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On April 14, 2022, the Supreme People’s Court issued the “Notice on Properly Handling Issues Related to the Effect of Subsequent Seizures” (Fa [2022] No. 107) (hereinafter referred to as the “Notice”), which further improves the subsequent seizure system. The spirit of the Notice can correctly and effectively guide people’s courts, lawyers, and parties in handling seizure, freezing, and other measures in enforcement proceedings. This article, taking the issuance of the Notice as an opportunity, briefly analyzes how courts should dispose of and distribute property in the enforcement phase when a first seal, subsequent seizure, and priority claims coexist.

I. Distinction Between First Seal and Subsequent Seizure

1. Concepts:

Generally speaking, in litigation preservation or enforcement proceedings, creditors often apply to the people’s court for seizure, freezing, or other measures against the debtor’s property to ensure effective realization of their lawful claims. When a debtor has multiple creditors who separately apply for property preservation or compulsory enforcement, the court that first takes seizure measures will enter enforcement proceedings first. This court is called the “first-sealing court,” and its action is called “first seizure.” The court that later takes seizure measures is called the “subsequent seizure court,” and its action is called “subsequent seizure.”

2. Legal Effect:

Current effective judicial interpretations provide for the legal effect of subsequent seizures. Article 26 of the “Provisions of the Supreme People’s Court on Several Issues Concerning Seizure, Freezing, and Auction of Property in Civil Enforcement by People’s Courts” (Fa Shi [2004] No. 15) (hereinafter referred to as “Fa Shi No. 15”) provides: “Where property has been seized, frozen, or auctioned by a people’s court, other people’s courts may conduct subsequent seizures, freezes, or auctions. When the prior seizure, freeze, or auction is lifted, the earliest subsequent seizure, freeze, or auction shall automatically take effect.”

Thus, while Fa Shi No. 15 grants the first-sealing court the right to dispose of the seized property, it considers only the first seal as a formal seizure. Only after the first seal is lawfully lifted does the earliest subsequent seizure automatically transform into a formal seizure. That is to say, before the first seal is lifted, a subsequent seizure has only expectant effect, similar to a “civil legal relationship with pending validity.” However, according to Article 2 of the newly issued Notice: “Subsequent seizures are binding on the first-sealing disposal court.” To发挥 the proper role of “subsequent seizures” and protect the lawful rights of subsequent seizure creditors, the Supreme People’s Court has newly赋予 subsequent seizures the effect of formal seizures, binding on both the first-sealing disposal court and the executed person.

In practice, the first-sealing court can directly dispose of seized property without going through the subsequent seizure court, leading to disputes between the first-sealing court and the subsequent seizure court over the disposal and repayment order of the seized property. The following sections briefly analyze these disputes under different circumstances.

II. Disposal Method When Both First Seal and Subsequent Seizure Are for Ordinary Claims

When the claims of both the first-sealing and subsequent seizure creditors against the executed person are ordinary claims, the key factor is whether the executed property is sufficient to satisfy all debts, leading to different disposal plans:

1. Executed Property Is Sufficient:

According to Article 55(1) of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Work of People’s Courts in Enforcement (Trial)” (Fa Shi [1998] No. 15) (hereinafter referred to as the “Enforcement Provisions”), if creditors do not have security interests in the executed property, multiple creditors with monetary claims shall be repaid in the order of the enforcement measures taken by the enforcement court.

2. Executed Property Is Insufficient:

Article 55(3) of the Enforcement Provisions provides: “Where multiple creditors with monetary claims determined by a single effective legal instrument apply for enforcement against the same executed person, and the executed property is insufficient to satisfy all debts, if none of the creditors has a security interest in the subject matter of enforcement, they shall be repaid in proportion to their respective claims.”

At this point, the enforcement court will adopt different enforcement measures based on the nature of the debtor (executed person):

(1) When the Executed Person Is an Enterprise Legal Person

If the executed person is an enterprise legal person, according to Article 2(1) of the Enterprise Bankruptcy Law, when the debtor’s property is insufficient to repay multiple monetary debts, the enforcement court shall, after obtaining the consent of one of the applying creditors or the debtor, rule to suspend enforcement and transfer the case to the bankruptcy court for “enforcement-to-bankruptcy” proceedings. This article does not discuss case处置 under bankruptcy proceedings. In practice, based on concerns about debt realization or maintaining the applied person’s business operations, creditors often do not agree to the “enforcement-to-bankruptcy” option. Therefore, Article 514 of the Civil Procedure Law Interpretation provides that when the parties do not agree to “enforcement-to-bankruptcy,” the enforcement court shall continue (or resume) enforcement and distribute proceeds in the following order: (1) enforcement fees; (2) priority claims; (3) ordinary claims.

(2) When the Executed Person Is a Citizen or Other Organization

Since citizens or other organizations cannot enter bankruptcy proceedings like enterprises, the law has separately established a “participation in distribution system.” In judicial practice, if the executed person (citizen or other organization) cannot satisfy all debts, the enforcement court may, based on applications for participation in distribution, convene creditors’ meetings and determine a distribution plan. For普通债权, in principle, they shall be repaid in proportion to their share of the total participating claims. It is worth noting that the law does not provide for the first-sealing creditor having a statutory priority in distribution. The provision on “proportional distribution in principle” leaves room for further elaboration in judicial practice and judicial interpretation. In practice, there are different views on whether the first-sealing creditor can receive a larger share:

View 1: The First-Sealing Creditor Can Receive a Larger Share

During the drafting of the Civil Procedure Law Interpretation, some scholars suggested that first-sealing creditors should receive a larger share, referencing a 20% proportion. However, the最终 adopted formal document did not adopt this view. Nevertheless, after the Civil Procedure Law Interpretation was issued, some local courts still insisted on the view that “first-sealing creditors can receive a larger share” and issued corresponding local documents.

For example: A. Article 5(7) of the “Answers to Questions on the Application of Law in Enforcement Work of the Chongqing Higher People’s Court (I)” (Yu Gao Fa [2016] No. 63) provides: “For ordinary claims meeting the following conditions, the people’s court may, based on the specific circumstances of the case, appropriately increase the distribution share on the premise of ensuring that all creditors participating in distribution receive some payment. The increased portion shall not exceed 20% of the property to be distributed and shall not exceed the total amount of the claim. The unpaid portion shall be repaid proportionally with other ordinary claims…”

B. Article 10 of the “Guiding Opinions of the Jiangsu Higher People’s Court on Correctly Understanding and Applying the Participation in Distribution System” provides: “After deducting the above expenses, if there is a remaining surplus, distribution shall be made in the following order: (1) Claims with priority rights or security interests shall be repaid in accordance with the statutory order; (2) Ordinary creditors’ claims shall be repaid in proportion to their claim amount included in the distribution process relative to the total claim amount included in the distribution scope.

The following creditors may receive an appropriately increased distribution ratio:

(1) Where the distributed property was discovered based on information provided by the creditor; (2) Where the distributed property was discovered as a result of the creditor’s first application for inquiry; (3) Where the distributed property was discovered through the creditor’s action to revoke, enforcement objection lawsuit, or through judicial audit, reward-based enforcement, or other means.

The distribution ratio for the above creditors shall be determined considering factors such as the size of the claim and the distributed property amount, and shall generally not exceed 20% of the amount they would receive under proportional distribution.”

View 2: The First-Sealing Creditor Cannot Receive a Larger Share

Some local courts insist that “first-sealing creditors cannot receive a larger share.”

Article 6 of the “Minutes of the Foshan Intermediate People’s Court on Standardizing Creditors’ Participation in Distribution in Enforcement Proceedings” (August 6, 2013) provides: “Where a creditor who first applied for property preservation claims priority in repayment or an appropriate increase in the distribution ratio, the presiding court shall not support such claim, unless all creditors agree to an appropriate increase in the distribution ratio for the creditor who first applied for property preservation.”

Numerous cases support the view that first-sealing creditors cannot receive a larger share. For example, in Case (2015) Si Min Chu Zi No. 2086, the court held that “the plaintiff’s claim against the third party does not have any statutory circumstances entitling it to priority in repayment. Although the plaintiff first applied to the court for seizure of the property involved, the court’s seizure is not the basis for the plaintiff’s priority in repayment over the seized property.” There are many similar cases, all reflecting the view that first seizure does not grant priority over subsequent seizures. In practice, most courts, seeking to improve enforcement efficiency, tend to adopt View 2.

In addition, in practice, some local courts have even rendered inconsistent decisions over time. For example:

The Fujian Higher People’s Court, in reviewing Case (2017) Min Min Zhong No. 570, held that “Huadi Company’s claim that as the first-sealing creditor it should receive a larger share of the auction proceeds lacks legal basis. Its claim that such a practice exists in this province’s judicial practice lacks factual basis. Moreover, it did not raise this claim when objecting to the enforcement distribution plan or during the first instance trial. Therefore, this court does not support this claim.” However, in 2019, the same court expressed a completely opposite view in Case (2019) Min Min Zhong No. 1284, citing Article 9 of the “Guiding Opinions of Fuzhou Intermediate People’s Court on the Specific Application of Participation in Distribution”: “In this case, Wu Li not only first took preservation measures against the property involved but also actively asserted rights in the third-party enforcement objection lawsuit filed by Chen Haiyun and Lin Qinming, contributing significant costs and making substantial contributions to the最终 auction of the property. Therefore, Fuzhou Intermediate Court, based on the above guiding opinions adopted by its adjudication committee and combined with the actual circumstances of the case, determined that Wu Li, as the creditor who first took preservation measures, could receive an 18% larger share. This does not violate legal provisions and is reasonable.”

III. Disposal Method When Only the First Seal Is a Priority Claim

When the first-sealing creditor also has a statutory priority right to repayment against the debtor, the first-sealing court shall directly dispose of the executed property. If, after satisfaction of the priority claim, there is a remaining surplus, it shall be handled according to Article 2 of the newly issued Notice.

According to Article 2 of the Notice:

1. Subsequent seizures are binding on the first seal; subsequent seizures also have formal legal effect.

2. Regarding the remaining portion of the proceeds from the sealed property after satisfying the first-sealing creditor, the first-sealing creditor and the executed person cannot dispose of it on their own.

3. The first-sealing court shall inform the subsequent seizure court of the disposal of the sealed property and transfer the remaining proceeds to the subsequent seizure court for handling according to law.

However, the above provisions only clarify the binding effect of subsequent seizures on the first seal. In practice, it is difficult for the subsequent seizure court to clearly understand the property disposal status and whether there is a remaining surplus after disposal. Therefore, implementing this new Notice in practice requires the first-sealing court to bear actual disclosure obligations. Otherwise, the Notice’s issuance cannot actually solve the problem of subsequent seizures not being realized.

IV. Disposal Method When Only the Subsequent Seizure Is a Priority Claim

Generally, when the sealed property is the subject matter of the dispute, if the first-sealing court obtains an effective judgment first, that court, as the enforcement first-sealing court, will directly enter enforcement proceedings. However, in practice, the first-sealing court may be “怠于” disposing of the executed property. To ensure the smooth conduct of enforcement proceedings, Article 1 of the “Supreme People’s Court’s Reply on Issues Concerning the Disposal of Sealed Property by the First-Sealing Court and the Priority Claim Enforcement Court (2015)” (hereinafter referred to as the “Reply”) clarifies: “During enforcement, the court that first seized, froze, or auctioned the property shall be responsible for its disposal. However, if a claim that has entered enforcement proceedings in another court has a prior security interest or priority right over the sealed property, and more than 60 days have passed since the first seizure, and the first-sealing court has not yet issued an auction announcement or entered into a sale process for the sealed property, the priority claim enforcement court may request transfer of enforcement of the sealed property.”

Thus, during enforcement, when the following four conditions are met: (1) the priority claim is confirmed by an effective legal instrument; (2) the priority claim has entered enforcement proceedings in another court; (3) more than 60 days have passed since the first seizure; (4) the first-sealing court has not yet issued an auction announcement or entered into a sale process for the sealed property; the priority claim enforcement court may request the first-sealing court to transfer enforcement of the sealed property, effectively solving problems existing in practice.

It Is Worth Noting

The above Reply does not clearly define the scope of “during enforcement” as set forth in Article 1, giving rise to the question of whether the priority claim court in a subsequent seizure can request the first-sealing court to transfer enforcement when the first-sealing court has not yet entered enforcement proceedings. After the Reply was issued, judges from the Enforcement Bureau of the Supreme People’s Court who participated in its drafting explicitly stated: “When the priority claim enforcement court requests transfer, if the first seal is a preservation seal, the first-sealing court shall immediately transfer.” In other words, preservation seals are generally more delayed in property disposal than enforcement seals, making transfer even more necessary. However, the above conclusion is limited to cases where the subsequent seizure claim is a priority claim. Regarding the relationship between a first-sealing court that has not entered enforcement proceedings (i.e., the preservation court) and a prior subsequent seizure court (which does not hold a priority claim), are there any relevant provisions?

V. Disposal Method for a Prior Subsequent Seizure Court When the First-Sealing Court Has Not Entered Enforcement

According to Article 21 of the Enforcement Provisions: “Where the preservation court has not disposed of the preserved property for more than one year after first taking seizure, freezing, or auction measures, unless the preserved property is the subject matter of the dispute, the prior subsequent seizure, freezing, or auction enforcement court may request the preservation court to transfer the preserved property for enforcement, unless otherwise provided by judicial interpretation.”

Thus, if the first-sealing court cannot enter enforcement proceedings first due to the absence of an effective judgment, the prior subsequent seizure court may request transfer of enforcement from the first-sealing court. However, there are differing views on whether the “preservation court” in this provision is limited to “preservation (seizure) courts at the trial stage”:

1. Affirmative View

According to Article 17 of the Enforcement Provisions: “If a interested party applies for pre-litigation property preservation and files a lawsuit or applies for arbitration within 30 days after the court takes preservation measures, the pre-litigation property preservation measures shall automatically convert into preservation measures during litigation or arbitration. After entering enforcement proceedings, the preservation measures shall automatically convert into seizure, freezing, or auction measures during enforcement.”

Thus, the affirmative view holds that the interpretation of Article 21 of the Enforcement Provisions should not be limited to its literal meaning but should be expanded. Regardless of whether the case has entered the enforcement phase, if the first-sealing (preservation) court has taken preservation measures for more than one year without disposing of the preserved property, it should be deemed that the first-sealing court has neglected enforcement or has not yet obtained an enforcement basis. In such circumstances, any prior subsequent seizure court may request transfer of enforcement from the first-sealing court and auction or sell the property. Only through such interpretation can the situation where the first-sealing court’s prolonged inaction leads to “enforcement deadlock” for later-sealing creditors be minimized.

2. Negative View

If both the first-sealing court and the subsequent seizure court have entered enforcement proceedings, regardless of whether the first-sealing court has “neglected” enforcement, the subsequent seizure court has no right to dispose of the sealed property. Thus, there is no need to further discuss the issue of transfer of enforcement disposal authority. Furthermore, in the absence of legal provisions, unlimited expansion of the scope of “preservation court” would necessarily have a negative impact on the first-sealing creditor’s property distribution.

3. The Author’s View

First, according to the spirit and related provisions of the newly issued Notice, the guiding direction of the two highest authorities has gradually confirmed and recognized the formal effect and binding force of subsequent seizures, no longer ignoring their status and effect as in the past. Consequently, future judicial practice may fully consider the interests of subsequent seizure creditors.

Furthermore, in the draft of the Civil Compulsory Enforcement Law of the People’s Republic of China, which was circulated for comment on June 4, 2022, Article 110(2) has drafted the provision: “If the people’s court that first sealed the property has not initiated the procedure for determining a reference price for the real estate within three months after the seal, the people’s court that later sealed the property may request the first-sealing court to transfer the disposal authority.” If the正式 enacted Civil Compulsory Enforcement Law does not modify this provision, “the people’s court that first sealed the property” will replace the definition of “preservation court” in Article 21 of the original Enforcement Provisions. Similarly, “the people’s court that later sealed the property” will replace the original “prior subsequent seizure, freezing, or auction enforcement court” wording. Thus, legislation has expanded the scope of both “first seal” and “subsequent seizures” to a certain extent, reflecting a more liberal legislative spirit.

Second, the system of requesting transfer of enforcement is designed to promote the realization of the lawful rights and interests of all creditors, avoid excessive cases falling into “enforcement deadlock,” and protect the interests of later-sealing creditors who have entered enforcement proceedings. It has practical significance in addressing China’s “difficulty in enforcement” problem.

Third, since it is common in practice for courts to fail to issue effective judgments within one year after preservation, while encouraging expanded interpretation of the scope of transfer requests, the lawful rights of first-sealing creditors must also be protected.

In Case (2018) Yun Zhi Fu No. 37, the court provided a good example. The court ruled: “Although the reapplicant Tang Yuming is the first-sealing creditor and Zhang Guoyong is the subsequent seizure creditor, after Zhang Guoyong’s case entered enforcement proceedings, Tang Yuming had not disposed of the preserved property for more than one year. Kunming Intermediate Court, based on Zhang Guoyong’s application, formulated a distribution plan for the executed property and disposed of the preserved property in proportion to the claims of both parties, which complies with the above judicial interpretation. However, referring to Article 3 of the Supreme People’s Court’s Reply on Issues Concerning the Disposal of Sealed Property by the First-Sealing Court and the Priority Claim Enforcement Court, the prior subsequent seizure court’s先行 disposal of the executed property does not deny the repayment order of the first-sealing claim. On the contrary, if the first-sealing claim has not been confirmed by an effective legal instrument, a corresponding share shall be reserved for the right holder according to the repayment order of the first-sealing claim.”

Therefore, regardless of whether the above disputes are actually resolved, in practice, more attention should be paid to ensuring and fully considering the first-sealing interests of the first-sealing creditor. Otherwise, the repayment order of seizures would be disrupted, creating a situation of irrational legislation to solve the “difficulty in enforcement” problem. This would ultimately lead to first-sealing creditors who are dissatisfied with the court’s decision to request transfer of enforcement having to seek relief only through enforcement objections or reapplications, inevitably increasing litigation burdens and prolonging the time for various creditors to realize their claims, significantly reducing the economic value of enforcement. Therefore, the author believes that when the Civil Compulsory Enforcement Law is enacted, detailed provisions should be made on the issue of “how first-sealing creditors should be relieved and protected when the prior subsequent seizure court disposes of the executed property first.”

VI. Practical Suggestions

This article mainly briefly analyzes the issues of property disposal and distribution when first seal and subsequent seizure coexist in practice. Although the newly issued Notice is only a formal document of the Supreme People’s Court without the effect of a judicial interpretation, it has significant implications for guiding practical work and legislative direction. Based on the above analysis and with reference to the new Notice, the author offers the following suggestions regarding issues with greater controversy in practice:

1. Suggestions for First-Sealing Creditors (Potential First-Sealing Creditors)

First, upon discovering that the debtor has failed to perform its obligations in accordance with law, the creditor should file a lawsuit as early as possible. At the same time, the creditor should actively pursue litigation preservation when the case enters the trial phase, striving for a favorable position in terms of order, and争取 becoming the first-sealing creditor.

Second, when uncertain about whether the first-sealing creditor can receive a larger share,尽可能 search for and cite successful precedents in judicial practice for the judge’s reference.

Third, where the first-sealing creditor has not yet obtained an effective legal instrument, the possibility of a prior subsequent seizure creditor requesting transfer of enforcement may arise. The first-sealing creditor should actively communicate with the prior subsequent seizure court, clearly establishing their first-sealing status, including the time of first seizure, the subject matter, the scope of the seal, and the amount preserved, and attach relevant preservation documents. They should strive to have a corresponding share reserved for them in the distribution by the prior subsequent seizure court. If dissatisfied with the prior subsequent seizure court’s decision to request transfer of enforcement, the first-sealing creditor may file an enforcement objection or seek reconsideration for relief under the Civil Procedure Law.

2. Suggestions for Subsequent Seizure Creditors

First, if unable to obtain first-sealing status during property preservation and faced with a first-sealing creditor who is “negligent” in enforcement, the subsequent seizure creditor may, if conditions are met, search for precedents in the region where a prior subsequent seizure court has先例 disposed of the executed property, and actively request the subsequent seizure court to seek transfer and distribution of the preserved property.

Second, if the subsequent seizure creditor is a citizen or other organization and has obtained an enforcement basis, they may disregard the Notice’s provision about “awaiting disposal by the first-sealing court before repayment from remaining proceeds.” As a subsequent seizure creditor, they may directly apply to the first-sealing court for participation in distribution, attend the creditors’ meeting convened by the court, and receive repayment proportionally.

Third, as the holder of a subsequent seizure right, the creditor should timely monitor the progress and status of the first-sealing court’s property disposal and maintain close tracking of the executed property.

According to the new Notice, when it is established that (1) the court knowingly allowed the auction subject to have a subsequent seizure; (2) violated the duty of proper handling; (3) returned the remaining proceeds to the executed person; the first-sealing court constitutes an enforcement error. Thus, for the first-sealing court to be found in error, it must have “knowingly” allowed the auction subject to have a subsequent seizure. As a subsequent seizure creditor, one should avoid passive waiting and instead maintain active communication with the first-sealing court, declare their seizure order, and proactively follow up on the first-sealing court’s property disposal progress.