Enforcement notarisation can guard against and control financing risks

By Bao Ningning and Wang Mingyu, DOCVIT Law Firm 

Jack Ma says that enterprises are always short of money. Regardless of whether it is a small enterprise that wants to grow big, or a large enterprise that wants to grow strong, they all need to raise money, or invest in third parties, to develop new products, expand into new sectors or integrate resources.

暴宁宁, Bao Ningning, Senior partner, DOCVIT Law Firm
Bao Ningning
Senior partner

However, financing presents risks. The lesson of the failure of the value adjustment mechanism relating to “Galloping Horse Group” remains fresh, along with the China Fortune debt crisis that recently made news. Financing risks not only exist in the operations of enterprises, but also in people’s daily lives.

The rise of internet finance and consumer lending has given rise to a large number of disputes involving online lending and overdue credit card payments. To timely recover claims and reduce the rate of non-performing assets, many banking financial institutions have made use of the risk control instrument known as “enforcement notarisation”.

Description, value of the system

The term “enforcement notarisation” means that, once the parties to an agreement that has payment as the objective, and under which the debtor (guarantor) undertakes to accept enforcement, jointly apply for and carry out notarisation, enforceability is conferred on such agreement such that in the event that the debtor (guarantor) defaults, is negligent in the performance of its obligation, or fails to completely or adequately perform its obligation, the creditor may apply to the notary office for the issuance of an enforcement certificate, and directly apply to the people’s court for enforcement without instituting a legal action.

The above-mentioned enforceable agreement is the notarised claim document, and its value and function in ensuring the safety of a claim are manifested as:

(1) it can have the function of procuring the performance by the debtor (guarantor) of its contractual obligations, reducing default on the obligation; and

(2) when the claim is jeopardised or actually impaired, it can save time and reduce attorney fees, as well as other litigation-relevant costs, thereby assisting the creditor in effectively and rapidly realising its rights relief.

王明玉, Wang Mingyu, Partner, DOCVIT Law Firm
Wang Mingyu

Scope, requirements of the document

Scope of the document

Article 1 of the Notice on Leveraging the Enforceability of Notarial Certificates in Serving Banks in Guarding Against and Controlling Financial Claim Risks, jointly issued by the Supreme People’s Court, the Ministry of Justice and the China Banking Regulatory Commission on 13 July 2017, specifies that a notary office can confer enforceability on the following claim documents, satisfying article 37 of the Notarisation Law, and executed in the course of the operations of a banking financial institution:

(1) various financing contracts, including credit contracts, loan contracts, entrusted loan contracts, trust loan contracts and other loan contracts, note acceptance agreements and other note financing contracts, financial leasing contracts, factoring contracts, contracts for the issuance of letters of credit, and credit card financing contracts (including credit card agreements and various instalment payment contracts);

(2) debt restructuring contracts, repayment contracts and repayment undertakings;

(3) various security contracts and letters of guarantee; and

(4) other claim documents that satisfy the conditions set out in article 2 of the notice.

Other claim documents recognised in judicial practice include: Equity beneficiary right transfer and buyback contracts; specific asset beneficiary right transfer and buyback contracts, and other such beneficiary right financing contracts; and payment agreements and security agreements.

Content requirements

Pursuant to article 2 of the above-mentioned notice, to carry out enforcement notarisation in respect of the claim documents, the following conditions need to be satisfied:

(1) the claim document is required to have provisions on the payment of cash, goods or negotiable securities;

(2) a clear claim/debt relationship, and no doubts between the creditor and the debtor as to the payment provisions of the claim document; and

(3) a stipulation in the claim document that in the event that the debtor fails to perform its obligation, or fails to completely perform its obligation, it is willing to accept an undertaking of enforcement in accordance with the law.

The undertaking may also be provided in the form of a written undertaking or supplementary agreement appended to the claim document.

Jurisdiction of handling, enforcement

Pursuant to relevant laws, a party may apply for and carry out notarisation that confers enforceability on a claim document with a notary office in its place of domicile, his or her place of habitual residence, the place of the act, or the place of occurrence of the fact.

If, after the conference of enforceability on a claim document that complies with the law, the debtor (guarantor) duly, timely and completely performs its obligation, no application to a notary office for the issuance of an enforcement certificate, or application to a court for enforcement, will be involved.

If a statutory or specified circumstance calling for enforcement arises, the creditor is required to apply to the original notary office for the issuance of an enforcement certificate during the statutory enforcement period. The limitation of actions for enforcement will be tolled from the date of application to the notary office for issuance of the enforcement certificate.

Once the enforcement certificate is issued, the creditor may apply to the people’s court of the place where the judgment debtor is located, or where the property subject to enforcement is located, for enforcement on the strength of the original notarised claim document and the enforcement certificate.

Note that the jurisdiction of enforcement is statutorily determined, and cannot be provided for by the parties to the agreement themselves; if the parties so provide, such provision is invalid.

Application of enforcement notarisations

From 2012-2017, the number of enforcement notarisations nationwide climbed from 139,354 to 1,115,818, an increase of 700.08%. The enforcement rate dropped from 10.75% to 4.02% and the percentage of decisions by people’s courts not granting enforcement was only a few tenths of 1%.

It can be seen that the carrying out of enforcement notarisation can first of all make clear the risk of the debtor defaulting, and, through the deterrent effect of enforcement, due performance of the contract can be procured. Second, even if defaults occur on a small number of contracts, the safety and efficiency of realising claims can be effectively ensured because enforcement can be applied for directly.

Bao Ningning is a senior partner and Wang Mingyu is a partner at DOCVIT Law Firm

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