Security Interests in Personal Property Under The Guarantee Law of The People's Republic of China: A Comparative View With UCC Article 9

ARTICLE
SECURITY INTERESTS IN PERSONAL PROPERTY UNDER THE

GUARANTEE LAW OF THE PEOPLE’S REPUBLIC OF CHINA:
A COMPARATIVE VIEW WITH UCC ARTICLE 9
Kun Zhao
TABLE OF CONTENTS
I. Introduction ............................................................................................................. 4
II. Bankruptcy .............................................................................................................. 5
III. Brief Structure of the Statute................................................................................... 7
IV. Mortgages of Personal Property: Security Interests in Personal Property
without Transferring Possession ............................................................................. 9
A. Scope of personal property which could be legally “Mortgaged” .......................... 9
B. Security Agreement ............................................................................................... 15
a. Required Form of Security Interest ................................................................... 15

b. Required Content of Security Agreement ......................................................... 17
C. Attachment (Effectiveness of Security Interest) ................................................... 23
D. Registration (Perfection) ....................................................................................... 26
a. Registration under the Statute and Relevant Regulations ................................. 26

b. Registration Place .............................................................................................. 27
c. Information Required for Registration and the Required Content in
Financing Statement. ......................................................................................... 30
d. When the Registration is Effective.................................................................... 34
e. Duration and Effectiveness of Registration ...................................................... 36
f. Variation in Description between Registration Record (Financing
Statement) and Security Agreement .................................................................. 38
g. Summary ........................................................................................................... 40
1
V. Pledge of Personal Property .................................................................................. 41
A. Scope of Personal Property That Could Be Pledged ............................................. 41
B. Attachment and Perfection of Collateral ............................................................... 43
a. “Tangible and movable things” (“Goods”) ....................................................... 43

b. Instruments, Chattel Paper and Documents of Title ......................................... 45
c. Investment Properties ........................................................................................ 47
d. Intellectual Property Rights............................................................................... 50
C. Duties and Rights of the Secured Party (Pledgee) Having Possession or
Control of Collateral.............................................................................................. 50
VI. Priority................................................................................................................... 52
A. Priority Rule between Conflicting Security Interests ............................................ 52
B. Priority Rule between the Security Interest and the Right of a Third
Party (Purchaser of the Collateral, Lessee of the Collateral, Lien
Creditor, etc.) in the Collateral .............................................................................. 54
a. Third Party Buyer of Collateral Goods ............................................................. 55

b. Rights of a Lessee of Goods.............................................................................. 57
c. Other Third Party Right Priority Rules ............................................................. 59
d. Priority of Possessory Lien ............................................................................... 60
e. Proceeds ............................................................................................................ 60
f. Special Priority Rule for Particular Categories of Collateral ............................ 62
VII. Default ................................................................................................................... 63
A. What is Default...................................................................................................... 64
B. Secured Party’s Options When Default Occurs .................................................... 65
C. Cumulative Remedy .............................................................................................. 69
D. Redemption Right ................................................................................................. 69
VIII. Conclusion............................................................................................................. 70
2
IX. Brief Amendment Suggestions for The Guarantee Law of The People’s Republic of
China…. ................................................................................................................ 72
3
SECURITY INTERESTS IN PERSONAL PROPERTY UNDER THE
GUARANTEE LAW OF THE PEOPLE’S REPUBLIC OF CHINA:
A COMPARATIVE VIEW WITH UCC ARTICLE 9
Kun Zhao∗
I. Introduction
The Guarantee Law of the People’s Republic of China (hereinafter referred to as “the
Statute”) was put in effect on October 1, 1997.1 The Supreme Court of the People’s Republic of
China has issued the Interpretation of Supreme Court on Several Issues Regarding the
Application of Guarantee Law of the People’s Republic of China (hereinafter referred to as “the
Interpretation”) on September 29, 2000.2 The Interpretation went into force on December 13,
2003.3 Both the Statute and the Interpretation are the most important and supreme laws,
4
governing the security interests in personal property .
In United States, Article 9 of the UCC deals with consensual security interests in personal
property and fixtures.5 The American Law Institute (“ALI”) and the National Conference of
Commissioners on Uniform State Laws (“NCCUSL”) appointed a study committee in 1990 to
review the provisions of Article 9 and to recommend possible changes.6 The Revised Article 9
∗ J.D. Candidate at Willamette University College of Law (graduation anticipated in May 2005). I owe thanks to
Professor Richard B. Hagedorn for his helpful comments on earlier drafts. I also thank Xiao Zhu for his assistance in
collecting regulations and statutes interrelated with the Guarantee Law of the People’s Republic of China (“the
statute”) and also legislation and interpretation of the statute.
1
The Guarantee Law of the People’s Republic of China art. 96 (1995).
2
The Interpretation of Supreme Court on Several Issues Regarding the Application of Guarantee Law of the
People’s Republic of China (2000)
3
Id.
4
Because of conceptional difference between the civil law and common law, personal property, which is discussed
here, is a common law conception. Personal property, in a broad and general sense, is everything subject to
ownership that is not real estate, or a right or interest in things personal, or a right or interest less than a freehold in
realty, or any right or interest which one has is movable. BLACK’S LAW DICTIONARY 1217 (6th ed. 1990). Also,
because of the length limitation of this thesis, the personal property discussed here excludes any personal property
which is attached to land, such as fixtures, timbers, or crops.
5
THE NEW ARTICLE 9 UNIFORM COMMERCIAL CODE 18 (Corinne Cooper ed., 2d ed. 2000).
6
Id. at 17.
4
(hereinafter referred to as “UCC Article 9”) was completed and was compromised in the 1999
Official Text of the UCC.7 ALI and NCCUSL approved the statute in 1998.8 Official
Comments were issued in early 1999 and amended in October 1999 and January 2000.9 UCC
Article 9 has now been enacted in a number of states and is before the legislatures in many other
states and the District of Columbia.10
China is now in the era of transformation from its old state planned economy to a
gradually free market economy. The Statute and the Interpretation, to some extent, reflects some
of the initial concerns and characteristics of the original economic structure. Through nearly ten
years of practice and application of the Statute and the Interpretation, new issues and problems
have emerged. However, few solutions or compromises have been reached. The Statute and the
Interpretation are facing the challenge of rapidly growing use of personal property as a security
of debt. This thesis is a brief discussion of the general rules of security interests in personal
property comparing the Statute, together with the Interpretation, and UCC Article 9. Through
the comparison, one probably can find some good solutions and amendment proposals to the
Statute, which will contribute to the effectiveness and efficiency of the Statute to develop a free
market economy and to keep pace with the rapid economic growth and the economic
transformation itself.
II. Bankruptcy
In the United States, the Bankruptcy Reform Act of 1978 governs the bankruptcy.11
There are four primary types of bankruptcy in the United States: Chapter 7, straight bankruptcy
7
Id. at 18.
8
Id.
9
Id.
10
Id.
11
11 U.S.C. §§ 101 (1994).
5
(a pure liquidation proceeding); Chapter 11, a reorganization proceeding for business; Chapter
12, a reorganization proceeding for farmers; and Chapter 13, a debt repayment plan for
individuals.12 The vast majority of bankruptcies are straight bankruptcies, and over 90 percent of
those are filed by individuals, as opposed to business.13 During the bankruptcy process, the
trustee, someone elected by the creditors, gathers up the debtor’s property.14 The trustee then
either surrenders the encumbered collateral to the secured creditors, or if the trustee elects to sell
the collateral, creditors with perfected security interests get their debts paid first from the
proceeds of the sale.15 The validity (perfection) of the security interest is a matter of state law
and will be measured by state standards.16 UCC Article 9 provides a model rule for each state
and a number of states have enacted UCC Article 9 as state law governing security interests in
personal property.17 If the security interest is finally determined to be unperfected, the interest is
destroyed, and the creditor becomes just another general (unsecured) creditor.18 In most
bankruptcies the unsecured creditors receive nothing.19 For this reason, most creditors want
security (collateral) for their debts, and the perfection of the security interest under the state law
(mostly follow UCC Article 9 rule) is extremely important to a creditor.
In China, bankruptcy is still an underdeveloped and under-regulated area. The
Bankruptcy law of the People’s Republic of China (hereinafter referred to as “the Bankruptcy
Law”) was issued in 1986 to govern bankruptcy of businesses.20 The Supreme Court of the
People’s Republic of China issued the Regulations on Several Issues Regarding Hearing
12
DOUGLAS J. WHALEY, PROBLEMS AND MATERIALS ON SECURED TRANSACTIONS 5-6 (5th ed. 2000).
13
Id. at 6.
14
Id.
15
Id. at 6-7
16
Id. at 7.
17
See Supra note 5.
18
WHALEY, supra note 12, at 7.
19
Id.
20
The Bankruptcy Law of the People’s Republic of China (1986).
6
Corporation Bankruptcy Cases in 2002. There is no individual bankruptcy in China at the
moment. The legislative body is discussing the new bankruptcy law now. Whether the law in
discussion will cover individual bankruptcy is still a mystery. Under the Bankruptcy law, similar
to the Bankruptcy Reform Act 1978, creditors with perfected security interests have the first
priority to get their debt paid.21 Unsecured creditors are treated as general creditors, and will not
have priority.22 Thus, with the priority concerned and the future possible inclusion of individual
bankruptcy, the perfection of secured interest in personal property plays a very important role in
bankruptcy in China too.
III. Brief Structure of the Statute
The Statute has seven chapters. They are General Provisions, Guarantee Responsibility,
Mortgage,23 Pledge, Lien, Earnest, and Supplemental Provisions.24 Chapter one, General
Provisions, articulates the purposes and principles of the Statute.25 Chapter two, Guarantee
Responsibility, sets forth rights and obligations of a third party surety and a creditor as to the
payment of the debt, if a debtor fails to repay the debt or perform the duty.26 Chapter five, Lien,
is about liens on property, which is in the possession of a particular creditor, who provides labor
and services to the debtor on the property.27 Chapter six, Earnest, is about the deposit which is
usually used to secure performance of a duty.28 Chapter seven, the supplemental provisions,
21
Id. art. 28, cl. 3.
22
Id. art. 28, cl. 3; See also supra note 2, ch. 3, sec. 2, art. 42, cl. 5, art. 43.
23
Mortgage, under the definition of the Statute Article 33, means a debtor or third party does not transfer
possession and use of property to a secured creditor to secure payment of a debt or performance of a duty. See supra
note 2, ch. 3 art. 33. This is also the same pre-code conception of Chattel Mortgage in the U.S.
24
See supra note 2.
25
Id. ch. 1.
26
Id. ch. 2.
27
Id. ch. 5.
28
Id. ch. 6.
7
defines real property and movable property, sets the effective date of the Statute, and sets forth
other miscellaneous issues.29
The security interest in personal property is set forth in chapter three and four, Mortgage
and Pledge respectively.30 Chapter three applies to mortgages in both personal property and real
property.31 The Statute regulates security interests in real property and personal property in the
same chapter.32 The discussion in this thesis will be limited to mortgages in personal property
under the Statute Chapter three.
It is true for the most part under UCC Article 9 that a security interest can only be created
by contractual agreement.33 Under the Statute, “Mortgage” means a security interest in property
without transferring its possession and use to a secured creditor.34 “Pledge” means a security
interest in movable and tangible personal property that is in the possession of a secured party, or
a security interest in “property rights,” such as security interests in securities, instruments or
intellectual properties.35 Both mortgage and pledge can only be created by contractual
agreements.36 This thesis will focus on discussing chapter three and four in comparison with
UCC Article 9.
29
Id. ch. 7.
30
Id. ch. 4, 5.
31
Id. ch. 3.
32
Id.
33
U.C.C. § 9-109 (a) (1) (2000); See also RAY D. HENSON, SECURED TRANSACTIONS UNDER THE UNIFORM
COMMERCIAL CODE 16 (2d ed. 1978).
34
See supra note 2, ch. 3, sec. 1, art. 33.
35
Id. ch. 4, sec. 1, 2.
36
Id. art. 38, 64, 76, 78, 79.
8
IV. Mortgages of Personal Property: Security Interests in Personal Property without
Transferring Possession
A. Scope of personal property which could be legally “Mortgaged”
Under the Statute, reading the statutory language literally, a party could acquire security
interest in almost all personal properties by security agreement without transferring possession of
the property. However, in real practice and application of the Statute, it is not the case.
The Statute Article 34 defines the scope of personal property which is allowed to be
“mortgaged” by enumeration of certain types of personal property with a catch-all clause.37 The
following personal property is allowed to be “mortgaged”: (1) machinery, means of transport,
and other properties owned by the mortgagor;38 (2) state owned machines, transportation
vehicles and other properties which the mortgagor has the authority to dispose of;39 (3) other
property which could be legally mortgaged.40
Machinery includes all kinds of machine tools, computers, chemistry lab equipments,
instruments and apparatus, communication equipment; loading machinery at the ports, stations,
tractors, harvesting implements, thresher, and other agricultural equipment.41 Means of
Transport includes aircraft, ships, trains, and all kinds of vehicles.42
The catch-all clause creates an ambiguity with regard to the scope of personal property to
which a party could attach a security interest without transferring possession. There is no
statutory interpretation or clarification at the state legislative level as to the scope of the catch-all
clause. The legislative purpose of adding the catch-all clause is for “the convenience of
37
Id. art. 34. Article 34 includes real property which is allowed to be mortgaged. Because this thesis is discussing
security interests in personal property, the real property part will not be excluded.
38
Id. ch. 3, sec. 1, art. 34, cl. 2.
39
Id. cl. 4.
40
Id. cl. 6.
41
SHENFPING GAO, NEW ISSUES ON THE GUARANTEE LAW AND CASE RESAERCH 490 (2000).
42
Id.
9
administration and implementation.43” The legislative intent does not expressly expand the
scope.
Such legislative intent is also consistent with the traditional civil law. Under ancient
Roman law, a mortgage does not limit the property only to real property.44 As the development
of real property mortgage reaches its peak and, most civil law countries such as France, Germany,
Switzerland and Japan, finally have adopted separate systems as to security interests in real
property and personal property.45 Mortgages mostly involve real property.46 Personal property
is usually pledged, instead of being mortgaged to secure the payment of a debt. However, with
the recent development of economy, those civil law countries have legislated special laws
regarding chattel mortgage.47 The property, which is allowed to be mortgaged, shall be real
property, or some particular personal property, which is deemed as real property, such as boats,
ships, aircrafts and vehicles.48
The Statute has adopted the trend to expand mortgage to personal property. It permits
personal property, such as equipment used for manufacturing and production and other movable
property, to be mortgaged.49 Notably, the Statute Chapter Seven Article 92 defines movable
property as things50 other than real property.51 Therefore, personal property, by legislative intent
and the Statute, should at least include movable things such as equipment used for manufacturing
and production, and other property in the similar category.
43
ANGRAN GU, THE ILLUSTRATION OF GUARANTEE LAW OF THE PEOPLE’S REPUBLIC OF CHINA (DRAFT) (1995);
See also XIANGJUN KONG, THE COMPREHENDING AND APPLICATION OF CURRENT GUARANTEE LAW AND JUDICIAL
INTERPRETATION app. 2, at 341 (2001).
44
KONG, supra note 43, at 204.
45
GAO, supra note 41, at 482.
46
See supra note 43.
47
See supra note 45.
48
See supra note 44.
49
See supra note 43.
50
“Things” is a limited definition of property which is tangible, movable and has value.
51
See supra note 2, art. 92.
10
On the other hand, the Statute Article 43 authorizes a notary office to register mortgages
of “other properties,” which are not vehicles or personal property owned by corporations
expressly enumerated in the Statute Article 34.52 Hence, if one employs the basic interpretation
rule that the provisions in a statute shall not contradict each other and each provision shall have
meaning, the Statute Article 43 implicitly acknowledges that certain personal properties other
than expressly enumerated in the Statute Article 34 can be mortgaged. Therefore, the personal
property which can be mortgaged under Article 34 should be in fact beyond the legislative intent.
Furthermore, the Mortgage Registration Method for Notary Offices (hereinafter referred
to as “the Method”) was issued in February 2002 by the Department of Justice of the People’s
Republic of China.53 The Method Article 3 expressly articulates that other properties in the
Statute Article 43 includes machinery, equipment, cattle, and other means of production,
furniture, household electronics, treasures and other means of livelihood, and other personal
property not included in Article 37, 42 of the Statute.54 Even though the Method is an
interpretation or implementation of the Statute Article 43 and not an interpretation or further
definition of the scope of “other property which is allowed to be mortgaged” in the Statute
Article 34, it can be inferred that personal property which could be mortgaged shall go beyond
the Statute Article 34 personal property.
Such expansion is also consistent with the legislative intent as to the convenience of
administration and application, particularly for the purpose of facilitating the rapid economic
development and reform in China. If the debtor has the right to dispose of the personal property
and the personal property is transferable, the personal property should be allowed to be
52
Id. ch. 3, sec. 2, art. 43.
53
The Mortgage Registration Method for Notary Offices (2002).
54
Id. art. 3.
11
mortgaged.55 With the development of the economy, the scope of personal property under the
Statute Article 34 will expand accordingly.56 For such anticipation, the article provides such
general inclusion.57
Therefore, the personal property, which is allowed under the Statute, goes beyond the
enumerated personal property in Article 34, such as machinery, equipment and vehicles. It also
includes popular tangible personal properties used in daily life, such as furniture, treasures,
electronics, etc. At this stage, the Statute and real practice have not expanded in scope to include
intangible personal property, or property rights, such as instruments, securities, chattel papers,
etc. Thus, the personal property, which is allowed under the Statute to be mortgaged, shall be
generally tangible personal property.
Based on the conclusion that generally tangible personal property is allowed to be
mortgaged, some types of property are prohibited from being subject to mortgage. Personal
property, which is used for public interest, can not be mortgaged, such as educational facilities,
and medical health facilities and other facilities for public use.58 Obviously, if a party intends to
create a mortgage in the personal property, the party must have ownership in the personal
property or a right to dispose of the personal property. Personal property, which is in ownership
dispute, attached, arrested or supervised and controlled according to law can not be mortgaged.59
Therefore, under the Statute, personal property, which can be mortgaged without
transferring possession, is typically tangible personal property, which is not used for public use
or subject to other legal enforcement or execution.
55
XIANGJUN KONG, THE CASE STUDY AND APPLICATION OF THE GUARANTEE LAW 260 (2001).
56
Id.
57
Id.
58
See supra note 2, ch. 3, sec. 1, art. 37, cl. 3.
59
Id. ch. 3, sec. 1, art. 37, cl. 4, 5.
12
UCC Article 9 primarily covers consensual security interests in personal property and
fixtures.60 UCC Article 9 applies to any transaction (regardless of its form) which is intended to
create a security interest in personal property or fixtures, including goods, documents,
instruments, general intangibles, chattel paper, or accounts.61 The collateral under UCC Article
9 is classified as tangible collateral, semi-tangible collateral and intangibles.62 Tangible
collateral is generally goods.63 “Goods” means all things which are movable when a security
interest attaches.64 It also includes fixtures, standing timber, unborn young animals, crops
growing or to be grown, manufactured homes, and even computer programs embedded in goods
and the supporting information provided in connection with a transaction relating to the
program.65 Goods are further classified as consumer goods, farm products, inventory, equipment,
fixtures and accessions.66 Semi-tangible collateral includes instruments, documents and chattel
paper.67 Intangible collateral includes accounts and general intangibles.68 Collateral also
includes proceeds, which is whatever received upon sale, exchange, collection or other
disposition of collateral or proceeds.69 Other personal property which could be collateral
includes: (1) timber to be cut; (2) minerals (including oil and gas); (3) motor vehicles; (4) mobile
goods; (5) money; (6) deposit accounts (including non-consumer bank accounts); (7) payment
intangibles; (8) health-care insurance receivables; (9) supporting obligations; (9) commercial tort
60
U.C.C. § 9-109 (a) (1) (2000).
61
BARKLEY CLARK, THE LAW OF SECURED TRANSACTIONS UNDER THE UNIFORM COMMERCIAL CODE, vol. 1,
¶1.02 [1], at 1-12.5 (rev. ed. 2000).
62
LOUIS F. DEL DUCA et al., PROBLEMS AND MATERIALS ON SECURED TRANSACTIONS UNDER THE UNIFORM
COMMERCIAL CODE 167 (1992).
63
Id.
64
U.C.C. § 9-102 (44) (2000).
65
Id.
66
Id.
67
Id.
68
Id.
69
U.C.C. § 9-102 (a) (64) (2000).
13
claims; and (10) letter-of-credit right.70 Each of these terms is defined under UCC § 9-102 (a) in
detail.
Though the classification of collateral is not for the purpose of defining the scope of
personal property which can be subject to a security interest, the broad inclusion of these
categories infers a broad range of personal property which are allowed to serve as collateral
without possession being transferred to the secured party, from tangible personal property to
intangible personal property.
Under the Statute, compared with the scope of personal property under UCC Article 9,
personal property, which can be mortgaged, is similar to the narrow and traditional meaning of
“Goods” defined under UCC § 9-102 (44), which are generally tangible and movable property.
Other categories of collaterals such as intangibles, semi-tangible collateral (indispensable paper),
and proceeds are not within the scope of “other property” under the Statute. Therefore, the scope
of personal property that can be mortgaged without transferring possession under the Statute is
much narrower than that under UCC Article 9.
Such narrow scope is appropriate for the economic development at the moment. The
traditional and dominant legal practice of real property mortgage restrains the personal property
mortgage practice. Because of the movability of personal property, one still prefers to have real
property as a mortgage. Another obstacle to expand the scope is the tedious and inconsistent
registration system for mortgages in personal property, which will be discussed in details later.
It causes unnecessary transaction costs and less effectiveness of public notice. Under such
circumstances, the expansion will cause more problems.
70
U.C.C. § 9-102 (a) (2000).
14
The establishment of public credit systems for individuals and legal entities are still at
inception. Without a reliable credit record system, such an expansion will cause less
effectiveness of secured transactions and leave creditors with more risk and uncertainty.
Furthermore, even though the expansion of the scope is demanded by the rapid economic
growth, the banking system is not ready for such expansion. The banking industry is not totally
under a market operation. The banking system is fragile and vulnerable because of huge amount
of policy loans and uncollectible loans. It is at the transformation stage from state owned banks
to real commercial banks. Most financial services, which are very commonly provided in the
United States, are still unavailable to individuals, for example, personal checking service. Thus,
the banking system is not ready for expansion of scope to intangibles, such as accounts. Besides,
the banking system is not as highly regulated as that in the United States. This is also true in the
securities market.
Therefore, with inadequate experience of these western market tools of finance and the
aching systematic transformation, it is not wise to expand the scope, such as to include
intangibles. At the moment, the scope of personal property under the Statute is realistic,
reasonable and appropriate.
B. Security Agreement
a. Required Form of Security Interest
Under the Statute, the security agreement is required to be in a written form.71 An oral
agreement is only enforceable and legally enforceable only if the debtor performs his duty under
the oral agreement, and the secured party accepts the performance.72 However, in real practice,
71
72
KONG, supra note 43, at 231; See also supra note 2, art. 36.
15
it rarely happens that the debtor will voluntarily deliver the collateral to the secured party to
enforce its security interest if there is an oral agreement. Thus, even though, the Uniform
Contract Law of China may recognize an established oral agreement by actual performance of
the obligation and acceptance of such performance, it does not have any much practical meaning.
Therefore, in fact, an enforceable mortgage can only be created by a written agreement.
Under UCC Article 9, for attachment purposes, the debtor must have authenticated a
security agreement.73 The authentication requirement includes to electronic records.74 Under the
definition of “authenticate,” the old-fashioned signature will still work.75 As an alternative to a
signature, however, encryption of a record with intent to identify the authenticating party and
accept the record, or establish authenticity of the record will suffice.76 The definition is intended
to enable creation of security interests through electronic communications.77 An oral security
agreement is not sufficient for attachment purpose under UCC Article 9 unless the secured
creditor has possession of the collateral.78
Thus, a mere oral security agreement is unenforceable under both the Statute and UCC
Article 9. Under UCC Article 9, the form could be all tangible and electronic communications.79
Under the Statute, the form is limited to merely a writing. The Statute does not define what
“writing” means. But, in real practice, it eliminates electronic records of authentication.
73
U.C.C. § 9- 203 (b) (3) (A) (2000); See also ELDON H. REILEY, SECURITY INTEREST IN PERSONAL PROPERTY, vol.
1, § 7:10, at 7-13 (3d ed. 2001); Food Serv. Equip. Co. v. First Nat’l Bank of Atlanta, 174 S.E.2d 216 (Ga. App. Ct.
1970).
74
U.C.C. § 9-102 (a) (7) (2000).
75
REILEY, supra note 73, at 7-14
76
Id.
77
Id.
78
U.C.C. § 9-203 (b) (3) (B) (2000); See also In re Owensboro Canning Co., 46 B.R. 607 (Bankr. W.D. Ky. 1985);
In re Swedenborg, 55 B.R. 820 (Bankr. N.D. Ohio 1985); In re Jay, 8 B.R. 774 (Bankr. M.D. Fla. 1981).
79
In re Owensboro Canning Co., 46 B.R. 607 (Bankr. W.D. Ky. 1985) (The secured party and the debtor have had a
meeting of the minds with some writing, the court found a security agreement based on facts surrounding the sale of
a business, even though no formal security agreement was executed by the buyer of the business); In re Numeric
Corp., 485 F.2d 1328 (1st Cir. 1973) (Debtor’s corporate minutes plus financing statement will be sufficient.)
16
With the development of electronic technology and its advantage of dramatic saving of
transaction costs, the volumes of electronic transactions are becoming more and more weighted
among the entire business transactions. The exclusion of creating security interests by electronic
communications will restrain such business practice in the future.
In addition, because the Statute requires a writing agreement, both parties’ signatures are
required. Under UCC Article 9, only the debtor’s authentication is required.80
b. Required Content of Security Agreement
Under the Statute, the content of a security agreement shall include: (1) the amount of the
debt; (2) when the debt is due; (3) the designation, amount, quality, condition, location, and
status of ownership of the collateral; (4) the amount of the debt secured by the collateral; (5)
other agreements, which the parties deem necessary.81
The security agreement is inadequate if the security agreement does not include
provisions regarding the amount of the debt and the collateral, or if there is an ambiguity as to
such, they cannot be inferred or supplemented according to the security agreement and the
principal contract.82 Such inadequacy will result in a finding of no security agreement.83 Even if
parties later agree on the amount and category of debt secured, it shall be treated as a new
security agreement.84
If the parties do not provide in the security agreement the exact amount of the debt
secured by collateral, the default rule under the Statute provides that it shall be the principal debt,
interest thereon, fines for breach of agreement, compensations for loss and damage and expenses
80
U.C.C. § 9-203 (b) (3) (A) (2000); See also Bank of Kansas v. Nelson Music Co., 949 F.2d 321 (10th Cir. 1991).
81
82
83
Id.
84
17
for the enforcement of the mortgage.85 As to the other two required contents, if the parties could
later supplement the relative provisions or they could be inferred by circumstantial evidence, the
security agreement is established.86 Thus, in real practice and application of the Statute, courts
focus on whether the required content can be determined by the circumstantial evidence or the
security agreement itself.
Noticeably, the requirement as to the description of collateral is detailed under the Statute.
The effect of such detailed description is that the collateral under mortgage shall be
particularized.87 The security agreement shall particularize and specify the collateral in detail.88
The general terms, such as equipment, inventories, or goods, are not sufficient to satisfy the
statutory requirement on the description of the collateral.
Under UCC Article 9, the formal requisites of a security agreement are: (1) authentication
of the debtor; (2) a description of the collateral; (3) language granting the security interest.89 In
addition, a security agreement should (but is not required to) describe the debt.90
As to the description of the collateral, the standard of sufficiency is “reasonably
identifiable.”91 A description of collateral reasonable identifies the collateral if it identifies the
collateral by (1) specific listing; (2) category; (3) a type of collateral defined in UCC; (4)
quantity; (5) computational or allocational formula or procedure; or (6) any other method if the
identity of the collateral is objectively determinable.92 In addition, UCC Article 9 creates a “safe
harbor,” that, except for consumer secured transactions and commercial tort claims, a description
85
86
KONG, supra note 55, at 308-309.
87
Id. at 307.
88
Id.
89
U.C.C. § 9-203 (b) (2000).
90
REILEY, supra note 73, at 7-14.
91
U.C.C. § 9-108 (a) (2000); See also In re Fibre Glass Boat Corp., 324 F. Supp. 1054 (Bankr. S.D. Fla. 1971);
Johns v. Teleflex Indus. Prod., Inc., 448 F.2d 781 (5th Cir. 1971); In re Laminated Veneers, Inc., 471 F.2d 1124 (2d
Cir. 1973); Material Serv. Corp. v. Bogdajewicz, 387 N.E.2d. 1057 (Ill. App. Ct. 1979).
92
U.C.C. § 9-108 (b) (2000).
18
using one or more of the collateral classifications, such as “equipment,” “inventory,” or
“accounts,” is sufficient.93 However, using a super generic term, such as “all the debtor’s
personal property,” or using words of similar import does not reasonably identify the collateral.94
As to consumer secured transactions, the description of consumer goods and investment property
shall be specific, and a generic term, such as that listed above, will not be sufficient.95
Accordingly, the specific securities accounts or securities entitlements should be identified.96
For commercial tort claims, § 9-108 (e) requires a specific description.97
The standard description of collateral is much more detailed under the Statute than that
under UCC Article 9. There is no express standard set under the Statute. However, the principle
requirement is reasonably to locate the collateral, or particularize the collateral, to facilitate
enforcement of the security interest in the collateral.98 The purpose of requiring a description of
collateral in a security agreement under UCC is evidentiary.99 The evidentiary purpose is to
facilitate the future enforcement of the security interest. Thus, this principle of the Statute is
similar to the “reasonably identifiable” standard under UCC Article 9. However, because of the
impact of the civil law theory, the collateral should be particularized. The generic term, like
“equipment,” “inventory” or “goods” are not enough to “particularize” and locate the collateral.
Thus, the “safe harbor” provision of UCC Article 9 will not be a sufficient description of the
collateral requirement under the Statute.
Because under UCC Article 9, the generic term, such as “equipment,” “inventory” or
“goods” are sufficient to describe the collateral, all after acquired personal property within such
93
REILEY, supra note 73, § 10:14, at 10-18; See also Coseo v. Alpena Sav. Bank, 612 F.2d 276 (6th Cir. 1980); In
re Shenandoah Warehouse Co., 202 B.R. 871 (W.D. Va. 1996).
94
U.C.C. § 9-108, Official Comment 2 (2000); See also REILEY, supra note 73, § 10:13, at 10-16.
95
REILEY, supra note 73, § 10:14, at 10-17.
96
Id.
97
U.C.C. § 9-108 (e) (2000).
98
GAO, supra note 41, at 365.
99
U.C.C. § 9-108, Official Comment 2 (2000).
19
category will be subject to a security interest if the security agreement provides. Much litigation
has arisen over whether a description in a security agreement is sufficient to include after-
acquired collateral if the agreement does not explicitly so provide.100 The Statute does not
expressly exclude after acquired personal property as collateral if the parties provides so in the
security agreement. At the time of contracting, parties cannot describe them according to the
requirement of the Statute. Therefore, the detailed and strict collateral description requirement
under the Statute, such as name, location, quantity, and quality, in fact eliminates the possibility
to include after acquired personal property as collateral.
The Statute obviously intends to provide certainty of collateral to protect creditor’s
interest with detailed requirement of description of collateral. The downside of such restrict
requirement is that the creditor loses the possibility to include more collateral to secure his debt
when the debtor acquires personal property after the security agreement has been reached. By
using generic terms, which do not fail a reasonably identifiable standard, the secured party can
include types of collateral as much as possible. Thus, such strict requirement actually does not
serve the best interest of the creditor. Even though the strict requirement under the Statute will
have fewer disputes, UCC Article approach does not prohibit creditors to describe collateral in
details and the parties can avoid such disputes by careful contract drafting. Thus, to allow the
use of generic term under UCC Article 9 and to include after-acquired personal property as
collateral will be a better approach.
100
U.C.C. § 9-108, Official Comment 3 (2000); See also In re World Wide Perfume, Inc., 7 UCC Rep. 616 (Bankr.
M.D. Ala. 1969); Boulder Bank & Trust Co. v. U. S., 26 UCC Rep. 774 (N.D. Okla. 1979); Graphic Res, Inc. v.
Thiebauth, 447 N.W.2d 28 (Neb. 1989). But see White Motor Credit Corp. v. Euclid Nat’l Bank, 30 UCC Rep. 331
(Ohio App. Ct. 1980) (upholding descriptions that omit any reference to after-acquired inventory); In re Fricks, 58
B.R. 883, (Bankr. N.D. Ala. 1986) (The court upheld the collateral includes after-required hogs when the security
agreement described the collateral as “hog inventory” and omitted any reference to after-acquired hogs.)
20
The Statute also requires a description of the debt in the security agreement. If such a
description is missing, the security agreement is invalid.101 Under civil law theory, the
establishment and validity of a security agreement is built upon the validity of the principal
contract that created the debt, such as a loan contract. If the security agreement does not include
what debt it secures, the linkage between the principal contract and the security agreement
cannot be proved. Thus, the lack of such provision will result in no security agreement. Under
UCC Article 9, a description of the debt is not required in the security agreement.102 Generally,
however, a careful secured party should include the description of the debt.103 When future
advances are to be secured, this should be specified in the security agreement.104
The Statute is more considerate on this point. The requirement of description of the
principal debt will help any third party evaluate the risk of lending to the debtor. With such
description requirement, it will be much easier to determine the amount of debt, which is secured
by the collateral when future advances are involved.
Finally, as to the granting language requirement, the statute does not expressly require
such language, nor does UCC Article 9. In older decisions, courts of the U.S. sometimes
required formal “granting” language in the security agreement.105 The more recent decisions
look at the matter more liberally.106 In In re Triangle Inn Associates, the court sensibly held that
the transaction should be viewed as a whole and that precise words “granting a security interest”
101
102
103
Id.
104
Id.
105
CLARK, supra note 61, vol. 1, ¶2.02[1][c], at 2-14; See also Shelton v. Erwin, 472 F2d 1118 (8th Cir. 1973);
Transp. Equip. Co. v. Guar. State Bank, 518 F2d 377 (10th Cir. 1975); Mid-Eastern Elec., Inc., v. First Nat’l Bank
of S. Md., 280 F2d 355 (4th Cir. 1967); In re Mann, 318 F. Supp. 32 (W.D. Va. 1970); In re United Thrift Stores,
Inc., 242 F. Supp. 714 (D.N.J. 1965), aff’d, 363 F2d 11 (3d Cir. 1966); In re Arctic Air, Inc., 202 B.R. 533 (Bankr.
DRI 1996).
106
CLARK, supra note 105, at 2-15.
21
were not necessary.107 In spite of authority to the contrary, the courts should not require formal
granting words in the security agreement as a condition to attachment.108 Such a requirement
smacks of the antiquated formalism the drafters were trying to avoid.109 A filed financing
statement standing alone will probably not suffice to serve as a security agreement.110 However,
in combination with other documentation, such as promissory notes, bills of sale, and written
memoranda, the financing statement should be given weight in that direction.111
The philosophy of the drafters of the UCC Article 9, the substance should rule supreme,
is also reflected in the Statute and civil law theory.112 Under the Statute, for a security agreement
to be established, the debtor must have the intent to grant such security interest in the
collateral.113 Such intent could be normally evidenced by the security agreement itself, with the
provision of the amount of debt secured by collateral, the description of collateral, the
description of the debtor, and other circumstantial evidence. The formal “magic language” is not
required. Therefore, the UCC Article 9 and the Statute both take a very liberal approach to this
issue.
The Statute does not have problems with the lack of express “granting language” to find
an intent to create a security interest. The statutorily required content in the security agreement
will be sufficient to evidence such intent. However, courts in the U.S., when applying UCC
107
Id. at 15, 16; See also In re Triangle Inn Ass’n, 641 F2d 185 (4th Cir. 1981).
108
109
Id.
110
American Card Co. v. HMH Co., 196 A.2d 150 (RI 1963) (financing statement that does not contain debtor’s
grant of security interest cannot serve as security agreement); In re Mitchell, 458 F.2d 700 (10th Cir. 1972); Gibbs v.
King, 564 S.W.2d 515 (Ark. 1978). Cf. Gibson County Farm Bureau Co-op. Ass’n v. Geer, 643 N.E.2d 313 (Ind.
1994) (a financing statement, standing alone, can qualify as a security agreement if parole evidence shows that the
parties had such intent.)
111
112
Id. at 2-14.
113
The Contract Law of the People’s Republic of China ch. 2 (1999).
22
Article 9, may have more trouble to find such intent when such language is missing in the
security agreement or only a financing statement is filed.114
In summary, as to the content of the security agreement, the requirements are similar
under the Statute and UCC Article 9. UCC Article 9 broadens the permissible authentication
means to adjust to the development of electronic communications. On the other hand, the Statute
still requires the old-fashioned form of a writing. Only debtor’s authentication is required under
UCC Article 9. However, the Statute requires the signatures of both the debtor and secured party.
Furthermore, the Statute requires the content in the security agreement more in detail and
specific, such as the description of collateral and the description of debt.
C. Attachment (Effectiveness of Security Interest)
Under the Statute, when a security agreement becomes “effective,” the security interest is
attached and the security agreement becomes enforceable against the secured party and the
debtor.115 The security agreement becomes effective if: (1) there is an effective principal
contract (for example, loan contract);116 (2) the collateral is statutorily permissible and not
prohibited under Article 37; (3) a security agreement exists which meets the statutory
requirements.117 In addition, if the collateral is aircraft, ships, vehicles, equipment and other
personal property owned by corporations, the security agreement is effective on the date when
the security agreement is registered.118 If the collateral is personal property other than those
above, the security agreement is effective on the date when the security agreement is signed.119
114
See cases cited supra note 105.
115
See supra note 2, ch. 3, sec. 2, art. 41, 43.
116
Id. ch. 1, art. 5. A security agreement is an accessory contract to a principal contract. If the principal contract is
invalid, the security agreement shall be found invalid.
117
See the discussion in IV. B. b. “Content of Security Agreement Required” supra.
118
119
Id. art. 43.
23
Under the civil law theory, the security agreement is the accessory contract subject to the
principal contract, such as a loan contract. If the principal contract is invalid, then the security
agreement cannot be valid and enforceable independently.
The collateral should be the personal property, which is within the scope of collateral
allowed to be mortgaged under the Statute. The Statute Article 37 also prohibits personal
property which has encumbrances or is maintained for certain public use to become collateral.
This includes personal property used for public health, public education, personal property
whose ownership is in dispute or unclear, or personal property which is subject to legal
enforcement or execution.120
Under UCC Article 9, the security agreement is effective if: (1) value has been given; (2)
the debtor has a right in collateral or has the power to transfer rights in the collateral to a secured
party; and (3) there is valid authenticated security agreement.121
The presumption of a valid principal contract under the Statute is similar, if not identical,
to the requirement of “value has been given.” Under UCC Article 9, a person gives value for
rights if he acquires them: (1) in return for a binding commitment to extend credit; (2) as security
for or in total or partial satisfaction of an antecedent debt; or (3) in return for any consideration
sufficient to support a simple contract.122 A principal contract under the Statute is usually a
contract to loan money, or more broadly, any contract which extends credit to the debtor. Also,
120
See supra note 2, ch. 3, sec. 1, art. 37, cl. 3-5.
121
U.C.C. § 9-203 (b) (2000). Here in this part, the discussion will be limited to a security interest acquired by a
security agreement without transferring possession, and the personal property is tangible and movable “things.”
Therefore, attachment by possession, delivery or control pursuant to the security agreement is not included in
discussion and comparison.
122
CLARK, supra note 61, vol. 1, ¶2.03, at 2-62; See also Powers v. U.S. Farmers Home Admin., 738 F. Supp. 174
(D. S.C. 1990) (Value may be found in the reamortization of an existing debt); Yamaha Motor Corp. v. Tri-City
Motors & Sports, Inc., 171 Mich. App. 260, 429 N.W.2d 871 (1988) (A security interest attached when seller
decided to treat a cash sale as a credit sale. Presumably that is when value as extended); In re IPS Sys., Inc., 205
B.R. 88 (S.D. Tex. 1997) (Agreement of law firm to represent debtor through bankruptcy was sufficient value for
security interest to attach.)
24
parties can reach security agreement later to secure the antecedent debt under a principal contract.
Under Uniform Contract Law of the People’s Republic of China, there is no such conception as
consideration. Thus, the principal contract, which usually creates a debtor and creditor
relationship, will include these three circumstances of “value.” In that sense, the prerequisite of
a “valid principal contract” will be much broader than “value.” In real practice, “value” is very
similar to the Statute’s requirement of a valid principal contract.
The prerequisite as to the allowable collateral under the Statute is similar to the
prerequisite of the UCC Article 9 requirement that “the debtor has rights in collateral or has the
power to transfer rights in the collateral to the secured party.” The reason for the Statute Article
37 that prohibits certain personal property to be used as collateral is to ensure that the collateral
is not encumbered by any authority and that the debtor has the right in the collateral or has the
power to transfer the rights in the collateral to the secured party. The prerequisite of collateral
under the Statute is more restrictive perhaps because of the public policy concern related to
restricting some personal property used for public health care and education. Overall, this
prerequisite under the Statute is similar to the corresponding prerequisite under UCC Article 9.
Both the Statute and UCC Article 9 require an authenticated security agreement for
evidentiary purposes.
Finally, as to attachment, there is an additional prerequisite under the Statute. For certain
types of personal property, such as aircraft, ships, vehicles, equipment and other personal
property owned by corporations, registration of the security agreement123 is required for the
security agreement to be enforceable. UCC Article 9 does not have such requirements for the
123
The registration here is the same as the registration discussion in the following section regarding perfection
purposes. For these types of collaterals, the registration serves both attachment purposes and perfection purposes.
25
effectiveness of a security interest. The primary reason for such requirement is that the
significant value of such collateral requires a formal public notice.
Therefore, most of the prerequisites under the Statute for attachment purposes are similar
to those under UCC Article 9.
D. Registration (Perfection)
a. Registration under the Statute and Relevant Regulations
The registration under the Statute serves two purposes, one for attachment purposes, and
the other for the determination of priority purpose. The Statute provides (1) for certain
categories of collaterals, the effectiveness of a security agreement shall be upon the
registration;124 (2) the place where to register; and (3) the documents which the parties shall
register.125 The Statute only regulates on a general level. The details are left to administrative
agencies and offices to issue “Methods” or “Regulations,” which to some extent result in
different, complicated, and confusing processes and requirements.
Filing financing statements is a standard means of perfection under UCC Article 9.126
Under UCC Article 9, the perfection of a security interest is only for priority purposes to protect
creditor from competing claims of third parties such as other creditors of the debtor, the debtor’s
trustee in bankruptcy, or purchasers of the collateral.127 Generally, perfection is not relevant
with respect to disputes between the debtor and the secured party.128
124
125
Id. art. 42, 43.
126
U.C.C. § 9-310 (a) (2000).
127
CLARK, supra note 61, vol. 1, ¶2.05, at 2-92.
128
In re Drewry, 966 F.2d 236 (7th Cir, 1992).
26
b. Registration Place
Instead of central registration, the Statute adopts the principle of registering the security
agreement at different administrative agencies depending upon the category of collateral.
If the collateral is aircraft, ships, and vehicles, the registration place is the administrative
department where the certificates or titles of those personal properties were issued, which is
similar to the certificate of title law in the U.S. For example, the General Administration of Civil
Aviation of China under the State Council of the People’s Republic of China conducts the
registration of civil aircraft.129 The Harbor Superintendence Administration of the People’s
Republic of China located at different ports, are the registration locations for all ships.130 As to
registered motor vehicles, if the debtor (the owner of the vehicle) uses the vehicle as collateral,
the debtor and the secured party should fill out “the Application Form of Motor Vehicle
Registration” and provide the application form to the local vehicle administration where is
certificate of title was issued.131
If the collateral is personal property owned by a corporation, the place for registration is
the Administration for Industry & Commerce, in the jurisdiction where the property is located.132
The State Administration for Industry & Commerce has issued “The Method of Mortgage
Registration of Personal Property Owned by Corporations” in 2000.
If the collateral is personal property other than that discussed above, the registration place
is the local notary office of the debtor’s location.133 The Department of Justice of the People’s
Republic of China has issued “the Mortgage Registration Method for Notary Offices” to regulate
the registration of these personal properties. The Statute and “the Method” do not define what
129
The Regulations of Right Registration of Civil Aircraft of the People’s Republic of China art. 3. (1997)
130
The Regulations of Registration of Ships of the People’s Republic of China art. 8 (1994).
131
The Method of Motor Vehicle Registration of the People’s Republic of China ch. 6, art. 33 (2001).
132
See supra note 2, ch. 3, sec. 2, art. 42, cl. 5.
133
Id. art. 43.
27
the debtor’s location means. Presumably, it should be the debtor’s principal residence. If the
debtor is an organization, it should be where the organization is registered. The Statute and
Method do not discuss the issue further. Therefore, the registration is at different and
complicated places according to what kind collateral it is, where it is located, or where the debtor
resides.
UCC Article 9 stands for a central filing principle within a particular state.134 Filing is
normally accomplished by the use of a financing statement.135 However, Article 9 defers to two
special kinds of filing Statutes outside the Code, for which a financing statement is neither
necessary nor sufficient: (1) federal statutes that provide for national registration or filing of
security interests and (2) state statutes that provide for the noting of consensual liens on a
certificate of title.136 Federal filing, which preempts Article 9 under the Supremacy Clause in
any case, applies to the following types of collateral:
(1) Documented ships under the successor to the Ship Mortgage Act of 1920;137
(2) Civil aircraft (including engines, propellers, appliances, and spare parts) under the
Federal Aviation Act of 1958;138
(3) Railroad rolling stock under the Interstate Commerce Commission Act;139
(4) Copyrights under the 1976 Copyright Act;140
(5) Patents under the federal patent statute;141
134
135
CLARK, supra note 61, vol. 1, ¶2.08[2], at 2-123,
136
Id.
137
46 U.S.C. ch.313 (2004); See also McCokle v. First Pa. Banking & Trust Co., 321 F. Supp. 149 (D. Md. 1970).
138
49 U.S.C. §§ 44107-44108 (1994) (Central filing of liens with Federal Aviation Authority office in Oklahoma
City).
139
49 U.S.C. § 11301 (1994).
140
17 U.S.C. § 205 (1994).
141
35 U.S.C. § 261 (1994). However, the case law suggests that Article 9 filing may be the exclusive way to
perfect a security interest in patents. In re Cybernetic Serv., 239 B.R. 917 (Bankr. 9th Cir. 1999), aff’d 252 F.3d
28
(6) Trademarks under the Lanham Act.142
Most of these federal statutes provide for the national registration of security interests.143
As to compliance with state certificate title law, a certificate title law will usually require
consensual liens to be noted on the certificate of title. Otherwise the security interest is not
perfected.144
Thus, under UCC Article 9, the perfection of security interests in aircraft, ships by filing
will be governed by federal law for nationwide registration. As to most vehicles, and small boats
which have a certificate of title, the secured party or debtor has to deal with administrative
agencies of a particular state which issue these titles to perfect the security interest subject to
state certificate title law. As to other personal property (movable and tangible personal property
for comparison purposes), UCC Article 9 requires filing of a financing statement state-wide.
A consistent fundamental policy should guide all aspects of a filing (registration) system.
UCC Article 9 adopts a notice filing philosophy, while the Statute is ambiguous at that point.
The perfection of security interests in aircraft, ships and vehicles, which are not governed
by UCC Article 9, will be similar to the registration under the Statute. As to aircraft, and ships,
the federal statute of the United States provides for a national registration. However, the
registration under the Statute is not nation-wide, and it will be at different levels of
administrative agencies located in each provinces. As to motor vehicles and boats, which have a
certificate of title, UCC Article 9 provides that the security interest should be titled at the state
department where the certificate was issued, which is the same under the Statute.
1039 (9th Cir. 2001); City Bank & Trust Co. v. Otto Fabric, Inc., 83 B.R. 780 (D. Kan. 1988); Holt v. U. S., 13 UCC
Rep. 336 (D.D.C. 1973); In re Tower Tech, Inc., 50 UCC Rep. 2d 923 (10th Cir. 2003).
142
15 U.S.C. § 1060 (1994). However, the case law suggests that Article 9 filing may be the exclusive way to
perfect a security interest in trademarks. In re TR-3 Indus., 41 B.R. 940 (Bankr. CD Cal. 1984); In re Roman
Cleanser, 43 B.R. 940 (Bankr. E.D. Mich. 1984), aff’d, 802 F.2d 207 (6th Cir. 1986); In re Chattanooga Choo-Choo
Co., 98 B.R. 792 (Bankr. E.D. Tenn. 1989).
143
CLARK, supra note 61, vol. 1, ¶2.08[2], at 2-124.
144
U.C.C. § 9-316 (d), official comment 5(2000).
29
Under UCC Article 9, as a general rule, central filing of financing statement as to
movable and tangible personal property other than those subject to federal statute and state
certificate of title law occurs with the secretary of state of the applicable state.145
A central filing requirement does not guide the Statute. The registration place varies
according to nature of the collateral, where the collateral is located or where the debtor resides.
The system is quite complex and confusing, which causes potential errors and inefficiency, and
also damages the effectiveness of public notice. The principal advantage of a state-wide central
filing system is ease of access to the credit information which the files exit to provide.146 The
more complete the files are centralized on a state-wide basis, the easier and cheaper it becomes
to procure credit information, especially for national distributors who do business national-
wide.147 In addition, a central filing system also saves costs on parties when several different
categories of collaterals are mortgaged at the same time in the security agreement. A central
filing system also will enhance the effectiveness of public notice of the mortgage with an easy
access to complete and centralized files of mortgages. Thus, future legislation should make an
uniform of filing authorities of different administrative agencies at different levels and consider a
centralized province-wide filing principle to facilitate secured transactions.
c. Information Required for Registration and the Required Content in Financing
Statement.
The Statute requires: (1) the principle contract, the security agreement; and (2) the
certificate of ownership of the collateral, if there is one to be registered.148 The administrative
“Methods” and “Regulations” usually requires more detailed information about the security
145
U.C.C. § 9-501 Official Comment 2.
146
Id.
147
Id.
148
30
agreement and the parties. Generally, the parties or a party shall file an application form together
with all required evidential documents to the registration office.
The application form shall generally include: (1) the names and addresses of the debtor
and secured party; (2) the detailed description of the collateral; (3) the ownership or use right of
the collateral; (4) the type and amount of the secured debt; (5) the term of the loan; (6) the
amount of debt secured by collateral; (7) applicants’ signatures and date.149
The information included in the application form is very similar to the information
included in the security agreement. Also, the applicant shall provide documents and certificates
relevant to the information in the application form to prove such statements. In addition, both
signatures of the parties are required.
However, there are only a few basic requirements for a UCC Article 9 financing
statement: (1) the name of the debtor; (2) the name of a secured party; and (3) an identification of
collateral covered by the financing statement.150 It is no longer for the debtor to sign a financing
statement.151 The key is whether the filing was authenticated and authorized under the law of
agency.152 A security agreement authorizes the secured party to file a financing statement
containing the same collateral description in the security agreement.153
Underlying filing is a simple concept of notice filing.154 The notice itself indicates
merely that a person may have a security interest in the collateral indicated.155 Further inquiry
from the parties concerned will be necessary to disclose the complete state of affairs.156
149
The Mortgage Registration Method for Notary Offices art. 6 (2002); the Method of Mortgage Registration of
Personal Property Owned by Corporations art. 5 (2000).
150
U.C.C. § 9-502 (a) (2000).
151
U.C.C. § 9-509 (a) (2000); See also CLARK, supra note 61, vol. 1, ¶2.18, at 2-308.
152
CLARK, supra note 61, vol. 1, ¶2.18, at 2-308.
153
U.C.C. § 9-509 (b) (1) (2000); See also, REILEY, supra note 73, vol. 1, § 10:3, at 10-3,4.
154
155
Id.
156
Id.
31
The requirement of debtor’s name is particularly important because the financing
statements are indexed under the name of the debtor.157 Those who wish to find financing
statements search for them under the debtor’s name.158 The requirement of providing the
secured party’s name is to provide a third party dealing with the debtor an opportunity to obtain
more information about the outstanding obligation and the exact collateral covered by the
security agreement.
Finally, UCC Article approves of very broad collateral descriptions in financing
statements.159 The secured party could employ one of the collateral classifications found in UCC
Article 9, such as consumer goods, equipment, farm products, inventory, or accounts.160
Furthermore, an indication that the financing statement covers all assets or all personal property
is allowed, such as a super-generic term, for example, “all debtor’s personal property” or “all
debtor’s assets.”161 When financing statement and security agreements are being prepared at the
same time, the description on the financing statement should be the same as the collateral
description on the security agreement.162 In such cases, the content of the description will be
guided by the rules for security agreements discussed above.163 It would be improper for a
secured party to place a collateral description in either a security agreement or financing
statement that has not been agreed to or authorized by the debtor.164
157
158
Id.
159
U.C.C. § 9-504 (2) (2000).
160
In re Turnage, 493 F.2d 505 (5th Cir. 1974); In re Trumble, 5 UCC Rep543 (Bankr. W.D. Mich. 1968);
Mountain Credit v. Michiana Lumber & Supply, Inc., 498 P.2d 967 (Colo. App. Ct. 1972); U. S. v. First Nat’l Bank
in Ogallala, Neb., 470 F.2d 944 (8th Cir. 1973); Cont’l Oil Co. v. Citizens Trust & Sav. Bank, 225 N.W.2d 209
(Mich. App. Ct. 1974), aff’d 244 N.W.2d 243 (Mich. 1976); Walker Bank & Trust Co. v. Smith, 501 P.2d 639 (Nev.
1972); Indus. Packaging Prods. Co. v. Fort Pitt Packaging Int’l, Inc., 161 A.2d 19 (Pa. 1960).
161
U.C.C. § 9-504 (2) (2000).
162
163
Id.
164
Id. at 10-3.
32
Under the Statute, both secured party and debtor should usually apply for the registration
under the Statute together.165 That means, even though there is a security agreement, the secured
party needs debtor’s signature or agreement as to the registration and perfection of the security
interest. Under UCC Article 9, the security agreement satisfies the authentication requirement
for the security party to file a financing statement to perfect the security interest. In other words,
the secured party alone could file a financing statement with the security agreement and the
signature of the debtor is not needed. The method under UCC Article 9 prevents the delay of
filing financing statement because of the debtor’s incorporation after the security agreement has
been reached. This method grants the secured party advantage of perfecting the security interest
as early as possible to have priority. The downside of this method is possible unauthorized filing.
However, if the debtor suffers loss resulting from inability to obtain timely or cost-effective
alternative financing, the debtor can sue the filer for actual damages, or a civil penalty.166 Thus,
UCC Article 9 provides a more efficient and timely approach for the secured party to obtain
priority.
The registration under the Statute is in fact a record of the security agreement, similar to
the prior chattel mortgage under the old UCC Article 9. The required information or content
provided in the application form to the registration office is usually what is required in the
security agreement under the Statute. On the other hand, with the notice filing policy, UCC
Article 9 only requires debtor’s name, secured party’s name and a description of the collateral,
which is more simplified than the requirements under the Statute. The registration under the
Statute imposes great unnecessary transaction costs on both the parties and the administrative
agencies because of the tedious process and detailed examination of documents and relevant
165
The Mortgage Registration Method for Notary Offices art. 6 (2002).
166
U.C.C. § 9-625 (b) (e) (2000); See also CLARK, supra note 57, vol. 1, ¶2.18, at 2-308.
33
certificates. However, UCC Article 9 approach’s notice filing provides effective public notice
and also provides any third party means to acquire complete information regarding the security
interest. In addition, notice filing has proved to be of great use in financing transactions
involving inventory, accounts, and chattel paper, because it obviates the necessity of refilling on
each of a series of transactions in a continuing arrangement under which the collateral changes
day by day.167 Even though at the moment, the Statute excludes after-acquired personal property
to be used as collateral, and the generic term such as inventory is not sufficient to describe the
collateral, with the development of commercial practice and secured transactions, such approach
will better serve the secured party’s interest in the future in China.
d. When the Registration is Effective
After examining and verifying the registration forms, the registration office will issue a
registration certificate to the applicant.168 The registration date will be stated in the registration
certificate.169 The date stated in the certificate is the effective date of the registration.
The information included in the subsequently issued “Registration Certificate” is the
same as the information provided in the application form.170 Also, the registration offices led by
different administrative agencies will have a registration book or computer system, which makes
the registration information publicly available. The records are indexed by the debtor’s name
according to Chinese Character Index searching either by Chinese Pinyin or Chinese character
strokes.171
167
168
See supra note 165, art. 11, cl. 7 (2002).
169
Id.
170
Id. art. 11; the Method of Mortgage Registration of Personal Property Owned by Corporations art. 8 (2000).
171
Chinese Pinyin system is an intermediate tool to find the debtor’s Chinese name. The pronunciation of each
Chinese character (which is the debtor’s name) is described by a combination of English letters. The Pinyin system
is in an alphabetic order from A to Z. The Chinese Character could also be searched by strokes of the character.
34
Under UCC Article 9 the filing is effective when there is a communication of a record to
a filing office and tender of the filing fee or acceptance of the record by the filing office
constitutes filing.172 The purpose is to encourage filing officers to reject filings that fail to
contain less important information (such as the address of the debtor and secured party), but still
validate the filings if such financing statements are accepted.173
The effective filing date under UCC Article 9 is very predictable by the secured party.
By a proper filing, the effective date is the date of filing. The secured party totally controls the
effectiveness of financing statement. On the other hand, under the Statute, the effective date is
when the administrative agencies designate in the certificate, not necessarily the date of filing,
the effective date is not in the control of the secured party. As the priority is determined by the
registration date,174 the rule under the Statute leaves the security party in a significant risk of
uncertainty. The involvement of government control in the private secured transactions is
intended to protect the secure party. But such control, as a result, causes inefficiency and
uncertainty to the secured party.
Another common issue is the effectiveness of registration or filing when the authorities
mistakenly or arbitrarily refuse to register or accept the filing. Under UCC Article 9, the filing is
not effective if the officer rejects the financing statements because of limited reasons which
include communication in a unauthorized method to the filing office, not enough filing fee being
tendered, the record could not be indexed by the filing office, the record does not provide a name
and mailing address for the debtor and secured party, etc.175 The effect of the rule is that upon
172
U.C.C. § 9-516 (a) (2000).
173
CLARK, supra note 61, vol. 1, ¶ 2.13[3], at 2-270.
174
The priority issue will be discussed in the later chapter of this thesis.
175
U.C.C. § 9-516 (b) (2000).
35
the communication and tender of the filing fee, the filing is ineffective only if an officer reject
the filing for the numerated reasons.176 Otherwise, the filing is effective on the date of filing.177
The Statute and its regulations do not provide details of the consequences and liabilities
for errors, delays, or abuse of authority by the registration officers to arbitrarily refuse to register
the security interest.
As to the refusal of registration because of the abuse of authority by the registration
office, the security agreement will be deemed to be registered if: (1) the debtor has delivered the
ownership certificate or use right certificate to the secured party; and (2) the secured party or
debtor has attempted to register.178 According to a literal reading of the Interpretation, this
provision does not apply to personal property, which does not have an ownership certificate, use
right certificate, or certain similar certificate. Thus, as to such personal property with no
certificate, there is no authority one can refer to when the registration office refuses to record
mistakenly or arbitrarily. In real practice, it creates significant problems.
e. Duration and Effectiveness of Registration
The Statute and its regulations do not state the duration of the registration. The Statute
and its regulations only provide that after the principal debt has been paid off or both parties
agree to terminate the contract before the performance of the contract, the parties shall nullify the
registration at the office.179 The Interpretation expressly prohibits the registration office to
impose a duration of registration.180 Thus, the registration is effective until the principal debt has
176
In re Flagstaff Food Serv. Corp., 16 B.R. 132 (Bankr. S.D.N.Y. 1981); In re Geary’s Bottled Liquors Co., 184
B.R. 408 (Bankr. D. Mass. 1995); In re Wright, 196 B.R. 97 (Bankr. W.D. Wis. 1995), aff’d, 192 BR 946 (W.D.
Wis. 1996).
177
U.C.C. § 9-516 (a) (2000).
178
179
See supra note 2, ch. 3, sec. 3, art. 52; See also The Method for the Mortgage of Personal Property Owned by
Corporation, art. 11, 12 (2000).
180
36
been paid off or a termination of registration has been filed. As to personal property owned by a
corporation, except for personal property such as vehicles, ships and aircraft, the parties shall file
the termination statement within 7 days after the obligation has been paid off, the collateral is
totally damaged or the parties agrees to terminate the registration.181 However, there is no
provision imposing clear liability of such failure to file termination statement within the period.
As to other personal property, there are no special regulations on the issue.
Under UCC Article 9, the financing statement is effective only for five years.182 Within
the six months before the end of the five-year period, a continuation statement should be filed to
continue the financing statement.183 After five years, the security interest will lapse and the
financing statement will be deemed as never being filed, it will require the secured party to file
continuation statement to extend the effectiveness duration if no continuation statement is
filed.184 During the effective period, a secured party must file a termination statement to
terminate the financing statement within one month after there is no obligation secured by the
collateral or if earlier, within 20 days after the secured party receives an authenticated demand
from a debtor.185
The Statute and UCC Article 9 both terminate the security interest when there is no
obligation secured by the collateral or the secured party filed a termination statement. However,
UCC Article 9 imposes a duty on the secured party to file a termination statement with the
specified period. UCC Article 9 draws a clear line to determine the secured party’s liability for
181
The Method for Mortgage Registration of Personal Property Owned by Corporations art. 11, 12 (2000).
182
U.C.C. § 9-515 (a) (2000).
183
U.C.C. § 9-515 (d) (2000); See also In re Jones, 79 B.R. 839 (N.D. Iowa 1987) (Each five-year period runs from
the original filing, and not from the date of the continuation statement filing); Banque Worms v. Davis Constr. Co.
Inc., 831 S.W.2d 921 (Ky. Ct. App. 1992); In re Hays, 41 UCC Rep. 1484 (Bankr. N.D. Ohio 1985); In re Hillyard
Drilling Co., 840 P.2d 596 (8th Cir. 1988) (A premature filing is invalid.)
184
U.C.C. § 9-510 (c) (2000).
185
U.C.C. § 9-513 (b) (2000); See also Tex. Kenworth Co. v. First Nat’l Bank of Bethany, 564 P.2d 222 (Okla.
1977) (A creditor is under on duty to terminate a financing statement unless the debtor demands it.)
37
the debtor’s damages or civil penalty.186 Except for personal property owned by a corporation
(not including vehicles, ships and aircraft), the Statute does not have such time limit on the
secured party to file the termination statement. It will be a problem to determine whether the
secured party conducts reasonably or violates duty of due diligence so that he is liable for the
debtor’s inability to obtain timely alternative financing.
The presumable effectiveness duration of five years under UCC Article 9 may alert the
secured party its security interest. It does not provide additional protection for the debtor from
losing alternative financing as the secured party has the duty to file a timely termination
statement. On the other hand, the filing of continuation statement may bring extra transaction
costs, even though it is minor. Therefore, the presumable duration does not have much meaning.
f. Variation in Description between Registration Record (Financing Statement) and
Security Agreement
The Statute is silent on both issues. As to any difference between the registration record
or certificate and the security agreement, the Interpretation provides that the registration record
prevails.187 As to the actual effect of this interpretation, there are disputes and arguments among
the academic scholars and in real practice as well. Some scholars believe that the Article gives
the registration absolute priority, while others argue that the registration is only registration of
“form” rather than “property right.”188 Under the Statute, the registration record is better
evidence if there is conflict between the registration record and the security agreement, unless
admitting the registration record will be obviously ridiculous, such as the debtor does not have
186
Kultura, Inc. v. Southern Leasing Corp., 923 S.W.2d 536 (Tenn. 1996); Southern Discount Co. of Ga. v. Ector,
262 S.E.2d 457 (Ga. App. Ct. 1979).
187
188
SHIBING CAO, THE SOLUTION AND PROSPECTUS ON THE ISSUES OF THE GUARANTEE LAW 213-216 (2001).
38
the collateral described in the registration record.189 Unfortunately, the legislative record and the
Supreme Court have not given further explanation.
Because of the notice filing philosophy under UCC Article 9, if the collateral description
in the financing statement is broader than in the security agreement, the secured party will be
limited to the collateral described in the security agreement.190 If the description in the financing
statement is narrower than that in the security agreement between the debtor and the secured
party, the broader description in the security agreement defines the collateral.191 With respect to
third parties, the security interest will be perfected only in the collateral described in the
financing statement.192
Thus, the rule is that the secured party cannot claim rights in collateral broader than the
collateral described in the secured agreement against either the debtor or third parties. If the
collateral description in the financing statement is narrower than in the security agreement, the
collateral not covered in the financing statement is not perfected and the secured party cannot
claim security interest against the third party.
There will be no issue if the description in the registration record is narrower than in the
security agreement because under the principle of the Statute, to acquire priority, public notice is
required. If the collateral description in the record is broader than in the security agreement,
there will be an issue whether the secured party can claim rights against a third party. The
Supreme Court and legislative body have not provided further explanation. Under UCC Article
9, this issue is quite clear because of the notice filing policy. The rule is that secured party
cannot claim rights in collateral broader than the collateral described in the secured agreement
189
Id.
190
DEL DUCA, supra note 62, at 111-112; See also Dowell v. Kincaid Chair Co., 125 N.C. App. 557, 481 S.E.2d
670 (1997); Mitchell v. Shepherd Mall State Bank, 458 F.2d 700 (10th Cir. 1971).
191
DEL DUCA, supra note 62, at 111-112.
192
Id.
39
against either the debtor or third parties. If the collateral description in financing statement is
narrower than in security agreement, the collateral not covered in the financing statement is not
perfected and the secured party cannot claim a security interest against the third party.193
UCC Article 9 encourages the third party to investigate the complete debt secured by the
collateral and the scope of the collateral. On the one hand, registration officers’ mistake and
responsibility as to the accuracy of the recording will no longer be a problem. On the other hand,
it protects the real intent between the parties. As the Statute and the Interpretation are silent on
the risk allocation and remedies between the debtor, secured party, and any third party who relies
on the registration record and the registration office, when the registration offices mistakenly
record the security interest or arbitrarily refuse to register the security interest, UCC Article 9
provides a suggestive approach to solve the problem.
g. Summary
China is using a decentralized registration system. The system is in some ways
oversimplified, in other ways complicated. It has a lot of ambiguities and is lacking in general
policy guidance. The whole tedious and complicated registration system under the Statute, the
Interpretation and relevant regulations, has caused significant problems, such as all kinds of
different registration offices, arbitrary nature in registration, and no particular rules regulating the
process of registration and the responsibility of the registration officers.194 The document to file
is the application form, the content of which is close to a security agreement, and relevant
certificates of proof. The government is supposed to undertake a duty to supervise and examine
those relevant documents to maintain an accurate registration record and process. However, the
system does not provide the liability of the registration officers if mistakes and abuse of authority
193
Id.
194
CAO, supra note 188, at 213-216.
40
occur. The remedy for the mistake of registration to the good faith third party or secured party is
still an unsolved problem.195 The effective date is usually shown on the registration certificate,
which is uncertain for the secured party. The system does not draw a reasonable line to
determine the secured party’s liability for its delay of filing termination statement when the
obligation secured by the collateral has been paid off or both parties both agree to terminate
without performance of the obligation.
The complexity and ambiguities cause inefficiency for public notice purposes, which
damages the protection of a security interest of the secured party and unnecessary high
transaction costs to the parties. UCC Article 9 indeed provides good references to solve these
problems.
V. Pledge of Personal Property
A. Scope of Personal Property That Could Be Pledged
Under the Statute, tangible things other than real property can be pledged.196 The
“things” must be particularized and identifiable; have exchange value; and must not be restricted
from circulation by law, such as cultural relics and nuclear materials.197 Thus, tangible things,
which are pledgeable, are generally moveable things.
China does not consider rights and interests in investment property, instruments, and
chattel paper as “tangible things.” Together with intellectual properties, they are considered
“property rights.” Under the Statute, the “property rights” that can be pledged include: (1) drafts,
checks, promissory notes, bonds, deposit certificates, warehouse receipt and bills of lading; (2)
shares of stock, which are duly transferable according to law; (3) property rights in the exclusive
195
Id.
196
197
CAO, supra note 188, at 565-566.
41
use of trademarks, patent rights and copyrights, which are transferable according to law; and (4)
other rights which may be pledged according to law.198 The Statute enumerates the most typical
types of property rights, which can be pledged. As to the expansion of property rights, which
may be pledged, it will be determined with the development of commercial practice.199
Thus, the scope of personal property, which is pledgeable, is basically limited to tangible
things and property rights expressly enumerated in the Statute.
UCC Article 9 provides that negotiable documents, goods, instruments, money, tangible
chattel paper or certificated securities by taking possession of the collateral.200
Under a literal reading, the scope under the Statute is a little broader than UCC Article 9.
The Statute covers general intangibles such as copyrights, use rights of trademarks, and patent
rights. As to these intangible intellectual property rights, The Statute also provides that the
effectiveness of pledge is upon a valid written pledge agreement and the registration of the
pledge at related administrative offices for public notice purposes.201 From this perspective,
even though the Statute is using the word “pledge,” it actually creates a security interest by
agreement without transferring the possession. Thus, the security interest in these intellectual
property rights is acquired not by the traditional concept of pledge.
In addition, as to investment property, under the Statute, the effectiveness of security
interest is upon a valid written pledge agreement, and registration of pledge at the Security
Registration Office. Thus, like a pledge of intellectual property rights, the security interest in
investment property is not a traditional concept pledge at all, but by a mortgage discussed in part
VI of this thesis.
198
See supra note 2, ch. 4, sec. 1, art. 63, ch. 7, art. 92.
199
THE EXPLANATION OF THE GUARANTEE LAW 95 (The Standing Committee of the National People's Congress,
the Legislative Affairs Commission Civil Law Division ed. 1995)
200
U.C.C. § 9-313 (2000); See also CLARK, supra note 61, vol. 1, ¶2.06[1], at 2-94.
201
See supra note 2, ch., sec. 2, art. 79.
42
Therefore, both Statute and UCC Article 9 articulate an ancient and simple idea to secure
the performance of an obligation. Both rules serve the purpose of creating a security interest by
possession of collateral. The “pledge” under the Statute is not a typical pledge under UCC
Article 9. The “pledge” under the Statute actually partially covers the creation of a security
interest by a mortgage. The security interest created by “pledge” in intellectual property rights
and investment securities are actually security interests created by contractual written agreement,
similar to what is discussed in Chapter IV of this thesis.
B. Attachment and Perfection of Collateral
For comparison purposes, this discussion is limited to the permissible collateral under the
Statute, which is summarized as “tangible and movable things” (“goods”), “instruments and
chattel paper,” investment properties, and intellectual property rights.
a. “Tangible and movable things” (“Goods”)
As to “tangible and movable things,” the security interest under the Statute is effective
upon a valid written pledge agreement and actual transfer of possession of the collateral.202
The pledge agreement shall also be written.203 The only other requirement is that the
pledge agreement should include the time of the delivery of the collateral.204
Under the Statute, the prerequisites to attaching the security interest are a valid principle
contract, which is usually a loan contract, similar to the value given and the requirement that the
pledgor shall have rights in the collateral. However, there is an exception to the requirement that
“the debtor has rights in collateral.” If the debtor only has a right of possession, not ownership,
and the pledgee realizes the security interest without knowledge of the debtor’s non-ownership,
202
203
Id.
204
Id.
43
the debtor shall be liable for the damage to the collateral.205 This provision protects a good faith
pledgee from the uncertainty of the attachment of security interest. The security interest is not
effective until the collateral is delivered. Upon the transfer of possession of the collateral in the
agreement, the security interest is attached and perfected.206
Under UCC Article 9, an exception to the requirement of a written agreement
(authenticated record of the security agreement) is possessory pledge.207 Collateral may be held
by the pledge under a prior oral security agreement.208 When the pledgee possesses the collateral,
the security interest in the collateral is attached and perfected if other requirements such as value
and the requirement that the pledgor has rights in the collateral are met.209
Thus, the first difference is that the Statute requires a written security agreement even
though the pledgee possesses the collateral. The second difference is that the required content
under the Statute is more detailed than that under UCC Article 9.210 The last difference is that
the attachment of the security interest extends to what right the debtor has in the collateral under
UCC Article 9. The baseline rule is that a security interest attaches only to whatever rights a
debtor may have, broad or limited as those rights may be.211 The rule under UCC Article 9 does
not protect a good faith pledgee like the Statute does.
Therefore, except for the three differences, when the collateral is possessed by the
pledgee, and the two other similar requirements, “value given” and requirement that “the debtor
has rights in collateral,” are met, the security interest is attached and perfected under both
systems.
205
206
207
U.C.C. § 9-203 (b) (3) (B) (2000); See also CLARK, supra note 61, vol. 1, ¶2.02[1][b], at 2-12.
208
CLARK, supra note 61, vol. 1, ¶2.02[1][b], at 2-12.
209
U.C.C. § 9-310 (b) (6) (2000).
210
See the discussion in Chapter IV., B., b. of this thesis supra.
211
44
b. Instruments, Chattel Paper and Documents of Title
The security interest is effective under the Statute upon the transfer of the possession of
the record, which evidences the right to payment or the title to goods.212 The security interest is
attached and perfected when the delivery of the instruments or documents of title is
completed.213 Other requirements as to attachment and perfection are the same as that of
“tangible and movable goods.”
Under UCC Article 9, the security interest in instruments is attached when there is an oral
or written security agreement, the pledgee has given value, and the pledgor has a right in the
instruments.214 The security interest is perfected either by filing a financing statement or by
possession of the instrument by the pledgee.215
An oral pledge agreement is invalid under the Statute. Even though UCC Article 9
permits oral pledge agreements because the possession itself evidences the agreement, the
Statute does not lift the requirement. A written pledge agreement is still required.
As to attachment, under the Statute possession of the instrument and chattel paper is
mandatory. Without possession, the security interest is not effective. However, under UCC
Article 9, possession of the instruments or chattel paper is not necessary to attach the security
interest.
Finally, under UCC Article 9, the security interest in instruments or chattel paper can be
perfected by either possession or a filing financing statement. On the other hand, the Statute
provides that physical possession is the only method by which to perfect a security interest in
instruments and chattel paper. The Statute does not give temporary perfection status like in UCC
212
213
Id.
214
U.C.C. § 9-203 (b) (2000); See also Barton v. Chemical Bank, 577 F.2d 1329 (5th Cir. 1978) (An oral security
agreement covering the pledge of a certificate of deposit was enforceable.)
215
U.C.C. § 9-310 (a), (b) (5) (2000).
45
Article 9. Noticeably, the Statute, instead of allowing the secured party to release the possession
of the instruments or chattel paper for limited purposes, authorizes the secured party to present or
collect the instruments for payment or to take delivery of goods in the name of the debtor, if the
date of tender for payment of the instruments or for delivery of goods is before the due date of
the debt.216 At the same time, the proceeds or goods shall be used to pay off debt or be deposited
with a third party agreed upon by the pledgor to secure the payment of the debt when due.217
However, on such issues, UCC Article 9 provides the secured party the status of temporary
perfection for 20 days upon the attachment of the security interest.218 Furthermore, UCC Article
9 does not allow the secured party to tender the instruments or chattel paper for payment or
delivery of goods. Instead, UCC Article 9 allows the secured party to release the possession of
the instruments or chattel paper for limited purposes without damaging the perfection status for
20 days.219 Thus, as to the conflict between the interest of the debtor and the interest of the
secured party, the Statute takes a different approach than UCC Article 9.
Furthermore, the Negotiable Instruments Law of China Article 35 provides that when the
promissory note is pledged, the promissory note shall be endorsed to the pledgee by recording
the word “pledge” along with the endorsement on the promissory note.220 The pledgee then has
the same rights in the promissory note as the pledgor.221 The provision also applies to other
instruments as well.222 The execution of the security interest in the instrument is conditional
216
217
Id.
218
U.C.C. § 9-312 (e) (2000).
219
U.C.C. § 9-312 (g) (2000); See also McIllroy Bank v. First Nat’l Bank of Fayetteville, 480 S.W.2d 127 (Ark.
1972); In re Apogee Robotics, Inc., 205 B.R. 270 (D. Colo. 1997); In re Schwinn Cycling and Fitness, Inc., 51 UCC
Rep. 2d 1224 (Bankr. D. Colo. 2003).
220
The Negotiable Instrument Law of the People’s Republic of China art. 35 (1996).
221
CAO, supra note 188, at 314.
222
Id.
46
upon default.223 Also, the pledge has the right to tender the instrument for payment when it is
mature.224 If the instrument is not endorsed as a pledge to the pledgee, the pledgee cannot assert
a pledge right against a third party who acquired the instrument in good faith.225
Thus, the pledge of instruments not only gives the secured party possession of the
instruments but also grants pledgee the same rights in the instruments as the pledgor has as the
holder of the instruments if the instrument is indorsed as pledge to pledgee.
For comparison purpose, as to pledges, the requirements regarding attachment and
perfection are similar. In addition, UCC Article 9 provides additional means for the attachment
and perfection of a security interest in instruments and chattel paper. On the other hand, the
Statute and the statute on instruments further give a secured party the same rights in the
instrument as the pledgor has.
c. Investment Properties
As to investment properties under the Statute, for a security interest to be effective,
besides the elements of “value given” and that “pledgor has right in the investment property,” a
written “pledge” agreement is also required.226 As to publicly transferable stocks, such as the
stocks transferable on the national security exchange, the attachment and perfection are upon the
registration of the “pledge” at the “Security Registration Office.”227 As to stocks of private
companies, the attachment and perfection are upon the recording of the pledge in the name list of
shareholders.228
223
Id. at 314-315.
224
225
226
227
Id.
228
Id.
47
Furthermore, if the publicly transferable stock is registered as pledged, the stock is not
transferable unless both the pledgee and pledgor agree on the transaction.229 The proceeds shall
be used to pay off the debt or be deposited with a third party agreed upon by the pledgee.230 As
to the sale of private limited liability company stocks, in principle, it is not transferable, but upon
agreement between the pledgee and pledgor, the stock can be sold pursuant to relevant
regulations, such as the Company Law of China.231
Under UCC Article 9, a security interest may attach to investment property in the
following ways: (1) through a security agreement authenticated by the debtor containing a
description of the collateral; (2) through delivery of a certified security in registered form,
provided delivery was with the consent of the debtor; and (3) by the secured party obtaining
control, provided control was obtained with the consent of the debtor.232
The perfection may be achieved by permissive filing of a financing statement or by
control. 233 As to stocks and securities, obtaining “control” means that the purchaser has taken
whatever steps are necessary, given the manner in which securities are held, to place itself in a
position where it can have the securities sold, without further action by the owner.234 The
detailed requirements to obtain control are provided in UCC § 8-106.
Also, UCC Article 9 gives automatic perfection status for 20 days from the time of
attachment if the investment property is a certified security.235 Release of possession for a
limited purpose does not destroy perfection for 20 days, such as for purpose of sale or exchange,
229
230
Id.
231
232
REILEY, supra note 73, vol. 2, § 28:7, at 28-14.
233
Id. at 28-15.
234
U.C.C. § 8-106, official comment 1 (2000).
235
U.C.C. § 9-312 (e) (2000).
48
registration of transfer, renewal, etc.236 If a broker, securities intermediary, or commodity
intermediary is the secured party or debtor, the security interest is perfected when it attaches to
the collateral.237
Even though the Statute categorizes a security interest in investment property as a
“pledge,” it actually is “chattel mortgage.” A written security agreement and registration of the
security interest is necessary for attachment. Under UCC Article 9, a written agreement is only
one approach to attach security interest. The secured party can also attach a security interest by
control or through delivery of a certificated security in registered form.
Because the registration under the Statute is mandatory for the security interest to attach,
the effect of perfection for priority purposes is minimal. Borrowing from the concept of a pledge,
the collateral could not be pledged to two different persons. Thus, once the security interest is
registered, there will be no priority issue. The Statute requires only public notice of the security
interest by registering the security interest. Through registration, the Statute does not grant the
secured party status of the holder or the entitlement holder of the security. The secured party has
no right to transfer the securities without the consent of the debtor. However, under UCC Article
9, through control, the security party put itself in the position where they can sell the securities
without further action by the owner of the securities. Thus, the Statute requires that the secured
party consent to the sale of the securities by the owner (pledgor). UCC Article 9, on the other
hand, deprives the owner (pledgor) of the right to sell and gives the secured party the right to sell
the securities without further action of the owner when the debtor defaults.
236
Id.
237
U.C.C. § 9-309 (10) (11) (2000).
49
d. Intellectual Property Rights
Under the Statute, in addition to a written security agreement, registration of the security
interest at an administrative agency is necessary for either attachment or perfection of the
security interest in a patent, copyright or trademark.238 The pledge in patent shall be registered at
the Patent Office.239 The pledge in trademark shall be registered at the Administrative of
Industries and Commerce.240 The pledge of copyright shall be registered at the Copyright
Bureau.241 After the security interest is attached and perfected, a right in those intellectual
properties could not be transferred or licensed without the consent of the secured party.242 If the
secured party consents to the transfer or license, the proceeds should be used to pay off the debt
or be deposited with a third party agreed upon by the secured party to repay the debt when it is
due.243
UCC Article 9 does not govern perfection of a security interest in these intellectual
property rights because those rights are regulated by federal law, which preempts the application
of UCC Article 9. Because of the limitation of this thesis, that comparison is beyond the
discussion.
C. Duties and Rights of the Secured Party (Pledgee) Having Possession or Control of
Collateral
The duties of secured party having possession of collateral under the Statute are similar to
that under UCC § 9-207.
238
239
The Temporary Method for the Registration of Pledge Contract in Patent art. 2 (1996).
240
The Procedure for the Pledge of Exclusive Use Right of Trademark art. 2 (1997).
241
The Method for the Registration of Pledge Contract in Copyright art. 3 (1996).
242
243
Id.
50
The Statute requires the pledgee use reasonable care in the custody of the collateral,
which is also required in UCC § 9-207 (a).244
Like UCC § 9-207 (b), the expenses incurred in custody and preservation are chargeable
to the debtor.245 The risk of accidental loss or damage is on the debtor.246 In addition, the
secured party could request that the debtor provide additional collateral if the original collateral
delivered is likely to be damaged or depreciated. If not, the secured party could sell the
collateral, and use the proceeds to pay off the debt or deposit the proceeds with a third party
agreed upon by the pledgor.247 The secured party may use or operate the collateral for his or her
own benefit.248 But if the use, operation, lease or disposition is not consented to by the pledgor
and the collateral is damaged, the pledgee is liable for the damage.249
Like UCC § 9-207 (c) (1) (2), the pledgee under the Statute has the rights to hold the
proceeds as additional security received from the collateral, but the proceeds could be money or
other properties.250 The proceeds could be used to reduce the secured obligation after deducting
the expense and cost of receiving the proceeds and the interest on the principal.251
The last issue is the right of a secured party to create a security interest in the pledged
collateral for the secured party’s own debt. The difference here is the requirement of consent of
pledgor. Under the Statute, consent of pledgor as to the repledge of the collateral is required.252
244
Id. ch. 4, sec. 1, art. 69. In re United East Coast Corp., 6 UCC Rep. 449 (E.D.N.Y. 1969); Cong. Fin. Corp. v.
Sterling-Coin Op Machine Corp., 456 F.2d 451 (3d Cir. 1972).
245
See supra note 2, ch. 4, sec. 1, art. 67. JT Jenkins Co. v. Kennedy, 119 Cal. Rptr. 578 (Cal. App. Ct. 1975);
Davis v. Small Bus. Inv. Co. of Houston, 535 S.W.2d 740 (Tex. App. Ct. 1976).
246
247
Id.
248
Id.
249
250
See Supra note 2, ch. 4, art. 68; See also supra note 3, art. 64, 96; CAO, supra note 188, at 578.
251
See Supra note 2, ch. 4, art. 68; Supra note 3, art. 64, 96
252
Supra note 3, art. 94.
51
Without the pledgor’s consent, the repledge is not enforceable.253 UCC Article 9 does not
expressively require consent of the pledgor for a repledge to be enforceable. However, the
pledgor under UCC § 9-623 has the right to redeem the collateral. Under both systems, generally
the secured party’s statutory right to repledge collateral is limited to an obligation, which is no
greater than that of the original debtor.254 Also, the new security interest is senior to the original
security interest.255
Thus, as to the rights and duties of the secured party having possession or control of
collateral, the two statutes are very similar to each other.
VI. Priority
The priority rules under the Statute are similar to those of UCC Article 9. However, the
Statute does not provide special rules for purchase money security interest, and future advances.
Thus, the priority rule between conflicting security interests is much simpler than that under
UCC Article 9. This is partly because of limited categories of collateral, which are allowed to be
mortgaged or pledged, and partly because China is still not a fully developed market economy,
having much less commercial experience and practice. Such legislation limitations are
reasonable and appropriate for commercial practice in China at the moment.
A. Priority Rule between Conflicting Security Interests
As to the priority rule between conflicting security interests under the Statute, the
registered security interest (which has the same effect as the perfected security interest) has
priority over an unregistered security interest.256 The conflicting registered security interests
253
Id.
254
U.C.C. § 9-207, Official Comment 5 (2000); Supra note 3, art. 94.
255
Id.
256
See supra note 2, ch. 3, art. 54.
52
rank according to the time of registration.257 The conflicting unregistered security interests rank
according to the time when the security agreements become effective, which is when the security
agreements were signed and the security interests attached.258 Finally, if conflicting registered
security interests are registered on the same date, the security interests rank equally in proportion
to the secured debts.259 The same rule applies to an unregistered security interest whose security
agreements become effective and enforceable on the same date.260 If the security interest is
acquired by a pledge under the Statute, the security interest is in effect treated as registered
security interest.
Under UCC Article 9, the general priority rule between conflicting security interests is
that: (1) a perfected security interest has priority over an unperfected security interest;261 (2)
conflicting perfected security interests rank according to priority in the time of filing or
perfection;262 (3) conflicting unperfected security interests rank according to the time of
attachment.263
By comparison, the priority rules under both systems are similar. The Statute’s rule is the
“first to get registered” rule, that is, whoever registered the security interest first attains priority.
UCC Article 9’s basic rule is the “first to file or perfect” rule. Both rules reflect the same idea
that those who give public notice attain priority and those who receive the notice shall not have a
better position than the person who already gave public notice.
257
Id.
258
Id.
259
Id.
260
Id.
261
U.C.C. § 9-322 (a) (2) (2000).
262
U.C.C. § 9-322 (a) (1) (2000).
263
U.C.C. § 9-322 (a) (3) (2000).
53
B. Priority Rule between the Security Interest and the Right of a Third Party
(Purchaser of the Collateral, Lessee of the Collateral, Lien Creditor, etc.) in the
Collateral
The Statute Article 41 and 43 provides that the security interest is perfected when the
security agreement is registered, and the secured party cannot assert an unregistered security
interest against “any third party.” The Statute and the Interpretation does not go a step further to
explain who “the third party” is and whether “the third party” should be a good faith third party.
The majority scholars and in real practice, the third party includes any person who has a claim in
the collateral, excluding ordinary creditors of the debtor.264 Thus, the third party will include a
third party purchaser of the collateral, lessee of the collateral, judicial lien creditor, licensee of
the collateral. Also, “a third party” refers to a good faith third party who acquires a right in
collateral without actual knowledge of the security interest.265
As to a registered security interest, the Statute takes a clear position that without the
consent of the secured party, a registered security interest has priority over any third party’s
rights or claims in the collateral.266 The Statute and the Interpretation do not go further in
specifying what the rights are. This needs to be clarified by the legislature or the Supreme Court.
However, there are some exceptions to this general rule, which will be discussed later.
As to an unregistered security interest, the general rule is that a third party’s right in the
collateral has priority over the unregistered security interest.267
264
GAO, supra note 41, at 499-504.
265
Id.
266
267
Id.
54
Thus, a registered security interest generally has priority over any third party’s rights in
the collateral. As to an unregistered security interest, the right of a good faith third party without
actual knowledge of the security interest has priority over the secured party’s security interest.
a. Third Party Buyer of Collateral Goods
The Statute’s general rule discussed above applies to a good faith third party buyer. As
to a registered security interest, the purchase does not cut off a security interest in the collateral,
and there is no exception to the rule. Upon the sale of registered collateral, the debtor shall
inform the secured party and notify the buyer of the security interest in the collateral.268 If debtor
does not fulfill the duty to inform, the sale is invalid.269 If the sale price is unreasonably lower
than the fair market value of the collateral, the secured party could request that the debtor
provide additional collateral.270 Otherwise, the debtor is prohibited from selling the collateral.271
As to an unregistered security interest, a good faith purchaser, without knowledge of the security
interest, takes the collateral free from security interest.272
Similar to the Statute, UCC Article 9 provides for continuation of the security interest
after sale but provides an exception to the rule to balance the interests of a good faith third party
buyer and the security interest of the secured party.
The general rule is that the purchase of collateral does not cut off a perfected security
interest. However, there is an exception to this rule, which is called the “buyer in the ordinary
course of business” rule. 273 The buyer in the ordinary course of business is defined as one who
buys goods “in good faith, without knowledge that the sale violates the rights of another person
268
Id. ch. 3, sec. 3, art. 49.
269
Id.
270
Id.
271
Id.
272
Id. art. 43.
273
55
and in the ordinary course of business.”274 Thus, the exception stabilizes the commercial
exchanges in the ordinary course of business by giving the purchaser priority over the security
interest. The only difference between the Statute and UCC Article 9 is that UCC Article 9
provides an exception for buyers in the ordinary course of business.
There is also another exception to this general rule, which is applies in a consumer to
consumer transaction.275 If a good faith third party purchases the collateral without knowledge
of the security interest for value primarily for personal, family or household purposes and before
the filing of a financing statement covering the goods, even though the security interest may be
perfected or a purchase money security interest in consumer goods, the purchaser takes the
collateral free of the security interest.276
As to an unperfected security interest, the general rule of UCC Article 9 is that the
purchase cuts off the unperfected security interest if the purchaser gives value and receives
delivery of the collateral without knowledge of security interest.277 The good faith third party
purchaser has priority over the security interest.278
In summary, the Statute treats a registered security interest and an unregistered security
interest completely different regarding priority over a third party purchaser’s right in the
collateral. As to a registered security interest, the security interest, in any case, will attach to the
collateral after the purchase. As to an unregistered security interest, a good faith purchaser will
take the collateral free from the security interest. On the other hand, UCC Article 9 provides that
the purchase does not cut off the security interest as to both the perfected and unperfected
security interests. In order to balance the interests of a third party purchaser, UCC Article 9
274
Id. See also Farmers & Merch. Bank & Trust of Watertown v. Ksenych, 252 N.W.2d 220 (S.D. 1977).
275
REILEY, supra note 73, §13-2, at 13-6.
276
U.C.C. § 9-320 (b) (2000). Balon v. Cadillac Auto. Co., 303 A.2d 194 (N.H. 1973).
277
U.C.C. § 9-317 (b) (2000).
278
Id.
56
includes “buyer in the ordinary course of business” rule and the “consumer to consumer”
exceptions, which allows the third-party purchaser to take collateral free from a security interest.
Also, under UCC Article 9, a good faith purchaser has priority over an unperfected security
interest.
The Statute thus focuses on the protection of the secured party’s interest by scarifying the
stability and speed of transactions in ordinary business. With the provision that the security
interest still attaches to the proceeds of the purchase,279 the benefit of the overprotection is less
than the loss of stability and speed of transactions in ordinary business. As the Statute does not
have special treatment on purchase money security interest in the collateral, the consumer to
consumer sale under UCC Article 9 will rarely happen under the Statute. Thus, it is quite
reasonable and appropriate for future legislation to consider such a “buyer in the ordinary
business” exception available to the purchaser in the ordinary course of business.
b. Rights of a Lessee of Goods
Under the Statute, if the property is leased before it is mortgaged, the lessee takes its
leasehold interest free from a security interest.280 If the property is leased after the property is
mortgaged, the security interest has priority over the leasehold interest, no matter whether the
security interest is registered or not.281 As to the loss suffered by the lessee when a secured party
claims its security interest in the collateral, the liability depends on whether the lessee has the
notice of the security interest or not. If the debtor does not inform a lessee of the security interest
279
280
281
Id. art. 66.
57
in written, the debtor is liable for the damage.282 If the lessee is informed by written notice, the
lessee shall undertake the loss.283
Thus, the line to determine whether the lessee takes free of the security interest is whether
the collateral is leased before it is mortgaged or not. If the lease is after the collateral is
mortgaged and the secured party claims its security interest in the collateral, no matter whether
the security interest is registered or not, the secured party has priority against the lessee’s interest
in the lease. The issue is not the priority, but who shall bear the loss of the lessee, the debtor or
the lessee itself based on the knowledge of the security interest at the time of lease.
UCC Article 9 maintains a consistent position that the lease does not cut off a perfected
security interest, which also is the case with the purchase of collateral. But it also provides the
exception that a lessee in the ordinary course of business takes its leasehold interest free of a
security interest in the goods created by the lessor, even if the security interest is perfected and
the lessee knows of its existence.284 As to an unperfected security interest, the lease cuts off the
security interest if the lessee gives value and receives the delivery of the collateral without
knowledge of the security interest.285
Therefore, the difference is the line to determine the priority between the Statute and
UCC Article 9. Under the Statute, the line is when the mortgage has been created. The Statute
protects a good faith lessee by imposing a liability on the debtor who fails to inform the
existence of the mortgage, even if the mortgage is not perfected. However, under UCC Article 9,
it is whether the security interest is perfected or not. UCC Article 9 protects a good faith lessee
instead of the secured party when the security interest is not perfected. Also, UCC Article 9
282
Id.
283
Id.
284
U.C.C. § 9-321 (c) (2000).
285
U.C.C. § 9-317 (c) (2000).
58
provides a “lease in the ordinary course of business” exception to the priority of the secured
party when the collateral is perfected.
c. Other Third Party Right Priority Rules
Except for the third party rights discussed above, the Statute and the Interpretation do not
provide any specific rules on the rights of third parties. Thus, the principal rule is that as to a
registered security interest, the security interest has the priority and as to an unregistered security
interest, the third party has priority.
In addition, as to a third party rights in investment properties and general intangibles,
such as securities and intellectual properties, the Statute prohibits the transfer or license of such
property rights without the consent of the secured party after registration of a security interest.286
Such rule provides another dimension to solve the conflict, which implicitly gives a secured
interest priority by invalidating such transfer or license.
As to third party rights, UCC Article 9 generally covers the rights of the purchaser, lessee,
and licensee of general intangibles.287 The buyer in the ordinary course of business rule also has
been extended to a licensee of a general intangible in the ordinary course of business.288 The
security interest remains attached to the collateral unless the licensee is a licensee in the ordinary
course of business.289
Thus, the Statute and UCC Article 9 cover similar types of third party rights in the
priority over a security interest. The principle under the Statute is to give the registered security
interest priority, and to give third party rights priority over an unregistered security interest. Of
course, there are exceptions to these principal rules. However, UCC Article 9 adopts the
286
See supra note 2, ch. 4, sec. 2, art. 79, 80.
287
U.C.C. § 9-321 (2000).
288
U.C.C. § 9-321 (b) (2000).
289
Id.
59
principle that a security interest has priority over third party rights except for a third party
acquires the rights in the ordinary course of business or in consumer-to-consumer transactions.
d. Priority of Possessory Lien
The possessory lien under the Statute means a security interest in the property which is
the possession of the party who serves labor or furnished materials on the property under a
maintenance contract, transport contract, or processing and consignment contract, to secure the
payment or performance of an obligation for the service and materials.290 Thus, the possessory
lien under the Statute is the same as the possessory lien under UCC Article 9.291
Under the Statute, a possessory lien on goods has priority over a registered security
interest in the goods.292 The rule is the same under UCC Article 9.293
e. Proceeds
The Statute does not define “proceeds.” In civil law, proceeds, typically includes any
interest arising out of the collateral naturally, such as newborn calves, or legally, such as interest
on the principal and rent payment of the lease.294 The “proceeds” does not include interest
acquired upon the sale of the collateral and claims arising out of the loss or damage of the
collateral. Under both rules on mortgage and pledge, any property received by the debtor upon
the sale and the claims arising out of the loss and damage to the collateral, shall be used to pay
off the debt or be deposited with a third party agreed upon by both parties.295 Thus, because of
the special treatment of the property and claims, the security interest remains attached to such
290
See supra note 2, ch. 5, art. 82, 84.
291
U.C.C. § 9-333 (a) (2000).
292
293
UCC § 9-333 (b) (2000).
294
KONG, supra note 55, at 414-416.
295
See supra note 2, ch. 3, section 2, art. 49, 70.
60
property. The Statute does not expressly as to whether such property is treated as registered or
not. Presumably and logically, also with the special treatment of such property, if the security
interest in the collateral is registered, the property acquired upon sale or the claims arising out of
the loss or damage to the collateral is registered as well.
The secured party has the right to collect and own the “proceeds” of the collateral after
the collateral is garnished by the court upon debtor’s default.296 Before the garnishment, the
security interest does not attach to the proceeds.297
UCC Article 9, the “proceeds” is much broader than that under the Statute. It includes
property acquired on disposition of the collateral, collected on account of collateral, rights from
the collateral, and claims due to loss or damage to the collateral.298 A security interest
automatically attaches to all identifiable proceeds of the collateral.299 The perfection of a
security interest in the original collateral automatically perfects an interest in the proceeds of the
collateral for at least 20 days after attachment.300 The perfection will continue if the proceeds are
identifiable cash proceeds, a financing statement has been filed or certain proceeds that (1) a
filed financing statement covers the original collateral; (2) proceeds are collateral in which a
security interest may be perfected at the same office where interest in original collateral was
perfected; and (3) the proceeds are not acquired with cash proceeds.301 The general priority rule
applies to the proceeds.
Under the Statute, except for the property acquired upon the sale or the claims due to loss
of or damage to the collateral, the secured party has no right in other proceeds under the UCC
296
Id. ch. 3, sec. 3, art. 47.
297
Id.
298
U.C.C. § 9-102 (a) (64) (2000).
299
U.C.C. § 9-203 (f) (2000).
300
U.C.C. § 9-315 (c) (d) (2000).
301
U.C.C. § 9-315 (d) (2000).
61
Article 9 broad definition unless it is garnished by courts upon debtor’s default. However, under
UCC Article 9, generally, the security interest will automatically attach to any identifiable
proceeds arising from the collateral. The Statute provides a simple rule as to the proceeds upon
sale and claims arising from the loss of or damage to the collateral. Such proceeds are treated as
registered and the principle priority rule applies to such proceeds. Similarly, under UCC Article
9, in most cases, if the security interest is perfected in the collateral, it is usually perfected
continuous in the proceeds as well.
The Statute’s ground is that the purpose of the mortgage is to render the debtor retain the
use of the collateral. Therefore, any interest, which is generated from the use, shall belong to the
debtor. Obviously, UCC Article 9 follows the logic that as the collateral is subject to the security
interest, all interest arising from the collateral shall be treated as part of the collateral.
f. Special Priority Rule for Particular Categories of Collateral
As to other categories of collaterals, most of them are not within the scope of permissible
collateral, which could be mortgaged or pledged under the Statute. Therefore, the Statute has no
special priority rules on these types of collaterals. The priority rule discussed above applies to
all collateral.
However, UCC Article 9 provides special rules for certain categories of collaterals, such
as purchase money security interests (PMSI), security interests in investment property, etc.
The PMSI priority rule is very important under UCC Article 9, which affords a special,
non-temporal priority to those PMSI.302 A perfected PMSI in goods other than inventory or
livestock has priority over a conflicting security interest in the same goods and its identifiable
proceeds, if the PMSI security interest is perfected when the debtor receives possession of the
302
62
collateral or within 20 days thereafter.303 Also, generally, PMSI in inventory has priority over a
conflicting security interest in the same inventory and its identifiable cash proceeds received on
or before the delivery of the inventory to the buyer when such PMSI satisfy the statutory
conditions.304 Thus, UCC Article 9 provides special protection of the secured party who extends
credit to the debtor so that the debtor could acquire the collateral. In most cases, priority will be
over a security interest asserted under an after-acquired property clause.305
The Statute does not grant special priority rule on PMSI. As after-acquired properties
cannot be mortgaged, the PMSI does not much meaning under the secured transactions system in
China at the moment.
VII. Default
The Statute Article 53 provides that if the secured party is not paid off when the debt is
due, the secured party may be compensated by retaining the collateral to offset the debt by value
agreed by both parties, or by the proceeds from the auction and sale of the collateral through
agreement with the debtor.306 If no agreement is reached, the secured party may file suit in court
for enforcement of the security interest.307 If the proceeds or value of the collateral agreed upon
are not adequate to pay off the debt, the debtor is still liable for the difference.308 As to the
collateral which is pledged, the pledgee can be compensated by retaining the collateral to offset
the debt by value agreed by both parties, or by the proceeds from the auction and sale of the
303
U.C.C. § 9-324 (a) (2000)
304
U.C.C. § 9-324 (b) (2000).
305
306
307
Id.
308
Id. See also supra note 3, art. 73.
63
collateral according to law.309 If the proceeds or value of the collateral agreed upon is not
adequate to pay off the debt, the pledgor is liable for the difference.310
Thus, the Statute generally provides when the secured party could enforce the security
interest and how to enforce.
A. What is Default
The Statute does not expressly define what constitutes default. According to Article 53,
when the debt is not paid when due, the failure to pay triggers the secured party’s right to enforce
a security interest in the collateral.311 Reading the provision literally, only failure to make a
payment due triggers default. There is no provision as to consequence of a creditor tolerating
late installment payments, such as acceptance of the late monthly payment. Whether the secured
party’s acceptance of late payments constitutes modification of principle contract, it will be
determined under Contract Law of China on case by case basis. The Statute does not prohibit
parties from defining what will be deemed as default. According to the general contract law in
China, parties can reach an agreement by free will. Thus, the Statute provides that a failure to
make a payment due will trigger the secured party’s ability to enforce the security interest. Also,
both parties can agree upon what events will be deemed a default and allow the security party to
a enforce security interest.
Similarly, UCC Article 9 contains no definition of default, but allows it to be defined by
the parties in the security agreement.312 Every well-drafted security agreement will include a
broad definition of default.313 Because Article 9 includes no definition of default, it is crucial
309
310
Id.
311
312
DEL DUCA, supra note 62, at 423.
313
Id.
64
that the events of default be spelled out in the security agreement subject only to the good faith
obligation of UCC § 1-304 and the limitations of UCC § 9-603 (a).314 If they are not, perhaps
only failure to make a payment will be deemed a default as a matter of general contract law.315
In general, the occurrence of any event defined in the security agreement as default can trigger
default.
Thus, even though the Statute does not define default, it provides that failure of payment
will be deemed a default. Also, both parties can provide in a security agreement the events
which will be deemed as default. By comparison, UCC Article 9 takes the similar approach.
Under general contract law, failure to make a payment due is default and parties can include
events of default in the security agreement.
B. Secured Party’s Options When Default Occurs
Under the Statute, the security party can ignore the security interest, sue in court and then
execute on the judgment.
If a secured party chooses to enforce the security interest, the Statute provides that if it is
mortgage, a secured party may execute the security interest by agreement with the debtor, or file
suit in court for judicial foreclosure if an execution agreement cannot be reached.316 The court
can either convert the collateral into money by sale or auction of the collateral. The order of the
application of proceeds is: (1) the expense and cost involved in repossession and foreclosure; (2)
the interest on the principal debt; and (3) the principal debt.317 If it is a pledge, the pledgee can
be compensated by foreclosing on collateral to offset the debt by value agreed by both parties, or
314
Id.
315
II G. GILMORE, SECURITY INTERESTS IN PERSONAL PROPERTY § 43.3, at 1193 (1965); See also Whisenhunt v.
Allen Parker Co., 168 S.E.2d 827 (Ga. App. Ct. 1969).
316
317
65
by the proceeds from the auction and sale of the collateral according to law.318 The Statute does
not provide an express standard of conducting sale or auction. Such an express standard is not
necessary in a mortgage because any disposition of collateral should be agreed upon the debtor.
Otherwise, the disposition will be conducted by the court. As to a pledge, this seems inadequate
as to disposition of collateral by sale or auction. But in practice, a reasonable standard is often
employed.
Under UCC Article 9, a secured party can seek judicial foreclosure or take possession of
the collateral after default.319 The option most frequently exercised by the secured party
following the debtor’s default and repossession is the holding of a foreclosure sale.320 The sale
should be conducted in a commercially reasonable way.321 In addition, UCC Article 9 goes
further to provide detailed rules and requirements on conducting disposition, such as notice to
the debtor, warranties on disposition, etc. The order of application is: first, the reasonable
expenses involved in the repossession and foreclosure; second, satisfaction of the foreclosing
creditor’s own debt; third, satisfaction of debts held by subordinate secured parties who come
forward for a share of the proceeds.322
Also, the secured party can retain the collateral in partial or full satisfaction of the
obligation, either by the debtor’s consent or in the absence of objection by those entitled to
notice, as the case may be, and where this is done the secured party waives any right to a
318
319
U.C.C. § 9-609 (b) (2000).
320
CLARK, supra note 57, vol., ¶4.06, at 4-156.
321
U.C.C. § 9- 607 (c) (2000); See also, U. S. v. Terry, 554 F.2d 685 (5th Cir. 1977); C.I.T. Corp. v. Lee Pontiac,
Inc., 513 F.2d 207 (9th Cir. 1975); Bryant v. American Nat’l Bank & Trust Co., 407 F. Supp. 360 (N.D. Ill. 1976);
In re Zsa Zsa Ltd., 352 F. Supp. 665 (1972), aff’d 475 F.2d 1393 (2d Cir. 1973); Old Colony Trust Co. v Penrose
Indus. Corp., 280 F. Supp. 698 (E.D. Pa. 1968), aff’d 398 F.2d 310 (3d Cir 1968).
322
Id.
66
deficiency.323 UCC Article 9 provides details of the procedure requirements and the exceptions
when is prohibited.324
The goal of foreclosure is the same under both systems, which is to obtain a reasonable
price upon disposition of the collateral. However, the foreclosure under the Statute is much
more restrictive than that under UCC Article 9.
First of all, UCC Article 9 gives more flexibility to the secured party to dispose of the
collateral. The foreclosure under the Statute is either by agreement or by judicial process. In
most cases, the foreclosure is conducted through a lawsuit. Under UCC Article 9, the secured
party after default and repossession of the collateral can dispose of the collateral without the
consent of the debtor if he conducts the disposition in a commercially reasonable way in every
aspect of a disposition. Thus, a disposition through the judicial process is rare.
The disposition of collateral under the Statute is by a sale. However, UCC Article 9
provides that after default, a secured party may sell, lease, license or otherwise dispose of any or
all of the collateral in its present condition or by following any commercially reasonable
preparation or processing.325 Thus, UCC Article 9 provides more flexibility to the secured party
to obtain a reasonable price, which in turn limits the size of the deficiency.326
UCC Article 9 provides much more detailed rules and standards as to the disposition of
collateral, in substance and in process. It includes the duties of the secured party, relevance of
the price obtained, warranties in the sale, standard of processing, etc. These give practical
323
RAY D. HENSON, SECURED TRANSACTIONS UNDER THE UNIFORM COMMERCIAL CODE 375 (1979); See also
Kruse , Kruse & Miklosko, Inc. v. Beedy, 353 N.E.2d 514 (1976). Cf. Moody v. Nides Finance Co., 115 Ga. App.
859, 156 S.E.2d 310 (1967); In re Copeland, 531 F.2d 1195 (3d Cir. 1976).
324
U.C.C. § 9-620 (2000). Mich. Nat’l Bank v. Marston, 29 Mich. App. 99, 185 N.W.2d 47 (1971). Klingbiel v.
Commercial Credit Corp., 439 F.2d 1303 (7th Cir. 1971). Margolin v. Franklin, 270 N.E.2d 140 (Ill. App. 1971).
Cf. Bradford v. Lindsey Chevrolet Co., 117 Ga. App. 781, 161 S.E.2d 904 (1968).
325
U.C.C. § 9-610 (a) (2000).
67
picture of how the disposition should proceed. However, the Statute and its Interpretation only
give a general principal rule on the foreclosure, which does not provide enough practical
guidance. There will be few problems in a mortgage because both the secured party and debtor
shall agree to all aspects of the disposition; otherwise, the secured party will go through a
standard judicial process for foreclosure. But in a pledge, as the sale and auction are conducted
by the secured party, there are less practical standards and less guidance to which to refer. Thus,
there will be many problems and disputes.
The order of application of the proceeds is the same. The Statute distributes the proceeds
according to the rule on the application of proceeds first to the foreclosing creditor, and then to
other subordinate secured parties according to the related priority rules in the Statute. UCC
Article 9 follows the same order as the Statute does.
The Statute allows the secured party to retain the collateral by agreement of both parties
to partly and fully satisfy the debt with the agreement of the debtor. UCC Article 9 also provides
similar method for the secured party with some conditions. However, there is only principle
allowance in the Statute, but the Code provides much more detailed and practical rule as to the
duties of secured party, process of strict foreclosure and exceptions to which strict foreclosure is
not permitted.
Thus, the rule in UCC Article 9 as to the disposition of collateral is much more flexible,
detailed and practical than the Statute. The effect of the rule in the Statute is that the process of
foreclosure is court oriented, however the foreclosure is creditor-oriented under UCC Article 9.
The rule under UCC Article 9 facilitates the foreclosure process to protect the secured party
interest timely.
68
C. Cumulative Remedy
Under both the Statute and UCC Article 9, the remedies are cumulative. The debtor is
liable for any deficiency under the statute.327 The same rule under UCC Article 9 is that if the
proceeds are not adequate to satisfy full amount of debt, the secured creditor could seek a
deficiency judgment to collect the unsatisfied debt if the secured party has carefully adhered to
UCC Article 9 provisions.328
D. Redemption Right
Under UCC Article 9, the debtor or any secondary obligor may redeem the collateral by
tendering the performance of all obligations secured by the collateral at any time before the
collateral has been disposed of or a contract for its disposition has been entered into or before the
obligation has been discharged by a timely failure to object to the secured party’s proposal to
retain the collateral in satisfaction of the debt.329 The redemption right cannot be waived unless
it is waived in writing after default.330 The Statute does not provide a statutory redemption right
to the debtor after default if the collateral is mortgaged. Of course in real practice, during a
negotiation or judicial process, the parties could agree on the redemption of the collateral. As to
pledge, the Statute provides that after default, if the debtor later pays off its debt or fulfills its
obligation, the secured shall return the collateral.331 The Statute does not give the debtor the
statutory right to redeem the collateral.
327
328
HENSON, supra note 323, at 359-360; See also U. S. v. Whitehouse Plastics, 501 F.2d 692 (5th Cir. 1974); Clark
Leasing Corp. v. White Sands Forest Prod, Inc., 87 N.M. 451, 535 P.2d 1077 (N. Mex. 1975); Wirth v. Heavey, 508
S.W.2d 263 (Mo. App. 1974).
329
U.C.C. § 9-623 (2000).
330
Ind. Morris Plan Corp. v. Karlen, 28 N.Y.S.2d 30, 319 N.Y.2d 831, 268 N.E.2d 632 (1971).
331
69
VIII. Conclusion
The mechanism and structure of the Statute are similar to that of UCC Article 9 in
security interests in personal property. However, UCC Article 9 provides more detailed rules
and practical guidance.
UCC Article 9 covers many more categories of personal property. The scope of personal
property which is covered in the Statute is limited to typical movable and tangible properties,
instruments, chattel paper, investment properties and intellectual properties. The limited scope is
because of an underdeveloped commercial practice, and the traditional civil law theory impact.
The requirement of the effectiveness of a security interest (attachment) under the Statute
is similar to the requirements under UCC Article 9. “Value given,” “the debtor has a right in
collateral,” and an effective security agreement are required under UCC Article 9. A valid
principal contract, which equals to “value given,” and the requirement that the debtor has right in
the collateral are prerequisites for the effectiveness of a security agreement under the Statute.
Thus, the requirements are reflected in both mechanisms. However, the content of the security
agreement included under the Statute is much more detailed, specific and broader than that under
the Code. The content required is more like that of chattel mortgage under the pre-code rules.
The perfection of the security interest under the Statute occurs upon registration at the
different administrative departments according to the different categories of collaterals. The
security interest under a valid pledge is also deemed as perfected. These are the only methods,
which are employed to perfect a security interest under the Statute. On the other hand, UCC
Article 9 provides more methods of perfection according to different categories of collateral.
Because of the impact of the precious long-term planned economy and the idea of governmental
control, the Statute does not use a similar philosophy of “central filing,” which is reflected in
70
UCC Article 9. The places of registration, process, and requirements of registration are
complicated and tedious, which increases the transaction costs of a secured transaction, and
delays the transaction.
The general priority rules between two mechanisms are similar. Between perfected
security interests, UCC Article 9 employs the “first to file or perfect” rule. The Statute uses the
“first to obtain registration” rule. In addition, the Statute provides if the registration dates are the
same, they rank equally in proportion to the debt secured. Between a perfected and unperfected
security interest, both mechanisms give the perfected security interest the priority. Both
mechanisms provide priority rules for certain third parties rights in the collateral. The UCC
Article generally adopts a consistent rule that the purchase or lease does not cut off a security
interest except for a transaction in the ordinary course of business. The Statute adopts a “fair
notice” idea, that if the third party notices the security interest, then the security interest has
priority; if not, the third party right has priority. Furthermore, the Statute does not provide the
special rules that UCC Article requires for certain categories of collateral, such as the purchase
money security interest, the purchaser of chattel-paper, and investment properties. Thus, UCC
Article 9 is much more detailed on the priority rules.
Under the Statute, movable things, instruments, chattel-paper, investment properties, and
intellectual properties can be pledged. In fact, only the “pledge” of movable things, instruments
and chattel paper are actual pledges like that under UCC Article 9. The “pledge” of investment
properties and intellectual properties are in fact a security interest created by contract without the
transfer of possession. In the case of a pledge, the general rules are similar to that under UCC
Article 9. However, a written agreement is still required under the statute.
71
As to default, the structures of the two mechanisms are similar. But the foreclosure of
collateral in real practice is court oriented under the Statute. However, the foreclosure of
collateral is “secured creditor” oriented under UCC Article 9. The Statute just gives principle
rules as to the foreclosure of collateral, while UCC Article 9 goes much further as to the duties of
the secured party, the standard of disposition, the process, etc. This gives the creditor a practical
guidance to process the disposition. Also, as to disposition, UCC Article 9 provides more
flexible and practical methods besides sale to serve the goal of obtaining a reasonable price.
In all, the Statute essentially has the same structure as UCC Article 9. The general rules
are similar. Because of the transformation of the economic structure, and the underdeveloped
commercial practice, the legislative body only gives principle rules on the issues of secured
transactions. Also, the structure of rules reflects a traditional theoretical impact of a civil law
system. With the development of a market economy and commercial practice, together with the
experience of legal practice, the rules of secured transactions in personal property will become
more detailed, precise, organized and practical. Because of the similarity between the rules and
ideas of the two mechanisms of secured transactions, UCC Article 9 and its experience in real
practice provide a good reference for further legislation and amendment in the Guarantee Law of
China regarding secured interests in personal property.
IX. SUGGESTIONS
Brief Amendment Suggestions for the Guarantee Law of the P. R. China
Content Suggestions
Structure • Provide a definition chapter to define the terminologies used in the Statute;
• Regulate Mortgage in personal property separately, independent from
mortgage in real property.
Scope of Collateral • Gradually expand the category of collateral allowed to instruments, chattel
in Mortgage paper and documents of title, or even to general intangibles in the future;
• Move pledge in investment property and intellectual property” to
Mortgage.
72
Security Agreement • Allow electronic records of security interest to be sufficient;
• Liberalize the description of collateral and allow to employ generic terms
as long as the description reasonably identifies the collateral;
• Establish rules for after-acquired collaterals to serve the best interests of
creditors.
Registration • Adopt a central filing principle and uniform the registration place at
province level as to collateral other than ships, aircraft, vehicles and
intellectual property rights;
• Adopt a notice filing principle and allow a generic description of
collateral;
• Reduce government intervening and the detailed examination, and impose
civil liability or penalty on mistaken registration or unauthorized
registration;
• Provide duties on the officers and impose liability on officers upon
mistakenly recording or abuse of authority;
• Allocate risk between the debtor and the secured party and provide
remedies as to mistaken registration either by the secured party or the
officers;
• Provide rules to determine the registration date, which should be certain to
the secured party if the filing provides correct information required and
the registration is filed in a proper method allowed under the Statute;
• Provide duty on the secured party to terminate registration upon certain
events, and impose liability on the secured party who fails to terminate
registration diligently;
• Employ notice filing principle and let description of collateral in security
agreement control the scope of the collateral in which the security interest
is attached, and the description of collateral in the registration control the
scope of the collateral in which the security interest is perfected;
Pledge • Oral agreement may be allowed;
• The content requirement of security agreement does not need to be as
detail as that in mortgage;
Priority • clarify the meaning of “third party” and provide detail priority rules to
these third parties;
• provide priority to purchasers, lessees, licensees in the ordinary course of
business in their rights against security interest;
• Provide priority rule to security interest in some special categories,
especially purchase money security interest;
Default • Change from court oriented foreclosure process to secured party oriented
foreclosure process;
• Establish commercially reasonable standard for such secured party
oriented foreclosure in every aspect;
• Provide more flexible, practical and detail rules for foreclosure by secured
party after default.
73

Security Interests in Personal Property Under The Guarantee Law of The People's Republic of China: A Comparative View With UCC Article 9

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Security Interests in Personal Property Under The Guarantee Law of The People's Republic of China: A Comparative View With UCC Article 9

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ARTICLE

SECURITY INTERESTS IN PERSONAL PROPERTY UNDER THE

II. Bankruptcy .............................................................................................................. 5

III. Brief Structure of the Statute................................................................................... 7

IV. Mortgages of Personal Property: Security Interests in Personal Property

without Transferring Possession ............................................................................. 9

A. Scope of personal property which could be legally “Mortgaged” .......................... 9

B. Security Agreement ............................................................................................... 15

a. Required Form of Security Interest ................................................................... 15

D. Registration (Perfection) ....................................................................................... 26

a. Registration under the Statute and Relevant Regulations ................................. 26

A. Scope of Personal Property That Could Be Pledged ............................................. 41

B. Attachment and Perfection of Collateral ............................................................... 43

a. “Tangible and movable things” (“Goods”) ....................................................... 43

A. Priority Rule between Conflicting Security Interests ............................................ 52

Party (Purchaser of the Collateral, Lessee of the Collateral, Lien

Creditor, etc.) in the Collateral .............................................................................. 54

a. Third Party Buyer of Collateral Goods ............................................................. 55

B. Secured Party’s Options When Default Occurs .................................................... 65

C. Cumulative Remedy .............................................................................................. 69

D. Redemption Right ................................................................................................. 69

Commissioners on Uniform State Laws (“NCCUSL”) appointed a study committee in 1990 to

states and the District of Columbia.10

(mostly follow UCC Article 9 rule) is extremely important to a creditor.

In China, bankruptcy is still an underdeveloped and under-regulated area. The

bankruptcy in China too.

III. Brief Structure of the Statute

other miscellaneous issues.29

under the Statute Chapter three.

a security interest in “property rights,” such as security interests in securities, instruments or

A. Scope of personal property which could be legally “Mortgaged”

following personal property is allowed to be “mortgaged”: (1) machinery, means of transport,

property which could be legally mortgaged.40

tractors, harvesting implements, thresher, and other agricultural equipment.41 Means of

Transport includes aircraft, ships, trains, and all kinds of vehicles.42

ships, aircrafts and vehicles.48

and production, and other property in the similar category.

interpretation or implementation of the Statute Article 43 and not an interpretation or further

the Statute Article 34 personal property.

generally tangible personal property.

Based on the conclusion that generally tangible personal property is allowed to be

or subject to other legal enforcement or execution.

create a security interest in personal property or fixtures, including goods, documents,

9 is classified as tangible collateral, semi-tangible collateral and intangibles.62 Tangible

disposition of collateral or proceeds.69 Other personal property which could be collateral

intangible personal property.

Other categories of collaterals such as intangibles, semi-tangible collateral (indispensable paper),

much narrower than that under UCC Article 9.

circumstances, the expansion will cause more problems.

reasonable and appropriate.

a. Required Form of Security Interest

Therefore, in fact, an enforceable mortgage can only be created by a written agreement.

definition of “authenticate,” the old-fashioned signature will still work.75 As an alternative to a

to enable creation of security interests through electronic communications.77 An oral security

creditor has possession of the collateral.78

“writing” means. But, in real practice, it eliminates electronic records of authentication.

communications will restrain such business practice in the future.

required. Under UCC Article 9, only the debtor’s authentication is required.80

b. Required Content of Security Agreement

other agreements, which the parties deem necessary.81

security agreement itself.

statutory requirement on the description of the collateral.

As to the description of the collateral, the standard of sufficiency is “reasonably