Recently, the Shanghai Financial Court released its annual Top Ten Executive Model Cases. The enforcement case concerning a dispute over pledged securities repurchases between a securities company and a Shanghai-based company, represented by Llinks, was successfully selected. The execution subject matter of this case exceeded RMB 700 million, involving multiple complex issues such as the disposal of listed companies' shares, the realization of financial claims, the assertion of historical tax delinquency priority, and the protection of real rights for security in the form of pledges.

While these issues may appear to be purely "enforcement procedures" on the surface, they fundamentally relate to a substantive cross-cutting issue between public and private law: When a tax authority asserts the priority of historical tax delinquency, must the security interest holder naturally step aside? The answer provided by this case is: Tax priority should be protected in accordance with the law, but this does not mean it can enjoy unconditional priority detached from legal procedures, public disclosure, and transactional reliance. What is ostensibly contested on the surface is the order of distribution; what is deeply established underneath is an enforceable, predictable, and dependable market rule.

I. Case Background: Dispute over Distribution Ranking within an Enforcement Fund of over RMB 700 Million

In this case, because the judgment debtor, a Shanghai-based company, failed to perform the obligations determined by an effective legal document, a securities company applied to the Shanghai Financial Court for compulsory enforcement. During the enforcement process, the court disposed of 41,010,734 shares of a joint-stock limited company held by the judgment debtor in accordance with the law.

During the distribution process of the auction proceeds, a relevant tax authority issued a letter stating that the judgment debtor had unpaid taxes and corresponding late payment fines during the tax periods in question. Relying on the provisions regarding tax priority in Article 45 of the Law on the Administration of Tax Collection, the authority requested that a corresponding amount be retained from the share auction proceeds to give priority to clearing the overdue taxes and late payment fines.

II. Strategy of Representation: From "Natural Deference" to "Judicial Review"

Tax claims do enjoy a prioritized status in many scenarios, and similar rules are frequently observed in liquidation procedures such as bankruptcy. Over time, a "stereotype" can easily form in practice: As long as a tax authority claims priority for overdue taxes, other creditors and security interest holders seemingly have no choice but to make way. Faced with this claim backed by strong institutional expectations, the Llinks representation team did not halt at the inertial judgment that "the tax authority's claim naturally means priority." Instead, they assisted the client in conducting a systematic analysis and demonstration from multiple dimensions, including the applicable conditions of tax priority, the regulatory purpose of the tax delinquency announcement system, the public disclosure and public trust foundation of pledged security interests, and the security of financial transactions.

The team contended that a tax authority asserting historical tax delinquency priority in enforcement procedures must not only satisfy the substantive conditions prescribed by law, but must also perform its procedural preliminary duties, such as publishing tax delinquency announcements, in accordance with the law. If the relevant tax delinquency information was not publicly disclosed according to the law, and the security interest holder could not foresee this priority encumbrance when establishing the security interest, the priority distribution status of the already established pledge claim should not be naturally denied.

III. Case Result: Protection of the Client's Core Rights and Interests

Ultimately, Llinks' representation strategy was recognized and accepted by the Shanghai Financial Court. The enforcement distribution plan formulated by the court did not support the tax authority's request to prioritize the unpaid taxes and late payment fines over the pledged claims, allowing the execution applicant, the securities company, to receive full priority satisfaction from the auction proceeds. The tax authority raised no objection to the distribution plan of the executed property.

IV. Rule Significance: Establishing Enforceable, Predictable, and Dependable Market Rules

The typical significance of this case lies in the fact that, within the property distribution procedure of enforcement, the court conducted a more meticulous review regarding the boundaries of the application of tax priority. As public law claims, tax claims should certainly be protected in accordance with the law; however, for such priority efficacy to actually be realized, it should be predicated upon the tax authority performing its duties according to law and timely announcing tax delinquency information. Only when the boundaries of rights can be identified, risk burdens can be foreseen, and procedural requirements can be verified, can market subjects make authentic and effective judgments and arrangements prior to entering into transactions.

Therefore, the value of this case is not confined to the smooth realization of over RMB 700 million in financial claims in a single case. More importantly, through a specific enforcement distribution, it further clarifies the path of review when public law claims and private law security interests conflict: Tax priority should be protected in accordance with the law, and transactional reliance should equally be protected in accordance with the law; the realization of public law claims should follow statutory procedures, and the stability of private law rights should also receive institutional respect.

In other words, what is ostensibly contested on the surface is the order of distribution; what is deeply established underneath is an enforceable, predictable, and dependable market rule.

This case was handled by the Llinks Dispute Resolution Team, with project team members including Ms. Wenjun Cai and Mr. Jason Zhang. The selection of this case into the Top Ten Executive Model Cases of the Shanghai Financial Court reflects the continuous focus of judicial organs on the protection of financial claims, the improvement of enforcement distribution rules, and the construction of a legalized business environment.

For the Llinks team, this case also represents a model practice of confronting difficulties head-on, arguing on strong legal grounds in a complex enforcement procedure, and ultimately achieving the protection of the client's core rights and interests. Llinks will continue to leverage its professional experience in the fields of financial dispute resolution, securities pledge business, compulsory enforcement, and the realization of complex debts to provide high-quality legal services for the protection of clients' major financial claims and risk mitigation.

Llinks Engagement Team

Wenjun Cai, Partner

Jason Zhang, Partner