Meaning
Statutory provision establishing priority rights for creditors holding security interests over specific assets of an insolvent company in Chinese bankruptcy proceedings. Secured claims governed by article 109 enjoy preferential right of payment directly from the realization proceeds of the encumbered property. This priority ranks above general bankruptcy claims and administrative insolvency expenses.
The right applies only up to the net liquidation value generated by the specific encumbered asset, converting any remaining unpaid balance into an unsecured claim.
Statutory Priority
Statutory insolvency administration places encumbered collateral outside general distribution schemes. Under article 109, a secured creditor maintains exclusive right to receive payment directly from the proceeds realized through the liquidation of pledged or mortgaged property. Administrators must liquidate collateral separately from unencumbered assets, preserving specific property assignments established under registration systems.
Liquidated sums flow to the collateral holder prior to paying labor wages or tax debts. Foreign equipment financiers rely on this mechanism when leasing machinery to domestic manufacturing entities. Verified mortgage entries determine exact payout hierarchy.
Encumbered Asset
Asset valuation dictates the exact financial recovery achieved by secured lenders during court proceedings. When property values fall below outstanding loan balances, article 109 restricts preferential treatment strictly to the realized amount. Administrators transfer residual obligations into general unsecured claims.
Valuations fluctuate during distress sales.
Enforcement Boundary
Judicial stay provisions temporarily pause automated foreclosure procedures immediately upon bankruptcy acceptance. Article 109 does not permit immediate unilateral asset grabs without insolvency administrator verification. Creditors must present registered security documents to establish valid priority status.
Formal approval unlocks distribution proceeds. Unregistered security agreements forfeit preferential treatment completely under statutory review.
