16 ALB CHINA INSOLVENCY & RESTRUCTURING GUIDE 2023 secured obligation, including the expenses for selling the collateral, all of which shall, unquestionably, be paid with priority from the proceeds from sale of the property.” Second, the security scope of security interest, according to Article 389 of the Civil Code, includes the expenses incurred for custody of the property and realization of security interest. Pending bankruptcy of a debtor, the said expenses for realization of security interest are conventionally advanced by the security interest holder, who will then receive prioritized reimbursement of the same out of the proceeds from sale of the property. In ongoing bankruptcy proceedings, however, such expenses are advanced by the administrator. In that context, if the expenses were held inferior to claims secured by property, it would be highly likely that, after satisfaction of claims secured by property, nothing would remain to pay the expenses, which would have to be paid using some other property of the debtor, a practice apparently unfair to other creditors and likely to affect disposal of the collateral. In consideration of the foregoing, we are inclined to support the following sequence of satisfaction of bankruptcy expenses, debts of common interest and claims secured by property: the proceeds from sale of the collateral shall be used first to pay the administrator’s expenses for managing the property and realizing the security interest, then discharge the claims secured by property, and finally, all other bankruptcy expenses and the debts of common interest. II. Problems Existing in Application of Rules on Discharge of Bankruptcy Expenses, Debts of Common Interest and Claims Secured by Property In practice, rules governing satisfaction of bankruptcy expenses, debts of common interest and claims secured by property in some bankruptcy cases are not always fully compliant with laws and regulations as the result of people’s different ways of understanding and complexity of bankruptcy proceedings. Followed are several typical examples: First, in some bankruptcy cases, the administrators disclose only the sum of bankruptcy expenses and debts of common interest without giving any expense details or causes, preventing the creditors from knowing the different causes of such expenses and debts, and in turn from accurately judging the payment sequence and the sources of funding. For instance, some bankruptcy expenses and debts of common interest might have arisen from the property posted as security but are paid off using unsecured property, which practice is unfair to ordinary creditors. Second, there are bankruptcy cases where all bankruptcy expenses and debts of common interest are straightly made prioritized over claims secured by property without disclosure of the details or causes of the expenses and debts, which is unfair to the creditors of the obligations secured by property. Third, according to the Regulations of the Supreme People’s Court on Determination of Administrator’s Remuneration in Enterprise Bankruptcy Cases (the “Administrator’s Remuneration Regulations” hereinafter), the value of the collateral that the security interest holder may receive with priority shall not be included in the total property value in administrator’s remuneration calculation, while the administrator shall have the right to receive an appropriate pay from the security interest holder for the reasonable work he has done for maintenance, sale, delivery and otherwise management of the collateral. However, the collateral’s value remains not deducted from the administrator’s base remuneration calculation in some bankruptcy proceedings, which may lead to an exorbitant pay to the administrator, leaving less property for other claims. Despite the laws and regulations providing rules on satisfaction of bankruptcy expenses, debts of common interest and claims secured by property, courts also support party autonomy in practice. Therefore, creditors in bankruptcy proceedings shall carefully check all relevant documents to determine whether the satisfaction rules are reasonable in order to avoid impairment of their legal rights and interests. III. Advice to Creditors Fair and reasonable rules shall be developed to govern discharge of bankruptcy expenses, debts of common interest and claims secured by property depending on the circumstances of the specific bankruptcy proceedings in order to achieve a balance of all parties’ interests and realize efficient liquidation of debts and claims. To safeguard their rights and interests, creditors shall promptly examine the rules to see if they are compliant with laws and regulations. Specifically, First, on occurrence of any expense for management, maintenance or sale of the property posted as security, the administrator shall immediately notify the security interest holder, fully guarantee his right of knowledge, and listen to his opinion. The administrator shall disclose details of all bankruptcy expenses and debts of common interest, categorize them by cause, and determine the discharge rules for each category separately. The first category shall be bankruptcy expenses and debts of common interest arising from the property posted as security, which ought to be paid from that property. In practice, the administrator, when taking possession of the property posted as security, often advances, out of unsecured property, the bankruptcy expenses and debts of common interest that have arisen from the property
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