1、 Problem generation

Article 242 of the Contract Law stipulates: "The lessor enjoys the ownership of the leased property. If the lessee goes bankrupt, the leased property does not belong to the bankruptcy property." Before the introduction of the Civil Code, there was no significant controversy regarding the bankruptcy of the lessee and the possibility of the financial leasing lessor to retrieve the leased property in accordance with Article 242 of the Contract Law, and mainstream judicial practice also supports this. However, the Civil Code has adjusted this provision of the Contract Law. Article 745 of the Civil Code stipulates: "The ownership of the leased property enjoyed by the lessor shall not be registered against a bona fide third party.". Compared to the two, there are two adjustments: first, the expression "without registration, no one may oppose a bona fide third party." has been added; The second is to delete the statement "If the lessee goes bankrupt, the leased property does not belong to the bankruptcy property.". This additional statement has the intention of structuring a financial lease as an atypical security right and conditionally granting the lessor ownership of the leased property. The deletion of the expression seems to lead to uncertainty as to whether the lessor can retrieve the leased property in bankruptcy proceedings, and there is even a risk that it cannot be retrieved.

So the question arises, with the implementation of the Civil Code, when the lessee enters bankruptcy proceedings, is the financial leasing lessor entitled to the exclusive right or the right to retrieve the leased property? Does the financial leasing lessor have the right to exercise the right to retrieve the leased property? The generality and ambiguity of the provisions of Article 745 of the Civil Code, the absence of corresponding judicial interpretations, the possible conflicts of application between the bankruptcy law as a procedural law and relevant substantive laws, and the lack of guidance cases to follow due to the short implementation time of the Civil Code make it difficult to explore the answers to the above questions, but it is undoubtedly necessary and meaningful to address this practical issue. Currently, various experts, scholars, and legal colleagues have different views on this issue. The author is not talented, and here I try to offer my humble opinions to attract valuable comments and seek advice from everyone.

2、 If the lessee goes bankrupt, can the financial leasing lessor claim a right of exclusion or a right of withdrawal from the administrator?

（1） The first view - if the lessor has already registered, it only enjoys the right of exclusion, not the right of retrieval

Regarding the amendment of Article 745 of the Civil Code to Article 242 of the Contract Law, there are mainly two different viewpoints in academic theory. A view represented by Professor Gao Shengping, a well-known security jurist, holds that the Civil Code has deleted the provision that "if the lessee goes bankrupt, the leased property does not belong to the bankruptcy property" and added the expression "without registration, no one may oppose a bona fide third party." This indicates that the Civil Code functions as a security right for the financial leasing lessor's ownership of the leased property, which belongs to atypical security. Therefore, when the lessee goes bankrupt, The lessor may not claim the right of bankruptcy recovery based on its ownership, but may only claim the priority right of compensation from the bankruptcy administrator if its ownership has been registered; "If not registered, it shall not have the effect against bona fide third parties, nor shall it have the effect against the bankruptcy administrator.". [1] And does not enjoy the right of recovery in the sense of bankruptcy law.

（2） The second point of view - if the lessor has already registered, it enjoys both the right of exclusion and the right of retrieval, with the option of exercising either
Another view is that deleting the expression "if the lessee goes bankrupt, the leased property does not belong to the bankruptcy property" does not mean that the Civil Code completely denies the lessor's ownership of the leased property when the lessee goes bankrupt, and based on this, retrieves the leased property from the lessee (administrator). This view also holds that, From the perspective of the Civil Code and the Interpretation of the Supreme People's Court on the Application of the Guarantee System in the Civil Code of the People's Republic of China (hereinafter referred to as the "Civil Code Guarantee Interpretation"), the Civil Code imposes an addition, not a reduction, on the rights of the lessor. When the lessee goes bankrupt, in addition to exercising the right to retrieve the leased property in accordance with Article 752 of the Civil Code, the lessor may also exercise the right to retrieve the leased property in accordance with Article 65 of the Civil Code Guarantee Interpretation "If the lessee fails to pay the rent as agreed and fails to do so within a reasonable period of time after being urged to do so, and the lessor requests the lessee to pay the full remaining rent and be compensated with the proceeds from the auction or sale of the leased property, the people's court shall support the exercise of the right of exclusion, which means that when the lessee goes bankrupt, the lessor may choose to require the payment of the full remaining rent and be compensated with the proceeds from the auction or sale of the leased property.". In other words, the right of withdrawal and the right of exclusion are two different ways of exercising rights granted to the lessor by law. The lessor can choose based on the financial leasing contract and its own will. [2] Of course, this view also holds that the premise for the lessor to exercise the right of retrieval and exclusion is that the lessor has previously registered the ownership of the leased property. However, the significance of this amendment to the Civil Code is that if the lessor fails to register and the lessee mortgages or transfers the leased property, if the provision that "the leased property does not belong to bankruptcy property" is deleted, the lessor cannot exercise the right of retrieval. [3]

（3） The Supreme Court's view - somewhat vague

The Supreme Court seems to prefer the first view, but careful analysis seems to be inconsistent with the first view. Regarding the understanding and application of Article 745 of the Civil Code, the Supreme Court held that, in combination with existing social practices and the provisions of Article 388 of the Civil Code on "other contracts with security functions", it is generally believed that the seller's ownership of the subject matter in a retention of ownership transaction and the lessor's ownership of the leased matter in a financial leasing transaction have actually been "functionalized" into a security right, "Ownership is no longer a property right in the sense of the Civil Code, but its content is closer to the limited property right of chattel mortgage (this paragraph seems to be consistent with Professor Gao Shengping's view).". Therefore, in order to rationalize the system of publicity rules for chattel security and unify the application of laws, Article 67 of the Civil Code Guarantee Interpretation promulgated by the Supreme Court stipulates that "in contracts such as retention of title sales, financial leases, and other contracts, the scope and effectiveness of" bona fide third parties "whose ownership of the seller and lessor cannot be opposed without registration shall be dealt with by reference to the provisions of Article 54 of this interpretation." [4] Article 54 (4) of the Civil Code Guarantee Interpretation stipulates that "if the mortgagor goes bankrupt and the mortgagee claims priority in repayment of the mortgaged property, the people's court will not support it.". Therefore, the Supreme Court interpreted article 745 of the Civil Code together with articles 54 and 67 of the Civil Code Guarantee Interpretation. Accordingly, the Supreme Court concluded that the scope of bona fide third parties against which unregistered ownership cannot be contested referred to in Article 745 of the Civil Code includes bankruptcy creditors and bankruptcy administrators. At the same time, the Supreme Court also pointed out that the main reason for making such provisions in Articles 54 and 67 of the Civil Code Guarantee Interpretation is to respond to and implement the basic idea of eliminating hidden guarantees in the Civil Code, and to make appropriate "restrictions" on the ownership of the lessor in financial leasing contracts. (Note to the author: Please note that it is "restrictions", not "denial".) It is also the result of legal and policy choices based on this idea and goal. [5] The question is, what is the scope and extent of this restriction? Is it true that the lessor cannot exercise ownership under any circumstances and can only exercise the right of exclusion if certain conditions are met (such as Professor Gao Shengping's view), or can it exercise ownership if certain conditions are met? The Supreme Court did not provide a clear answer. However, based on the Supreme Court's discussion in its book "Judicial Interpretation, Understanding, and Application of the Security System of the Civil Code", and the conclusion reached by the Supreme Court above that "unregistered ownership cannot compete against bankruptcy creditors and bankruptcy administrators", the author believes that the latter should be the case, that is, when the lessee goes bankrupt and the lessor has previously registered, it has the right to claim the right to retrieve the leased property from the bankruptcy administrator. The reasons are as follows: First, in the context of Article 745 of the Civil Code, the subject of "without registration, no one may oppose a bona fide third party" is ownership, rather than fixed property rights such as "chattel mortgage". Although the ownership of finance leases has a security function, it cannot be completely equivalent to fixed property rights such as "chattel mortgage"; Secondly, the ownership of the lessor is a right explicitly granted to the lessor by Articles 745 and 752 of the Civil Code and financial leasing contracts (as most financial leasing contracts do), which should be protected and cannot be arbitrarily deprived.

（4） The author's viewpoint

After analysis, the author's viewpoint is more inclined to the aforementioned second viewpoint, but the reason for the discussion is to combine the second viewpoint with the existing viewpoint of the Supreme Court.

"If the lessee goes bankrupt and the ownership of the leased property is not registered, the lessor cannot exercise either the right of exclusion or the right of retrieval.".
Following the thinking of the Supreme Court and following the above analysis, the author concludes that the ownership of the leased property enjoyed by the lessor, if not registered, cannot be used against the bankruptcy creditors and administrators of the lessee who has already accepted the bankruptcy application. In other words, in the case of bankruptcy of the lessee, if the lessor is not registered, the lessor has no right to retrieve the leased property directly based on its ownership of the leased property, and the administrator has the right to refuse its claim to retrieve the leased property, in particular, For example, a bankrupt creditor has established a mortgage on the leased property and registered it (in this case, the leased property is the mortgaged property, and the administrator should exercise the right of exclusion, and the mortgagee has the right to receive priority compensation for the proceeds from the disposal of the mortgaged property), and in another case, the lessee has sold the leased property to a bona fide third person (in this case, the bona fide third person is entitled to obtain ownership of the leased property if it meets the conditions for bona fide acquisition), The lessor is objectively unable to retrieve the leased property.

Another question: If the above analysis shows that the lessor has no right to claim restitution from the bankruptcy administrator based on its ownership of the leased property without registration, can the lessor claim a right of exclusion from the administrator, require the administrator to auction and sell the leased property, and give priority to the payment with the obtained price? In my opinion, neither can I. Upon careful observation, it can be found that Article 65 of the Guarantee Interpretation of the Civil Code stipulates: "In a financial leasing contract, if the lessee fails to pay the rent as agreed and fails to pay within a reasonable period of time after being urged to do so, the lessor requests the lessee to pay all the remaining rent and be compensated with the proceeds from the auction or sale of the leased property, the people's court shall support it;...". The term "compensation" in this article is not "priority compensation". The author believes that this is not a loophole in the judicial interpretation, but rather a response to the provision in Article 745 of the Civil Code that "without registration, no one may oppose a bona fide third party." That is, only if the lessor registers its ownership of the leased property, can it have priority compensation for the price obtained from the auction, sale, and other disposal actions of the leased property, otherwise it cannot have priority compensation, "It can only be" paid ", and this non priority" paid "in bankruptcy proceedings is actually not substantially different from the rights of ordinary bankruptcy creditors.".

Therefore, the author believes that without registration, the lessor cannot exercise the right of retrieval, nor can it enjoy the right of exclusion from the leased property, that is, it cannot claim a priority right of compensation for the price received from the leased property. In this case, the lessor actually only has to claim rights according to the second path specified in Article 752 of the Civil Code, that is, only the remaining total rent and corresponding losses can be declared to the administrator as ordinary claims.
"If the lessee breaks down the property and has previously registered the ownership of the leased property, the lessor has both the right of exclusion and the right to retrieve it, either of which can be exercised.".

If the lessor has completed the registration of the leased property, and the registration is earlier, the lessor has a adversarial effect against the bankruptcy administrator and bankruptcy creditors. The author agrees with Mr. Li Zhigang's view that "the civil code adds to the lessor's rights, not subtracts them." The author believes that the lessor can choose two ways to make a claim to the administrator as stipulated in Article 752 of the civil code. One is to request the payment of the full rent, while enjoying the right to exclude the leased property, that is, at this time, the leased property serves as a guarantee for the payment of rent, and the lessor can request the administrator to auction the leased property Sell off and give priority to paying off the proceeds to the lessor; The second is to apply to the manager for termination of the contract, requiring the manager to return the leased property and compensate for the corresponding losses (if any). In other words, when the leased property has been registered, the lessor has both the right of exclusion and the right to retrieve the leased property, and the lessor can choose to exercise it.

Of course, the lessor can formulate different claim strategies and file different claims based on the actual situation of the case, centering on the right of exclusion and the right of retrieval. This is not a key issue discussed in this article, and will not be discussed here.

3、 Is there a conflict between the lessor's claim and the manager's right to select and perform the contract

There is also a question that many people are puzzled about: When the lessee goes bankrupt, does the lessor propose to the administrator related rights such as exercising the right of exclusion and withdrawal, which conflicts with the administrator's right to choose and perform "contracts that have not been performed by both parties" as stipulated in Article 18 of the Enterprise Bankruptcy Law?

（1） If the lessee goes bankrupt, does the financing lease contract belong to a "contract that has not been fully performed by both parties"?

To answer this question, the first thing to discuss is that in the event of the lessee's bankruptcy, the lessee fails to pay the rent as agreed, or even accelerates the expiration of all the rent. At this time, the leased property is under the control of the (lessee) manager. In this case, does the financing lease contract belong to a "contract that has not been fully performed by both parties"? There are also different views on this issue.

One view is that it does not belong to. The reason is that the obligation of the lessor has been completed, as the obligation of the lessor is to purchase the leased property, pay the price, and deliver the leased property. At this point, only the obligations of the lessee have not been fulfilled (the rent has not been paid according to the contract). Therefore, this situation belongs to a contract where only one party has not completed the performance, rather than a contract where both parties have not completed the performance.

Another view is that belonging to. Because in addition to purchasing and delivering the leased property, the lessor has an obligation to ensure the lessee's peaceful possession of the leased property according to Article 748 (1) of the Civil Code, which stipulates that "the lessor shall ensure the lessee's possession and use of the leased property.". [6]

The author agrees with the latter viewpoint, but believes that the reasons for the latter viewpoint may be slightly insufficient. "Usually, the lessor takes back the leased property because the lessee has breached the contract and is based on contractual and legal provisions, rather than affecting the lessee's possession and use of the leased property without justified reasons as stipulated in Article 748, paragraph 2, of the Civil Code.". "If the lessor is required to ensure the lessee's peaceful possession of the leased property under the circumstances specified in Article 748, paragraph 2, of the Civil Code, it is too strict, unreasonable, and does not comply with the legislative intent set forth in this article.". Therefore, the author attempts to explain it from another perspective. According to Article 34 of the Provisions of the Supreme People's Court on the Application of the Enterprise Bankruptcy Law of the People's Republic of China (II): "Both parties to a sales contract agree in the contract to retain the ownership of the subject matter. If one party goes bankrupt before the ownership of the subject matter is transferred to the buyer according to law, the sales contract belongs to a contract that has not been fully performed by both parties, and the administrator has the right to decide to terminate or continue to perform the contract in accordance with Article 108 of the Enterprise Bankruptcy Law.", A retention of ownership sales contract is treated as a contract that has not been fully performed by both parties in bankruptcy proceedings because the seller has not completed the transfer of ownership of the subject matter (generally, of course, because the buyer has not paid for the goods in accordance with the contract). Title retention transactions and financial leasing transactions are atypical guarantees with security functions in the civil code system, and they have many very similar characteristics. So, in bankruptcy proceedings, can we refer to the practice of retention of ownership sales contracts to recognize financial leasing contracts as contracts that have not been fully performed by both parties? The author believes that it is possible. "Due to the bankruptcy of the lessee, whether the lessor has ownership of the leased property, whether it can be retrieved, whether the lessor can obtain repayment in the bankruptcy proceedings, who can ultimately obtain ownership of the leased property according to the agreement after the repayment, and how the ownership of the leased property will ultimately be transferred have not been determined, or have yet to be fulfilled. Therefore, the author believes that in general, in the case of the lessee's bankruptcy and unpaid rent,", A financial leasing contract should be recognized as a contract that has not been fully performed by both parties.

（2） Is there a conflict between the lessor's claim and the manager's right to choose and perform the contract?

Given the above understanding, let's return to the initial question: Is there a conflict between the lessor's claim and the manager's right to select and perform the contract? This issue seems to need to be discussed in different situations:

1. The lessor has registered the ownership of the leased property

As previously analyzed, in this case, the lessor can request payment of the entire rent and receive priority compensation for the price obtained from the leased property (which can be achieved by referring to the security interest procedure); You can also apply to the manager for termination of the contract and require the manager to return the leased property and compensate for the corresponding losses. The former corresponds to the exercise of the right of exclusion, while the latter corresponds to the exercise of the right of retrieval, which can be exercised either way, and the option lies with the lessor. However, no matter what kind of rights are exercised (of course, the first step is to comply with the legal provisions and conditions agreed in the financial leasing contract), the manager has no right to refuse on the grounds of the contract performance picking right. For example, when the lessor chooses the former, the manager has no right to choose to terminate the contract and return the leased property, but does not pay the rent. For another example, if the lessor chooses to terminate the contract and take back the leased property, the manager has no right to choose to continue performing the contract. On this issue, the author agrees with Mr. Li Zhigang's view that bankruptcy law is only a comprehensive process for dealing with conflicts of rights, and the bankruptcy law itself has no denaturation function to transform the lessor's ownership of the leased property into a security right. The provisions of the Chapter on Financial Leasing Contracts of the Civil Code and the "Civil Code Guarantee Interpretation" have not been changed due to bankruptcy proceedings - the bankruptcy law as a procedural law does not provide a basis for such changes/modifications. As for Article 18 of the "Enterprise Bankruptcy Law", which stipulates that the administrator's contract selects the source of the right to perform, it is necessary to solve the continuing contract, which is not automatically terminated due to the bankruptcy of the lessee. In the absence of other factors, only bankruptcy factors are introduced, the administrator of the lessee shall decide whether to terminate the contract. The legal basis of this provision is "the full performance of the contract is the obligation of both parties to the contract. Therefore, if the administrator decides to continue to perform the contract, the other party should perform" [7]. It is not because the lessee goes bankrupt that the administrator has the super decision-making power to continue to perform and terminate the financial leasing contract, even absorbing the lessor's legal right to terminate. [8] As discussed in the "Civil Judgment on the Dispute over General Withdrawal Rights between Haitong Hengxin International Finance Leasing Co., Ltd. and Chongqing Yongfa Technology Co., Ltd." heard by the People's Court of Beibei District, Chongqing in December 2020, "the provisions of this article (referring to Article 18 of the Enterprise Bankruptcy Law) It aims to maximize the value of the property of bankrupt enterprises, pay off fairly, and save the enterprise. In this case, after the defendant entered bankruptcy and reorganization proceedings, the plaintiff sent a letter to the defendant's bankruptcy administrator to apply for the recovery of the leased property. The bankruptcy administrator responded by choosing to continue performing the contract and confirming that the unpaid rent of 319360.4 yuan due before the date of acceptance of the bankruptcy was an ordinary creditor's right. The above actions have fully reflected the important goals of the bankruptcy law, namely, maximizing the value of the property of the bankrupt enterprise, paying off fairly, and saving the enterprise, "However, the law also has fairness, and the bankruptcy law should take into account the interests of the lessor of a financial leasing contract while achieving the above objectives.", Finally, the court ruled that the financial lessor had the right to request the return of the leased property. It can be seen that in judicial practice, even the maintenance of fair liquidation value in bankruptcy proceedings is limited, and cannot be at the expense of damaging other legitimate rights and interests.

2. The lessor has not registered the ownership of the leased property

As previously analyzed, in the event that the lessor has not registered the ownership of the leased property, the lessor can only declare ordinary claims to the administrator for the remaining total rent and corresponding losses. In this case, due to certain limitations on the lessor's claims, in fact, even if the manager has the contract performance picking right: (1) If the manager claims to continue performing the contract, it is relatively more advantageous for the lessor, because the debt generated by the manager's choice to continue performing the contract based on the contract picking right belongs to a joint beneficial debt, and for the lessor, it belongs to a joint beneficial debt, The co beneficial creditor's rights have priority over ordinary creditor's rights and can be repaid at any time; (2) If the manager chooses to terminate the contract, then the lessor has a reason to retrieve the leased property, which is generally beneficial for the lessor. Of course, in practice, the author believes that administrators rarely operate in this way, which violates the important purposes of the bankruptcy law on maximizing the value of bankrupt enterprises' property, paying off fairly, and saving the enterprise.
To sum up, in fact, in the case of bankruptcy of the lessee, no matter whether the lessor registers the ownership of the leased property or not, there is no substantive conflict with the manager's contract selection right to perform, or the manager's contract selection right to perform has no applicable reason in this situation.

4、 Conclusion

To sum up, the Civil Code has transformed the function of financial leasing into an atypical security right. The ownership of the leased property has undergone some weakening, which has limited the lessor's exercise of ownership of the leased property. However, the law does not completely deny it, and even explicitly grants the lessor the ownership of the leased property under certain conditions. Even bankruptcy proceedings that comprehensively coordinate and handle multiple rights conflicts cannot be deprived without cause. Therefore, the author believes that in a financial leasing transaction, if the lessee enters bankruptcy proceedings and the lessee has not yet paid the rent according to the contract, in the event that the lessor has registered and registered the ownership of the leased property first (considering that there may be more than one right registered on the leased property, such as the registration of chattel mortgage, for example), it has the right to claim the exercise of the right of exclusion or the right of withdrawal from the administrator (optional exercise), The administrator has no right to refuse or claim the right of selective performance of the contract in accordance with Article 18 of the Enterprise Bankruptcy Law. Of course, the exercise of such rights by the lessor also needs to comply with the relevant provisions of the financial leasing contract. "In the event that the lessor has not registered the ownership of the leased property, the lessor cannot exercise either the right of exclusion or the right of retrieval. It can only declare ordinary claims to the administrator for the remaining total rent and corresponding losses. At this time, there is also no room for the administrator to exercise the contract performance picking right.". Therefore, after entering bankruptcy proceedings, the lessee recognizes that the financial leasing lessor has ownership of the leased property under the conditions that it has registered and registered first, and can exercise the right to retrieve it under the conditions that meet the contractual agreements. This does not violate the provisions of Article 18 of the Enterprise Bankruptcy Law, nor does it detract from the legislative purpose of the bankruptcy law, but rather can better protect those who do not sleep on their rights, This is also in line with legal principles and the due value orientation of the law.
Admittedly, there are currently no clear legal provisions or guiding cases to follow for the answer to the question at the beginning of the article. The author's level is limited, and I am afraid that there are still some inadequacies in his reasoning. We welcome criticism and correction. At the same time, let's also hope that subsequent legal or judicial interpretations can fill this gap as soon as possible, or that relevant guidance cases will appear as soon as possible, so that the pending arguments can be firmly settled.

References and Notes:

[1] See Gao Shengping, "Understanding and Application of the Civil Code Guarantee System and Its Supporting Judicial Interpretation" (Part 2), China Legal Publishing House, March 2021 edition, page 1219.

The right of exclusion refers to the right of creditors who enjoy property security to receive separate and preferential compensation for the secured property, regardless of the bankruptcy distribution procedure, after the debtor declares bankruptcy.

[2] See Li Zhigang, "The Tenant Bankrupts, Is the Financial Leaseholder Entitled to the Right of Withdrawal or the Right of Exclusion", published in https://mp.weixin.qq.com/s/olvJhAecNj7qxRz1cUW85A , visited on July 6, 2022.

[3] See Li Zhigang, "The Tenant Bankrupts, Is the Financial Leaseholder Entitled to the Right of Withdrawal or the Right of Exclusion", published in https://mp.weixin.qq.com/s/olvJhAecNj7qxRz1cUW85A , visited on July 6, 2022.

[4] See Supreme People's Court: Understanding and Application of Judicial Interpretation of the Civil Code Guarantee System, People's Court Press, May 2021 edition, page 560.

[5] See Supreme People's Court: Understanding and Application of Judicial Interpretation of the Civil Code Guarantee System, People's Court Press, May 2021 edition, pp. 562-563.

[6] See Gao Ping, Li Zengguang, Zhang Danni: the article "Anjie Perspective | Financial Leasing Dispute Resolution Practice (I): Lessee Bankruptcy, How the Lessor Claims Rights" published on Anjie Law Firm's WeChat official account, visit the link: https://mp.weixin.qq.com/s/MRRIoqPzbcrlYqaXSBNIZw , accessed July 6, 2022.

[7] "Interpretation and Application of the Provisions of the Enterprise Bankruptcy Law of the People's Republic of China," edited by Wu Goldman Sachs, People's Court Press, 2006 edition, pp. 35-36.

[8] See Li Zhigang, "The lessee goes bankrupt, does the financial leasing lessor have a right of recall or a right of exclusion?", published in https://mp.weixin.qq.com/s/olvJhAecNj7qxRz1cUW85A , visited on July 6, 2022.