Analysis of types of security in the Civil Code

By Li Dan and Leng Yixiao, AnJie Law Firm

On 28 May 2020, the third session of the 13th National People’s Congress passed the Civil Code. On the basis of the original Property Law, Security Law, Contract Law and other legal norms, the Civil Code has made some major changes to types of security. In addition to the traditional nominate securities including guarantee, mortgage, pledge, lien and deposit, some innominate forms of security are also included in the scope of security system in the Civil Code. This article analyses the types of security in the Civil Code, and provides a reference for studying, researching and applying the new rules governing securities.

李丹, Li Dan, Senior counsel, Anjie Law Firm
Li Dan
Senior counsel
Anjie Law Firm

Q: What is a nominate security system?

A: Nominate security refers to a security that has been clearly provided in the law, including guarantee, mortgage, pledge, lien and deposit, which are respectively provided in the books on contracts and real rights in the Civil Code as follows:

Guarantee. Chapter XIII “Contracts of guarantee”, of tile two “Nominate contracts”, of book three “Contracts” of the Civil Code provides that guarantee can be divided into general guarantee and joint-and-several liability guarantee, according to whether the guarantor enjoys beneficium ordinis. If there is no agreement on the method of guarantee, or the agreement is not clear, the guarantee shall be treated as general guarantee.

However, the Civil Code provides that only a market-oriented subject can be a guarantor. Article 683 of the Civil Code provides that a state organ legal person (except for sub-lending of loans received from foreign governments or international economic organisations approved by the State Council), a non-profit legal person, or unincorporated organisation for public welfare shall not be a guarantor.

Mortgage. The Civil Code provides on mortgage, in book two “Real rights”, that the following property which the debtor or a third party has the right to dispose of may be mortgaged: Buildings and other fixtures on land; the right to use land for construction; the right to use sea areas; production equipment; raw materials; semi-finished products; products; buildings; vessels and aircrafts under construction; means of transportation; and any other property that is not prohibited from being mortgaged by any law and administrative regulations. However, the following property that the debtor or a third party has no right to dispose of may not be mortgaged: Land ownership; the right to use the land owned by the collective; property with unknown ownership; and property subject to compulsory measures according to law.

Although educational, medical and health, and other public welfare facilities of schools, kindergartens and medical institutions, and other non-profit legal persons formed for public welfare purposes, are not allowed to be mortgaged, the Interpretation of the Supreme People’s Court on the Application of the Security Part of the Civil Code of the People’s Republic of China (Draft for Comments) issued on 9 November 2020, recognises the validity of sales contracts by way of financial leasing and ownership retention for public welfare facilities.

冷依晓, Leng Yixiao, Paralegal, Anjie Law Firm
Leng Yixiao
Anjie Law Firm

Pledge. Following the provisions of the Property Law and Security Law, pledge provided in the Civil Code is still divided into pledge of movables and pledge of rights. Pledge of rights includes: Pledge of bills of exchange; promissory notes and checks; bonds and certificates of deposit; warehouse receipts and bills of lading; transferable fund shares and equity interests; transferable property rights among intellectual property rights, such as the right to the exclusive use of registered trademarks, patents and copyrights; existing and contingent accounts receivable; and other property rights that can be pledged.

Lien. Following the legislative mode of the Property Law, article 447 of the Civil Code provides: “Where the debtor fails to pay the due debt, the creditor may exercise a lien over the legally possessed movable of the debtor, and has the priority of repayment out of such a movable.”

Deposit. Articles 586 and 587 of the chapter on liability for breach of contract, of the book on contracts of the Civil Code, provide on security deposit, and security deposit in case of breach is the most common, in practice. It should be noted that the deposit contract is formed when the deposit is actually delivered, and the agreed amount of the deposit shall not exceed 20% of the value of the subject matter of the contract.

Q: What is an innominate security system?

A: The first paragraph of article 388 of the Civil Code recognises the effectiveness of a contract with security function in the obligation law: “For the creation of security interest, a contract on the provision of security shall be entered into in accordance with the provisions of this [Civil] Code and other laws. Contracts on the provision of security include mortgage contracts, pledge contracts and other contracts with security functions.” This major innovation of the Civil Code has significant and positive practical value.

Typical transactions in innominate securities such as factoring, financial leasing, ownership retention, etc., can partially be governed by the rules on nominate securities, or by the special provisions of the book III “Contracts”, in the Civil Code; and the recognition of the validity of “other contracts with security functions” in article 388 also makes it possible to bring innominate transactions such as liquidity support, assignment by way of security, floating pledge and stock repurchase pledge into the scope of regulation of contract on the provision of security, providing a basis for judicial practice, and having extraordinary positive significance for financial innovation.

Li Dan is a senior counsel and Leng Yixiao is a paralegal at AnJie Law Firm

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