In the face of bankrupt enterprises, is your collateral really useful?

——Which right has more priority between tax collection right and security interest

1.The process of enterprise bankruptcy

In practice, there are two paths of enterprise bankruptcy procedure: administrative process and judicial process.

Administrative process: refers to the company's own shareholders' meeting to resolve the dissolution of the company, set up a liquidation group to clear up the company's property and complete the liquidation procedures.

Judicial process: when the company is insolvent, the relevant creditors and debtors apply to the court for bankruptcy. After receiving the bankruptcy application, the court reviews the relevant evidence materials and finds that the bankruptcy conditions are met. The court decides to accept the bankruptcy application and appoint the relevant bankruptcy administrator at the same time. After the bankruptcy liquidator has cleared up, appraised and distributed the bankruptcy property, the people's court shall make a ruling to terminate the bankruptcy.

2.Tax collection right PK security interest? Who wins？

In the administrative process, when an enterprise applies to the administrative department for Industry and Commerce for cancellation of registration, it must submit the "tax payment certificate" issued by the tax department to the registration authority. Therefore, in practice, when enterprises distribute bankruptcy property, they generally need to pay relevant taxes to the tax department and obtain "tax payment certificate" before further property distribution, that is to say, tax has priority to some extent.

According to the civil code, mortgage is the real right for security that the debtor or the third party provides the creditor with real estate or chattel as the guarantee to pay off the debt without transferring possession. When the debtor fails to perform the debt when it is due, the mortgagee has the priority to be paid for the value of the mortgaged property.

Then the question comes, one is the "priority" of birth "with the golden key", and the other is the "priority" given by law. Who has the priority over whom?

According to the relevant provisions of the tax collection and administration law and the bankruptcy law, in practice, the bankruptcy property is generally paid off in the following order: the secured creditor's rights set before the occurrence of tax - tax - the secured creditor's rights set after the occurrence of tax - bankruptcy expenses and common interest debt - employee's rights - ordinary bankruptcy rights.

It can be seen that if we go through the judicial bankruptcy procedure, the mainstream trial idea is to see whether your secured claims occur before or after the unpaid taxes. However, we were surprised to find that in a bankruptcy case in 2018, Shaoxing intermediate people's court gave us a new trial idea, which made us bright.

               [brief introduction to the case]

——Shaoxing Yuecheng sub branch of Agricultural Bank of China Limited (hereinafter referred to as "ABC Yuecheng sub branch") has successively granted a loan of 14.1 million yuan to Shaoxing jinbaoli Textile Co., Ltd. (hereinafter referred to as "jinbaoli company"). Jinbaoli company has set mortgage on its real estate and land use right, and has gone through mortgage registration.

——On September 28, 2014, the court ruled to accept the bankruptcy liquidation case of jinbaoli company, with Zhejiang Dagong law firm as the administrator.

——On November 26, 2014, the manager of jinbaoli company issued the confirmation form of creditor's rights examination, confirming that the above-mentioned creditor's rights of 14.1 million yuan of Yuecheng branch of ABC are secured by property, and noting in the remarks column: "the amount of the creditor's rights shall be examined and identified, but the tax priority of 37419373.07 yuan of Shaoxing State Taxation Bureau is prior to the creditor's rights secured by property of your bank." The next day, the Yuecheng sub branch of ABC replied to the above audit results of creditor's rights: "our bank has no objection to the amount of creditor's rights, and has objection to the tax priority of the State Administration of taxation over the creditor's rights guaranteed by property of our bank.

——On November 3, 2016, the Yuecheng branch of ABC filed a lawsuit to the court to confirm that its security interest has priority over tax claims, which eventually triggered the proceedings of the first and second instance.

              [result of first instance]

The court of first instance held that according to the bankruptcy law, the obligee who has a security right in the specific property of the bankrupt has the priority to be compensated for the specific property. The priority of these rights should be determined by the nature and order of security rights the provisions of the tax administration law should be the exception of the priority of security interest in article 386 of the civil code. Therefore, the provisions of the bankruptcy law on the order of liquidation of bankruptcy claims are general provisions on the order of liquidation of bankruptcy claims, which does not exclude the possibility of applying the original intention and interpretation of the tax administration law.

ABC Yuecheng sub branch lost the lawsuit.

              [result of the second trial]

The court of second instance held that in the field of bankruptcy, the bankruptcy law, compared with the tax administration law, should be a special law, and the provisions of the bankruptcy law should be applied first. In the context of bankruptcy, the provisions of the tax collection and administration law will cause chaos in the liquidation system of bankruptcy claims article 45 of the law of the people's Republic of China on tax collection and administration stipulates that it can only adjust the repayment procedure of tax claims and secured claims under normal circumstances, but can not apply to the repayment sequence of tax claims and secured claims under the background of bankruptcy. In bankruptcy procedure, mortgage has the nature of exclusive right, while tax priority should be limited.

The second instance changed the judgment to support the appeal of ABC Yuecheng sub branch .

              Relevant laws and regulations

            The first paragraph of Article 45 of the tax administration law:

when tax authorities collect tax, tax shall take precedence over non guaranteed creditor's rights, unless otherwise stipulated by law; If the overdue tax of a taxpayer occurs before the taxpayer sets up a mortgage or pledge with his property or the taxpayer's property is detained, the tax shall be executed prior to the mortgage, pledge or lien.

              Article 109 of the bankruptcy law :

the obligee who has the security right over the bankrupt's specific property shall have the priority to be paid for the specific property.

             The first paragraph of Article 113 of the bankruptcy law:

 after giving priority to the payment of bankruptcy expenses and common interest debts, the bankruptcy property shall be paid in the following order:

（1） The wages, medical, disability and pension expenses owed by the bankrupt to the employees, the basic endowment insurance and basic medical insurance expenses owed to the employees' personal accounts, and the compensation that should be paid to the employees according to the laws and administrative regulations;

（2） The social insurance expenses and taxes owed by the bankrupt other than those specified in the preceding paragraph;

（3） Ordinary bankruptcy claims.

3.Hai Jun's viewpoint

The bankruptcy liquidation case of Kimberly company in this paper is the "first case" in which the court finally determined that the security interest is prior to the tax collection right. As we all know, tax is compulsory by the state, which is a kind of state behavior that the state obtains financial revenue free of charge in order to provide public goods to the society and meet the common needs of the society. The real right for security is the real right set on the property of the debtor or the third party by the creditor to ensure the performance of the debt.

In the bankruptcy environment, who has prior when the tax priority of the IRS conflicts with the claims secured by property?

——From the perspective of law application, the formulation of the tax collection and administration law is based on the fact that the taxpayer is in a normal state of operation, but there are no clear and special provisions for the taxpayer to enter the bankruptcy procedure. In contrast, the background of the formulation of the bankruptcy law is that the enterprise is in an abnormal state of operation, and the principles and methods for dealing with various matters are stipulated. Comparatively speaking, for enterprises in bankruptcy, the bankruptcy law is more special than the tax administration law.

——From the nature of right, security interest is a kind of real right. As for the right of tax collection, based on the theory of tax debt relationship, it is generally regarded as a kind of creditor's right. Based on the general principle of "real right is prior to creditor's right" in the civil law, it can be concluded that the real right for security should be paid prior to the right of tax collection. At the same time, within the scope of Taxation, there is no market transaction behavior, so there is no need to maintain the market transaction order; The main body of taxation is the state organ of power, which has no obvious weak position compared with enterprises. Therefore, there is no need to maintain the security of the transaction and there is no difficulty in the relief of the creditor's rights. It is obviously not conducive to the establishment of the relevant legal system to rashly break through the basic principle of "property rights prior to creditor's rights".

——From the perspective of legal purpose, Article 45 of the tax administration law is established to prevent the tax authorities from being lazy in exercising their tax rights and passively exercising their tax collection rights when their rights overlap, which leads to the loss of tax receivable. However, the bankrupt enterprise has certain particularity. For the purpose of bankruptcy, when the bankrupt enterprise is insolvent, it should guarantee the rights of ordinary creditors and ensure the bankrupt enterprise to withdraw from the market reasonably. However, if the enterprise is required to strictly perform its tax obligations when it is in great difficulty, so that creditors can not get due relief, it may not achieve the original intention of the law to establish security interest.

When the debtor goes bankrupt, the collateral in the hands of creditors is like a sponge. If the "tax part" is squeezed out first, there will be little left. Although China is not a country with a case law system, the above cases can also give many creditors a glimmer of hope.