Question raised:

 

In real estate financing projects handled by trust companies, in order to ensure the smooth realization of the trust company's creditor's rights, a fund collection/settlement clause is usually set up in the transaction contract, requiring the debtor or a third person to collect a certain proportion of the funds to the designated collection account within a certain time before the financing expires, or requiring the debtor or a third person to deposit the sales proceeds of the loan project or collateral project to the designated settlement account according to a certain amount or proportion, The purpose of collecting/depositing funds is generally limited to repaying debts to trust companies. Can the trust company, as a creditor, have a priority right to receive compensation for the funds in the collection/settlement account when the debtor fails to fulfill its obligations?

 

（1） Contractual agreement

 

Generally speaking, the purpose of setting the fund collection/settlement clause is to ensure that the debtor has sufficient funds to repay the debt. In many projects, it is directly agreed in the transaction contract that the collection/settlement fund is regarded as the deposit paid by the debtor, and it is agreed that when the debtor fails to perform the debt, the creditor has the right to directly deduct the funds in the collection/settlement account for realizing the creditor's rights. From the perspective of the purpose of the provision setting and the specific content agreed in the contract, collecting/depositing funds can serve as a guarantee for debts, and identifying such funds as margin is more conducive to the realization of creditors' priority to repayment.

 

（2） Provisions on deposit in laws and regulations

 

Before the formal implementation of the Civil Code of the People's Republic of China (hereinafter referred to as the "Civil Code"), the relevant legal basis for margin guarantee was mainly the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of the "Guarantee Law of the People's Republic of China" (hereinafter referred to as the "Judicial Interpretation of the Guarantee Law"). Article 85 of the Judicial Interpretation of the Guarantee Law stipulates that "after the debtor or a third party has specified its money in the form of a special account, a deposit, or a security deposit, it shall be transferred to the creditor for possession as security for the creditor's rights. If the debtor fails to perform its obligations, the creditor may have priority in receiving compensation with the money." In this judicial interpretation, it is considered that the security deposit is a pledge of money, and the legal relationship of chattel pledge shall apply.

 

Article 70 of the Interpretation of the Supreme People's Court 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") stipulates that:, "If the debtor or a third party establishes a special margin account to guarantee the performance of the debt and is under the actual control of the creditor, or deposits its funds into the margin account established by the creditor, and the creditor claims priority in compensation for the funds in the account, the people's court shall support it. If a party claims that the creditor who actually controls the account does not have priority in compensation for the funds in the account on the ground that the funds in the margin account fluctuate,", The people's court did not support it. The separate deposit accounts established under bank accounts shall be handled with reference to the provisions of the preceding paragraph. "If the security deposit agreed upon by the parties is not established to guarantee the performance of the obligation, or does not comply with the provisions of the preceding two paragraphs, and the creditor claims priority in compensation for the security deposit, the people's court shall not support it, but it shall not affect the parties' claims in accordance with the provisions of the law or the agreement of the parties."

 

（3） Relevant judicial cases

 

Due to the formal implementation of the Judicial Interpretation of the Civil Code Guarantee System on January 1, 2021, among the relevant judicial cases retrieved by the author's team, the Judicial Interpretation of the Guarantee Law is still mainly used as the legal basis for determining the legal relationship between margin pledge. Although the Judicial Interpretation of the Security Law has been repealed, the court's determination criteria for fund specialization and creditor actual control in relevant cases still have important reference significance.

 

According to Article 85 of the Judicial Interpretation of the Security Law, the formation of a security deposit pledge must meet two requirements: the specialization of funds and the transfer to the possession of creditors. The court mainly determines whether the pledge right is established from these two aspects.

 

Case 1: Dispute between Wang Xinping and outsiders such as the Sanmenxia Branch of Luoyang Bank Co., Ltd. (Henan Provincial High People's Court (2020) Yuminzai No. 108)

 

Luoyang Bank Sanmenxia Branch and Dinghong Guarantee Company signed a "Guarantee Cooperation Agreement" and a "Deposit Pledge Contract", which agreed that Dinghong Guarantee Company would open a deposit account at Luoyang Bank Sanmenxia Branch with an account of 60 ××× 44 (i.e., the involved account). The balance of this account is a security deposit, with a legal nature of chattel pledge, and is used to provide guarantees for the guaranteed parties who borrow funds from the Sanmenxia Branch of Luoyang Bank. In the case of a civil loan dispute between Wang Xinping and the defendants, Wang Jinyu, Dinghong Guarantee Company, and Fei Zhijie, executed by the court of first instance, the outsider, the Sanmenxia Branch of Luoyang Bank, enforced against the court the account established by Dinghong Guarantee Company in its place ××× A written objection was raised against the 9.91 million yuan in "44", claiming a priority right to compensation, requesting the cancellation of the notice for assisting in the deduction of deposits, and lifting the preservation and sealing up of the 9.91 million yuan in the account involved.

 

The Higher People's Court of Henan Province holds that:

 

1. The margin account involved in this case has been specified. The Sanmenxia Branch of the Bank of Luoyang has opened a deposit account in accordance with the provisions of the "Guarantee Cooperation Agreement" and the "Deposit Pledge Contract" signed between it and Dinghong Guarantee Company. The funds in this account are used as guarantee deposits and pledged to the Sanmenxia Branch of the Bank of Luoyang to provide guarantees for the guaranteed parties who borrow funds from the Sanmenxia Branch of the Bank of Luoyang. Dinghong Guarantee Company has deposited a deposit of approximately 18 million yuan. Although this account was also used as a bank custody account for Dinghong Guarantee Company, the establishment of this custody account has not affected the characteristics and nature of the deposit account, and is still managed and controlled by the bank. Since the opening of the margin account, the use of funds in the account has been related to the realization of the margin guarantee function, and has not been used for daily settlement or other purposes. It has the basic characteristics of specifying the margin account. Due to the overdue repayment of the loan guaranteed by Dinghong Guarantee Company, Bank of Luoyang Sanmenxia Branch directly deducted the deposit according to the agreement, resulting in changes in the funds in the account. However, these changes are related to the deposit business and do not affect the specialization of the deposit account.

 

2. The Sanmenxia Branch of Luoyang Bank has actually possessed and controlled the margin account involved in the case. Not only are the following provisions stipulated in the Deposit Agreement or the Deposit Pledge Contract involved: "The deposit refers to the special account deposited by Party B (Dinghong Guarantee Company) in Party A (Sanmenxia Branch of Luoyang Bank) and held by Party A", "Party B hereby irrevocably authorizes Party A to deduct the deposit at any time to repay or pay the debts under the main contract on behalf of Party A" "During the deposit period, Party B guarantees that it will not withdraw or transfer the deposit for any reason, or take other measures to affect Party A's possession and disposal of the deposit." In the actual performance of the contract, the Bank of Luoyang Sanmenxia Branch also directly deducts the deposit involved in the case in accordance with the agreement. The special transfer debit summons of the Bank of Luoyang is a special internal bank instrument used to deduct the deposit of Dinghong Guarantee Company, It can be operated without the consent of Dinghong Guarantee Company, which is sufficient to determine that the account involved in the case is occupied and managed by the Sanmenxia Branch of Luoyang Bank. The pledge right in this case has been established.

 

Case 2: Dispute over Financial Loan Contracts between Bohai International Trust Co., Ltd. and Ping An Bank Co., Ltd. Wuxi Branch (Supreme People's Court (2019) Supreme Law Min Zhong No. 138)

 

In this case, Ping An Bank (Party A) signed a "Loan Contract" with Wuxi World Trade (Party B), stipulating that Ping An Bank will issue loans to Wuxi World Trade. The contract stipulates that Party B agrees to open a capital withdrawal account at Party A's request. Party B must collect the full price of the sales proceeds and rental income of the Wuxi World Trade Center Phase II project into the capital withdrawal account in accordance with the provisions of the capital supervision agreement. Party B can apply to Party A for using the sales proceeds to pay the taxes and agency fees of the corresponding sold property, with a proportion not exceeding 30% of the sales price. When Party B fails to repay the loan owed to Party A in a timely manner, Party A has the right to deduct funds from the fund withdrawal account opened by Party B with Party A and other accounts opened by Party B with Party A and its subordinate branches for repayment of the principal and interest of the loan.

 

The Jiangsu Provincial High People's Court of First Instance held that Wuxi World Trade used the funds in the fund withdrawal account to guarantee the performance of the debt. Except for the 5.2 million yuan allowed by Ping An Bank on November 30, 2015, the remaining funds were used to repay the loan interest owed. The funds in the account can be distinguished from other funds in Wuxi World Trade, so the funds in the account meet the specific requirements. Ping An Bank also handled the payment suspension procedures for this account and deducted funds from this account to repay the loan interest after Wuxi World Trade owed the interest, so it has obtained control of this account. Accordingly, it should be determined that both parties have established a pledge right over the funds in the fund withdrawal account involved in the case. The court of first instance upheld Ping An Bank's claim for priority in compensation for the funds in the fund withdrawal account. The Supreme People's Court upheld the original judgment in the second instance.

 

Case 3: Bank of China Limited Xiangyang Free Trade Zone Sub-branch v. Xiangyang Tiandiyuan Industrial Co., Ltd. and Li Kangli for Objection to Execution (Supreme People's Court (2018) Supreme Court Civil Zai No. 168)

 

The Supreme People's Court mentioned in the judgment of the case that Article 210 of the Property Law of the People's Republic of China stipulates that "When establishing a pledge, the parties shall conclude a pledge contract in writing." The pledge contract specified in this article is not necessarily an independent contract, and the pledge terms or other contract terms that reflect the parties' agreement to establish the pledge also belong to the pledge contract specified in this article. The substantive significance of the specialization of the deposit is to separate a specific amount of money from the property of the pledgor, so that it is not confused with other properties of the pledgor After Tiandiyuan Company deposited the deposit as agreed, the Bank of China Free Trade Zone Branch froze the two deposit accounts involved in the case. As the owner of the funds in the deposit account, Tiandiyuan Company was not allowed to freely withdraw the funds in the account without the consent of the bank, effectively losing control and management of the deposit account. When an individual loan is overdue, the deposit is directly used to repay the overdue loan. According to this, the Bank of China Free Trade Zone Branch has actually obtained control of the account involved in the case, and this transfer of control meets the requirements for delivery and possession of movable property.

 

According to the Judicial Interpretation of the Guarantee System of the Civil Code and referring to the court's determination criteria for fund specialization and actual control of creditors in relevant cases, in order to maximize the priority of the trust company's right to receive compensation for the funds in the collection/settlement account, the following recommendations are made:

 

（1） Explicit warranty intent

 

In the transaction contract, it is clearly agreed that the nature of the collected/precipitated funds is a security deposit, which provides guarantee for the debtor's performance of debts. It is also agreed that the trust company has the priority right to receive compensation for such funds. It is clearly agreed that when the debtor fails to perform debts, the trust company has the right to directly deduct such funds for repayment of the debtor's debts. Special margin pledge contracts can be signed with counterparties, or relevant margin guarantees can be clearly specified in transaction documents.

 

（2） Account specialization and actual control

 

According to the Judicial Interpretation of the Guarantee System of the Civil Code, there are two types of margin accounts: one is to establish a special margin account that is actually controlled by the creditor, and the other is to deposit funds into a margin account established by the creditor. If a margin account is opened in the name of a trust company (creditor), and other agreements on margin guarantee are met, there should be no dispute on the determination criteria for the trust company to claim the priority right to compensation for the margin in the account. If a margin account is opened under the name of a counterparty, the recommended operations from the perspective of the specialization and actual control of the margin account and funds are as follows:

 

1. The newly established account is dedicated to receiving and collecting/depositing funds

 

In principle, this account should not be confused with the counterparty's basic account, daily settlement account, account for collecting trust financing funds, and project sales collection account. It should be ensured that the collected/deposited funds are distinguished from other properties of the counterparty, and it should be explicitly agreed that the collected/deposited account is a margin account specifically established by the debtor or a third party to guarantee the performance of the debt.

 

2. Implement strong regulatory measures for accounts

 

The regulatory measures taken by trust companies for collection/settlement accounts mainly include the following arrangements: one is to regulate the margin account by reserving a seal in the margin account, and maintaining a U-shield for online banking transfer review; One is to introduce the account opening bank to supervise the margin account by signing a tripartite supervision agreement.

 

In relevant cases, the court has the following two important criteria for determining the actual control of a margin account: 1. A counterparty may not freely withdraw funds from the account without the consent of the creditor; 2. In the event that a counterparty is overdue, the creditor may directly deduct the margin for repayment of the overdue debt without obtaining the consent of the counterparty. Due to the fact that the creditors involved in the relevant cases are all banks, and as the deposit bank of the margin account, the bank has a natural advantage in account control. In the relevant cases, the court of law has recognized the bank's control over the margin account.

 

Trust companies do not have the advantage of banks in account control, and can only restrict counterparties from freely withdrawing funds from their accounts by only taking measures such as reserving seals and keeping U-shields for online banking transfer review. They may not be able to directly deduct funds when counterparties are overdue, which may have an impact on the determination of whether the trust company actually controls the account. It is recommended to introduce the account opening bank to supervise the margin account by signing a tripartite regulatory agreement, and to specify in the regulatory agreement that when the counterparty is overdue, the bank will deduct the margin according to the trust company's unilateral transfer instructions to repay the overdue debt. Of course, if the account opening bank is not introduced as a regulatory bank, and the trust company takes regulatory measures on its own and can fully control the margin account (in line with the two important criteria for determining actual control rights mentioned above), the actual control rights of the trust company over the account should also be recognized in this case.

 

3. The funds in the account are limited to debt repayment

 

Strictly control the withdrawal of funds from the collection/settlement account, and the funds in the account shall not be used for other purposes except for debt repayment. The amount of funds in the collection/settlement account can fluctuate based on the deposit and expenditure of funds, but the expenditure amount cannot be used for daily settlement by counterparties. The trust company will conduct a prior review of the expenditure of each payment.

 

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