An Introduction to Measures for the Registration of Pledged Account Receivables

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1 Llinks Banking Law Bulletin November 2007 An Introduction to Measures for the Registration of Pledged Account Receivables By Charles Qin and Michael Mei The PRC Property Law of People s Republic of China (Property Law) came into effect on 1 October At the same time Measures for the Registration of Pledged Account Receivables (Measures), formulated by the People s Bank of China, became effective as well. The registration procedure embodied in the Measures aims to facilitate the pledge of account receivables stipulated in Article 228 of the Property Law. Since the general legislation and supportive registration measures on pledge of account receivables have been in place, a new channel has been made available to facilitate debt financing, especially for medium and small-sized companies. The definition of account receivables in the Measures and the guideline significance thereof Article 228 of the Property Law keeps silent on the definition of account receivables which makes it difficult in practice to create pledge over account receivables. 如 果 您 需 要 本 出 版 物 的 中 文 本, 请 与 下 列 人 员 联 系 : 韩 东 红 : (86 21) Publication@llinkslaw.com If you would like other Llinks publications, please contact: Lily Han: (86 21) Publication@llinkslaw.com Llinks Law Offices Aiming to fill in the aforesaid vacancy, Article 4 of the Measures, by way of illustrating and listing, defines account receivables as follows. The term account receivables, as mentioned in the Measures, refers to the right to require the debtor to make payments which are obtained by the creditor for offering goods, services or facilities, including existing and prospective monetary claims and the proceeds thereof, but not including the right to claim payments incurred from bills or other negotiable instruments. Based on the above definition we may conclude a general understanding concerning the legal meaning of account receivables to be existing and prospective monetary claim, not including the right to claim a payment incurred from bills or other negotiable instruments. 1

2 Before the Property Law came into effect, transfer of receivables and assignment by way of security of receivables have long been applied in practice for financing purpose. 1 Account receivables, as a form of monetary claim, are identical to other claims whose transfer shall be regulated by rules of claim transfer stipulated in Articles 79 to 83 of the PRC Contract Law. However, we reckon before promulgation of the Property Law, the basis on which account receivables are regarded as subject matter of pledge of rights can be found in Article 75 of the 1995 PRC Security Law (Security Law). The aforesaid Article 75 stipulates various subject matter of pledge of rights including: 1) securities claims, 2) shares, 3) property rights of intellectual property and 4) general claims. Account receivables shall belong to other rights that can be pledged according to laws provided in the fourth item of Article 75. There is no express regulation on pledge of general claims in the Guarantee Law. Since general claims including account receivables are very common, it is impossible to neglect pledge of rights whose subject matter is general claim. In December 2000, the Supreme People s Court promulgated the Judicial Interpretation on Some Issues Regarding the Application of the Security Law (Interpretation). However, the Interpretation is silent on how general claims including account receivables can be pledged. According to a survey carried out by the People s Bank of China among 70 financial institutions, 15 guarantee institutions and 29 registration institutions, seventy-four percent of all the financial institutions accepted single installment or multiple installments of pledged account receivables. The amount of loans secured by single installment or installments of account receivables accounts for 0.9 percent of the total amount of the secured loans of all surveyed financial institutions. 2 However, for the time being it is uncertain whether the basic characteristic of security of account receivables will be pledge or mortgage. 3 The above facts highlight the importance of the Measures definition of account receivables. The Measures lists five types of account receivables and also provides that account receivables shall not be limited to the above five types, which leaves space for other types of account receivables generating in the future. To specify, the five types of account receivables include: 1) claims from sale, including sale of goods, supply of water, power, gas and heat, and license of intellectual property; 2) claims from lease, including lease of movable and immovable property; 3) claims from rendering services; 4) right to charge fees for immovable property such as toll roads, bridges, tunnels, ferries etc. and 5) claims from granting loans or other credit. The above five types of account receivables are applicable to the pledge of account receivables and registration formalities. The significance of registration of pledged account receivables For the purpose of taking pledge over securities claims, a debtor or a third party may transfer the possession of bills of exchange, cheques, promissory notes and other negotiable instruments in accordance with law to a creditor. A negotiable instrument represents rights within its own paper form and transferring possession of aforesaid paper is equal to transfer of possession of rights. According to Section 17 of the Property Law, account receivables shall be a kind of rights which can be pledged.. Since there is no right certificate for account receivables, it is difficult for the creation of pledge of rights to be achieved by transfer possession. Public registration is therefore necessary to compensate for the vacancy, and so the parties shall enter into a written contract and the pledge shall come into being once the credit centre carries out the procedure for registration of the pledge. 2

3 Article 228 of the Property Law specifies the registration institution for pledge of account receivables to read If account receivables are pledged, the parties shall enter into a written contract. The pledge shall come into being once the credit centre carries out the procedure for registration of the pledge. Based on the explanation from the Legislation Committee of the National People s Congress, credit centre refers to the Credit Centre of the People s Bank of China. The Measures provides the function of credit centre, the Credit Centre of the People s Bank of China (Center) is the registration authority for pledge of account receivables. The Center shall establish a system for publicizing registration information of pledge of account receivables (System). This article may be regarded as a bridge between the Measures and Article 228 of the Property Law. The distinguishing features of the Measures in practice While formulating the Measures, the People s Bank of China publicly and extensively sought comments. Establishing the System on Internet and specifying registration rules for pledge of account receivables will arouse enthusiasm for financing secured by account receivables, which offers a new choice for both medium and small-sized companies to raise money. According to the Measures, registration of pledged account receivables shall be handled through the System. On 8 October 2007, the People s Bank of China held a press conference to introduce online operations of the System. Searching for registration information of pledged account receivables can be easily achieved by logging on to the Center s website. That morning, Bank of Communications Ltd., Wuhan Branch successfully registered pledged account receivables through the System for the first time. The registration procedure of pledged account receivables stipulated in the Measures aims to inherit the best practice worldwide, which shows accuracy, quickness, ease of connectivity, low cost and convenience. To specify, user information can be accurately input and published, registration and search can be promptly achieved; the database can be easily accessed and low fees incurred, all despite time and location. In addition, the Measures includes the following features: The person who owns the right to register According to the Measures, a pledgee is entitled to register. Before registering a pledgee shall sign an agreement with a pledgor concerning pledge registration, which provides that the registration of pledged account receivables shall be handled by the pledgee. We understand that according to the Property Law, registration is a pre-condition for pledge over account receivables to become effective, and thus relates to the pledgee s substantial rights. Therefore, a pledgee is sure to actively promote the registration of pledged account receivables. The regulation that a pledgee, other than a pledgee and a pledgor jointly, shall handle the pledge registration is more beneficial for pledged account receivables to become effective. The content to be registered Article 10 of the Measures provides that the contents to be registered shall include basic information about the pledgee and the pledgor, description of account receivables and valid period of the registration. The valid period of registration shall be decided by both parties; however, the period shall not exceed five years. The set period may remind the pledgee and the pledgor to exercise the pledge rights or to discharge the pledge over account receivables. Otherwise, the pledgee shall apply for renewal 90 days prior to expiration of the period to maintain the validity of registration of pledge over account receivables. 3

4 In addition to the above registration items, the pledgee shall also submit the agreement signed by both parties concerning pledge registration as an appendix to the System. We understand the submission of aforesaid agreement as an appendix is for the purpose of further assuring that the pledgee owns the right to register and avoids registration with bad faith as well as abuse of registration, which helps to compensate for the System s absence of substantial supervision. A pledgee and a pledgor may also decide to register and publish other information, for example, the amount of primary claim. Since this information may reveal trade secrets, whether to publish or not shall be subject to both parties agreement. This Article 10 is flexible in regulating the scope within which information shall be published. It therefore settles the contradiction between publication and trade secrets and is of great significance in practice. Demurrer registration Demurrer registration offers the pledgor and other stakeholders a chance to remedy pledgee s mistakes or his/her registration with bad faith. In case the pledgor or other stakeholders reckon that registered information contains inaccurate information, he/she/they is/are entitled to require the pledgee to make alteration or deregistration. On condition that the pledgee refuses to comply, the pledgor or other stakeholders may handle demurrer registration. Compared with the consultative draft, the Measures contains a new article stating that the pledgor or other stakeholders may deregister the demurrer registration at his/her own will. The article adds flexibility to demurrer registration, stating that once the pledgor and the pledgee compromise on demurrer, he/she may deregister the demurrer registration, and litigation procedure is not indispensable here for settlement of disputes. However, if there is no settlement to be reached, the pledgor or other stakeholders shall bring litigation 15 days after demurrer registration, otherwise the Center will deregister the demurrer registration. We understand that the 15-day period of demurrer registration offers the pledgor and other stakeholders different alternatives. Lawsuit is the second choice after settlement through consultation. Register truthfully The Measures stipulates that the pledgor, the pledgee and other stakeholders shall fill in items truthfully under the guidelines of the System. The pledgee, while registering, altering and deregistering the registration, or the pledgor and other stakeholders, while handling demurrer registration, shall not take advantage of the System s absence of substantial supervision to register with bad faith. Compared with the consultative draft, there is a new article in the Measures stating if the pledgor or the pledgee provides false materials in handling the registration formalities, which brings damage to other people, he/she shall assume corresponding legal liability. The article specifies that if the pledgor and the pledgee provide false information they may assume legal liability. We may conclude that the Measures promulgated after the consultative draft, with the System inheriting the best practice worldwide, expressly represents features such as pledgee leading registration formalities, discretion on the part of scope of publishing and demurrer registration of the pledgor and stakeholders, and that the Measures will push forward the civil and commercial practice in pledge over account receivables after the Property Law has come into effect. 4

5 Contact Details If you would like to know more information about the subjects covered in this publication, please feel free to contact the following people or your usual Llinks contact. Charles Qin Tel: (86 21) (86 10) David Yu Tel: (86 21) Michael Mei Tel: (86 21) This article was first published in LexisNexis: China Legal Review, October These two financing methods can be accordingly categorized into assignment by way of outright sale and assignment by way of security as described in the International Convention on the Assignment of Receivables. 2 Page 96, the Security Rights of Movable Property and Development of Credit Market in P.R..C. (CITIC Press, 2006) 3 Article 18 of the Measures on Mortgage Registration with Notary Public Offices adopted by the Ministry of Justice of P.R.C. on 20 February 2002 provides that account receivables can be mortgaged and mortgage registration shall be handled with notary public offices. The Interim Measures on Accounting Concerning Financing by Way of Receivable Claims between Enterprises and Banks and other Financial Institutions promulgated by the Ministry of Finance of P.R.C. confirms that the nature of security over account receivables is a pledge. 5