji Qin'an has resigned as chairman of the plaintiff and no longer served as member of the plaintiff's board of directors. His resignation was required under the settlement agreement resulting from the litigation between him and the U.S. Securities and Exchange Commission. On July 3, 2014, the Bankruptcy Court for the Southern District of New York, the United States, made the The Arrangement for the Appointment of the Interim Trustee and the Amount of Bonds for the Trustee in the case of In re China Natural Gas, Inc. (Debtor), Case No. 13-10419 (SHL). It is stated in the Arrangement that Alan Nisselson, Esq. of New York City, New York, was appointed as interim trustee of the property of China Natural Gas Inc. in accordance with the relevant provisions of United States Code, Title 11.

On September 8, 2015, China National Gas Inc., sued Shanxi Xilan Natural Gas Equipment Co., Ltd. Together with others claims, China National Gas Inc. requested the court to determine that, the board resolution of China National Gas Inc, and the Notice of Appointment and Resignation of the Legal Representatives and Directors, made on May 5, 2015, are not valid (The board resolution and the Notice were made in the form of the Written Consent of the Sole Director of China National Gas Inc. by Alan, as he was the sole member of board of directors). In 2018, the appellant Shanxi Xilan Natural Gas Equipment Co., Ltd. declined to accept the Civil Decision [2015] Xi Zhong Min Si Chu Zi No. 00480, which was made by Xi'an Intermediate People's Court in respect of the dispute between Shanxi Xilan Natural Gas Equipment Co., Ltd.,and China Natural Gas, Inc, and therefore Shanxi Xilan Natural Gas Equipment Co., appealed the decision.


II. Reason for Law Ascertainment

On account of the difficulties in the determination of the applicable law in this trial, the plaintiff entrusted BCI & BIMC to conduct American law ascertainment on the issues listed below:

ISSUE One:

Whether a bankruptcy trustee of a company, which was incorporated under the laws of the State of Delaware, is entitled to appoint himself as the sole director of the concerned company under US law;

ISSUE Two:

Whether a bankruptcy trustee of a company incorporated under the laws of the State of Delaware is entitled to appoint or remove a director or authorized representatives of the concerned company's wholly-owned subsidiary.


III. Outcome of Ascertainment

On 16 September, 2017, legal ascertainment expert(s) of BCI & BIMC produced "legal ascertainment opinion on issues relating to corporate governance after a company established under the laws of the State of Delaware enters into bankruptcy liquidation proceedings."

On Issue One:

After the debtor concerned entered the federal bankruptcy liquidation procedure, the self-appointment of the trustee concerned as the sole director of the debtor is consistent with the relevant provisions of the Delaware General Corporation Law, and did not violate the U.S. statutory laws or Case law in bankruptcy.

It is also mentioned in the report that the "Bankruptcy Sale order" issued by the bankruptcy judge explicitly authorized the trustee concerned to re-appoint the debtor's directors and elect himself to be the debtor's sole director in the order No. 13, and further authorized the trustee concerned in the order No. 14 to take necessary actions to put the aforementioned into legal effects;

Under the premise that the "Bankruptcy Sale order" has entered into force in accordance with the law and has not been overturned, modified or abolished through effective legal procedures, this report states that after the debtor concerned entered into the federal bankruptcy liquidation procedure, self-appointment of the trustee concerned as the sole director of the debtor concerned is legally valid.

On Issue Two:

On May 5, 2015 the trustee concerned made the Written Consent of the Sole Director of China National Gas Inc. (signed by Alan as the sole member of board of directors) to exercise the shareholders' rights (which belongs to the debtor concerned), which constitutes the use of the debtor's property by the bankruptcy trustee outside the ordinary course of business of the debtor and such use does not violate the provisions in the U.S. bankruptcy law. However, the trustee concerned is obliged to comply with the relevant procedural requirements in the U.S. bankruptcy law and notify the relevant parties of his intention. Nevertheless, in fact the validity of the above-mentioned actions by the trustee concerned does not necessarily require the prior court hearing or the authorization from the court;

It is also mentioned in the report that the "Bankruptcy Sale order" issued by the bankruptcy judge has determined that, the trustee concerned has given proper notice of his use of the bankruptcy property and his requests for relief, which were subject to the court hearing, while no objection was put forward in respect of his requests. Besides, the order No. 13 of the "Bankruptcy Sale order" has explicitly authorized the trustee concerned to exercise the rights of the debtor's shareholders and elect the directors and legal representative of its wholly-owned subsidiary in China. The order No. 14 further empowered the trustee concerned to take necessary actions to put the aforementioned into legal effects;

On the premise that the "Bankruptcy Sale order" has entered into legal force and has not been overturned, modified or abolished through effective legal procedures, this report considers that the bankruptcy trustee concerned has fulfilled the relevant procedural requirements on the use of bankruptcy property prescribed in the U.S. bankruptcy law. The validity of such actions has also been explicitly confirmed by the competent court.

Hence, the behavior of the trustee exercising shareholder rights (which originally belongs to the debtor concerned) by issuing the Written Consent of the Sole Director of China National Gas Inc., is legal and valid. In the process of the trial, the plaintiff clarified that the written consent signed by Alan on May 5, 2015 as the sole member of the Board of China National Gas Inc, is the plaintiff's board resolution. Based on the fact that the plaintiff was the sole shareholder of the defendant, and was empowered to appoint defendant's directors as well as legal representative by virtue of the defendant's articles of association, this resolution constitutes the defendant's resolution of the shareholders' meeting; the plaintiff is currently undergoing the bankruptcy liquidation process, without suspension or termination.

Apart from that, the appellant stated in the appeal that "the court of first instance did not carry out the foreign law ascertainment ex officio. Instead, the appellee unilaterally entrusted the relevant institution to conduct the foreign law ascertainment. The scope of the ascertainment was thus limited to legal issues in the appellee' favor, which is inconsistent with legal procedures. With respect to this issue, the court of second instance made the following decision in its judgment:

As for appellant's claim that the court of first instance's application of U.S. law as the applicable law to determine whether the appellee has the standing in the lawsuit was a wrong application of law, on one hand, when confirming the standing of the appellee in the suit, the court of the first instance applied the relevant provisions of the Civil Procedure Law of the People's Republic of China in its judgment. On the other hand, based on the fact that the appellee has entered into insolvency proceedings, whether Alan, as the trustee of the appellee's insolvency property, had the right to handle the use of the property on behalf of the appellee, is related to issues such as the civil capacity and civil competence of foreign juridical persons (legal persons). Pursuant to Article 14 of the "PRC Law on the Application of Laws to Foreign-Related Civil Relationships" (the "Law"), issues such as the civil capacity, civil competence, organizational structure and shareholder rights, etc. of a juridical person and its branches are governed by the law of the place of registration. Since the appellee is a legal person registered and incorporated in the United States, it is correct for the court of first instance to apply U.S. law to determine these issues.


Read the original: 藍海查明案例 ▍美國公司的破產受托人,是否有權任免公司董事或授權代表?

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