Refinement Of The Rules On The Suspension Of A Security Right In Insolvency Proceedings

The rule on the suspension of the exercise of a security right in insolvency proceedings is a typical issue that reflects the full collision and cross-fertilization of insolvency and security law in reality.Regrettably,its rules and corresponding interpretations have long been criticized for their lack of specificity and clarity.For example,the principles of "necessary for the reorganization of the enterprise" is too subjective and give the insolvency administrator and the debtor greater autonomy in the disposal of the enterprise’s property and interests,creating the potential for excessive restrictions on security rights in practice.For the time being,these studies have been given new significance and value by the changes to the security regime in the Civil Code of the People’s Republic of China(the Civil Code)and its judicial interpretations,as well as the commencement of the pilot project on judicial assistance in cross-border insolvency.Firstly,the performance of the various forms of security created in commercial transactions is recognised at the statutory level by the Civil Code,and the abundance of security forms may result in more insolvency creditors’ interests being restricted as described above,and the many problems that already existed with the rules on the suspension of security rights will become more complex.For this reason,this article clarifies in chapter I that the function of the rules on the suspension of the exercise of the security right lies in the fact that they allow the necessary time and space to weigh the interests of all parties and to distribute the property in a reasonable manner by bringing the specific property of the enterprise under the unified supervision of the insolvency administrator,which is in line with the values and legislative objectives of the current insolvency regime.However,the limits of its application are that it must not be used as the sole means of disproportionately sacrificing the interests of the security right holder,that it must not defeat the purpose for which the security was created by the parties,and that it must not render the function of the security to secure the fulfilment of the claim impossible.Secondly,in order to clarify the scope of the limitations on the suspension of a security right,Chapter II of this article builds on existing norms in terms of the insolvency proceedings to which the suspension rules apply,the types of rights that are suspended and the types of collateral against which the suspension applies,providing more principled criteria for determining whether a particular in rem security right in insolvency proceedings needs to be suspended.In addition,this paper is concerned that the consent of the parties is the main reason for the emergence of security innovations and,given that financial security claims often account for a large proportion of enterprise insolvency claims and are novel and varied,this paper proposes that the use of termination netting provisions in financial derivatives transactions in insolvency liquidation should be used as an example of the special nature of the application of the moratorium rule to financial security rights in insolvency proceedings and that an exception to the application of the moratorium rule for security rights should be permitted with the prior consent of the parties.Furthermore,new forms of security recognised by the Civil Code,such as retention of title and financial leases,present difficulties in the analysis of whether and how the rules on suspension of security rights apply under the established insolvency law framework.In response,chapter III of this article builds on the scope of application of the moratorium identified in chapter II and specifically addresses the interface between the security functions of deposit guarantees,cession guarantees,retention of title and financial leases and the moratorium rules.The basic idea of the analysis concerns two levels,on the one hand,the normative and theoretical discussion of whether the claim will have a preferential effect in liquidation against the particulars of the insolvent enterprise at the time of entry into insolvency proceedings.A suspension is only necessary if the claim has priority and can be considered an infringement of the interests of the creditor.Once it has been established that the security right holder has priority in the realised value of the property,the principle criteria set out in Chapter II can be used to make a specific determination of whether to suspend the exercise from the perspective of the insolvency representative or the court,taking into account factors such as possession and the nature and characteristics of the property.Finally,how to match the relatively fixed rules of security and insolvency law with the extensive innovations in secured transactions will be an issue that should be considered and resolved for a long time to come.The premise and basis for the continued expansion of cross-border judicial assistance in insolvency should be that China’s insolvency procedures and rules are sufficiently well developed and in line with other international insolvency rules.To this end,Chapter IV of this article proposes to take the opportunity of the revision of the Enterprise Insolvency Law to improve the rules on the suspension of the exercise of security rights in insolvency proceedings,taking as a starting point the concept of balancing the interests of various subjects in insolvency and protecting the security of transactions.Based on the understanding and interpretation of the current legislation on the suspension of the exercise of the security right rule,the corresponding legal improvements are proposed from the perspective of reorganization and liquidation proceedings,two proceedings that have the possibility of applying the rules on suspension of the security right.