Methods for Registration of Mortgage of Chattels

An example may shed some light on the jargon. A signed a security contract with B, charging its equipment to B to secure a loan from B. According to the Law of Secured Interests in 1995, such a contract takes effect only after it is duly filed with relevant authority, i.e., an AIC with appropriate jurisdiction. Failure to file will render the contract invalid, as if it had never been entered into. Under the Law of Property and the New Methods, however, such a contract is nevertheless valid between the parties. When a third party, C, buys equipment from A, the legal consequence of the non-filed security arrangement on C depends on the status of C. If C qualifies as a bona fide third party, that is, one who does not know the existence of the security interest and has paid consideration for the equipment at stake, then C's right has priority. Otherwise, C will lose the equipment to B.

However, probably following the model of US Uniform Commercial Code [UCC], a charge on personal property, albeit duly filed, may nevertheless be uninvokable against a "purchaser who paid the reasonable consideration and obtained the property in ordinary business course" according to the Law of Property. Thus in the example above, if C, qualified as a purchaser in the ordinary course of business, has obtained a property from A by having paid a reasonable price, C's right is prior to B's, even though the charge on such a property had been duly filed. While the Law of Property does not give a definition of the "ordinary course of business", it may be furnished by implementing rules or judicial interpretations for the Law of Property by the State Council or the Supreme People's Court in the future.

According to the Law of Secured Interests and the relevant judicial interpretation, when there are more than one filing records on a piece of property, the priority order shall be determined by the time order of the filings.

DOCUMENTS TO BE SUBMITTED

The provisions of the New Methods on documents to be submitted to the AIC are simpler and more practice-oriented compared to the counterpart provisions of the Old Methods. While the Old Methods adopt a "transaction filing" approach, i.e., require loan contracts, security contracts and other such transaction documents to be filed, the New Method instead takes on a somewhat UCC-styled "notice filing" system where documents of the transaction are not needed, and only basic information of the debt and the security is required to be filed.

Under the New Methods, except for the identity documents of the parties, the Form for Registration is the single most important document that should be filled out and submitted by a filer to the authority. The Form for Registration shall contain such information as the name and residential place of chargor and chargee, the name of the agent, the type and amount of secured credit, the scope the security covers, the term of debt performance by the debtor, the name, quantity, quality, status, location, and title of the security property, and other such information. The Form shall be signed or chopped by both the chargor and the chargee.

The requirement of the Old Methods for a title certificate of charged properties is removed, probably because there are no title certificates for many personal properties (other than for aircraft, vessels and vehicles, which can be filed with authorities other than the AIC) in most cases.

WHAT ARE CHARGEABLE PERSONAL PROPERTIES

One instance of landmark progress made by the Law of Property in connection to security property rights is the law's inclusion of after-acquired or future chattels into the security property list. Needless to say, this is extremely important to debtors as well as to banks eager to enlarge the pool of security properties acceptable under the law.

According to the New Methods, current or future personal properties include equipment for manufacturing, raw materials, semi-products, and products. Receivables are conspicuously not included here, because the People's Bank of China is in administration of filing for receivables charges.

As discussed above, the New Methods mandate a disclosure of basic information of charged property in the Form for Registration that is to be filed with the authority. Information as such in connection to future properties may not be available when the filing is made. Especially in the case of inventory finance or floating charges, the security property is a cover-all category, the contents of which may ever fluctuate depending on the business of the chargor until the event of crystallization happens. How and to what extent the information of future property is reflected in the Form for Registration is up to further clarification by the SAIC.

WHO SHALL CONDUCT THE FILING

According to the New Methods, the parties who are to conduct the filing are "enterprises, small industrial or commercial businesses, and dealers of agricultural production" that own the charge property currently or in the future. It appears from the wording that the chargor has the sole power to make the filing, probably because the handling authority is often the AIC of the chargor's registration place. However, as discussed above, the Form for Registration shall be signed or chopped by both the chargor and the chargee. As a result, the New Methods do not make substantial changes to the Old Methods (which mandate "both parties to the security contract" as the filer) regarding the identity of the filer.

In practice, it is usually the chargee who is most concerned about the filing. Therefore it is in the interest of the chargee to take endeavors urging the chargor to complete the filing process as soon as possible.

WHEN TO FILE

By comparison, under the UCC, a filing can be made prior to the conclusion of the security contract. This enables an intending creditor to preserve its priority during negotiations with the debtor by filing the particulars of the charge in advance of the creation of the charge.

The New Methods, however, do not explicitly touch on the issue of the time for filing. Whether the New Methods adopt the "notice filing" approach completely and thus permit a filing prior to the conclusion of the security contract is yet to be clarified by the SAIC.

TO WHOM FILING SHOULD BE MADE

Two changes appear in the New Methods from the Old Methods. Firstly, the Old Methods provide that filings shall be made with the AIC of the locale of the charged property, at municipal or county level. As a result, filers often do not know with which agency they should file, and third parties are burdened with searching records with at least two agencies (AICs at both municipal and county level in a place). In contrast, in the New Methods the filing authority is a single governmental agency, i.e., the AIC of the domicile of the chargor at a county level.

Secondly, under the Old Methods, filings were made with the AIC of the location of the charged property. Instead, the New Methods use the domicile of the chargor as the determinant of the filing authority. The rationale for this change is not clear. It could be argued that personal properties are movable, that under the old system a party intending to identify secured interests on a certain movable would face the enormous task of tracking all places the chattel has traveled. But the new system does little better with regard to such a burden: the interested party now has to trace all the holders of certain property throughout its history, find their domiciles and make searches with the AICs of such domiciles accordingly. A nationwide, unified record system of charged properties which may reflect filings with all AICs at various levels and places would seem to be a good solution.

FILING FEE

Under the Old Methods, the authority would charge a certain fee in an amount proportional to the amount of secured debt. The New Methods do not mention the filing fee. Whether a filing fee is still needed depends on further clarification of the SAIC, or the practices of various AICs.

CHANGE AND CANCELLATION OF REGISTRATION

According to the New Methods, where there is change to the security contract or the Form of Registration, parties or their designated agent may conduct registration for change with the original authority. Where the underlying debt is discharged, or the secured interest right is fulfilled, or the creditor forfeits its secured interest right, the parties or their designated agent may conduct the registration for cancellation with the original authority.

Notice that in both cases a "may" is used instead of a "shall". Does it imply that parties may choose whether to change / cancel their registration or not? If yes, is it an example of the "notice filing" philosophy of the New Methods, that is, that the filing information only serves as a pointer for further searches about certain property, rather than exhaustive, completely reliable information of encumbrances on it? Again the answer is not available until further explanation is issued by the SAIC.

REGISTRATION BOOK OF CHATTEL CHARGES

According to the New Methods, the AICs shall maintain a Registration Book for Charges of Personal Property for searches. It appears that each AIC that is competent to handle filings (county-level AICs) shall keep its own registration book; no centralized book system is mentioned.

Relevant units (Dan Wei) and individuals with legitimate ID certificate can check and copy the information on the Registration Book. Unlike the Old Methods, the New Methods do not mention the file checking fee. In practice it is possible that certain fees will be charged to cover the administrative cost of the AICs.

*About the author:

Mr. Zhang Zheng is a senior associate of Haiwen & Partners Shanghai Office.