Editor's Note: In enterprise bankruptcy proceedings, disputes over the order of satisfaction of tax claims and security claims have long existed. Article 45(1) of the current Tax Administration Law stipulates that if the tax claim arises before the secured claim, the tax claim shall be paid in priority, while the Enterprise Bankruptcy Law clearly stipulates the right of exclusion of the security right, and the secured claim in the bankruptcy procedure enjoys the right of priority within the scope of the realization of the secured property. This article takes a bankruptcy claim confirmation dispute case as a citation and analyzes it from the dimensions of legal application rules and coordination of legal system, which provides clearer rules and guidelines for solving the same kind of disputes.

01 Wujiang District Tax Bureau v. Company A, Company D, Dispute over Confirmation of Bankruptcy Claims

(i) Basic facts of the case

From January 1, 2011 to December 31, 2011, Company A owed Wujiang District Taxation Bureau a tax amount of RMB5.04 million, resulting in tax arrears of RMB5.04 million.Between 2014 and 2016, Company B entered into several loan contracts with Bank C, obtaining a total of RMB321 million in bank loans.On April 3, 2014, Company A entered into a mortgage contract with Bank C, which stipulated that Company A would use its machinery and equipment to Bank C. The main claim secured by the mortgage was all the bank loans obtained by Company B from Bank C since 2014, and the maximum claim amount of the mortgage was RMB149 million. On the same day, Company A and Bank C registered the mortgage of the machinery and equipment. in October 2017, Bank C's loan claim and mortgage were assigned to D Capital Management.

On May 31, 2018, Wujiang District People's Court of Suzhou ruled to accept the bankruptcy liquidation of Company A. Subsequently, Wujiang District Tax Bureau declared claims of 10.56 million yuan to the administrator, including 5.04 million yuan of tax arrears from 2011.D Capital Management Company also declared claims to the administrator.

In 2019, the machinery and equipment of Company A was disposed of by auction with a transaction price of RMB1.83 million.In June 2019, the administrator served a notification letter on the result of claim satisfaction to Wujiang District Tax Bureau, informing it that the full amount of the said realized amount was to be satisfied by D Capital Management Company on a priority basis. Wujiang Taxation Bureau was not satisfied with this result and filed a lawsuit with Wujiang District People's Court, requesting that the tax claim in the case be paid in priority to the claim of D Capital Management Company against the auction realization amount. The Wujiang District People's Court rejected the claim of Wujiang Taxation Bureau. The Wujiang Taxation Bureau appealed against the decision and the Suzhou Intermediate People's Court of the second instance dismissed the appeal and upheld the original judgment.

(ii) Views of the parties

The dispute in this case centered on the order in which the tax claim asserted by Wujiang District Tax Bureau and the mortgage right enjoyed by D Capital Management Company were paid in respect of the realized amount.

The Wujiang District Taxation Bureau is of the view that, according to article 45 of the Tax Administration Law, tax claims should be prioritized over mortgage claims, and the priority of tax claims extends to the field of bankruptcy. Taxes are of public interest, and in the case of bankruptcy, the application of the Enterprise Bankruptcy Law instead of the Tax Administration Law will lead to a huge loss of tax revenue.

Company A and Company D argued that the viewpoint of applying Article 45 of the Tax Administration Law that tax claims are superior to mortgages, as proposed by the Wujiang District Tax Bureau, should be restricted in bankruptcy cases. According to the provisions of the Enterprise Bankruptcy Law, the order of settlement of tax claims is located after the mortgagee. In the present case, the auction price of the mortgages in question was not sufficient to cover the priority claims of the mortgages, and therefore the tax claims could not be satisfied.

Wujiang District People's Court and Suzhou Intermediate People's Court held that: Wujiang District Taxation Bureau claimed the application of the provisions of Article 45 of the Taxation Administration Law, but the provisions were general law, the Enterprise Bankruptcy Law was special law, and according to the principle that special law is superior to general law, the provisions of the Enterprise Bankruptcy Law should be prioritized, and therefore, the mortgage enjoyed by D Capital Management Company was prioritized over the settlement of the tax claim.

02 Priority should be given to the application of the relevant provisions of the Enterprise Insolvency Law in insolvency proceedings

In bankruptcy proceedings, the dispute over the order of settlement of tax claims and secured claims stems from the conflict between the provisions of the Tax Administration Law and the Enterprise Bankruptcy Law, which leads to the disagreement between the tax authorities and the administrators of the bankrupt enterprises.

Paragraph 1 of Article 45 of the Tax Administration Law provides that "if the tax owed by a taxpayer occurs before the taxpayer has created a mortgage or pledge on its property or the taxpayer's property has been subjected to a lien, the tax shall be enforced prior to the mortgage, pledge or lien." Based on this, the tax authorities are of the view that when tax claims and secured claims coexist, the time of occurrence of the tax claim and the time of creation of the mortgage should be compared, and the prior tax claim has priority over the later secured claim.

Article 109 of the Enterprise Bankruptcy Law stipulates that "the right holder of a security right in a specific property of the bankrupt shall have the right to be paid in priority for the specific property", and Article 113 of the Enterprise Bankruptcy Law stipulates that the bankruptcy estate shall be paid in the order of "employees' claims - tax claims - ordinary claims", after priority is given to the payment of bankruptcy expenses and co-beneficial debts. Employee Claims - Tax Claims - Ordinary Claims". Accordingly, the administrator considered that, in the bankruptcy proceedings, claims secured by mortgages were entitled to exclusion rights, and within the scope of the mortgages, they were given priority over bankruptcy expenses, co-beneficial debts, employees' claims, tax claims and ordinary claims.

Both of these laws were enacted by the Standing Committee of the National People's Congress and have the same legal status, so what provisions should be applied when faced with such a dispute? In this regard, article 103 of the Legislative Law provides that where special provisions are inconsistent with general provisions of a law enacted by the same organ, the special provisions shall apply. The so-called general provisions are legal norms formulated to regulate certain types of social relations, while the special provisions are legal norms with a narrower scope of regulation than the general provisions, and are applicable to specific areas, subjects and matters.

Article 2 of the Tax Collection and Administration Law provides that "This Law shall apply to the collection and administration of all taxes collected by the tax authorities in accordance with the law", which indicates that the Law regulates the collection and payment of taxes by all taxpayers, and Article 45 of the Law regulates the order of settlement of tax claims and secured claims of enterprises in any state, covering both the situation of bankruptcy and the situation of normal operation of enterprises. Article 45 of the Law regulates the order of settlement of tax claims and secured claims of enterprises in any state, covering both cases of bankruptcy and normal operation of enterprises. Article 2 of the Enterprise Bankruptcy Law stipulates that "where an enterprise legal person is unable to settle its debts as they fall due and its assets are insufficient to settle all its debts or it obviously lacks the ability to do so, it shall liquidate its debts in accordance with the provisions of this Law", which indicates that the Law regulates the general and fair procedure for the liquidation of the claims and debts of an enterprise that has entered into bankruptcy proceedings in an abnormal state, and that this particular procedure is not a fair procedure. This indicates that the Law regulates the procedure for the generalized and equitable settlement of claims and debts of enterprises in an irregular state entering into bankruptcy proceedings, and that the rights of the bankrupt enterprise and creditors and other relevant subjects in this particular procedure are subject to restriction, which are special provisions. In other words, the scope of adjustment under articles 109 and 113 of the Enterprise Bankruptcy Law is limited to the order of settlement of tax claims and secured claims of an enterprise in the case of bankruptcy.

Comparing the two, the scope of adjustment provided for in Article 45 of the Tax Administration Law is wider than that provided for in Articles 109 and 113 of the Enterprise Bankruptcy Law, which is more pertinent to the focus of the dispute in this case and has the attribute of a special provision. According to the provisions of special law over general law, the provisions of the Enterprise Bankruptcy Law on the order of claims should be applied in priority, i.e., secured claims have priority over tax claims.

In fact, Item (3) of Article 4 of the Announcement on Several Matters Concerning Tax Levy and Administration issued by the State Administration of Taxation (SAT) on December 12, 2019, concerning tax levy and administration in the liquidation procedures of enterprise bankruptcy, provides that the tax owed by an enterprise, late payment fees, and interest due to special tax adjustments shall be declared by the tax authorities in accordance with the relevant provisions of the Enterprise Bankruptcy Law. It can be seen that the State Administration of Taxation has also made it clear that the tax authorities should declare the taxes owed by bankrupt enterprises in accordance with the provisions of the Enterprise Bankruptcy Law, and has recognized the application of the provisions of the Bankruptcy Law.

03 Priority of tax claims should be appropriately contracted in insolvency proceedings

The reasons why tax claims are given priority are: firstly, taxes are of public interest, and rights of public interest are prioritized over rights of private interest, and secondly, taxes are risky, and as a kind of claim that lacks treatment of payment, there is asymmetry of information between tax authorities and taxpayers, and there is risk in the collection and management of taxes. However, in the special situation of bankruptcy proceedings, the priority of tax claims should be appropriately limited to balance the interests of all parties and maintain the reasonableness of the order of bankruptcy liquidation.

Firstly, the priority of rights of public interest is not absolute in bankruptcy proceedings. Despite the public welfare nature of taxes, Article 113 of the Enterprise Bankruptcy Law stipulates that tax claims are inferior to employee claims for compensation, which is a concrete manifestation that the priority of public welfare rights is limited in bankruptcy proceedings. In addition, the Supreme People's Court stated in the Minutes of the Work Conference on Bankruptcy Trials of National Courts (Law [2018] No. 53) that "for claims for which the law does not specify the order of liquidation, the people's court may reasonably determine, in accordance with the principle that claims for personal damages are prioritized over claims for property, claims under private law are prioritized over claims under public law, and claims for compensatory damages are prioritized over claims of punitive nature, the The order of liquidation". When a debtor enters into bankruptcy proceedings, given the insufficiency of the bankruptcy estate, tax creditors and secured creditors will essentially form a zero-sum game, and at this time, emphasizing the public welfare of tax claims is not reasonable or justified.

Secondly, the risky nature of tax claims should not be a reason for priority protection in bankruptcy proceedings. The Tax Administration Law has equipped the tax authorities with a series of powerful means of tax administration, such as tax preservation, enforcement, tax guarantee, etc., giving them a significant advantage over ordinary creditors outside the bankruptcy proceedings. The ability to realize claims under such public power should make it the most qualified subject to realize claims in time. If it is still given super priority in bankruptcy proceedings, it is tantamount to shifting the problems that may exist in the process of levying and administration, such as negligence in exercising authority and ineffective risk prevention and control, to the security owner, which is not in line with the concept of social fairness, and may also connive at the levying and administration inertia of the administrative organs.

Finally, from the viewpoint of the internal logic of the legal system, there is an irreconcilable conflict between the provisions of article 45 of the Tax Administration Law and the rules of liquidation in bankruptcy proceedings. The Enterprise Bankruptcy Law explicitly provides for the right to exclude security rights, and tax claims are paid after employee claims. If the tax claims are allowed to be paid in priority to the secured claims, by logical deduction, the tax claims will be given priority over the employees' claims, which will violate the bankruptcy liquidation order of "Employees' Claims - Tax Claims - Ordinary Claims" stipulated in Article 113 of the Enterprise Bankruptcy Law. This would violate the "employee claims - tax claims - ordinary claims" bankruptcy liquidation order stipulated in Article 113 of the Enterprise Bankruptcy Law. In addition, under the logic of allowing tax claims to be paid in priority to secured claims, if the amount of tax claims is greater than the amount of collateral realized, the tax claims up to the amount of collateral realized will be paid in priority to employees' claims, while the excess amount will be paid at a disadvantage to employees' claims, resulting in a cyclical disruption of the order of payment of the tax claims in the insolvency proceedings.

As for the present case, the time of occurrence of the tax claim was many years from the time when Company A entered into bankruptcy proceedings, and the materials submitted by the tax department showed that it was aware of Company A's tax arrears, and Company A entered into bankruptcy proceedings by the ruling of the Court of First Instance on May 31, 2018, and it was not persuasive to emphasize the risk of the tax claim at this time. Therefore, the priority of tax claims and mortgage guarantee claims in the bankruptcy proceedings of this case should be determined in accordance with the provisions of Article 109 and Article 113 of the Enterprise Bankruptcy Law, and the mortgage guarantee claims of Company D should be given priority over the tax claims claimed by Wujiang District Taxation Bureau for the settlement of tax claims within the scope of the amount of the sale of the mortgages.

04 Conclusion

The conflict between the provisions of the Tax Collection and Administration Law and the Enterprise Bankruptcy Law has led to ongoing disputes in practice regarding the order of settlement of claims in bankruptcy proceedings where tax claims and secured claims co-exist. Recently, the State Administration of Taxation ("SAT") issued the Revised Draft of the Tax Collection and Administration Law ("Revised Draft") for public consultation. Paragraph 1 of Article 52 of the Revised Exposure Draft stipulates that, "If the tax authorities collect taxes, the taxes shall take precedence over the unsecured claims; if the taxes owed by the taxpayer occur before the taxpayer sets up mortgages or pledges on his/her property, the taxes shall be enforced before the mortgages or pledges. Except as otherwise provided in the Enterprise Bankruptcy Law of the People's Republic of China."

The provision clarifies that the order of satisfaction of tax claims in the field of insolvency shall follow the provisions of the Enterprise Insolvency Law through the establishment of exceptions, reaffirming the principle that special laws are superior to general laws, and that the provisions on the priority of tax claims over mortgages and pledges shall not be applied to enterprises in insolvency, thus resolving the conflict of application of the above-mentioned laws. The amendment of this provision reflects the principle that the effect of claims in rem takes precedence over claims in creditor's rights, and also provides reasonable and fair protection to other creditors in bankruptcy proceedings, reflecting the social principle that the State does not compete with the people for profits.