The case: Company A was the discredited judgment debtor.  Company B applied for enforcement and the freezing of the deposit of 15 million yuan in Company A’s account. Later, after a non-involved party Company C filed an objection to the enforcement on the grounds that it enjoys rights and interests sufficient to exclude the enforcement, the court rejected Party A’s application. Company A filed an an objection to the enforcement on the grounds of improper enforcement, but it was still rejected. It is learned that the amount of debt owed by Company B to Company A was 16 million yuan, and the amount of debt owed by Company C to Company A was 18 million yuan. Company B and Company C shall allocate frozen deposits in accordance with the order and proportion of allocation.

I. The system for participation in the allocation

     In the legal practice of enforcement, there are often multiple creditors, which involves the order and amount of allocation of each creditor. In the enforcement procedure, the system for participation in the allocation refers to the system in which each creditor applies to the people’s court for the disposition of the property of the discredited judgment debtor in the enforcement procedure, and the people’s court will pay the creditors after the property of the discredited judgment debtor is cashed.

      Among the currently valid normative documents, the Provisions of the Supreme People’s Court on Several Issues of the Implementation by the People’s Courts (Trial) (2020 Amendment)” (hereinafter referred to as the “Implementation Provisions”) and the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China (2020 Amendment) (hereinafter referred to as the “Interpretation of the Civil Procedure Law”) stipulate system for participation in the allocation.

      Article 508 of the Judicial Interpretation of the Civil Litigation Law stipulates that the discredited judgment debtor is a citizen or other organization.  After the enforcement procedure begins, if other creditors who have obtained the basis for the enforcement find that the property of the discredited judgment debtor cannot pay off all the claims, they may apply to the people’s court to participate in the allocation. Creditors who have priority or secured property rights over the property sealed, seized, or frozen by the people’s court may directly apply to participate in the allocation and claim priority right to compensation. The prerequisite for participating in the allocation is that the discredited judgment debtor is a citizen or other organization, and the creditor who enjoys ordinary creditor’s rights needs to obtain a corresponding basis for enforcement.

      As to the order of allocation in the case where each creditor has no priority over the subject matter of the enforcement, Article 55 (1) of the Enforcement Regulations stipulates: Multiple creditors who are entitled to cash payment in effective legal documents should apply for enforcement of the same subject matter separately.  If each creditor has no secured property right in the subject matter of enforcement, they shall be compensated in accordance with the order in which the enforcement measures taken by the enforcement court. Article 510 of the Interpretation of the Civil Litigation Law stipulates: In participation in the allocation of enforcement, after the deduction of enforcement costs from the price obtained from the enforcement and the paying off of the creditor’s rights that should be paid first, for ordinary creditor’s rights, in principle, they shall be compensated in accordance with their proportion in the total applied allocation amount; In a response on May 11, 2021, the Supreme People’s Court pointed out that the order of allocation in the Enforcement Regulations is a general rule in the enforcement procedures and does not apply to situations such as insolvency of the discredited judgment debtors, the applicants’ participation in the allocation or conversion of enforcement to bankruptcy. However, the order of allocation in the Interpretation of the Civil Litigation Law is to further clarify the principles of handling when the discredited judgment debtor’s property is not enough to pay off all debts.

      Conclusion: When the discredited judgment debtor is a citizen or other organization, where the allocation system is applicable:

• For creditors who enjoy priority and secured property rights, they can directly apply to participate in the allocation and claim priority right to compensation;
• For creditors who enjoy ordinary creditor’s rights, if the discredited judgment debtor is insolvent, they will receive the allocation proportionally; if the property of the discredited judgment debtor is sufficient to settle the relevant debts, they will be paid in accordance with the order of enforcement measures taken by the enforcement court.
   

II. The connection between the participation distribution system and the bankruptcy system

      Article 513 of the Judicial Interpretation of the Civil Procedure Law stipulates that if the legal person of the discredited judgment debtor falls under the circumstances stipulated in Article 2 (1) of the Enterprise Bankruptcy Law, the enforcement court shall, with the consent of one of the persons applying for enforcement or the discredited judgment debtor, rule to suspend the enforcement and transfer the relevant materials of the enforcement to the court where the discredited judgment debtor is domiciled; Article 516 stipulates that if the parties do not agree to conversion into the bankruptcy or if the people’s court where the discredited judgment debtor is domiciled will not accept the bankruptcy case, the enforcement court shall enforce the property obtained from cashing, and carryout the compensation in accordance with the order of the property which is sealed, seized or frozen during preservation and enforcement for ordinary claims after deducting the enforcement costs and paying off the priority claims.

      Once the bankruptcy proceedings are entered, the Enterprise Bankruptcy Law and the relevant judicial interpretation shall apply. Article 19 of the Bankruptcy Law stipulates that, after the people’s court accepts the bankruptcy application, the preservation measures related to the debtor’s property shall be lifted and the enforcement procedures shall be suspended; Article 102(1) of the Supreme People’s Court on Several Issues of Enforcement by People’s Courts stipulates that, if the people’s court has accepted the bankruptcy application with the discredited judgment debtor as the debtor, the people’s court shall rule to suspend the enforcement; Article 105 stipulates that, in the course of enforcement, if the discredited judgment debtor is declared bankrupt by a ruling of the people’s court, the enforcement court shall rule to terminate the enforcement. Based on this, after the entry into the bankruptcy proceedings, ordinary creditors will not enjoy the priority right to compensation.

Conclusion: When the discredited judgment debtor is a legal entity and the funds deducted from the account are not enough to repay all the creditor’s rights:

• According to Article 516 of the Judicial Interpretation of the Civil Litigation Law, if the parties do not agree to the conversion into the bankruptcy or if the people’s court of the place where the discredited judgment debtor is domiciled will not accept the bankruptcy case, the enforcement court will enforce the property obtained from the cashing, and carryout the compensation in accordance with the order of the property which is sealed, seized or frozen during preservation and enforcement for ordinary claims after deducting the enforcement costs and paying off the priority claims.
• According to Article 513 of the Judicial Interpretation of the Civil Litigation Law, if one of the applicants of enforcement or the discredited judgment debtor agrees to the conversion into bankruptcy, the enforcement shall be suspended and the relevant materials of the enforcement shall be transferred to the court where the discredited judgment debtor is domiciled, and the provisions of the Enterprise Bankruptcy Law and related judicial interpretations shall apply, that is, ordinary creditors shall be compensated in accordance with the proportion of the amount of creditor’s rights they enjoy to the total amount of creditor’s rights.