No. Secured creditors generally have priority to the extent of the value of their security, but any portion of the debt not covered by the value of the security is treated as an unsecured claim.

For certain types of security, such as a mortgage, it is permissible for a security provider to create securities in favor of different creditors over the same assets. The PRC Civil Code contains general provisions in terms of priority among different creditors in relation to securities created over the same assets. For example:

• If there is more than one mortgage over the same asset (with a mortgage taking effect on registration with the relevant governmental authority), the priority is determined based on the sequence of registration.
• If there is a mortgage and a pledge over the same asset, a registered mortgage has priority over a pledge but a pledge has priority over an unregistered mortgage.

However, in practice, except for mortgages over real property, having more than one mortgage over the same asset does not often occur in banking transactions.

The PRC Civil Code recognizes the concept of a floating mortgage. This is usually created over assets such as equipment, raw materials, semi-finished products and finished products.

A floating mortgage will take effect when the mortgage contract takes effect, but it will not be upheld against bona fide third parties unless it is registered with the PBOC. Due to the floating nature of the underlying assets, a floating mortgage is not common in banking transactions.

Yes, although for domestic syndicated loan transactions, as only licensed trust companies may carry on trust business but cannot be a party to a syndicated loan transaction, a security agent (rather than a security trustee), which is one of the lending banks, is used.

Not applicable.

No. If the security is held by a security agent, it is not necessary to take new security (or amend the security agreement or update the security registration with government authorities) if there is a change of lenders.

Under the PRC Civil Code, a mortgage or a pledge cannot be created over the following assets:

• Land title (with a few exceptions, land title belongs to the state; therefore, the land title cannot be mortgaged or pledged and, instead, the land use right can be mortgaged).
• A land use right in relation to collectively owned land (which refers to some land in rural areas).
• Educational facilities, hospital facilities and other public service facilities.
• Assets whose title or use right is unclear or in dispute.
• Assets that are subject to attachment.
• Assets that are not allowed to be mortgaged or pledged by law (as may be prohibited by national and local laws and regulations).

There is no concept of "corporate benefit" under PRC law; therefore, there is no prohibition on a PRC company providing security or a guarantee to a third party.

Types of typical security

The PRC Civil Code recognizes the following types of typical security:¹

It is not necessary to complete any regulatory formalities to create and perfect a guarantee.

Mortgage

A mortgage can be created over real property and movable assets.

For a mortgage over real property (including real property with construction in progress), the mortgage will take effect on its registration with the local authority (usually the local real estate registration authority).

For a mortgage over movable assets (such as equipment, vehicles and aircraft), the mortgage will take effect when the mortgage contract takes effect, but it will not be upheld against bona fide third parties unless it is registered with the relevant authority. See the answer to question 4 of this section in relation to a floating mortgage.

Pledge

A pledge can be created over movable assets and certain rights (such as stocks, equity interest and accounts receivable). For a pledge over movable assets, the pledge will take effect when the pledged asset is delivered to the pledgee. For a pledge over rights, the pledge will take effect when the following occur:

• The certificate evidencing that right (such as a certificate of time deposit) is delivered to the pledgee; and
• The pledge is registered with the relevant authority.

Deposit

A cash deposit takes effect when the deposit is delivered to the beneficiary.

Lien

It is not necessary to complete any regulatory formalities to create and perfect a lien.

General

Administrative practices and requirements in different provinces, cities, districts and counties may vary. It is therefore advisable to check with the relevant local authorities before taking security.

For further details on the registration requirements, see the answer to question 12 of this section.

1 Apart from the types of typical PRC law security listed, the PRC Civil Code also recognizes the "non-standard security" interest contemplated by "non-typical security contracts." Such contracts are contracts that do not take the form of a guarantee, mortgage or pledge but would nevertheless serve a security function according to their respective terms. Currently, security by transfer of ownership, retention of title, financial leasing and factoring arrangements would generally fall within the scope of such "non-standard security." The overall legal judicial practice regarding such "non-standard security contracts" has not yet been well established. It is expected to evolve given that the PRC Civil Code is still fairly new legislation and it is not yet common for creditors to take "non-standard security" in the market. Hence, we have only focused on the types of typical security in our responses that are most popular among offshore lender banks.

Jurisdiction of companies involved

There are some particular requirements, depending on whether the security relates to a PRC company or a foreign entity.

For a pledge over an equity interest in a PRC company, the pledge must be recorded in the company's share register and registered with the local counterpart of the State Administration for Market Regulation.

If the beneficiary of the security is a foreign entity, the exchange control regulations on cross-border security may be relevant. In particular, if:

• Both the primary obligor and the creditor (i.e., the beneficiary of the security) are foreign parties; and
• The security provider (references to "security provider" include reference to guarantors as well) is a PRC party,

the security provider (references to "security provider" include reference to guarantors as well) must effect cross-border security registration with the State Administration of Foreign Exchange. The registration is not a condition that affects the validity of the security but without registration, it will be difficult for the security provider to remit the enforcement proceeds out of the PRC when the security is enforced.

Additional requirements in some localities

In some localities, there are additional administrative requirements. For example, for a mortgage over real property, if the mortgagor or mortgagee is a foreign entity, the mortgage contract and the foreign entity's corporate documents may need to be notarized and legalized¹ or apostilled² before they are permitted to be submitted to the local authorities.

Subordination and intercreditor documents

There are no registration or notarization requirements in relation to subordination or intercreditor documents.

1 Applicable to documents issued in a non-contracting state of Hague Convention Abolishing the Requirement of Legalization.

2 Applicable to documents issued in a contracting state of Hague Convention Abolishing the Requirement of Legalization.

No stamp duty is payable in relation to securities (including guarantees), subordination or intercreditor documents.

In most cases, the registration of securities is free of charge, except that local authorities may charge a fee for the registration of a mortgage over real property. Local practice should therefore be checked at an early stage.