The Pre-Bankruptcy Payments and the Supplier’s Set-Off

Under Enterprise Bankruptcy Law art. 32, within six months before the court accepts a bankruptcy application, if the debtor was insolvent and repaid an individual creditor, the administrator may request avoidance. The payment on 15 February 2025 is within six months of 10 June 2025. Hengda’s later inability to pay its debts supports insolvency at the relevant time, although the administrator must prove it. The key issue is the statutory exception for a repayment that benefits the debtor’s property. A’s threat to stop supplies and the RMB 300,000 net profit show that the payment had some business rationale, but the exception requires a net benefit to the estate, not merely a benefit to the creditor or the continuation of business. Hengda paid RMB 2 million and obtained only RMB 300,000 in net profit. The estate therefore did not receive equivalent new value; the payment mainly preferred A over other creditors. On these numbers, the exception should fail, and the administrator can avoid the payment. A must return the RMB 2 million and then file an unsecured claim for it. If the profit had exceeded the payment or the payment had avoided a larger liability, the analysis could differ.

Both transactions fall within the one-year avoidance window under Enterprise Bankruptcy Law art. 31. The bankruptcy acceptance date is 10 June 2025, so the relevant period runs back to 10 June 2024. First, on 20 January 2025 Hengda mortgaged its only factory to bank B to secure a previously unsecured RMB 5 million loan. Article 31(3) covers providing security for a debt that was originally unsecured within one year before acceptance. The administrator can avoid the mortgage, with the result that B loses secured status and is treated as an unsecured creditor for the RMB 5 million. Second, on 1 March 2025 Hengda repaid a RMB 1 million shareholder loan that was not due until 2027. Article 31(4) covers repayment of a debt not yet due within one year before acceptance. The administrator can recover the RMB 1 million from the shareholder. The shareholder’s claim is restored as an unsecured claim, but the early repayment itself is avoided. The six-month rule in art. 32 is not the main basis here because both transactions fall within the longer one-year period and match the specific categories in art. 31.

Under Enterprise Bankruptcy Law art. 40, after the court accepts the bankruptcy case, a creditor that owes a debt to the debtor may claim set-off. The right is denied if the creditor acquired the claim after acceptance, or acquired it knowing that the debtor was unable to pay its due debts, or in other specified bad-faith situations. A’s RMB 2 million raw-material claim arose before bankruptcy, and its RMB 500,000 equipment debt also arose before bankruptcy. There is no fact showing that A acquired the claim after acceptance or with the prohibited knowledge. A’s set-off is therefore effective in principle. The avoidance of the 15 February payment changes the mechanics but not the existence of A’s claim. A must return the RMB 2 million; its RMB 2 million claim is restored. A may then set off its RMB 500,000 equipment debt, leaving a RMB 1.5 million unsecured claim. The administrator cannot reject the set-off merely because A must return the preferential payment. The administrator can, however, require A to return the RMB 2 million first and then allow the set-off and claim filing, so that the estate’s cash position is protected.