For an insolvent enterprise in bankruptcy proceedings, the first issue to be addressed is the settlement of creditors' claims. Insolvent enterprises are often insolvent, and the filed claims can often not be fully satisfied, or even if satisfied, a certain percentage deduction is required. What is the order of repayment for filed claims? Which claims are entitled to priority in repayment? According to the provisions of current Chinese laws, the order of claim repayment is sorted out as follows:

I. Priority Repayment of Security Interests

Article 109 of the Enterprise Bankruptcy Law of the People's Republic of China stipulates:

A right holder who has a security interest (mortgage right, pledge right, lien right) in specific property of the bankrupt shall have the right to priority in repayment from such specific property.

Article 3 of the Judicial Interpretation (II) of the Supreme People's Court on the Application of the Enterprise Bankruptcy Law of the People's Republic of China stipulates:

Specific property of the debtor on which a security interest has been legally created shall be deemed as the debtor's property. The remaining portion of the debtor's specific property after the extinction or realization of the security interest may be used in bankruptcy proceedings to settle bankruptcy expenses, community debts and other bankruptcy claims.

In principle, in bankruptcy proceedings, a creditor who has a security interest in specific property of the debtor may at any time claim against the administrator the right to exercise priority in repayment by realizing the value of such specific property through disposal. However, if the separate disposal of the secured property would reduce the value of other bankruptcy property and thus overall disposal is required, the administrator may decide to dispose of it at an appropriate time.

When conflicts arise between different security interests, repayment shall be made in the following order according to the nature of the security interests:

(I) Lien Right

The lien holder is entitled to repayment in the first order. According to Article 456 of the Civil Code of the People's Republic of China:

Where a mortgage right or pledge right has been established on the same chattel and the chattel is subsequently retained, the lien holder shall have priority in repayment.

(II) Mortgage Right and Pledge Right

The order of repayment of pledge rights and mortgage rights shall be determined based on whether publicity has been completed and the sequence of publicity.

Article 65 of the Minutes of the National Court Civil and Commercial Trial Work Conference (2019) stipulates:

Where both a pledge right and a mortgage right are established on the same chattel, the provisions of Article 199 of the Property Law (now Article 414 of the Civil Code) shall be applied mutatis mutandis to determine the order of repayment based on whether publicity has been completed and the sequence of publicity:

• If the pledge right is validly established and the mortgage right has completed mortgage registration, the order of repayment shall be determined according to the sequence of publicity; if the sequences are the same, repayment shall be made in proportion to the claims;
• If the pledge right is validly established but the mortgage right has not completed mortgage registration, the pledge right shall take precedence over the mortgage right;
• If the pledge right is not validly established and the mortgage right has not completed mortgage registration, the mortgage right shall be entitled to priority in repayment since the mortgage right has been validly established at this time.

In addition,Article 54 of the Interpretation of the Supreme People's Court on the Relevant Security System of the Civil Code of the People's Republic of China stipulates:

After the enterprise goes bankrupt, if the chattel mortgage contract is concluded but the mortgage registration is not completed, the mortgagee shall not claim priority in repayment from the mortgaged property.

II. Bankruptcy Expenses

Bankruptcy expenses generally refer to the expenses incurred to ensure the smooth progress of bankruptcy proceedings.

Pursuant to Article 41 of the Enterprise Bankruptcy Law of the People's Republic of China and Article 88 of the Provisions of the Supreme People's Court on Several Issues Concerning the Trial of Enterprise Bankruptcy Cases, the following expenses incurred after the people's court accepts the bankruptcy application shall be deemed as bankruptcy expenses:

• (I) Litigation costs of the bankruptcy case;
• (II) Expenses for the administration, valuation and distribution of the debtor's property;
• (III) Expenses for the performance of duties by the administrator, remuneration and expenses for the employment of staff;
• (IV) Other expenses paid in the bankruptcy proceedings for the common interests of all creditors.

Pursuant to Article 43 of the Enterprise Bankruptcy Law of the People's Republic of China, the aforementioned bankruptcy expenses shall be repaid by the debtor's propertyat any time. However, if the debtor's property is insufficient to pay all bankruptcy expenses and community debts,bankruptcy expenses shall be repaid first. If the debtor's property is insufficient to pay the bankruptcy expenses, the administrator shall apply to the people's court for terminating the bankruptcy proceedings.

III. Community Debts

Community debts are also debts to be repaid by the debtor's property at any time.

Pursuant to Article 42 of the Enterprise Bankruptcy Law of the People's Republic of China, community debts refer to the following six types of debts incurred after the people's court accepts the bankruptcy application:

• (I) Debts incurred by the administrator or the debtor requesting the other party to perform an unfulfilled contract;
• (II) Debts incurred by the debtor's property being under negotiorum gestio;
• (III) Debts incurred by the debtor's unjust enrichment;
• (IV) Labor remuneration and social insurance premiums to be paid for the continued operation of the debtor and other debts arising therefrom;
• (V) Debts incurred by the administrator or relevant personnel causing damage to others in the performance of their duties;
• (VI) Debts incurred by the debtor's property causing damage to others.

IV. Employee Claims

Based on the protection of the right to subsistence of the special group of enterprise employees, such employee claims are given special protection when the enterprise undergoes bankruptcy liquidation. Pursuant to Article 113 of the Enterprise Bankruptcy Law of the People's Republic of China, after the priority repayment of bankruptcy expenses and community debts from the bankruptcy property, the repayment of employee claims shall begin.

Employee claims refer to the amounts owed by the bankrupt enterprise to its employees, including:

• Wages, medical expenses, disability subsidies and pension expenses
• Unpaid basic pension insurance and basic medical insurance premiums that should be credited to employees' personal accounts
• Compensation that shall be paid to employees in accordance with the provisions of laws and administrative regulations

Living expenses and medical expenses of employees during the liquidation period may be paid in priority from the bankruptcy property.

It should be noted that the wages of directors, supervisors and senior managers of the bankrupt enterprise shall be calculated based on the average wage of the enterprise's employees. The portion exceeding the average wage of the enterprise's employees may be repaid as ordinary bankruptcy claims.

For compensatory damages of a punitive nature, such as double wages for failure to sign a written labor contract and compensation for illegal termination of labor contracts, in accordance with the legislative purpose of the Enterprise Bankruptcy Law, such compensatory damages are not within the scope of protection for employee claims and shall be repaid as ordinary claims.