preface

The Civil Code of the People's Republic of China (hereinafter referred to as the "Civil Code") came into force on January 1, 2021. In order to cooperate with the implementation of the Civil Code, the Supreme People's Court, on the basis of clearing up relevant judicial interpretations, combined with judicial practice, The Supreme People's Court's Interpretation on the Application of the Guarantee Part of the Civil Code of the People's Republic of China (hereinafter referred to as the "Judicial Interpretation of the Guarantee System of the Civil Code") has been formulated and implemented simultaneously with the Civil Code. "What is the impact of the Civil Code and the Judicial Interpretation of the Civil Code Guarantee System on the project guarantee measures of financial institutions? What are the key points of attention for financial institutions to pay when arranging and implementing project guarantee measures after the Civil Code? We have made relevant summaries for reference.".

1. The agreement on guarantee independence is invalid

The Judicial Interpretation of the Guarantee System of the Civil Code stipulates that if the parties agree in the guarantee contract that the effectiveness of the guarantee contract is independent of the main contract, or agree that the guarantor shall bear the guarantee liability for the legal consequences of the invalidity of the main contract, the agreement on the independence of the guarantee is invalid. If the main contract is valid, the invalidity of the agreement on the independence of the guarantee shall not affect the validity of the guarantee contract; "If the main contract is invalid, the people's court shall determine that the guarantee contract is invalid, except as otherwise provided by law.".

This Judicial Interpretation of the Guarantee System of the Civil Code continues the spirit of the Minutes of the National Court Civil and Commercial Trial Work Conference (Law [2019] No. 254), clarifying the subordination of guarantee from the perspective of judicial interpretation. Whether it is an agreement on the independence of the validity of the guarantee contract or an agreement on the guarantor's liability for the legal consequences of the invalidity of the main contract, it will be deemed invalid due to a violation of the principle of subordination of guarantee. "If the guarantee contract provided by a third party is invalid due to the invalidity of the main contract, the guarantor shall not be liable for compensation if he is not at fault. If the guarantor is at fault, his liability for compensation shall not exceed one-third of the debtor's inability to repay the debt.".

As for whether the guarantor can bear other liabilities (non guarantee liabilities) when the main contract is invalid, the current provisions seem unclear in terms of expression. From the perspective of maximizing the security of creditor's rights, it may be considered to stipulate in the guarantee contract that the guarantor shall bear corresponding compensation liabilities or other liabilities (non guarantee liabilities) for the legal consequences of invalidity of the main contract. However, it should be noted that these provisions may still be considered to break through the subordination of the guarantee and be deemed invalid, which remains to be further tested in judicial practice.

In addition, the Judicial Interpretation of the Guarantee System of the Civil Code once again emphasizes the subordinate nature of guarantee, and the liability borne by the guarantor shall not exceed the scope of liability that the debtor should bear. If the liability exceeds the scope, the guarantor's request for the creditor to return the excess part shall be supported by the people's court according to law. If the guarantor's liability for breach of contract or the amount required to be borne by the guarantor in the guarantee contract exceeds the scope that the debtor should bear, even if the guarantor has already paid, the creditor cannot "leave the bag as safe". If it does exceed the scope of responsibility that the debtor should bear, the guarantor still has the right to request return according to law.

02. The subject matter that can be pledged includes "existing and future accounts receivable"

The scope of the rights that can be pledged under the Civil Code includes "existing and future accounts receivable". The Judicial Interpretation of the Civil Code's Guarantee System further defines "future accounts receivable" as "claims arising from the right to benefit from infrastructure and public utility projects, the provision of services or labor services, and other future accounts receivable", namely, highway toll rights Rights such as electricity revenue rights belong to future receivables.

According to the provisions of the Judicial Interpretation of the Guarantee System of the Civil Code, if a party establishes a specific account for the pledge of certain accounts receivable, and there are legal or agreed reasons for the realization of the pledge, if the pledgee requests priority compensation for the funds in the specific account, the People's Court shall provide support; "If the funds in a specific account are insufficient to pay off the debt or there is no specific account established, and the pledgee requests a discount or auction, or sells off the project proceeds, and other receivables that will be received in priority with the proceeds obtained, the people's court shall support it in accordance with the law.".

When using some accounts receivable as pledged property, the pledgee may, when realizing the pledge, have priority in receiving compensation for the funds in a specific account established for the accounts receivable or for the proceeds from the auction or sale of accounts receivable. It is recommended that when using some accounts receivable as pledged property, a specific account should be established for the accounts receivable and the pledgee should have actual control over the specific account, Ensure that the pledgee has a priority right to be repaid for the realized amount of the accounts receivable.

03. Legal Consequences of the Mortgagor Transferring the Mortgaged Property during the Mortgage Period

The Civil Code stipulates that during the mortgage period, the mortgagor may transfer the mortgaged property. "If the parties agree otherwise, such agreement shall prevail.".

According to the Judicial Interpretation of the Guarantee System of the Civil Code, if the parties agree to prohibit or restrict the transfer of the mortgaged property but fail to register the agreement, the mortgagor transfers the mortgaged property in violation of the agreement, and the mortgagee requests to confirm that the transfer contract is invalid, the people's court will not support it; "If the mortgaged property has been delivered or registered, and the mortgagee requests confirmation that the transfer does not have the effect of biological rights, the people's court shall not support it;"; If the mortgagee requests the mortgagor to bear the liability for breach of contract, the people's court shall support it according to law. If the parties agree to prohibit or restrict the transfer of the mortgaged property and have registered the agreement, and the mortgagor transfers the mortgaged property in violation of the agreement, and the mortgagee requests to confirm that the transfer contract is invalid, the people's court shall not support it; "If the mortgaged property has been delivered or registered, and the mortgagee claims that the transfer of the mortgaged property does not have any effect on the rights, the people's court shall support it.".

That is, only if the parties agree to prohibit or restrict the transfer of the mortgaged property and have registered the agreement can the mortgagee claim that the transfer does not have the effect of biological rights when the mortgagee transfers the mortgaged property in violation of the agreement. Currently, financial institutions usually agree to prohibit or restrict the transfer of mortgaged property in mortgage contracts, but after the Civil Code, this agreement still needs to be registered by the mortgage registration department to have adversarial effect, involving coordination and cooperation in the real estate registration system. It is recommended that financial institutions communicate with the mortgage registration department on the registration of agreements prohibiting or restricting the transfer of mortgaged property during subsequent mortgage registration, strive to register relevant agreements, and communicate with the mortgage registration department on supplementary registration matters regarding the mortgage registration of existing projects. At the same time, they continue to pay attention to the modification of the supporting registration system after the implementation of the Civil Code, and timely conduct supplementary registration according to the modified registration system (if necessary). At the same time, it is recommended that the mortgage contract clearly stipulate the liability for breach of contract that the mortgagor should bear when transferring the mortgaged property in violation of the agreement.

04. The guarantee of the old loan can continue to provide guarantee for the new loan when the new loan is repaid

The Judicial Interpretation of the Security System of the Civil Code stipulates that the parties to the main contract agree to repay the old loan with a new loan, and the guarantor of the object of the old loan agrees to continue to provide security for the new loan even though the registration has not yet been cancelled. Before entering into a new loan contract, the secured property is used to establish a security interest for other creditors. If other creditors claim that their security interest has priority over the new loan creditor, the people's court will not support it.

"If the guarantor of the old loan agrees to continue providing security for the new loan even though the registration has not been cancelled, the security interest will not disappear with the repayment of the old loan, and the guarantor will continue to provide security for the new loan, and the determination of the ranking of the security interest will not be affected by the loan contract for the new loan that has not yet been concluded.". It should be noted that the above rules only apply to situations where the parties to the main contract agree to repay the old loan with a new loan. Financial institutions should still adhere to the principle of collateral subordination when the main creditor's right is extinguished and the security interest is subsequently extinguished when handling business. If the two financing transactions involved are only the same collateral but not the case where the new loan is used to repay the old loan, the cancellation registration procedures for the security interest should still be handled after the previous financing transaction is repaid, And go through new registration procedures for the latter financing.

05. Pay attention to the registration of financial leasing business, factoring business, and ownership retention

This Civil Code regards financial leasing, factoring, and retention of ownership as atypical guarantees, with significant changes in their legal nature. According to the doctrine of property rights publicity, registration and publicity are required to obtain effectiveness in real rights or against third parties. The Judicial Interpretation of the Guarantee System of the Civil Code stipulates that if there are factoring, pledge of accounts receivable, and transfer of creditor's rights for the same account receivable, and the parties claim to determine the priority by referring to the provisions of Article 768 of the Civil Code, the people's court should support it. Referring to Article 768 of the Civil Code, registered accounts shall have priority over unregistered accounts, and the order of registration shall be determined according to the registration time. If none of the accounts are registered, the accounts receivable shall be obtained from the person specified in the transfer notice that first arrived at the debtor of the accounts receivable. If neither of the accounts is registered nor notified, the accounts receivable shall be obtained according to the proportion of financing funds or service remuneration.

It can be seen that after the implementation of the Civil Code, the registration of financial leasing, factoring, and other businesses will be very important. In the past, financial leasing, factoring, and other businesses may not pay much attention to registration. In the future, it is necessary to promptly handle registration and notify the debtor in a timely manner when handling relevant businesses. Currently, in automobile financing leasing, it is common to use "mortgage instead of transfer", which means that the leased item is registered in the lessee's name but mortgaged to the lessor to prevent the lessee from disposing of it without authorization. After the implementation of the Civil Code, we understand that the above mortgage registration cannot replace the registration of financial leasing, and the lessor should still handle the registration of financial leasing according to regulations.

According to the Decision of the State Council on Implementing the Unified Registration of Movables and Rights Guarantees, the Unified Registration and Publicity System for Movables and Rights Guarantees of the Credit Reference Center of the People's Bank of China has undertaken the unified registration services for movables and rights guarantees nationwide since January 1, 2021, including financial leasing, factoring, and ownership retention.

06. Although the difference between "unable to perform debts" and "non performing debts" is only one word, there are substantial differences

"The Civil Code stipulates that a general guarantee is one in which the parties agree in the guarantee contract that if the debtor is unable to perform his obligations, the guarantor shall assume the guarantee responsibility.". A suretyship of joint and several liability is a suretyship contract in which the parties agree that the surety and the debtor shall bear joint and several liability for the debt.

According to the Judicial Interpretation of the Guarantee System of the Civil Code, if the parties stipulate in the guarantee contract that the guarantor shall bear the guarantee liability only when the debtor is unable to perform or unable to repay the debt, or other similar content, and have the intention that the debtor should bear the responsibility first, it shall be recognized as a general guarantee. "If the parties agree in the guarantee contract that the guarantor shall assume the guarantee liability when the debtor defaults or fails to repay the debt, unconditionally assume the guarantee liability, and other similar contents, and there is no indication that the debtor should bear the responsibility first, it shall be recognized as a joint and several liability guarantee.".

The guarantee contract of a financial institution as a creditor clearly stipulates the guarantee method and in principle is a joint and several liability guarantee. Therefore, there is no problem of determining the guarantee method according to the specific provisions in the guarantee contract. However, when financial institutions adopt safeguards other than guarantees, such as liquidity support and margin replenishment, and intend to achieve substantially the same credit enhancement effect as guarantees, attention should be paid to the substantive differences between "debtors unable to perform or unable to repay their debts" and "debtors unable to perform or outstanding their debts", especially when counterparties are relatively strong in demanding the use of the liquidity support letters provided by them In versions such as the commitment letter for making up the difference, special attention should be paid to reviewing the expression of the relevant agreement on the liability of the liquidity support commitment person/difference making up commitment person, to avoid the expression of the intention of the debtor to bear the liability first in the relevant agreement, or to clarify the intention of the commitment person and other parties to bear joint and several liabilities, otherwise, the liquidity support/difference making up may be considered as a "general guarantee", The promisor and others are likely to be liable only for the portion of the debtor's property that cannot be performed after being enforced according to law.

(This article is translated by software translator for reference only.)