Perspective | Analysis of the Priority Repayment Order Rules in the Seizure of Property Enforcement Procedure

Statutory priority rights arise from direct legal provisions and have the effect of being repaid prior to other claims. In the seizure and execution of property, statutory priority rights are in the highest priority order of repayment, reflecting the law's special protection of specific claims.
 

First, the priority right of payment for construction projects is a typical example of statutory priority rights, mainly based on the provisions of Article 807 of the "Civil Code of the People's Republic of China." The contractor has a priority right of repayment for the discounted or auctioned proceeds of the project, and the effect is higher than the mortgage right. This provision ensures that when the developer owes the construction funds, the contractor can obtain priority repayment from the discounted or auctioned proceeds of the construction project.

Secondly, the consumer's property right expectancy also has statutory priority rights, mainly based on Article 29 of the "Supreme People's Court's Provisions on Several Issues Concerning the Handling of Execution Objections and Reconsideration Cases (2020 Revision)". In the execution of monetary claims, if the buyer objects to the commercial housing registered under the name of the executed real estate development enterprise and meets the following circumstances and its rights can exclude execution, the people's court should support it: (3) The paid price exceeds 50% of the total contract price. Therefore, after the homebuyer pays all or most of the house payment, the property right expectancy of the house takes precedence over the mortgage right and ordinary claims.

Finally, ship priority is also an important type of statutory priority right. According to Article 22 of the "Maritime Law of the People's Republic of China," only the five legally defined types of maritime claimants have the right to priority repayment on the vessel in question. The existence of ship priority protects the interests of specific creditors related to ship operations, and is of great significance to maintaining maritime transport order, protecting the rights and interests of maritime workers, and promoting the development of the shipping industry.

Secured property rights are property rights established to ensure the performance of debts, including mortgage rights, pledge rights, and lien rights. In the seizure and execution of property, secured property rights have the effect of priority repayment. This is based on the essential attributes and purpose of secured property rights, that is, to enhance the security of claims by granting creditors a priority right of repayment on the secured property.
 

A mortgage right is the right of a creditor to have the property of a debtor or a third party, which is provided as collateral without transferring possession, to be converted into cash and repaid with priority according to law when the debtor fails to perform the debt or when the circumstances agreed upon by the parties for the realization of the mortgage right occur. In the case of multiple mortgages, according to Article 414 of the "Civil Code of the People's Republic of China," if the mortgage right has been registered, the repayment order shall be determined according to the time of registration; the registered mortgage right shall be repaid before the unregistered mortgage right; if the mortgage right is not registered, it shall be repaid according to the proportion of the claim.

A pledge right is for the purpose of securing the performance of a debt. The debtor or a third party transfers the possession of his or her movable property or rights to the creditor. When the debtor fails to perform the debt, the creditor has the right to priority repayment from the property in his or her possession. When there are both mortgage rights and pledge rights on the same property, if the mortgage right has been registered, the mortgagee shall be repaid before the pledgee; if the pledge right is established earlier, and the pledgee can prove the existence and establishment time of his or her pledge right, the effect of the pledge right is superior to the unregistered mortgage right.

A lien right is that the creditor possesses the debtor's property according to the contract agreement. When the debtor fails to perform the debt after the due date, the creditor has the right to retain the property to force the debtor to perform the debt, and to be repaid with priority from the property when the debtor still fails to perform the debt. When a mortgage right and a lien right coexist on the same property, the lien holder shall be repaid before the mortgagee. This is because the lien right is based on the creditor's legal possession of the subject matter and the added value paid for the subject matter. In order to protect this special creditor-debtor relationship, the law grants the lien right a higher priority repayment effect.

In the absence of secured property rights or other priority repayment rights, repayment in the seizure and execution of property shall be made in the order of seizure. This rule reflects the principle of "first come, first served," encouraging creditors to exercise their rights in a timely manner to protect their own interests, and also provides a clear and operable standard for the order of repayment in the execution procedure, improving execution efficiency.
 

Determining the executing court is also an important step in the disposition of seized property. In the execution procedure, there are generally three types of courts that can take measures to dispose of the seized property under the name of the debtor: the first seizing court, the pending seizure court, and the priority court.

The first seizing court refers to the court that first takes property preservation measures such as seizure, detention, or freezing on the specific property of the debtor in various stages of litigation, arbitration, and execution. The first seizing court has clear legal provisions for the disposal of the property under the name of the person subject to execution, which is justified.

However, there are conditions and exceptions for requesting transfer. First, if the first seizing court has not disposed of the property for more than one year, the prior pending court may request a transfer of execution. The pending seizure court does not have priority claims: if the first seizing court has not disposed of the property for more than one year, the prior pending court may request a transfer of execution (Article 21 of the "Supreme People's Court's Provisions on Several Issues Concerning the Handling of Property Preservation Cases"). Second, if the first seizing court has seized the property for more than 60 days and has not yet issued an auction announcement or entered the sale procedure, the pending court with priority claims may request a transfer of execution (Article 1 of the "Supreme People's Court's Reply on Issues Concerning the Disposal of Seized Property by the First Seizing Court and the Priority Claim Execution Court").

The pending seizure creditor court, unlike the first seizing court, is the court that takes pending seizure or control measures on the debtor's property. Usually, the court with the earlier seizure time is determined as the first seizing court, and the later one is the pending seizure court. When the term of the first seizure expires and the applicant does not apply for renewal, the pending seizure in the subsequent order takes effect.

The priority execution court refers to the court that applies for compulsory execution by the creditor who has the priority repayment order for the specific property already seized from the debtor. A priority creditor refers to a creditor who has the right to priority repayment from the proceeds of the sale of the debtor's specific property according to the law. Priority creditors include priority repayment rights for construction projects, mortgage rights, pledge rights, and consumer's real estate property right expectancies.

After clarifying the court's handling of seized assets during enforcement, when both statutory priority rights and other ordinary claims exist during disposal, how should the priority rights and ordinary claims be allocated, and how should the allocation ratio be determined? Because there are differences in the repayment procedures for companies, citizens, or other organizations, the following discussion will be separated accordingly.

1. Rules for Repayment of Disposal of Assets When the Obligor is a Citizen or Other Organization and Their Assets Are Sufficient to Repay All Debts
 

When the obligor is a citizen or other organization, and the property under the name of the citizen or other organization is sufficient to repay the debts of all creditors, then repayment shall be made in accordance with the order of priority repayment for priority right holders, first-seized creditors, and subsequent creditors.

2. When a Citizen or Other Organization is the Obligor and Cannot Repay All Debts, Creditors Who Have Obtained Enforcement Documents May Apply to Participate in the Distribution

The rules for repayment of disposal of assets when the personal property of the obligor is insufficient to repay all debts is to apply the system of participation in distribution (Articles 506, 507, and 508 of the Interpretation of the Civil Procedure Law). After the enforcement procedure, the following conditions must be met to apply the system of participation in distribution: the obligor is an individual or other organization; the assets of the obligor are insufficient to repay all claims; the creditor has obtained enforcement documents, or although not obtained enforcement documents, but has priority rights over the executed assets and should be allocated; the creditor shall submit a written application before the execution of the obligor's assets is finalized.

According to the system of participation in distribution, after deducting related litigation expenses and execution fees, the court presiding over the distribution shall allocate the remaining assets in the following order: Creditors with priority rights (secured creditors, priority rights for construction projects, etc.) shall be repaid first in accordance with the statutory order; in principle, the claims of ordinary creditors shall be repaid in proportion to the amount of their claims included in the distribution procedure to the total amount of claims included in the distribution scope. In addition, in judicial practice, without damaging the claims of priority creditors, the court presiding over the distribution of assets may appropriately increase the proportion of participation in distribution for the first-seized creditor (i.e., the ordinary creditor who first applied for seizure and control of the assets involved in the execution).

1. Rules for Repayment of Disposal of Assets When the Obligor is a Corporate Legal Person and Its Assets Are Sufficient to Repay All Debts
 

When the obligor is a company and the company's assets are sufficient to repay the debts of all creditors, the rules for the disposal of seized assets are to repay in accordance with the priority repayment order of priority right holders, first-seized creditors, and subsequent creditors (Article 514 of the Interpretation of the Civil Procedure Law). The repayment rules in this case are the same as when the obligor is a citizen or other organization.

2. When the company's assets are insufficient to repay all debts, the system of participation in distribution is not applicable. At this time, the uniform order and scope of repayment for different right holders after the disposal of assets will be affected by whether the company is bankrupt.

(1) Rules for Repayment of Disposal of Assets When the Obligor Company is Legally Ruled Bankrupt. In this case, the rules for repayment of disposal of assets of the obligor company need to follow the rules of repayment for different types of claims under the Bankruptcy Law. For bankrupt assets, repayment shall first be made in order of the claims of those who have been resettled due to demolition, the consumer's expectant right to homeownership, and priority claims for construction projects. After repaying the above-mentioned claims and relevant bankruptcy expenses and other special claims, if there are still remaining assets of the obligor company, mortgage right priority creditors shall be repaid first, followed by the first-seized creditors and subsequent creditors under ordinary claims, repaid according to the proportion determined by the administrator at the time of bankruptcy.

(2) Rules for Repayment of Disposal of Assets When the Obligor Company Follows Normal Enforcement Procedures. When the assets of the obligor company are insufficient to repay all debts and bankruptcy procedures (including bankruptcy liquidation and bankruptcy reorganization) are not followed, the rules for repayment of asset disposal are that priority claims are repaid first, followed by the first-seized creditors and subsequent creditors according to the order of seizure. After the first-seized creditor has been repaid, the subsequent creditors will receive repayment accordingly.

In addition, in this case, if the court handling the disposal of assets is the first-seizing court and there are still remaining assets after the first-seized creditor has been fully repaid, the first-seizing court needs to protect the legitimate interests of subsequent creditors. The Supreme People's Court issued the "Notice on Correctly Handling Issues Related to the Effectiveness of Subsequent Seizures" (Document [2022] No. 107) (hereinafter referred to as the "Subsequent Seizure Notice"), Articles 1 and 2 of which make detailed provisions in this regard. Article 1 stipulates that the subsequent seizure has the effect of ensuring that subsequent creditors can obtain the remaining portion after the first-seized creditor has received repayment from the proceeds of the disposal of the seized property. Article 2 stipulates that the subsequent seizure is binding on the first-seizing court. This is also the Supreme People's Court clarifying the protective effect of the subsequent creditor's claims through judicial interpretation.

For example, in the case of Song Moumou v. Linfen City Casting Factory, Du Moumou, and Liu Moumou ( (2021) Highest Court Enforcement Supervision No. 59), the Supreme Court's judgment stated: The precondition of Article 55, paragraph 1 of the Supreme People's Court's Provisions on Several Issues Concerning the Enforcement Work of People's Courts (Trial Implementation) is that the debtor's assets are sufficient to satisfy all claims. Only in this case will ordinary claims become priority claims due to the first seizure. Conversely, if the debtor's property cannot satisfy the repayment of all claims, and the participation in distribution procedure needs to be followed, each claim should be repaid proportionally on average, and the ordinary claim with a first seizure measure no longer has priority repayment status.