Several Issues Concerning the Application of the « PRC Security Law» Interpretations

Article 2: A counter-security provider may be the debtor or a third party other than the debtor.

Counter-security may be in the form of a mortgage or pledge provided by the debtor or in the form of a guarantee, mortgage or pledge provided by a third party.

Article 3: If a State organization, or an institution or social organization for the public good, violates provisions of the law by providing security, the security contract is void. The losses thereby incurred by the creditor shall be handled pursuant to the second paragraph of Article 5 of the Security Law.

Article 4: If a director or manager violates Article 60 of the PRC, Company Law by providing the company's assets as security for the obligation of a company shareholder or another individual, the security contract is void. The debtor and the security provider are jointly and severally liable for the loss incurred by the creditor, unless the creditor knew or ought to have known of such provision of company assets.

Article 5: If property that laws or regulations forbid be circulated or assigned is provided as security, the security contract is void.

If property that laws or regulations restrict the circulation of is provided as security, the people's court shall, when the claim is realized, handle such property in accordance with the relevant laws and regulations.

Article 6: A contract for the provision of security to a foreign entity is void if:

(1) the security is provided to a foreign entity without the approval of, or registration with, the relevant competent State authority;

(2) the security is provided for an organization outside China to a creditor in China without the approval of, or registration with, the relevant competent State authority;

(3) the security is provided in respect of the registered capital of a foreign investment enterprise, or a foreign debt in respect of the foreign party's portion of the investment in a foreign investment enterprise;

(4) the security is provided by a financial institution without the right to engage in foreign exchange security business or a non-finance enterprise legal person without foreign exchange revenue; or

(5) the principal contract is amended or the creditor assigns his rights under the contract for security to a foreign entity without the consent of the security provider or the approval of the relevant competent State authority, in which case the security provider is released from his security liability unless laws or regulations provide otherwise.

Article 7: If the principal contract is valid and the security contract is void, the security provider and the debtor are jointly and severally liable for compensation for the financial loss of the creditor under the principal contract, provided that such creditor is not at fault. If the creditor and the security provider are at fault, the portion of civil liability borne by the security provider shall not exceed half of the portion that the debtor is unable to discharge.

Article 8: If the security contract becomes void due to the invalidity of the principal contract and the security provider is not at fault, the security provider is not civilly liable. If the security provider is at fault, the portion of civil liability borne by the security provider shall not exceed one-third of the portion that the debtor is unable to discharge.

Article 9: After the security provider has assumed his liability to compensate the creditor due to the invalidity of the security contract, he may seek recourse against the debtor or, to the extent of the liability for compensation assumed by him, demand that the counter-security provider at fault assumes liability for compensation.

The security provider may institute a separate court action against the debtor or the counter-security provider based on the fact that he assumed liability for compensation.

Article 10: After the principal contract has been terminated, the security provider shall continue to bear security liability in respect of the civil liability bearable by the debtor, unless the security contract provides otherwise.

Article 11: If the legal representative or responsible person of a legal person or another organization concluded a security contract ultra vires, such representative act is valid unless the other party knew or ought to have known that the person acted ultra vires.

Article 12: The security term agreed upon by the parties or required for registration by the registration authority is not legally binding on the existence of the right over the secured property.

After the expiration of the statute of limitations on the obligation secured by the right over the secured property, the peoplefs court shall support the person to whom the security was provided if he exercises his right over the secured property within two years after the expiration of the statute of limitations.

2. INTERPRETATIONS CONCERNING THE SECTION ON GUARANTEES

Article 13: If a guarantee contract provides that the guarantor is to perform a non-monetary obligation on behalf of the obligor and the guarantor fails to actually perform such obligation on behalf of the obligor, thereby causing loss to the obligee, the guarantor shall be liable for compensation.

Article 14: If a legal person, another organization or a natural person without full discharge capacity concludes a guarantee contract as a guarantor and subsequently requests that he be released from his guarantee liability on the grounds of his lack of capacity to discharge the obligation on behalf of the obligor, the people's court shall not support such request.

Article 15: The term "other organizations" stipulated in Article 7 of the Security Law mainly includes:

(1) wholly owned enterprises and partnerships that are legally registered and have obtained their business licences;

(2) jointly operated enterprises that are legally registered and have obtained their business licences;

(3) Sino-foreign cooperative joint ventures that are legally registered and have obtained their business licences;

(4) social organizations whose registration has been approved by the civil affairs authorities;

(5) town, street and village enterprises whose registration has been approved and that have obtained their business licences.

Article 16: A guarantee contract entered into as guarantor by an institution or social organization engaging in business activities shall be determined valid in the absence of other circumstances making such contract void.

Article 17: If a branch of an enterprise legal person provides a guarantee without the written authorization of the legal person, the guarantee contract is void. If loss is caused to the creditor as a result thereof, the matter shall be handled pursuant to the second paragraph of Article of the Security Law.

If a branch of an enterprise legal person provides a guarantee with the written authorization of the legal person but the scope of the written authorization conferred by the legal person is unclear, the branch of the legal person shall bear guarantee liability for the entire obligation specified in the guarantee contract.

|If the property dealt in and managed by the branch of the enterprise legal person is insufficient to cover the guarantee liability of the branch, the enterprise legal person shall assume civil liability.

If the branch of the enterprise legal person has provided a void guarantee and is subsequently required to assume liability for compensation, such liability shall be borne using the property dealt in and managed by the branch. If the enterprise legal person is at fault, the matter shall be handled pursuant to Article 29 of the Security Law.

Article 18: If a functional division of an enterprise legal person provides a guarantee, the guarantee contract is void. If the creditor knew or ought to have known that the guarantor was the functional division of an enterprise legal person, the loss thereby incurred by the creditor shall be borne by the creditor himself.

If the creditor was unaware that the guarantor was the functional division of an enterprise legal person, the loss thereby incurred by the creditor may be handled by reference to the second paragraph of Article 5 and Article 29 of the Security Law.

Article 19: If two or more guarantors provide security for the same obligation simultaneously or separately and the guarantors did not agree upon their respective shares of the guarantee with the creditor, such guarantees shall be deemed to be joint and several.

If the guarantors to a joint and several guarantee oppose the creditor with the respective shares that they have mutually agreed upon to bear, the people's court shall not support such opposition.

Article 20: If a debtor covered by a joint and several guarantee fails to perform his obligation by the expiration of the term for the performance of his obligation as stipulated in the principal contract, the creditor may require the debtor to perform his obligation or he may require any one of the guarantors to assume the entire guarantee liability.

After the guarantors to a joint and several guarantee have assumed their guarantee liability, the portion of the debt not recoverable from the debtor shall be borne by the guarantors in the proportion mutually agreed upon among them. In the absence of an agreement among them, they shall bear such unrecoverable portion equally.

Article 21: After a guarantor to a proportionate several guarantee has borne his share of the guarantee liability as stipulated in the guarantee contract, he has recourse against the debtor to the extent of the performance of his guarantee liability.

Article 22: If a third party unilaterally issues a written letter of guarantee to the creditor and the creditor accepts such letter of guarantee without objections, a guarantee contract is formed.

If a guarantor signs or affixes his seal to the principal contract as a guarantor, notwithstanding the absence of a guarantee clause in the principal contract, a guarantee contract is formed.

Article 23: After an indeterminate obligation under a contract of guarantee up to a maximum amount has become determinate, the guarantor shall bear, up to the maximum obligation amount, the guarantee liability for the balance of successive obligations arising over a certain period of time.

Article 24: If the guarantor to an ordinary guarantee provides to the creditor, after the term for the performance of the principal obligation expires, true information on property of the debtor available for enforcement and the creditor waives or neglects to exercise his right, thus rendering enforcement against the said property impossible, the guarantor may petition the people's court to release him from his guarantee liability to the extent of the actual value of the property available for enforcement that he provided.

Article 25: The major difficulties encountered by the creditor in demanding that the debtor perform his obligation as specified in Item (1) of the third paragraph of Article 17 of the Security Law include the situation where the whereabouts of the debtor are unknown or the debtor has moved his domicile abroad, and there is no property available for enforcement.

Article 26: If a third party warrants to the creditor that he will supervise the disbursement of funds earmarked for a specific purpose, he will no longer be liable once he has performed his obligation to supervise the disbursement of the funds earmarked for the specific purpose. If the third party fails to fully perform his supervisory obligation, thus resulting in a loss of the funds, he shall bear liability for making good the funds lost.

Article 27: If the guarantor provides a guarantee in respect of the debtor's registered capital and there is a discrepancy between the debtor's actual investment and its registered capital or the debtor spirits away or transfers its registered capital, the guarantor will bear joint and several guarantee liability to the extent of the registered capital shortfall or the registered capital that was spirited away or transferred.

Article 28: If the creditor legally assigns the principal claim to a third party during the guarantee term, the guaranteed obligation is simultaneously assigned and the guarantor bears guarantee liability to the assignee to the extent of the original security by guarantee. However, the guarantor no longer bears guarantee liability if the guarantor and the creditor had previously agreed that the guarantor would only bear guarantee liability in relation to a specific creditor or that assignment of the claim was forbidden.

Article 29: If the creditor permits the debtor to assign part of his obligation during the guarantee term without the written consent of the guarantor, the guarantor no longer bears guarantee liability in respect of the portion of the debt assigned without his consent. However, the guarantor shall continue to bear guarantee liability in respect of the portion that was not assigned.

Article 30: If, without the consent of the guarantor, the creditor and the debtor amend such particulars of the principal contract as the quantity, price, currency or interest rate, etc. during the guarantee term, thereby diminishing the obligation of the debtor, the guarantor shall continue to bear guarantee liability under the amended contract. If the amendment(s) increase(s) the obligation of the debtor, the guarantor will not bear guarantee liability for the increased portion.

If the creditor and the debtor amend the term for performing the principal contract without the written consent of the guarantor, the guarantee term is the term stipulated in the original contract or in law.

If the creditor and the debtor agree to amend the content of the principal contract but fail to actually implement such amendments, the guarantor shall continue to bear his guarantee liability.

Article 31: The following legal consequences, that is suspension, termination or extension, will not arise for any reason during the guarantee term.

Article 32: If the guarantee term specified in the guarantee contract is shorter than or equivalent to the term for performing the principal obligation, no guarantee term will be deemed to have been specified and the guarantee term will be six months from the date of the expiration of the term for performing the principal obligation.

If the guarantee contract specifies that the guarantor will bear guarantee liability until the principal of the debt has been fully repaid together with all the interest thereon or contains similar stipulations, such stipulations will be deemed to be unclear and the guarantee term will be two years from the date of the expiration of the term for performing the principal obligation.

Article 33: If the term for performing the principal obligation is not stipulated in the principal contract or such stipulation is unclear, calculation of the guarantee term commences from the date of expiration of the grace period awarded by the creditor to the debtor to perform his obligation.

Article 34: If a creditor secured by an ordinary guarantee institutes a legal action or applies for arbitration against the debtor before the expiration of the guarantee term, the statute of limitations on the guarantee contract starts to run from the effective date of the judgment or arbitration award.

If a creditor secured by a joint and several guarantee demands that a guarantor assume his guarantee liability before the expiration of the guarantee term, the statute of limitations on the guarantee contract starts to run from the date the creditor demanded that the guarantor assume his guarantee liability.

Article 35: If a guarantor assumes guarantee liability or provides a guarantee for an obligation whose statute of limitations has expired and asserts a defence on the grounds that the statute of limitations has expired, the people's court shall not support such defence.

Article 36: In the case of an ordinary guarantee, if the statute of limitations on the principal obligation is tolled, the statute of limitations on the guaranteed obligation is tolled. In the case of a joint and several guarantee, if the statute of limitations on the principal obligation is tolled, the statute of limitations on the guaranteed obligation is not tolled.

In the case of an ordinary guarantee or a joint and several guarantee, if the statute of limitations on the principal obligation terminates, the statute of limitations on the guaranteed obligation terminates simultaneously.

Article 37: If a contract of guarantee up to a maximum amount does not stipulate the guarantee term or such stipulation is unclear, but such contract does stipulate the term for discharging the obligation by the guarantor, the guarantee term will be six months from the date of the expiration of the term for discharging the obligation. If no term for discharging the obligation is stipulated, the guarantee term will be six months from the termination date of the contract of guarantee up to a maximum amount or six months from the date of receipt by the creditor of written notice from the guarantor terminating the guarantee contract.

Article 38: If the same obligation is secured by both a guarantee and third party provided property, the creditor may ask either the guarantor or the provider of secured property to assume the security liability. If the parties have not stipulated the scope of the security by guarantee or the scope of the security in the form of property, or such stipulation is unclear, the security provider who assumed the security liability may either seek recourse against the debtor or demand that the other security provider discharge the shares bearable by him.

If the same obligation is secured by both a guarantee and property and the contract for security in the form of property is confirmed to be void or is rescinded, or the secured property is lost due to the occurrence of an event of force majeure and there is no substitute, the guarantor shall continue to bear guarantee liability in accordance with the contract or the law.

If the creditor neglects to exercise his right over the secured property after the expiration of the term for performing the principal contract, causing the secured property to decrease in value or to be damaged, destroyed or lost, the creditor will be deemed to have waived part or all of the security provided in the form of property. The guarantor's guarantee liability is diminished, or he is released therefrom, to the extent of the rights waived by the creditor.

Article 39: If the parties to the principal contract agree to the repayment of an existing loan by means of a new loan, the guarantor is not civilly liable unless he knew or ought to have known of the agreement.

If both the new loan and the existing loan are guaranteed by the same guarantor, the preceding paragraph does not apply.

Article 40: If the debtor under the principal contract uses such means as fraud or coercion to cause the guarantor to provide a guarantee contrary to his true intention and the creditor knew or ought to have known of the facts of the fraud or coercion, the matter shall be handled pursuant to Article 30 of the Security Law.

Article 41: If the debtor and the guarantor jointly defraud the creditor in entering into the principal contract and the guarantee contract, the creditor may petition the people's court to rescind such contracts. If loss is caused to the creditor as a result thereof, the guarantor and the debtor are jointly and severally liable for compensation.

Article 42: If the people's court renders a judgment to the effect that the guarantor bears guarantee liability or liability for compensation, it shall expressly state in the body of the judgment that the guarantor enjoys the right specified in Article 31 of the Security Law. If the right of recourse is not expressly stated in the judgment, the guarantor can only institute a separate legal action based on the fact that he assumed liability.

The statute of limitations on the guarantor's exercise of his right of recourse against the debtor starts to run from the date the guarantor assumes his liability toward the creditor.

Article 43: If the guarantor performs his guarantee liability on his own initiative and the amount he discharges is greater than the scope of the principal claim, the guarantor's recourse against the debtor is limited to the extent of the principal claim.

Article 44: If the people's court accepts a case for bankruptcy of the debtor during the guarantee term, the creditor may declare his claim to the people's court or assert his right against the guarantor.

After the creditor has declared his claim, the guarantor shall continue to bear guarantee liability for any portion not discharged through the bankruptcy proceedings. If the creditor demands that the guarantor assume his guarantee liability, he shall make such demand within six months after the conclusion of the bankruptcy proceedings.

Article 45: If the creditor knew or ought to have known of the debtor's bankruptcy and neither declares his claim nor notifies the guarantor, rendering it impossible for the guarantor to exercise his right of recourse beforehand, the guarantor is released from his guarantee liability to the extent that such claim would have been recoverable through the bankruptcy proceedings.

Article 46: If the creditor fails to declare his claim after the people's court has accepted the case for the bankruptcy of the debtor, each of the guarantors to a joint and several guarantee shall declare their claim, and exercise their right of recourse beforehand, as a single entity.

3. INTERPRETATIONS CONCERNING THE SECTION ON MORTGAGES

Article 47: If a mortgage is created over a building or other structure for which construction approval has been received but that has not yet been constructed or that is currently being constructed, and the parties have carried out the procedures for registering the mortgaged property, the people's court may determine the mortgage to be valid.

Article 48: If a mortgage is created over a structure that has been confirmed, through legal procedures, to violate laws or regulations, the mortgage is void.

Article 49: If a mortgage is created over property for which the procedures for obtaining a certificate of title have not been carried out, the mortgage may be determined to be valid if a certificate of title can be submitted or registration procedures are carried out before the conclusion of pleadings in the court of first instance.

If the parties have not registered the mortgaged property, they may not oppose third parties.

Article 50: If different items of property as set forth in the first paragraph of Article 34 of the Security Law are mortgaged together, the scope of the mortgaged property shall be the property registered. The value of the mortgaged property will be determined at the time the mortgage rights are realized.

Article 51: If the debt secured by the mortgagor exceeds the value of the mortgaged property, priority in receiving payment does not apply to the portion in excess.

Article 52: If a party simultaneously mortgages his crops and the leaseholds to the land from which the crops have not yet been separated, the mortgage over the leaseholds is void.

Article 53: If such an institution or social organization for the public good as a school, kindergarten or hospital, etc. secures its own obligation by mortgaging property other than its educational facilities, medical facilities, health facilities or other facilities for the public good, the people's court may determine the mortgage to be valid.

Article 54: If a proportionate co-owner creates a mortgage over his share of the co-owned property, the mortgage is valid.

If a joint owner creates a mortgage over the property he jointly owns without the consent of the other joint owners, the mortgage is void. However, if the other joint owners knew or ought to have known of the mortgage but did not raise an objection thereto they will be deemed to have consented and the mortgage is valid.

Article 55: The validity of the mortgage is not affected if the property that has been mortgaged is subjected to such property preservation or enforcement measures as placement under seal, impoundment, etc.

Article 56: No mortgage is created if the type of the principal obligation secured or the mortgaged property is not specified or is unclearly specified in the mortgage contract, and the same cannot be supplemented on the basis of, or be inferred from, the principal contract and the mortgage contract.

If, after the execution of a mortgage contract that the law specifies be registered to become valid, the mortgagor acts contrary to the principle of good faith by refusing to register the mortgage, thereby causing the creditor to suffer loss, he shall be liable for compensation.

Article 57: If the parties to a mortgage contract stipulate therein that the ownership of the mortgaged property will pass to the creditor if the mortgagee has not received fulfilment of the obligation at the expiration of the term for the performance of such obligation, such stipulation is void. The invalidity of such stipulation does not affect the validity of the other stipulations of the mortgage contract.

If the mortgagee has not received fulfilment of the obligation at the expiration of the term for the performance of such obligation, the mortgagee and mortgagor may agree that the mortgagee obtain the mortgaged property subsequent to its evaluation in terms of money.1 However, if such is prejudicial to the interests of parties with rights over secured property or other creditors who have lower priority, the people's court may apply the relevant provisions of Articles 74 and 75 of the Contract Law.

Article 58: If parties register the mortgaged property with different statutory registration authorities on the same day, all mortgage rights are deemed of equal priority.

If consecutive registrations of the same mortgaged property arise due to a reason attributable to the registration authority, the date of the first registration of the mortgaged property will be deemed the date of registration of the mortgage and the priority of the mortgage rights will be determined accordingly.

Article 59: If at the time the parties carry out procedures for the registration of mortgaged property they are unable to obtain registration due to a reason attributable to the registration authority but the mortgagor delivers proof of the right to the creditor, the creditor may be recognized as having priority in receiving payment from such property. However, third parties may not be opposed if the mortgaged property has not been registered.

Article 60: In the event that (i) a mortgage is created over an immovable as stipulated in Item (2) of Article 42 of the Security Law, and (ii) the local people's government at or above the county level failed to designate the registration authority and (iii) the parties carried out the registration procedures for the mortgaged property with the land administration authority or the real property administration authority, the peoplefs court may confirm such registration to be valid.

Article 61: If there is a discrepancy between the particulars recorded in the mortgaged property registration and the provisions of the mortgage contract, the particulars recorded in the registration will prevail.

Article 62: If ownership of the mortgaged property passes to a third party due to attachment to or mixture with other property or through processing, the effect of the mortgage extends to the consideration paid for the foregoing. If the owner of the mortgaged property is the owner of the attached property, mixed property or processed property, the effect of the mortgage extends to the attached property, mixed property or processed property. If a third party and the owner of the mortgaged property are co-owners of the attached property, mixed property or processed property, the effect of the mortgage extends to the mortgagor's share of the co-owned property.

Article 63: The effect of the mortgage extends to the accessories to the mortgaged property in the event such accessories existed before the creation of the mortgage. However, if the mortgaged property and the accessories thereto are separately owned by two or more persons, the effect of the mortgage does not extend to the accessories to the mortgaged property.

Article 64: If the mortgaged property is legally seized by the people's court due to the debtor's failure to perform his obligation before the expiration of the term for the performance thereof, the natural fruits and civil fruits separated from the mortgaged property that are collected by the mortgagee from the date of seizure will be used to discharge the following in the order set forth below:

(1) the expenses for collecting the fruits;

(2) the interest on the principal obligation;

(3) the principal obligation.

Article 65: If the mortgagor mortgages property that has been leased, the lease contract will, after the realization of the mortgage rights, continue to be binding on the assignee of the mortgaged property for the term of such lease contract.

Article 66: If the mortgagor leases property that has been mortgaged, the lease contract will not, after the realization of the mortgage rights, be binding on the assignee.

If the mortgagor leases property that has been mortgaged and fails to inform the lessee in writing that such property has been mortgaged, the mortgagor will be liable for compensation for the loss incurred by the lessee due to his leasing of the mortgaged property. If the mortgagor has informed the lessee in writing that such property has been mortgaged, the lessor will himself be liable for the loss he incurs due to the realization of the mortgage rights.

Article 67: If the mortgagor assigns the mortgaged property during the existence of the mortgage without notifying the mortgagee or informing the assignee, the mortgagee may still exercise his mortgage rights if the mortgaged property has been registered. The assignee who obtains ownership of the mortgaged property may discharge the entire obligation on behalf of the debtor so as to extinguish the mortgage. After discharging the obligation, the assignee has recourse against the mortgagor.

If the mortgaged property was not registered, the mortgage rights may not be set up against the assignee. If loss is caused to the mortgagee as a result thereof, the mortgagor is liable for compensation.

Article 68: If the mortgaged property is succeeded to or gifted in accordance with the law, the mortgage rights are not affected.

Article 69: If a debtor has several ordinary creditors and, when discharging his obligations, conspires in bad faith with one such creditor to mortgage all or part of his assets to the said creditor, thereby losing his capacity to perform his other obligations and prejudicing the lawful rights and interests of the other creditors, the injured creditors may petition the people's court to nullify such mortgage.

Article 70: If an act of the mortgagor is sufficient to diminish the value of the mortgaged property and the mortgagor rejects the mortgagee's request that he return the property to its original state or provide security, the mortgagee may request that the debtor perform the obligation or he may request the early exercise of his mortgage rights.

Article 71: If the principal obligation is not discharged in full, the mortgagee may exercise his mortgage rights in respect of the entire mortgaged property.

If the mortgaged property has been divided or a part thereof has been assigned, the mortgagee may exercise his mortgage rights in respect of the mortgaged property as divided or assigned.

Article 72: If the principal claim has been divided or a part thereof has been assigned, each creditor may exercise mortgage rights to the extent of the share of the claim to which he is entitled.

If the principal obligation has been divided or a part thereof has been assigned, the mortgagor continues to secure with his mortgaged property the performance of the obligations by the debtors. However, if the mortgage is provided by a third party and the creditor permits the debtor to assign his obligation, and the debtor does so without the written consent of the mortgagor, the mortgagor no longer bears security liability for the obligation whose assignment he did not consent to.

Article 73: If the value of the mortgaged property after its evaluation in terms of money or the proceeds derived from the auction or selling off thereof is less than the value stipulated at the creation of the mortgage, the discharge of the obligation shall be effected at the realized value of the mortgaged property. The undischarged balance shall be discharged by the debtor.

Article 74: If the parties failed to provide therefor, the value of the mortgaged property after its evaluation in terms of money or the proceeds derived from the auction or selling off thereof will be used to discharge the following in the order set forth below:

(1) the expenses for realizing the mortgage rights;

(2) the interest on the principal obligation;

(3) the principal obligation.

Article 75: If the same obligation is secured by two or more mortgagors and the creditor renounces the mortgage security provided by the debtor, the other mortgagor(s) may petition the people's court to diminish the security liability bearable by him (them) or to release him (them) therefrom.

If the same obligation is secured by two or more mortgagors and the shares of the obligation secured by the mortgaged property provided by the parties or their order of priority has not been stipulated or such stipulation is unclear, the mortgagee may exercise his mortgage rights in respect of the property of any one of the parties or of each party.

After a mortgagor has assumed his security liability he may seek recourse against the debtor or demand that the other mortgagor(s) discharge the shares respectively bearable by him (each).

Article 76: If the same movable is mortgaged to two or more creditors and the parties did not register the mortgaged property, each mortgagee will receive payment in proportion to his respective claim when the mortgage rights are realized.

Article 77: If the same property is mortgaged to two or more creditors and higher ranking mortgage rights and the ownership of such property belong to the same person, the owner of the property may set up his mortgage rights against lower ranking mortgage rights.

Article 78: If the same property is mortgaged to two or more creditors and the (an) obligation secured by lower ranking mortgage rights matures first, the mortgagee can only receive payment for the portion of the value of the mortgaged property that exceeds the obligation(s) secured by the higher ranking mortgage(s).

If the (an) obligation secured by higher ranking mortgage rights matures first, the balance of the proceeds remaining after the realization of the mortgage rights shall be deposited and retained to discharge the obligations(s) secured by the lower ranking mortgage(s).

Article 79: If the same property is encumbered by both a statutorily registered mortgage and a pledge, the mortgagee ranks above the pledgee in receiving payment.

If the same property is encumbered by both a mortgage and a lien, the lien-holder ranks above the mortgagee in receiving payment.

Article 80: In the event that the mortgaged property is lost, destroyed, damaged or requisitioned, the mortgagee is entitled to priority in receiving payment from the insurance payment, indemnification or compensation therefor.

In the event that the mortgaged property is lost, destroyed, damaged or requisitioned and the term for the discharge of the obligation secured by the mortgage has not yet expired, the mortgagee may petition the people's court to take preservation measures against the insurance payment, indemnification or compensation therefor.

Article 81: The scope of obligations secured by a mortgage up to a maximum amount does not cover obligations that arise after the mortgaged property is placed under seal for the purposes of property preservation or of an enforcement procedure or after the debtor or mortgagor becomes bankrupt.

Article 82: If the parties to a contract for a mortgage up to a maximum amount amend the maximum amount or the term of the mortgage and subsequently set up such amendment against a mortgagee with a lower priority, the people's court shall not support such setting up of the amendment.

Article 83: If the term for the discharge of an indeterminate obligation secured by a mortgage up to a maximum amount has expired by the time the obligation becomes determinate, the mortgagee may exercise his mortgage rights pursuant to the regulations for ordinary mortgage rights.

When the mortgage rights under a mortgage up to a maximum amount are realized, if the balance of the obligations that have actually arisen is greater than the maximum amount, the maximum amount is the limit, and priority in receiving payment is not applicable to the portion in excess. If the balance of the claims that have actually arisen is less than the maximum amount, the mortgagee is entitled to priority in receiving payment from the mortgaged property to the extent of the obligations that have actually arisen.

4. INTERPRETATIONS CONCERNING THE SECTION ON PLEDGES

(1) Pledge of Movables

Article 84: If the pledgor pledges a movable that he does not own but that is legally in his possession and the pledgee is not aware that the pledgor has no right to dispose of the movable, the pledgor is liable for the loss incurred by the owner of the movable as a consequence of the exercise by the pledgee of his pledge rights.

Article 85: If the debtor or a third party delivers possession of his money to the creditor as security for an obligation after making it specific by placing it in a special account, sealing it or providing it as a guarantee deposit, etc., the creditor is entitled to priority receipt of payment from such money if the debtor fails to perform his obligation.

Article 86: If the debtor or a third party fails to deliver the thing pledged by the time stipulated in the pledge contract, thereby causing loss to the pledgee, the pledgor shall be liable for compensation to the extent of his fault.

Article 87: The pledge contract does not enter into effect if the pledgor holds the thing pledged in his possession on behalf of the pledgee. The people's court shall not support the pledgee's use of his pledge rights to oppose a third party, if the pledgee does so after returning the thing pledged to the pledgor.

If the pledgee loses possession of the thing pledged due to a reason not attributable to the pledgee, the pledgee may request that the party who is in improper possession of the thing pledged cease his trespass, return the thing pledged to its original state and return it to him.

Article 88: If the pledgor pledges property that he indirectly possesses, the pledge contract will be deemed delivered upon service of a written notice on the possessor. If, after his receipt of the pledge notice, the possessor accepts an instruction from the pledgor to dispose of the pledged property, such act is void.

Article 89: If the pledged property is unclearly stipulated in the pledge contract or there is a discrepancy between the pledged property stipulated and the property actually delivered, the property of which possession is actually delivered prevails.

Article 90: If the thing pledged has a hidden defect that causes damage to other property of the pledgee, the pledgor shall be liable for compensation, unless the pledgee was well aware at the time of delivery that the thing pledged was defective but nonetheless accepted it.

Article 91: The effect of pledge over movables extends to the accessories thereto. However, if possession of the accessories is not delivered to the pledgee together with the thing pledged, the effect of the pledge does not extend to the accessories.

Article 92: If the thing pledged is deposited pursuant to Article 69 of the Security Law, the expenses for depositing the thing pledged are borne by the pledgee. If the pledgor discharges the obligation early, the interest on the portion not yet matured shall be deducted.

Article 93: If during the existence of the pledge the pledgee uses, leases or disposes of the thing pledged without the consent of the pledgor, thereby causing loss to the pledgor, the pledgee will be liable for compensation.

Article 94: If during the existence of the pledge the pledgee, with the consent of the pledgor, creates a pledge over the pledged thing in its possession in favour of a third party, as security for the pledgee's own obligation, such transferred pledge shall not exceed the scope of the obligation secured by the original pledge. Priority in receiving payment is not applicable to any portion in excess thereof. The transferred pledge has priority over the original pledge.

If during the existence of the pledge the pledgee, without the consent of the pledgor, creates a pledge over the pledged thing in its possession in favour of a third party, as security for the pledgee's own obligation, such transfer of the pledge is void. The pledgee is liable for compensation for the damage arising from such transfer of the pledge.

Article 95: If the term for the performance of the obligation expires without the pledgee having received payment in full, the pledgee may continue to retain the thing pledged and exercise his rights in respect of the entire thing pledged. The pledgee shall return the thing pledged after the pledgor discharges the secured obligation.

If at the expiration of the term for performing the obligation the pledgor requests that the pledgee promptly exercise his rights but the pledgee neglects to do so, resulting in a decrease in the value of the thing pledged, the pledgee shall be liable for compensation for the loss thereby incurred.

Article 96: Articles 57, 62, 64, 71, 72, 73, 74 and 80 hereof apply to pledges over movables.

(2) Pledge of Rights

Article 97: Pledges of the right to the earnings from such immovables as highway bridges, highway tunnels or highway ferry crossings, etc. shall be handled pursuant to Item (4) of Article 75 of the Security Law.

Article 98: If the pledgor and the pledgee of a bill of exchange, cheque or promissory note who failed to endorse such negotiable instrument with the word "Pledged" subsequently set up the pledge against a bonafide third party, the people's court shall not support such setting up of the pledge.

Article 99: If the pledgor and the pledgee of company bonds who failed to endorse such bonds with the word "Pledged" subsequently set up the pledge against the company or a third party, the people's court shall not support such setting up of the pledge.

Article 100: If a deposit certificate is pledged and, after having approved the pledge, the issuing bank accepts a report of loss of the certificate, resulting in a loss of funds deposited, the bank shall be civilly liable.

Article 101: The further assignment or pledge of pledged bonds or a pledged negotiable instrument, certificate of deposit, warehouse receipt or bill of lading by the pledgee is void.

Article 102: If bonds or a bill of exchange, cheque, promissory note, certificate of deposit, warehouse receipt or bill of lading bearing the date for encashment or for taking delivery of the goods is pledged and the date for encashment or for taking delivery of the goods is later than the date for performing the obligation, the pledgee may only cash the instrument or take delivery of the goods when the date for encashment or taking delivery of the goods has arrived.

Article 103: The pledge of shares of companies limited by shares is governed by the provisions on the transfer of shares of the PRC, Company Law.

A contract for the pledge of shares of a listed company enters into effect on the date of registration of the pledge with the securities registrar.

A contract for the pledge of shares of a non-listed company enters into effect on the date the pledge is recorded in the register of shareholders.

Article 104: If legally transferable shares or share certificates are pledged, the effect of the pledge rights extends to the civil fruits derived from the shares or share certificates.

Article 105: If the exclusive right to use a trademark, a patent right or a property right forming part of copyright is pledged and the pledgor assigns or licences the pledged right to a third party without the consent of the pledgee, such assignment or licence shall be determined to be void. If the pledgee or the third party suffers loss as a result thereof, the pledgor will be civilly liable

Article 106: If the pledgor and the debtor whose obligation was secured with the pledge reject the pledgee's exercise of his pledge rights against them, the pledgee may institute a legal action against both the pledgor and the debtor whose obligation was secured with the pledge or institute a legal action solely against the debtor whose obligation was secured with the pledge.

5. INTERPRETATIONS CONCERNING THE SECTION ON LIENS

Article 107: If the parties agree in the contract to exclude the right of lien, the people's court shall not support the exercise by the creditor of the right of lien after the expiration of the term for performing the obligation.

Article 108: If, when taking lawful possession of a movable delivered by the debtor, the creditor was not aware that the debtor did not have the right to dispose of such movable, the creditor is entitled to exercise a lien against such movable pursuant to Article 82 of the Security Law.

Article 109: If the term for discharge of the debtor's obligation has expired and the possession of the movable by the creditor of such obligation is linked to the incurrence of the obligation, the creditor has a lien on the movable in his possession.

Article 110: Until the holder of a lien on indivisible property has received full payment of his claim, he may exercise a lien over the entire property.

Article 111: If the lien-holder's exercise of his lien conflicts with his obligations or special provisions of the contract, the people's court shall not support the exercise of the lien.

Article 112: If the debtor's term for discharge of his obligation has not expired but the creditor's term for performance of his obligation to deliver possession of the subject matter has expired, the creditor may not exercise a lien on such subject matter, unless the creditor can prove that the debtor has no payment capability.

Article 113: If the creditor fails to give notice to the debtor, in accordance with the term stipulated in Article 87 of the Security Law, that he should perform his obligation, and instead directly disposes of the property subject to lien at the prevailing price, he shall be liable for compensation for the loss arising therefrom. If the creditor and the debtor have specified a grace period in their contract pursuant to Article 87 of the Security Law, the creditor may directly exercise his lien without giving notice.

Article 114: Articles 64, 80, 87, 91 and 93 hereof apply to liens

6. INTERPRETATIONS CONCERNING THE SECTION ON DEPOSITS

Article 115: If the parties have agreed upon the payment of a deposit as security for entering into the principal contract and the party providing the deposit refuses to enter into the principal contract, he is not entitled to demand a refund of the deposit. If the party that received the deposit refuses to enter into the principal contract, he shall refund twice the amount of the deposit.

Article 116: If the parties have stipulated that the payment of a deposit is a condition precedent to the formation or entry into effect of the principal contract and the party providing the deposit fails to pay such deposit but the principal contract or the major part thereof has been performed, the formation or entry into effect of the principal contract is not affected.

Article 117: After the payment of the deposit, the party providing the deposit may, in accordance with the provisions of the contract, terminate the principal contract at the cost of forfeiting the deposit. The party receiving the deposit may terminate the principal contract at the cost of refunding twice the amount of the deposit. The handling of liability after the termination of the contract is governed by the PRC, Contract Law.

Article 118: If a party pays a lien deposit, security deposit, guarantee deposit, contract deposit, rental deposit or purchase deposit, etc. but the nature of the deposit is not stipulated, the people's court shall not support the party's assertion of rights over the deposit.

Article 119: The actual payment of a deposit in an amount greater or less than the amount stipulated will be deemed an amendment to the deposit contract. The deposit contract does not enter into effect if the party receiving the deposit raises an objection and refuses to accept the deposit.

Article 120: If the realization of the objective of the contract is rendered impossible due to delayed performance or other breach by a party, penal provisions in respect of the deposit may be applied, unless otherwise provided in law or stipulated by the parties.

If a party fails to perform the contract in full, penal provisions in respect of the deposit shall be applied in proportion to the stipulated content of the contract accounted for by the executory portion.

Article 121: If the amount of the deposit stipulated by the parties exceeds 20% of the value of the subject matter of the contract, the people's court shall not support the portion in excess thereof.

Article 122: Penal provisions in respect of the deposit do not apply in the event that force majeure or an unforeseen adverse event renders the principal contract non-performable. Penal provisions in respect of the deposit apply in the event that the fault of a third party unrelated to the contract renders the principal contract non-performable. The party subjected to the deposit penalty may seek recourse against the third party in accordance with the law.

7. INTERPRETATIONS CONCERNING OTHER ISSUES

Article 123: If several rights over secured property exist in respect of the same obligation and the creditor renounces the security provided by the debtor in the form of property, the security liability of the other security provider(s) is reduced or he (they) is (are) released therefrom to the extent of the rights renounced by the creditor.

Article 124: If a branch of an enterprise legal person provides a guarantee for a third party, the people's court may, when hearing a dispute over the guarantee, designate the enterprise legal person as a co-defendant in the action. However, this provision does not apply to branches of commercial banks and branches of insurance companies.

Article 125: If a creditor secured by an ordinary guarantee institutes an action against both the debtor and the guarantor, the people's court may designate the debtor and the guarantor as co-defendants in the action. However, the people's court shall state expressly in the judgment that the guarantor shall bear guarantee liability if the debtor remains incapable of performing his obligation after legal enforcement against his property.

Article 126: A creditor secured by a joint and several guarantee may institute an action with the debtor as defendant or the guarantor as defendant or he may institute an action with the debtor and the guarantor as co-defendants.

Article 127: If the debtor institutes an action against the creditor and the creditor institutes a counter-action against the debtor, the guarantor may participate in the actions as a third party.

Article 128: When a creditor petitions the people's court to exercise his right over secured property, the debtor and the security provider shall participate in the action as co-defendants.

If an obligation is secured by both a guarantee and property and a party institutes an action subsequent to the occurrence of a dispute, the debtor and the guarantor, mortgagor or pledgor may participate in the action as co-defendants.

Article 129: If an action is instituted subsequent to a dispute occurring over the principal contract and the security contract, jurisdiction over the case shall be determined pursuant to the principal contract. If a dispute arises over a security contract under which the security provider bears joint and several liability, and the creditor asserts his right against the security provider, the court of the place where the security provider is domiciled shall have jurisdiction.

If there is a discrepancy between the competent court selected in the principal contract and that selected in the security contract, jurisdiction over the case shall be determined pursuant to the principal contract.

Article 130: If no judgment was rendered on the security contract during the hearing of a dispute over the principal contract, the people's court shall not directly carry out enforcement against the property of the security provider on the basis of the judgment or ruling rendered in respect of the parties to the principal contract.

Article 131: For the purposes of these Interpretations, the term "unable to dischargerefer" to the state whereby the obligation remains incompletely discharged after the completion of enforcement against movables of the debtor such as deposits, cash, negotiable securities, finished products, semi-finished products, raw materials, means of transportation, etc. and other property of the debtor against which enforcement is convenient.

Article 132: If a party provides security in the form of property during the trial of a case or in the course of enforcement procedures, the people's court shall impound the certificate of title thereto and issue a notice of assistance with enforcement to the relevant authorities, requesting them not to carry out transfer procedures for the secured property during the stipulated period.

Article 133: Acts of providing security that occurred before the implementation of the Security Law are governed by the laws, regulations and relevant judicial interpretations in effect at the time such acts occurred.

If a party applies for a retrial, or a decision for retrial is rendered pursuant to trial supervision procedures, in a dispute over an act of providing security that occurred after the implementation of the Security Law and in which a final judgment was rendered before the issuance and implementation of these Interpretations, these Interpretations do not apply.

Acts of providing security that occurred after the implementation of the Security Law and that were still at the first instance or second instance stage when these Interpretations were issued and implemented are governed by the Security Law and these Interpretations.

Article 134: In the event of a conflict between the Security Law or these Interpretations and a judicial interpretation concerning a security issue rendered by the Supreme People's Court before the implementation of the Security Law, such judicial interpretation shall no longer apply.

Translator's Notes:

1 The Chinese term ???? , here rendered as ?nbsp;valuation in terms of money means that the mortgagor transfers title of the mortgaged property to the mortgagee and sets the value of the property off against his obligation. The value used is that appraised by the relevant authority.