By Li Jinnan and Pan Ye of King & Wood’s Finance Group

I. Background

On October 17, 2007, the State Administration of Industry and Commerce ("SAIC" and its local counterpart "AIC") issued the Rules on Registration of Mortgage over Movable Properties ("New Rules")(1) , which came into force on the same day. As an implementation of the recently effective Property Right Law of the People’s Republic of China ("Property Law")(2) , these New Rules supersede the previous Rules on Registration of Mortgaged Movable Properties issued by SAIC in 1995 ("Old Rules")(3) . We herein set out an introduction on the key features of the New Rules in comparison to the Old Rules.

II. The Scope of Mortgageable Movable Properties

Under the 1995 PRC Security Law (the "Security Law")(4) , which was partly superseded by the Property Law, only existing movable properties could be mortgaged. Accordingly, the Old Rules only allow the registration of mortgage over existing movable properties. In contrast, the Property Law has broadened the range of mortgageable movable properties by allowing the mortgage of certain kinds of future movable properties, including (i) production equipment; (ii) raw materials; (iii) semi-finished products, and (iv) finished products(5) . According to the New Rules, the mortgage of such existing and future movable properties shall be registered with the county level AIC at the domicile of the mortgagor(6) . The permission to mortgage future properties, as deemed by many practitioners, would provide what is in effect a floating charge over those movable properties.

III. The Legal Effect of the Registration

Under the Security Law and the Old Rules, a mortgage agreement in relation to the mortgage of movable properties may only take effect upon the completion of mortgage registration(7) . The New Rules, along with the Property Law, took a different approach by clearly stating that a mortgage over movable assets would come into effect upon the effectiveness of the relevant mortgage agreement while the mortgage agreement would come into force upon its conclusion(8) . This means the mortgages over movable assets could be effective even without registration. However, the mortgagee still needs to perfect such mortgage through registration to guard its security interest against bona fide third parties(9) .

IV. The Registration Fee

Different from Old Rules setting forth how to charge mortgage fees and the default allocation of such fees between the parties, the New Rules are silent on such fee issues. Such silence may signal that the AICs would not charge any registration fees for the registration of mortgage over movable properties. This still needs to be tested in practice.

V. Documents to Be Submitted

For the purpose of applying mortgage registration, the New Rules only requires the submission of (i) mortgage registration form and (ii) identity certificates of the mortgagor and the mortgagee(10) . If the mortgagor and the mortgagee entrust a third party to handle the registration, the identity certificate of such third party and a power of attorney will also be required. Previously, under the Old Rules, the mortgagor and the mortgagee were required to submit a large number of documents, including the mortgage contract and the relevant primary agreement(11).

VI. Degree of Review

According to the Old Rules, before its acceptance of the registration application(12) the relevant AICs shall check, among other things, (i) whether the properties in question have been repeatedly registered for mortgage; and (ii) whether the security period will extend beyond the period within which the properties will be owned or used by the mortgagor. In contrast with the substantial review approach under the Old Rules, the New Rules seems to only require the relevant AICs confirm the completeness of the application materials presented and the truthfulness certified by both parties of the information therein(13) .

VII. Conclusion

The New Rules shall be applauded for providing a uniform guideline for the county level AICs to make the registrations of the mortgage over movable properties and to make available to the general public the inquiry of such mortgage, which will remarkably enhance the willingness of the banks to grant facility against such movable properties and broaden the finance channels of many production enterprises. However, it does leave several issues to be further explored and clarified, including how to crystallize the floating mortgage upon its enforcement; how long it will take to complete the mortgage registration; and whether mortgage could be registered to secure a debt higher than the value of the movable property. All these unresolved issues need to be further clarified and tested in practice.

The article was originally written in English, the Chinese version is a translation. This article was first published in the firm’s periodical China Bulletin January Issue, 2008, Vol.31)

Notes:

(1) State Administration of Industry and Commerce order No. 30, October 17, 2007;

(2) Adopted by the fifth session of the National People’s Congress on March 16, 2007 and effective as of October 1, 2007;

(3) State Administration of Industry and Commerce order No. 35, October 18, 1995;

(4) Adopted by the Standing Committee of the National People’s Congress on June 30, 1995 and effective as of October 1, 1995.

(5) Article 181 of the PRC Property Law "enterprises, practitioners, agriculture producers may mortgage their existing or future production equipment, raw materials, semi-finished products, and finished products. The creditor shall have priority over the mortgaged moveable property when the debtor cannot discharge its obligations when due or upon occurrence of the circumstance as agreed to enforce mortgage."

(6) Article 2 of the New Rules: "mortgage of existing or future production equipment, raw materials, semi-finished products, and finished products provided by enterprises, practitioners, agriculture producers shall be registered at the Administration of Industry and Commerce at county level where the mortgagor locates. Without such registration, the mortgage may not withstand a bona fide third party."

(7) Article 41 of the Security Law: "The mortgage of properties falling into the categories listed in Article 42 shall be registered and the mortgage contract goes into effect as of the date of registration." Article 3 of the Old Rules: "The mortgage of the following moveable properties other than air plans, vessels and vehicles shall be registered at the relevant administration of industry and commerce, and the mortgage contract goes into effect as of the date of registration: …"

(8) Article 15 of the PRC Property Law: "Unless otherwise provided by law or in the contract, a contract establishing, modifying, transferring or terminating property rights shall come into effect when the contract is concluded. The effect of the contract is not affected by failure of registration of the property rights."

(9) Article 188 of the PRC Property Law: "For mortgage of properties listed in item (4), (6) or vessels or air plans under construction falling under item (5) of Article 181, the mortgage right is created upon conclusion of the mortgage agreement; without registration, the mortgage right may not withstand a bona fide third party."

(10) See Article 3 of the New Rules.

(11) See Article 4 of the Old Rules.

(12) See Article 7 of the Old Rules.

(13) Article 7 of the Old Rules provides documents to be submitted to AIC for review, while the New Rules does not provide such a requirement.