9 Since Hongyan Mechanical Engineering Co Ltd (Hongyan Co) could not settle the huge amount of debts due, its
creditors applied for bankruptcy in the competent people’s court. The court accepted the application of the creditors
and declared the bankruptcy of Hongyan Co. The court designated a bankruptcy administrator to be in charge of the
bankruptcy liquidation. During the process of bankruptcy liquidation, the bankruptcy administrator formulated a list
of bankruptcy assets, debts due and declared credits.
(a) the appraised bankruptcy assets of Hongyan Co were as follows:
(i) Office building – appraised value of RMB 2,400,000 yuan, mortgaged for a loan borrowed from the
Communication Bank.
(ii) Investment to a mutual fund – RMB 1,400,000 yuan.
(iii) A rental receivable from Company A – RMB 1,900,000 yuan.
(iv) Giving up a creditor’s right due 10 months before the bankruptcy of Hongyan Co – RMB 1,000,000 yuan.
(b) the declared credits by Hongyan Co’s creditors were as follows:
(i) Communication Bank’s loan – principal RMB 2,000,000 yuan with 10% of annual interest rate for two
years.
(ii) Company A’s credit due – RMB 7,000,000 yuan.
(iii) Company B’s credit under a sales contract payable by Hongyan Co – RMB 1,500,000 yuan.
(iv) Company C’s damages due to the termination of contract by the bankruptcy administrator –
RMB 1,400,000 yuan.
Required:
Answer the following questions in accordance with the relevant provisions of the Enterprise Bankruptcy Law of
China and give your reasons for your answer:
(a) state which creditor should be satisfied in the priority order in the allocation of the bankruptcy assets;
(2 marks)
(b) state the particular debt of Hongyan Co that could be off-set from its bankruptcy assets; (2 marks)
(c) state the particular transaction of Hongyan Co that could be revoked by the bankruptcy administrator in the
process of liquidation; and (3 marks)
(d) state the credits that should be deemed as the common credits of bankruptcy. (3 marks)
(10 marks)

9 This question requires candidates to deal with the legal issues in relation to the bankruptcy liquidation under the relevant provisions
of the Enterprise Bankruptcy Law of China.
(a) In accordance with Article 109 of the Enterprise Bankruptcy Law, an owner of the right to guaranty on the particular assets
of the bankrupt enterprise may enjoy the priority right to be repaid by means of the particular assets.
In this case the office building, with the appraised value of RMB 2,400,000 yuan, had been mortgaged for a loan from
Communication Bank. According to the above-mentioned provision of law Communication Bank, as a mortgagee of the office
building, should enjoy the priority right to be repaid from the value of the office building. Since the principal RMB 2,000,000
yuan plus the interest of RMB 400,000 yuan were equivalent to the amount of the appraised value of the office building, the
credit of Communication Bank could be satisfied by the appraised value of the office building.
(b) In accordance with Article 40 of the Enterprise Bankruptcy Law, where a creditor is indebted with its debtor before an
application for bankruptcy is accepted, it may claim to offset such debts with the bankruptcy administrator, provided that the
situation falls within the exceptions set forth in this law.
In this case Hongyan Co owed a debt of RMB 7,000,000 yuan to Company A, while it also had a receivable of
RMB 1,900,000 yuan under the rental contract. Therefore, the amount of RMB 1,900,000 yuan could be off-set from the
debt of RMB 7,000,000 yuan.
(c) In accordance with Article 31 of the Enterprise Bankruptcy Law, within one year before the court accepts a bankruptcy
application, a bankruptcy administrator has the right to plead the court to revoke the act in which the bankrupt enterprise
gave up the creditor’s right.
In this case Hongyan Co had given up a credit in the amount of RMB 1,000,000 yuan before the court accepted the
bankruptcy application, which had taken place within the period of one year before the court accepted the bankruptcy
application. Therefore, the bankruptcy administrator might plead the court to revoke such act and recover this amount.
(d) In accordance with Articles 109 and 40 of the Enterprise Bankruptcy Law as mentioned in Question (a) and (b) respectively,
the common credits of bankruptcy shall be the remaining part of credits after the necessary deduction from the secured credits
and settled by means of offset during the process of liquidation.
Based on the facts and the law, the following credits should be deemed as the common credits of bankruptcy:
(i) Company A’s credit due: RMB 5,100,000 yuan (7,000,000 – 1,900,000)
(ii) Company B’s credit under a sales contract payable by Hongyan Co: RMB 1,500,000 yuan.
(iii) Company C’s damages due to the termination of contract by the bankruptcy administrator: RMB 1,400,000 yuan.

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