Lawyer | Li Shangrong: Reflections on the System of Entrusted Holding of Security Interests in the Civil Code

Article 4 of the Interpretation of the Security System in the Civil Code stipulates that in any of the following circumstances, if a party registers the security interest in the name of another person, if the debtor fails to fulfill the due debt or if there is a situation agreed upon by the parties to realize the security interest, and the creditor or its trustee claims to receive priority compensation for the property, the people's court shall support it in accordance with the law:

Article 4 of the Interpretation of the Security System in the Civil Code stipulates that in any of the following circumstances, if a party registers the security interest in the name of another person, if the debtor fails to fulfill the due debt or if there is a situation agreed upon by the parties to realize the security interest, and the creditor or its trustee claims to receive priority compensation for the property, the people's court shall support it in accordance with the law:


(1) The security interest provided to bondholders is registered under the name of the bond trustee;

(2) Register the security interest provided by the entrusted lender under the name of the trustee;

(3) Other situations where the guarantor is aware of the existence of a delegation relationship between the creditor and others.


As is well known, the holder of the security interest can only be a creditor, and this provision essentially creates a system of entrusted holding of the security interest, allowing for the separation of the two under certain circumstances, allowing the security interest holder to be someone entrusted by the creditor. In the case of bond trading and entrusted loans, due to the dispersion and large number of creditors, it is objectively impossible to handle the registration of security interests one by one. In fact, before the promulgation of the above regulations, judicial decisions had tacitly allowed the unified entrusted holding of security interests and recognized the priority right to repayment upon realization. This is an inherent requirement of the continuous development of the market economy to promote convenient transactions and reduce management costs, and the above judicial interpretations are urgently needed to regulate it.


But in the traditional field, based on specific transaction arrangements or misconceptions of commercial entities, limitations or work errors of the registration authority, how to determine the effectiveness of a mortgage when it is registered in the name of others? In judicial practice, judges almost always consider the violation of the subordinate nature of mortgage rights (mainly reflecting the absence of creditor's rights contracts and the reasons for property rights changes) as invalid. The author encountered: Case 1, a dispute over a sales contract, where the buyer had a third party register the mortgage of the property under the name of the seller's executive partner; Case 2, Financial Loan Contract Dispute, in the form of counter guarantee, the borrower registers the mortgage of the construction in progress under the name of the loan guarantor, and the lender and guarantor are affiliated companies.


In Case One, the mortgagor (the third party of the buyer) actually guarantees the debt of the buyer to the seller. Although a mortgage contract is signed with the mortgagee (the executive partner of the seller), there is no debt relationship between the buyer and the mortgagee. As a subordinate contract, the mortgage contract lacks a main creditor's right contract, and even if registration is completed, it belongs to the basic legal relationship without property rights change. This essentially separates the mortgage right from the creditor's rights, and the reasons for this phenomenon are: 1. The seller mistakenly believes that the executing partner and themselves can be regarded as the same legal entity qualification; 2. The buyer and the mortgagor also consider the first two as the same interest subjects and recognize the seller's registration arrangement; 3. The registration authority does not require the provision of the main creditor's rights contract but only records the amount of the guaranteed main creditor's rights in the registration book, or fails to provide registration due to the negligence of the staff.


In Case 2, the borrower (counter guarantor) registered the mortgage of property rights under the name of the guarantor (mortgagee), and the mortgage did not belong to the borrower's main debt contract, but originated from the counter guarantee contract. Generally speaking, everyone finds it incredible that the mortgagee here would first appear as the guarantor of the debtor, and then change back to the same interest identity as the creditor through the counter guarantee of property rights. From the perspective of development laws, the freer the economy, the more complex the relationships, and the more dynamic the market. If enterprises or individuals have certain concerns and all parties agree, the above specific arrangements that appear to violate trading habits but are in line with their own interests will naturally arise. At this time, the fairness of the law will not be deeply considered.


From a legal perspective, counter guarantee is also a guarantee contract, belonging to the original guarantee contract's security interest contract. It guarantees the guarantee debt provided by the guarantor to the borrower for the lender's debt, rather than the main debt, that is, the contract derived from the subordinate contract has no direct relationship with the main creditor's contract, and the resulting security interest is likely to have been separated from the creditor's right. Some mortgagees have a right of recovery based on guarantee, Rather than the priority of the value of property rights.


In the past, the property law only stipulated the subordination of mortgage rights from two aspects: disposal and elimination, without involving the determination of occurrence. Scholars have many different views on this, but generally believe that: 1. The occurrence or establishment of a mortgage right is conditional on the existence of the secured creditor's right. If the creditor's right does not exist, the mortgage right is not established. If the creditor's right is invalid or revoked, the mortgage right is also correspondingly invalid or ineffective; 2. The main contract and the mortgage contract both refer to the same debt, that is, the rights holders of the two contracts - the creditor and the mortgagee - belong to the same rights holders of the debt.


Is there a change in the concept that creditors and mortgagees must be the same person with the introduction of the system of entrusted holding of security interests? To stimulate economic vitality and fully respect the autonomy of the parties involved, the answer should be affirmative, but it is only a matter of time. Considering that the third situation of this provision is based on legislative technology and reserved reserve clauses and relevant registration regulations that have not yet been matched, and the mainstream judgment viewpoint has not wavered, it is still necessary to maintain a conservative attitude in practice. Once there are any transaction arrangements or registration errors related to the separation mentioned above in commercial activities, they should be corrected in a timely manner to avoid adverse results.


Entrusted holding creates a distinction between nominal mortgagees and actual mortgagees, and the Nine Minutes of the People advocates breaking through superficialism and emphasizing substantive rights review, which is also a trend signal. As early as Wang Fuhai and Anhui Guorui Investment Group Co., Ltd. in the second instance civil judgment (2015) Min Yi Zhong Zi No. 107 case of civil lending disputes, the Supreme Court also believed that in the case of a bona fide third party claiming rights without relying on registration, the ownership of rights should be determined based on the agreement of the parties.


From the perspective of the original entrustment norms, both the Contract Law and the Civil Code stipulate the right of the principal to intervene, the right of the principal to third parties, and the right of the third party to choose the other party. However, the essence of the entrusted holding of security interests belongs to or refers to the entrustment relationship. If the third party is aware of the agency relationship between the trustee and the principal at the time of signing the contract, the contract directly binds the principal and the third party, This is consistent with the provision of the third situation in the above judicial interpretation.


The above are some reflections on the system of entrusted holding of security interests. We believe that in the near future, everyone will accumulate more judicial experience, and we will wait and see.


Relevant instructions and some reference materials:


1. The Interpretation of the Supreme People's Court on the Application of the Guarantee System Related to the Civil Code of the People's Republic of China is abbreviated as the Interpretation of the Guarantee System of the Civil Code;

2. The notice of the Supreme People's Court on the issuance of the "Minutes of the National Conference on Civil and Commercial Trial Work of Courts" is abbreviated as the "Nine Minutes of the People's Republic of China";

3. Enshi Intermediate People's Court, Wu Wei, "Determination of Mortgage Effectiveness for Separation of Mortgagees and Creditors in Real Estate Mortgage";

4. Sucheng Court, Zhu Lishen, "Legal Consequences of Real Estate Mortgage Registration in the Name of Non Creditors";

5. Jin Du Law Firm, Sha Jun, Liao Shuxin, "Changes and Reflections on the Rules for the Separation of Creditors and Security Owners";

6. Guangzhou Arbitration Commission (2019) Suizhong Case No. 9305 Award;

7. Supreme Court (2015) Min Yi Zhong Zi No. 107 Judgment;

8. The original Ministry of Land and Resources issued the "Operating Regulations for Real Estate Registration (Trial)";

9. Guangzhou Municipal Planning and Natural Resources Bureau's "Guangzhou Real Estate Registration Regulations".