Insolvency 2025

CHINA Trends and Developments Contributed by: Wenle Du, Yao Zhang, Lei Zhu and Yadan Pang, Han Kun Law Offices

4. Refining the rules of setting aside or annulling trans - actions and the priority of claims First, the Revision Draft details circumstances for setting aside or annulling a transaction or a transfer. Based on the original five types of revocable transac - tions, the Revision Draft classifies revocable transac - tions by nature and incorporates new types, includ - ing waiving security associated with external claims, extending the maturity of due claims, disposing of property rights for free, and assuming the role of a guarantor or co-debtor. The look-back period cov - ering transactions between the debtor and its affili - ates is extended to two years prior to the onset of the bankruptcy process, and fraudulent preference with affiliate parties is extended to one year. According to the Revision Draft, the bankruptcy administrator will prevail in litigation within one year from the date it knew or should have known the cause for revocation (Articles 42 to 47). Second, the Revision Draft introduces a provision granting the creditors’ meeting the right to decide on significant property disposal of the debtor (Article 84). Third, the priority of claims has been restructured. The revised order is: • claims for personal injury compensation; • liabilities associated with goods or services essen - tial for consumers’ sustenance; • employee salaries and social insurance; • tax; and • general unsecured claims. Furthermore, the Revision Draft introduces a frame - work for subordinated debts, including loans provided by family members to the individual debtor, interest accruing post-bankruptcy acceptance, subordinated bonds, punitive damages, and claims from unfair transactions with affiliated parties (Article 162). 5. Introducing an out-of-court restructuring system This framework facilitates out-of-court restructuring aimed at achieving reorganisation. In terms of linking out-of-court restructuring with formal reorganisation procedures, the following apply.

• The debtor may apply to the court for the inclu - sion of the terms of the out-of-court restructuring agreement into the reorganisation plan. If the reor - ganisation plan is consistent with the restructuring agreement, the consent given by creditors and the debtor’s shareholders to the agreement is deemed as their consent to the corresponding sections of the reorganisation plan. • The debtor may also apply for approval of a pre - liminary reorganisation plan concurrent with its application for reorganisation. For this, the debtor would need to disclose necessary information, the content of the reorganisation plan would need to align with the Enterprise Bankruptcy Law, and adherence to pre-voting procedures and outcomes as stipulated in the Enterprise Bankruptcy Law is required. Additionally, the debtor would be required to prove the proposed plan is viable (Articles 100 to 102, Article 120). 6. Optimising the regulations on reorganisation The Revision Draft introduces specific guidelines for selecting investors, emphasising the importance of an open and transparent recruitment process. Creditors and the debtor’s shareholders may propose potential investors, who would be granted access to debtor information and be required to submit deposits and maintain confidentiality (Articles 113 and 114). The Revision Draft clarifies that creditors and inter - ested parties whose rights are not adversely impacted by the reorganisation plan would not participate in the voting (Article 117). The criteria for court approval of reorganisation plans are detailed, requiring adherence to legitimate voting procedures, feasibility of the business plan, and fair - ness, justice and legality of the plan’s content. Should creditors not approve the plan, the court may conduct a hearing prior to enforcing a cram-down approval. Interested parties dissatisfied with the court’s deci - sion may apply for a review by a higher court (Articles 123 to 128). A mechanism for credit repair is established, allow - ing debtors to apply to pertinent government depart - ments, banks and other financial institutions for credit rehabilitation (Article 139).

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