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When a Chinese Company Goes Bankrupt, Who Shall be Paid First?

When you deal with or work for a Chinese company, it’s possible that the Chinese company owes you money for various reasons, and if this company has a lot of other debts besides owing you money, it may go bankrupt.


When the Chinese company goes bankrupt, and this bankrupt company owes money to other people or companies, without enough property to pay off all the debts, which debt should it repay first? And if the property of the bankrupt company has been mortgaged to the bank, does the property need to be used to repay the debt owned to the bank first?


According to Articles 42, 109, 110 and 113 of the PRC Enterprise Bankruptcy Law (中华人民共和国企业破产法), and referring to the cases of the PRC Supreme People's Court and Hangzhou Intermediate People's Court, when a Chinese company goes bankrupt, the order of its debt settlement is as follows:


1. If the property of the bankrupt company is used for mortgage or other guarantees to some people or companies, the property used for mortgage or other guarantees shall be used to repay the debts owned to these people or companies first.


2. After the property of the bankrupt company is used to repay the money to people or companies with mortgage right or other security rights, the remaining property of the bankrupt company should first be used to pay off the bankruptcy expenses and common benefits debts.


3. After completing the repayment of the debts in the above two points, the remaining property of the bankrupt company will be used to repay other debts in the following order:


(1) The wages, medical aid and pension expenses owed by the bankrupt company to the employees, and the basic endowment insurance and basic medical insurance expenses owed by the bankrupt company that should be included in the personal accounts of the employees, and the compensation that the bankrupt company should pay to the employees according to the law.


(2) The social insurance expenses that the bankrupt company owes in addition to those specified in the previous point, and the taxes owed by the bankrupt company.


(3) Other ordinary debts of the bankrupt company.


According to Article 42 of the PRC Enterprise Bankruptcy Law, common benefits debts refer to the following debts incurred after the people's court accepts the bankruptcy application of the bankrupt company:


1. Debts arising from the request of the administrator or bankrupt company for the other party to perform the contract, which has not been fully performed by both parties (according to the PRC Enterprise Bankruptcy Law, the administrator is the person appointed by the people's court to manage the property of the bankrupt company).


2. Debts arising from someone’s spontaneous agency / voluntary service of the bankrupt company's property.


3. Debts arising from unjust enrichment of the bankrupt company.


4. The labor remuneration and social insurance expenses that should be paid for the bankrupt company to continue its business as well as other debts arising therefrom.


5. Debts arising from personal injury caused by the performance of duties by the administrator or relevant personnel.


6. Debts arising from the damage caused by the property of the bankrupt company.


The above are China’s regulations on the order of debt repayment of bankrupt companies, if you have any more related questions, please do not hesitate to contact our professional Chinese lawyers.


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Larry Zhou, Partner

Landing Law Offices China

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