CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
Release of Lien Rights After the debtor repays the debt, the lien holder must return the liened property. The debtor may also pro- vide equivalent security (eg, a deposit) to request an early release of the lien. 5.7 Rules Governing the Priority of Competing Security Interests Under PRC law, rules for priority of competing security interests are: • registered security takes priority over unregistered security; • for all registered securities, priority follows the reg- istration order; and • for unregistered chattel mortgages, repayment is in proportion to claims (a chattel pledge is effective upon delivery; no pledge right exists if the property is not delivered, so it is not given priority). Subordination methods include: • contractual subordination (creditors agree that part of their claims are subordinate to other claims); and • security subordination (sureties agree their liability is subordinate to other securities). Priority can be contractually adjusted within a lender group or between two groups, but such arrangements cannot be enforced against bona fide third parties. Upon the borrower’s insolvency, contractual subordina- tion provisions remain valid – subordinate creditors can claim only after senior creditors are repaid. However, if such provisions harm overall insolvency creditors’ interests (eg, disguised asset transfer), the insolvency administrator may ask the court to revoke them. 5.8 Priming Liens Major statutory security interests (priming liens) that take priority over lenders’ security interests include: • insolvency expenses and common benefit debts (eg, insolvency litigation fees, loans for the debtor’s continued operation), which have priority over all security interests; • employees’ wages, social insurance premiums and compensation, which are prioritised over general security interests in insolvency;
• construction project price priority (contractors are paid first from project proceeds), which takes prec- edence over registered real estate mortgages; and • ship/aircraft liens (eg, crew wages, salvage fees), which take priority over ship/aircraft mortgages. Common methods to structure around priming liens include: • verify unpaid project prices or labour debts on target assets before lending; • require contractors to issue written commitments to “waive construction project price priority”; • for ship/aircraft loans, prioritise targets with no existing liens or cancelled lien records; • in insolvency, obtain priority by providing common benefit debt financing to indirectly cover risks to the original security interests. 6. Enforcement 6.1 Enforcement of Collateral by Secured Lenders Under PRC law, a secured lender may enforce its col- lateral in the following circumstances: • the principal debt is unpaid after maturity (eg, the borrower fails to repay the principal or interest on time); • agreed acceleration events occur (eg, the borrower transfers assets without permission or initiates bankruptcy/liquidation); and • the guarantor breaches obligations (eg, the guaran- tor transfers assets to avoid liability). Methods, procedures, restrictions and concerns including the following. • Enforcement methods: judicial enforcement is primary – lenders may sue in court or apply for compulsory execution with a notarised enforce- ment certificate; courts usually dispose of collateral via judicial auction or sale. Private enforcement (eg, negotiated set-off) is allowed if it is contractually agreed and not harmful to others. • Procedural requirements: for real estate mort- gages, verify the status of the right with the regis-
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