15 ALB CHINA INSOLVENCY & RESTRUCTURING GUIDE 2023 court decides to accept the bankruptcy application, all costs of compulsory liquidation and the appraisal, announcement, custody fees and charges incurred in pending enforcement procedures, as may be payable but unpaid by the debtor, may be paid off out of the debtor’s property from time to time with reference to the provisions of the Enterprise Bankruptcy Law regarding bankruptcy expenses. All court costs and enforcement application fees payable but unpaid by the debtor may be treated as bankruptcy claims and paid off as such.” It is essentially an addition to the bankruptcy expenses-related part of Article 41 of the Bankruptcy Law. (II) Identification of Claims Secured by Property A claim secured by property refers to a claim holding security interest in a specific property of the debtor. According to Article 109 of the Bankruptcy Law, “The rights holder with security interest in a specific property of the bankrupt shall enjoy priority of payment from the property.” It is defined in Article 389 of the Civil Code, “The security scope of the security interest shall include the principal obligation and the interest thereon, penalties, damages, and expenses incurred in the custody of the securing property and realization of the security interest. If the parties have otherwise agreed thereupon, such other agreement shall apply.” Accordingly, the creditor of a debt secured by a property may demand prioritized payment of its expenses for realizing the security interest out of the property. It is noteworthy that the payee of the “expenses incurred in the custody of the secured property and realization of the security interest” shall be identified depending on the cause of the expenses and the payer. It is likely that such expenses may be paid by the creditor directly, or, in bankruptcy cases, by the administrator. In bankruptcy proceedings, the expenses incurred by the administrator for managing, selling and distributing the securing property fall in the category of bankruptcy expenses. In addition, the securing property may incur debts of common interest, such as those arising from negotiorum gestio, unjust enrichment or infringement, which, if construed broadly, may also be included in “expenses incurred in the custody of the securing property and realization of the security interest”. Therefore, “expenses incurred in the custody of the securing property and realization of the security interest” occurring during bankruptcy proceedings may in some cases constitute bankruptcy expenses and debts of common interest. (III) Discharge of Bankruptcy Expenses, Debts of Common Interest and Claims Secured by Property The following general rules may be drawn from Article 43 of the Bankruptcy Law over the discharge of bankruptcy expenses and debts of common interest. First, bankruptcy expenses and debts of common interest shall be paid from time to time out of the debtor’s property. Second, when the debtor’s property is insufficient to satisfy the bankruptcy expenses and debts of common interest in full, the bankruptcy expenses shall be settled first. Third, if the debtor’s property is inadequate to discharge the bankruptcy expenses in full, payment shall be made pro rata; if the debtor’s property remaining after the discharge of bankruptcy expenses is not enough to cover the debts of common interest, the debts shall be satisfied on proportionate basis. Fourth, when the debtor’s property is insufficient to support payment of the bankruptcy expenses, the administrator shall file a request to the people’s court for terminating the bankruptcy proceedings. Where a claim is secured by property, the creditor may demand prioritized payment of the secured amounts from the securing property according to Article 109 of the Bankruptcy Law and Article 389 of the Civil Code. Discharge Sequence of Bankruptcy Expenses, Debts of Common Interest and Claims Secured by Property & Sources of Funding: According to Article 3 of the Regulations of the Supreme People’s Court on Applicability of the Law of PRC on Enterprise Bankruptcy (II) (“Interpretation No. 2” hereinafter), “Where security interest has been established on any specific property of the debtor under law, the people’s court shall identify it as the debtor’s property. During bankruptcy proceedings, the portion of such property remaining after extinction or exercise of the security interest may be used to satisfy bankruptcy expenses, debts of common interest and other bankruptcy obligations”. It means that, where any security interest has been set upon a specific property (the “security” hereinafter), the obligation secured thereunder shall enjoy priority of payment, and the portion of the property remaining thereafter, if any, shall be used to satisfy bankruptcy expenses, debts of common interest and other bankruptcy obligations. Given that, as defined in Article 41 of the Bankruptcy Law, the expenses incurred by the administrator for managing and selling the collateral shall also be treated as part of bankruptcy expenses, may we conclude such part of bankruptcy expenses shall be inferior to claims secured by property in terms of payment sequence? Our answer is no because: First, according to Interpretation No. 1 and Interpretation No. 2 of the Bankruptcy Law in the interpretations of the Supreme People’s Court regarding understanding and applicability of the Enterprise Bankruptcy Law, “The debtor’s property (or bankruptcy property) is managed by the administrator. Once the property posted as security is incorporated into the debtor’s property, there will come the administrator’s expenses for managing the property and the remuneration payable for such management. Expenses for managing the property posted as security include all costs and amounts that may be incurred directly or indirectly for the purpose of realizing the
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