Viewpoint | A brief analysis of atypical guarantees in current business practices
Published:
2024-04-08
The atypical guarantees analyzed in this paper are the more common credit enhancement measures, retention of title, transfer and guarantee, and margin in current business practices.
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my country's Civil Code system clearly stipulates the guarantee forms of security rights, guarantee contracts, financial lease contracts, and factoring contracts. Although financial leases and factoring are not typical guarantees, the Civil Code has clearly stipulated the above two types of contracts in the contract chapter. The typical contracts in China have made clear provisions, and the corresponding legal provisions are relatively complete, so we will not repeat them here. The atypical guarantees analyzed in this paper are the more common credit enhancement measures, retention of title, transfer and guarantee, and margin in current business practices.
1. Credit enhancement measures
A credit enhancement measure is an atypical guarantee for a third party to provide a creditor with a similar commitment document such as a shortfall, liquidity support, etc. According to the provisions of Article 36 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System of the the People's Republic of China Civil Code, the guarantee liability shall be assumed if the credit enhancement measure has a guarantee intention, and if there is a debt to join, it shall be recognized as a guarantee if it is difficult to determine whether it is a guarantee or a debt to join. However, the use of third-party credit enhancement measures is more common in current business practices, and there is usually no ambiguity in terms of guarantees or debt accession, and there is generally a situation where the debtor cannot perform, and creditors can usually only claim civil liability in accordance with the obligations agreed upon in the agreement. Such atypical security situations usually only guarantee the normal performance of the transaction, but not the realization of the creditor's claim or preferential payment after the debtor's default.
2. Retention of title
Retention of title refers to an atypical guarantee in a contract of sale in which the buyer first takes possession of the subject matter, but the parties agree that the seller retains ownership of the subject matter until certain conditions are met. In the event of the buyer's default, the seller can retrieve the subject matter and the buyer can obtain the use of the subject matter without having to pay the purchase price immediately. It is precisely because of such characteristics of retention of title that Article 25 of the Interpretation of the Supreme People's Court on the Application of Law in the Trial of Disputes over Contracts of Sale and Purchase also stipulates that retention of title does not apply to immovable property. The agreement of retention of title makes the interests of the seller and the buyer be protected in a balanced way, and the transaction risk between the two parties is reasonably allocated, but the retention of title agreement is relatively hidden, usually can not fight against the other rights of bona fide third parties, or even against the prior preservation, seizure, seizure and freezing.
3. Assignment and guarantee
The concession and security refers to an atypical guarantee in which the debtor or a third party agrees with the creditor to transfer the property in the form of a transfer to the creditor, and the debtor fails to perform the debt due, and the creditor has the right to discount the property or to repay the debt at the price obtained from the auction or sale of the property. The assignment of security often manifests itself as a transfer of ownership of the subject matter, but the debtor has no true intention of actually transferring the subject matter, and the creditor's contractual purpose is also the realization of the secured claim, not the acquisition of the subject matter itself. Such contracts usually provide that the debtor has the right to repurchase for a certain period of time, and the creditor cannot directly pay the debt in kind, but because the ownership has been transferred, the creditor has a stronger control over the subject matter and is generally given priority to be paid for the disposal price of the subject matter.
4. Security Deposit
Margin refers to an atypical form of security in which the debtor or a third party sets up a special margin account for the performance of the secured obligation and is actually controlled by the creditor, or deposits its funds into a margin account established by the creditor, and the creditor claims priority payment of the funds in the account. According to Article 70 of the Interpretation of the Supreme People's Court on the Application of the Guarantee System of the the People's Republic of China Civil Code, creditors may give priority to the payment of funds in the security account, and any defense of the debtor is of no practical significance when the terms of the security contract are clearly agreed. Even if the margin account is found not to be established for the performance of the secured obligation due to unclear agreement, the creditor can apply to the people's court to preserve the account with the debtor's property information clear, which can guarantee the realization of the claim to the maximum extent.
To sum up, credit enhancement measures, ownership retention, transfer and guarantee, and deposit are relatively common atypical forms of guarantee in current commercial activities. Because they are not publicized and informed to a third party in a broad sense, they are usually in a weak position when fighting against other rights of bona fide third parties, or they cannot fully cover all creditor's rights. However, because of this, more third parties are willing to provide such limited guarantees for debtors, to promote the formation of transactions and ensure the continued performance of transactions, such guarantees are an effective supplement to China's existing guarantee system.
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