Preface

Article 40 of the Enterprise Bankruptcy Law of the People's Republic of China stipulates the system of bankruptcy set-off rights, and 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 (II) also makes further provisions on the exercise, validity, and prohibited reasons of bankruptcy set-off rights. When the administrator encounters a situation in which a creditor requests the administrator to exercise the right of set-off in the process of performing his duties in accordance with the law, he needs to conduct necessary review of the creditor's request and make corresponding treatment. So, in practice, how does the administrator review and decide on the creditor's request to exercise the right of set-off?

 

I. Definition of Bankruptcy Set-off Right

Bankruptcy set-off right refers to the right of a bankruptcy creditor who owes a debt to the bankrupt before the declaration of bankruptcy, regardless of the type and due date of the debt, to offset the debt owed by him with the bankruptcy claim before the distribution of bankruptcy property.

 

II. Review Content by the Administrator

(1) Whether the subject of exercise is a creditor

 

Article 41 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 (II) stipulates that: "A creditor who exercises the right of set-off in accordance with the provisions of Article 40 of the Enterprise Bankruptcy Law shall submit a claim of set-off to the administrator. The administrator shall not actively set off the mutual debts between the debtor and the creditor, unless the set-off benefits the debtor's property."

It can be seen from the above provisions that the subjects of exercising the right of bankruptcy set-off are two categories: creditors and administrators when the set-off benefits the debtor's property. This article discusses the situation where the creditor exercises the right of bankruptcy set-off, so the administrator needs to review whether the subject of exercise is a creditor.

 

(2) Whether the time of exercise is before the announcement of the final distribution plan of bankruptcy property

 

Considering the efficiency and cost of bankruptcy cases, the bankruptcy creditor's set-off request should be filed before the announcement of the final distribution plan of bankruptcy property.

 

(3) Conditions and methods of exercise

 

1. The bankruptcy creditor must declare the claim to be set off to the administrator

 Since the premise of exercising the right of set-off requires both parties to owe each other debts, the creditor must declare the claim to be set off to the administrator, and the claim shall be subject to the administrator's review and the debtor's and creditors' meeting verification procedures, and confirmed by the court's ruling.

 

 2. The bankruptcy creditor must submit a written request to the administrator to claim set-off and submit corresponding supporting materials

 When a bankruptcy creditor claims to exercise the right of set-off to the administrator, he shall submit a written notice and corresponding supporting materials to the administrator to prove that the corresponding materials submitted by the bankruptcy creditor shall include but not be limited to the following:

(1) The creditor owes a debt to the bankrupt debtor before the bankruptcy application is accepted;

(2) There is no reason to prohibit set-off (see item (4) below for the circumstances where set-off is prohibited).

 

(4) There is no circumstance prohibiting the exercise of rights

 

1. Article 40 of the Enterprise Bankruptcy Law of the People's Republic of China stipulates three circumstances under which set-off may not be exercised:

(1) The debtor's debtor's claim against the debtor obtained after the acceptance of the bankruptcy application shall not be used for set-off;

(2) If the creditor knows that the debtor has been unable to pay off the debts due or the fact of bankruptcy application, and bears the debt to the debtor, the set-off shall not be allowed. However, this does not apply if the creditor bears the debt due to legal provisions or reasons that occurred one year before the bankruptcy application.

(3) If the debtor's debtor knows that the debtor has been unable to pay off the debts due or the fact of bankruptcy application, the claim obtained against the debtor shall not be set off. However, this does not apply if the debtor's debtor obtains the claim due to legal provisions or reasons that occurred one year before the bankruptcy application.

 

2. Circumstances where set-off is prohibited under Articles 44 and 46 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 (II)

(1) Article 44 stipulates that: "Within six months before the acceptance of the bankruptcy application, if the debtor has the circumstances stipulated in the first paragraph of Article 2 of the Enterprise Bankruptcy Law, and the debtor pays off individual creditors by means of set-off, and the set-off claims and debts fall under one of the circumstances stipulated in Items (2) and (3) of Article 40 of the Enterprise Bankruptcy Law, the administrator shall file a lawsuit with the people's court within three months from the date of acceptance of the bankruptcy application, claiming that the set-off is invalid, and the people's court shall support it."

(2) Article 46 stipulates that: "If the debtor's shareholder claims to set off the following debts with the debts owed to him by the debtor, and the debtor's administrator raises an objection, the people's court shall support it: (1) the debt owed by the debtor's shareholder due to the failure to pay the debtor's capital contribution or the withdrawal of capital;"

 

(2) The debt owed by the debtor's shareholder due to abuse of shareholder rights or related party relationships to damage the company's interests."

 

III. Handling of Bankruptcy Set-off Rights by the Administrator

Article 42 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 (II) stipulates the handling method after the administrator receives the notice from the creditor claiming debt set-off:

1. If there is no objection after review, the set-off shall take effect from the date the administrator receives the notice;

2. If the administrator has an objection to the set-off claim, he shall file a lawsuit with the people's court within the agreed objection period or within three months from the date of receiving the notice claiming debt set-off. If the lawsuit is filed overdue without justified reasons, the people's court shall not support it. If the people's court rules to reject the administrator's claim for invalidation of the set-off, the set-off shall take effect from the date the administrator receives the notice claiming debt set-off.

 

IV. Handling of Differences after Set-off

The set-off between the creditor and the debtor shall be based on the principle of equal set-off. If the debt to be set off exceeds the bankruptcy claim after the equal set-off between the two parties, the administrator shall claim repayment from the creditor in accordance with the law; for the part of the bankruptcy claim that exceeds the debt to be set off after the set-off, it shall be included in the creditor's bankruptcy claim.