Preface

Contingent liabilities are potential obligations formed by an enterprise's past transactions or events, the existence of which must be confirmed by the occurrence or non-occurrence of uncertain future events; or present obligations formed by past transactions or events, where it is not probable that the settlement of the obligation will result in an outflow of economic benefits from the enterprise, or the amount of the obligation cannot be reliably measured.

I. Causes of Formation of Contingent Liabilities

1. Debtor-related Factors

Debtors may have irregular financial management, or fail to provide detailed creditor's rights information, or the creditor information is incomplete, resulting in incomplete creditor's rights and liabilities information. Ultimately, this leads to the failure to notify all creditors, thus giving rise to contingent liabilities.

2. Creditor-related Factors

Creditors may not receive the notice for declaring creditor's rights due to their own reasons, or fail to take the initiative to declare creditor's rights within the specified time after receiving the notice.

3. Court and Administrator-related Factors

Courts or administrators may have omissions in notifying creditors and fail to notify all known creditors, resulting in creditors failing to declare their creditor's rights in a timely manner.

4. Factors Related to Inherent Nature

It is necessary to confirm whether a liability exists through uncertain future events, such as pending litigation, potential litigation, etc.

II. Handling of Contingent Liabilities

According to Article 1 of the Enterprise Bankruptcy Law:

"This Law is formulated for the purpose of regulating the enterprise bankruptcy procedure, fairly liquidating creditor's rights and liabilities, protecting the legitimate rights and interests of creditors and debtors, and maintaining the order of the socialist market economy."

Fairly liquidating creditor's rights and liabilities and protecting the legitimate rights and interests of creditors and debtors are the legislative purposes of the Bankruptcy Law. In addition, according to Paragraph 2 of Article 92 of the Enterprise Bankruptcy Law:

"A creditor who fails to declare his creditor's rights in accordance with the provisions of this Law shall not exercise his rights during the performance period of the reorganization plan; after the performance of the reorganization plan is completed, he may exercise his rights in accordance with the repayment conditions for the same category of creditor's rights as stipulated in the reorganization plan."

Therefore, creditors of contingent liabilities also have the right to receive repayment after the completion of the performance of the reorganization plan.

In practice, the common approach is to reserve funds for repaying contingent liabilities in advance. This not only protects the legitimate rights and interests of contingent creditors, but also helps reorganization investors to make reasonable budgets for investment amounts, increases the stability of reorganization investments, reduces the possibility of investment judgment errors, and enhances investment enthusiasm; at the same time, the reorganization plan can be better implemented and executed, which is more conducive to debtors resuming production and operation as soon as possible, achieving the goal of reorganization, and promoting the smooth progress of reorganization.

III. Response Measures for Contingent Liabilities

In cases where a bankrupt enterprise has potential obligations arising from past transactions or events that may lead to an increase in the enterprise's future liabilities, reorganization investors may take the following measures to respond:

1. Investigate and Verify Contingent Liabilities

• Request the bankrupt and reorganized enterprise to provide information on creditor's rights, liabilities and guarantees, and understand and verify the relevant situation of the bankrupt and reorganized enterprise's creditor's rights and liabilities in combination with financial account sets;
• Entrust a professional audit institution to conduct a comprehensive audit of the debtor, inspect contracts, accounting books, financial vouchers and other materials, and analyze and judge the possibility of contingent liabilities;
• Retrieve the files of the bankrupt and reorganized enterprise from the People's Bank of China, the Administration for Market Regulation, the people's courts and other units to verify the relevant situation;
• Communicate with stakeholders or insiders, and judge whether there are unreasonable situations in combination;
• Use tools to improve efficiency, and try to fully disclose the list of contingent liabilities through multiple angles and channels.

2. Stipulate Contingent Liabilities in the Draft Reorganization Plan

• List the details of contingent liabilities in the draft reorganization plan based on the investigation results of contingent liabilities, and specify the reserved funds for debt repayment;
• In addition, the draft reorganization plan shall clarify the deadline for declaring contingent liabilities and the follow-up disposal plan for the reserved debt repayment funds, so as to provide a basis for the subsequent disposal of contingent liabilities.