Real life case sharing:

On July 10, 2012, Company A borrowed RMB 30 million from the bank and signed a mortgage contract, and created a mortgage on several properties in its name. on July 20, 2012, the bank completed the registration of the mortgage and obtained a mortgage certificate. As Company A failed to repay the loan at maturity, the bank filed a lawsuit with the court. on June 10, 2014, the court ruled that Company A should repay the principal amount of the loan and the overdue interest to the bank, and at the same time, confirmed the bank's right to priority compensation for the mortgaged property. After the judgment came into effect, on August 18, 2014, the bank applied to the court for compulsory execution. in July 2020, the claim in question was assigned by a natural person, Li Mou, after two assignments, and the court changed the applicant for execution to Li Mou. from September to October 2024, the mortgaged property was unsuccessfully sold through the first and second auctions. in November 2024, Li Mou applied to the court for a set-off of the debt in kind.

In September 2024, the tax bureau where Company A was located filed an application to the court for the allocation of the execution case funds, claiming the right to tax priority for the 25.75 million yuan of taxes and 25.75 million yuan of late payment fees owed by Company A, in accordance with the provisions of Article 45 of the Taxation Levy and Administration Law.In December 2024, the court issued a Notice of Execution, which held that the time of Company A's tax liability occurred on May 2, 2011 , which was earlier than the time of creation of the mortgage on July 20, 2012, and therefore found that the tax was prioritized over the enforcement of the mortgage, and rejected Li's application for in rem payment.

In December 2024, Li filed an execution objection to the execution court, requesting to revoke the said Execution Notice.2025 In February 2025, the court issued an Execution Ruling, holding that according to the provisions of Article 45 of the Taxation Administration Law, the taxes and late fees owed by Company A should be prioritized over the execution of the mortgage, and rejected Li's application to set off the debt against the goods and ultimately rejected Li's objection request.

Huashui Analysis:

This is a case involving a dispute over tax priority in civil enforcement proceedings. In judicial practice, there are different opinions on whether tax priority can be applied in civil enforcement procedures. The court in this case held that tax priority could be prioritized over mortgage enforcement, while some judicial cases took the opposite position, holding that tax priority could not be applied in civil enforcement procedures due to the lack of grounds.

The Higher People's Court of Shanxi Province in the case of (2020) Jin Enforcement Review No. 107 clearly pointed out that "the first paragraph of Article 45 of the Tax Administration Law provides for the tax priority system. However, the laws and judicial interpretations on civil enforcement do not provide that the tax priority can participate in the distribution of the case funds in the enforcement procedure and give priority to its realization. Therefore, there is no direct, legal interest between the tax authorities and the people's court in the distribution of case funds, and they do not have the subjective qualification of interested parties as stipulated in article 225 of the Civil Procedure Law."

The Beijing No. 2 Intermediate People's Court also emphasized in its Judgment No. (2024) Beijing 02 Enforcement No. 678 that "among the existing laws and regulations, only the Bankruptcy Law has made relevant provisions on the tax authorities' right to enjoy the priority of tax in civil litigation proceedings, and the laws and judicial interpretations on civil enforcement have no provisions on the priority of tax and late payment to participate in the distribution of the case funds in the enforcement proceedings and to realize the priority of tax and late payment to be realized". There is no provision that tax and late payment can participate in the distribution of case funds and be realized with priority in the execution procedure. Therefore, the tax authority's objection to the priority of late payment of taxes is not valid."

In the author's opinion, the tax priority in civil enforcement procedures should not be applied. The Tax Administration Law has given the tax authorities the legal means of tax administration, such as tax preservation, enforcement, tax guarantee, etc., and as a subject of public power, they should give priority to the realization of claims through administrative enforcement procedures. When there are other enforceable properties of the executed person, the tax authorities should recover the tax through administrative enforcement procedures, instead of competing with the mortgagee for the benefit of the realization of the particular mortgaged property. Only when the exhaustive investigation procedure confirms that the executed person has no other property available for execution except for the mortgaged property, the claim of tax priority has the practical necessity.

In other words, in civil enforcement proceedings, if the executed person has a number of assets and the mortgage only covers a specific property, the tax authorities should not intervene in the enforcement of the distribution of the mortgaged property, or else it is to transfer to other creditors the problems that may exist in the levy and administration such as negligence in the performance of duties, which is contrary to the principle of fairness, and may also connive at the inertia of the levy and administration of the administrative authorities.

Creditors can take the following remedies when faced with tax authorities claiming tax priority in civil enforcement proceedings: one of them is to apply for enterprise bankruptcy. According to Article 7(2) and Article 109 of the Enterprise Bankruptcy Law, creditors may apply to the court for bankruptcy and liquidation of the debtor when the debtor fails to repay the debts due, and the secured claims in the bankruptcy proceedings will be given priority over the tax claims within the scope of the realization of the secured property. Secondly, the filing of enforcement objections and subsequent remedies. The creditor may file an execution objection to the priority claim of the tax authority, and if the objection is rejected by the court, the creditor may apply for reconsideration to the higher court in accordance with Article 236 of the Civil Procedure Law, and if the result of the reconsideration is unsatisfactory, the creditor may continue to obtain remedies through the statutory channels such as the execution supervision procedure.

Combined with this case, after receiving the execution ruling rejecting his objection application, Li may apply for reconsideration to the higher court in accordance with the law, or assess whether Company A meets the conditions for applying for bankruptcy, and redefine the rights of each party through initiating bankruptcy proceedings. In short, when facing similar disputes, creditors should make full use of the existing legal procedures to safeguard their legitimate rights and interests by means of filing execution objections, applying for reconsideration and initiating bankruptcy proceedings.