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The principle of the bankruptcy administrator’s disclosure of the debtor’s commercial secrets

Introduction

Where a company goes bankrupt, the controlling rights of the company’s original shareholders over the company are restricted due to the entry of new entities enjoying such rights – the decisions made by the administrator as well as the creditors’ meeting may have a far-reaching impact on the company. On the one hand, the creditors of the bankrupt company have the right to know in accordance with the law; on the other hand, the disclosure of the debtor’s operation information by the administrator, such as transaction information, financial information, the list of key clients, etc., may divulge commercial secrets, harming debtor’s interests and indirectly harming the interests of all creditors. How to balance the creditor’s information rights with the protection of the debtor’s commercial secrets? Based on the above, this article intends to discuss the principle of the bankruptcy administrator’s disclosure of the debtor’s commercial information, especially the operation information.

1. Scope of Commercial Secrets

According to Article 9 of the Law of the People’s Republic of China Against Unfair Competition, commercial secrets referred to in the Law hereof shall mean commercial information such as technical information and business information, which is not known to the public and has commercial value and for which the rights holder has adopted the corresponding confidentiality measures. In practice, the technical information of the enterprise, such as formulas and unexamined patents, uncontroversially constitutes a commercial secret, while whether some business information of enterprises such as the list of key customers, financial statements, accounting statements, transaction records, and other business transaction information constitutes commercial secrets is still in dispute.

By retrieving relevant cases of Shanghai Intellectual Property Court, the Supreme People’s Court, and other courts, and in accordance with relevant laws and regulations, we believe that specific business information may constitute commercial secrets as well if meeting the following requirements:

  • Value: economic value, competitive advantage
  • Confidentiality: in-depth information not known to the public
  • Security: reasonable confidentiality measures adopted

The disclosure by the administrator of such information during duty performance may cause potential competitors to use such information, harming the interests of the debtor.

2. The Administrator Shall Be Obliged To Keep The Bankrupt Enterprise’s Commercial Secrets Confidential In The Whole Process Of Performing Duties

Although the Business Bankruptcy Law of the People’s Republic of China does not directly stipulates the administrator’s obligation to keep the commercial secrets confidential, but not to divulge the debtor’s commercial secrets is included in the obligation of loyalty in Article 27 of the Business Bankruptcy Law. After the administrator takes over the bankrupt enterprise, he will inevitably come into contact with the important commercial secrets and technical secrets of the enterprise in the process of performing his duties in the administration of the debtor’s property and affairs. Commercial secrets are related to the important interests of enterprises, especially for enterprises in the process of restructuring, divulging their commercial secrets may directly lead to the failure of enterprise regeneration. Therefore, the administrator shall bear the corresponding legal liability when violates the confidentiality obligation and harms the interests of the debtor. The principle of protecting the debtors’ commercial secrets has been established in some local regulations.

3. The Balance Between Protecting Debtors’ Commercial Secrets And Creditors’ Rights To Know

According to the Business Bankruptcy Law and Provisions of Supreme People’s Court on Several Issues Relating to Application of the Business Bankruptcy Law of the People’s Republic of China (III) (hereinafter referred to as the “Judicial Interpretation of the Bankruptcy Law (III)”), the creditors of the bankrupt enterprises have the right to know. Article 10 of the Judicial Interpretation of the Bankruptcy Law (III) also specifies the relief and remedies for creditors when the administrator, without a proper reason, refuses to provide the debtor’s financial and business information necessary for the creditors to participate in the bankruptcy proceedings, so as to fully protect the exercise of creditors’ right to know.

On the one hand, the administrator has the obligation to keep the bankrupt enterprise’s commercial secrets confidential; on the other hand, the administrator is required to perform the obligation of disclosing information to creditors in the bankruptcy proceedings. How should the administrators balance these two obligations when there is an inherent conflict?

According to the interpretation of the relevant provisions in the Understanding and Application of Provisions of Supreme People’s Court on Several Issues Relating to Application of the Business Bankruptcy Law of the People’s Republic of China (III), creditors’ information rights are aimed at solving the problem of information asymmetries in bankruptcy proceedings, so as to ensure that creditors can obtain necessary information from parties to effectively exercise voting and supervisory rights. Therefore, the information that creditors apply for inspection should be relevant to the bankruptcy process and necessary for creditors to exercise their legal rights granted by the Business Bankruptcy Law, such as the right to vote and to supervise. With reference to the seventh typical case issued by Shanghai Bankruptcy Tribunal, we are of the opinion that when individual creditors take the initiative to request access to the debtor’s enterprise information, the administrator shall examine the subject qualifications of the creditors as well as the necessity and the legitimacy of the purpose of such access. After examination, the administrator shall only disclose information within the necessary scope and shall require the relevant creditors to assume the confidentiality obligation.

Imposing certain restrictions on the creditors’ information rights where the commercial secrets of the debtors are involved is in line with international practice. Provisions for such practice can be found in the Legislative Guide on Insolvency Law by the United Nations Commission on International Trade Law and Section 107 of the United States Bankruptcy Code.

4. How To Supervise The Administrator’s Disclosure Of The Bankrupt Enterprise’s Confidential Information

According to Article 23 of Business Bankruptcy Law, the people’s court, the creditors’ meeting, and the creditors’ committee have the right to supervise the administrator’s disclosure of the debtor’s confidential information, which is indisputable both in theory and in practice. However, the Business Bankruptcy Law does not specify whether the debtor or its original shareholders have the right to require the administrator not to disclose certain information. On the one hand, there is a natural conflict between the interests of the debtor’s original shareholders and those of creditors, the debtor’s original shareholders who are driven by the human instinct of profit-seeking may protect their own interests at the expense of other interested parties’. On the other hand, the debtor’s original shareholders are more sensitive to business information essential to the debtor based on their familiarity with business operations and strengths in business judgment. The protection of commercial secrets is the key to the success of an enterprise’s revival and subsequent development, especially in the context of bankruptcy reorganization.

We believe that although Chinese legislation is left blank on whether the administrator shall be supervised by the debtor’s original shareholders regarding disclosing commercial secrets at current stage, within the scope of commercial secrets protection, there is inherent rationality in granting certain supervisory rights to original shareholders of the debtor. Therefore, we suggest, in order to avoid irreparable losses caused by the information disclosure, we suggest that within the scope of commercial secrets, the administrator should attach great importance to the opinions of the debtor’s original shareholders, analyze possible adverse consequences caused by information disclosure, and refer to the court for decision when necessary.

Summary

When an enterprise goes bankrupt, the administrator often overlooks his obligation to protect the commercial secrets of the bankrupt enterprise while safeguarding creditors’ information rights under the law. When disclosing past transaction information of the debtor’s enterprise to creditors, the administrator should pay particular attention to whether the enterprise’s commercial secrets would be disclosed, weigh carefully, and seek instructions from the court if necessary. At the same time, we suggest that the legislation on the protection of commercial secrets of bankrupt enterprises, especially of those under bankruptcy reorganization, should be improved by granting certain supervisory rights within the scope of commercial secret protection to the original shareholders, such as the right to apply to the administrator to keep the information involving commercial secrets confidential, and the right to apply to the court to request the administrator to keep secrets when the administrator rejects such application, etc. so as to guide the administrator to balance commercial secret protection and creditors’ information rights in practice.