Viewpoint | After a collateral asset has been seized, can the bank’s claim to priority repayment for a loan extension be upheld?

Seizure is a preservation or enforcement measure adopted by the people's courts during civil enforcement proceedings against the property of the party being enforced against, with the purpose of restricting their ability to dispose of such property. According to the Civil Procedure Law and relevant judicial interpretations, after real estate is seized, the debtor may not transfer, mortgage, or otherwise dispose of that property. In other words, once the mortgaged property is seized, the mortgagor loses the right to freely dispose of it, and any establishment or modification of other rights in relation to the property will also be frozen.

Although an attachment has the effect of being enforceable against third parties, it does not automatically affect a mortgage that was lawfully established prior to the attachment. In cases where a mortgage is established before an attachment is imposed, the mortgage—as a real right—exists prior to the attachment order and, according to law, should be entitled to priority payment over the general creditors of the applicant for the attachment. As pointed out by the Quanzhou Intermediate People’s Court in one case: although the loan involved was extended after the mortgaged property had been seized, the mortgage had already been established before the seizure and had not been canceled. Therefore, the seizure does not lead to the extinction of the mortgage, and the bank’s priority right to be repaid from the mortgaged property remains legally protected. Thus, an attachment primarily affects the procedure for disposing of the property rather than the validity of any pre-existing mortgage. It is important to note that, in situations where an attachment is imposed before a mortgage is established, if another party establishes a mortgage on the property after it has been seized, such mortgage would likely be deemed invalid because it violates the prohibition against disposing of seized property. Consequently, the mortgage right cannot be established. This also reflects the principle of publicity and good faith underlying real rights.

Although a mortgage is not automatically lost upon seizure, the seizure does affect the mortgagee’s right to dispose of and monetize the mortgaged property. After a seizure, the sale or auction of the mortgaged property typically must be conducted through court enforcement procedures, meaning the mortgagee cannot independently dispose of the property and realize its value. This could prolong the time it takes to enforce the mortgage and increase associated costs. Moreover, during the enforcement proceedings, the mortgagee should promptly register its mortgage claim and actively participate in the distribution process to safeguard its priority position in receiving payment.

For Maximum-amount mortgage Regarding this issue, according to Article 27 of the “Regulations of the Supreme People’s Court on Seizure, Detention, and Freezing of Property in Civil Enforcement by People’s Courts”: If the property subject to seizure is collateral under a maximum-amount mortgage, the court shall notify the mortgagee. From the date the notice is served, the amount of the secured claim under the mortgage shall no longer increase. In other words, after receiving the seizure notice, the bank’s previously expandable claim amount under the maximum-amount mortgage will be capped and may not exceed the amount of the claim as stated in the notice due to any extension of the loan term. This provision prevents mortgagees from taking advantage of loan extensions or additional loans to expand the scope of their secured claims following a seizure in another case, thereby safeguarding the interests of other creditors. As for general mortgages (non-maximum-amount mortgages), the amount of the secured claim is typically fixed in the mortgage contract itself, and the seizure notice does not affect the principal amount of the secured claim. However, loan extensions may lead to an increase in interest, and banks should also pay attention to avoiding any undue expansion of the claim amount.

In summary, after the collateral is seized, the mortgage right, as an existing right, ... Real right The bank’s priority lien status remains legally valid in principle and is not directly affected by the seizure itself. However, the seizure effectively freezes the circulation and re-guarantee of the mortgaged property, thereby restricting the bank’s ability to register changes to the mortgage and enforce its mortgage rights. Against this backdrop, if the bank decides to extend the loan secured by a mortgaged property that has already been seized, it will face heightened legal risks.

Article 678 of the Civil Code explicitly stipulates: “The borrower may, prior to the expiration of the repayment term, apply to the lender for an extension; if the lender agrees, the loan may be extended.” Therefore, an extension essentially constitutes a modification of the original contract’s performance period rather than the establishment of a new lending relationship. Most judicial opinions also concur that an extension is merely a continuation of the original creditor-debtor relationship and does not give rise to a new principal claim. Since the original claim remains intact, the original mortgage right continues to exist accordingly. As the Supreme People’s Court stated in its reply, an extended loan “in nature is a modification of the original loan contract’s term.” This means that if we determine a particular transaction as an “extension,” the mortgage right will not be re-established nor extinguished due to the extension; instead, the mortgage security continues together with the original claim.

However, it is important to pay attention to the criteria for determining whether a loan extension has taken place. In practice, whether a particular transaction constitutes a loan extension or establishes a new borrowing relationship depends not only on the name of the agreement but also on its actual content and the manner in which it is executed. If a bank and a borrower sign an agreement labeled as a “loan extension agreement,” yet in substance the old debt is fully repaid and a new debt is created, such arrangement should not be regarded as a genuine loan extension; rather, it would be considered a case of “borrowing new to repay old.” Therefore, a loan extension should be carried out only when the original loan has not yet reached its maturity date and the underlying claim remains valid. Any extension that goes beyond these prerequisites may be deemed a new debt relationship, thereby resulting in the loss of priority for repayment.

A mortgage right is subordinate and legally defined as a real right. If the creditor and debtor unilaterally alter the content of the underlying claim, this could affect the scope of the secured property right. According to Article 12 of the "General Rules on Loans" and the spirit of Article 30 of the former "Judicial Interpretation of the Security Law," an applicant seeking an extension of a mortgage loan must also obtain written consent from the mortgagor. Although Article 695 of the "Civil Code" provides a rule specifically for guarantee liabilities—namely, "if the debt is increased, the guarantor shall not be liable for the increased portion; if the performance period is extended, the guarantee period remains unaffected"—this rule has also been analogously applied in judicial practice to third-party mortgagors. In other words, if the mortgagor is not the borrower himself but rather a third party providing the mortgage security, then without the mortgagor’s written consent to extend the debt’s performance period, the mortgagor is entitled to claim exemption from or partial exemption of the corresponding guarantee liability.

In practice, most financial institutions require the mortgagor—whether the debtor himself or a third party—to sign a written document consenting to the extension of the loan and agreeing to continue providing collateral security when processing a loan extension. Such documents may take the form of a tripartite “Loan Extension Agreement,” or a separate consent letter or commitment letter issued by the mortgagor. What legal consequences would arise if the mortgagor’s consent is not obtained? Based on experience from judicial practice, a loan extension agreement entered into without the mortgagor’s consent does not necessarily render the mortgage invalid; however, the mortgagee’s ability to enforce its rights will be restricted. When exercising its priority right to be repaid from the mortgaged property, the mortgagee can only assert its claims within the original debt term stipulated in the loan contract. In other words, an extension agreed upon without the mortgagor’s knowledge does not affect the continued existence of the mortgage itself, but it may impact the calculation of the statute of limitations or the duration of the guarantee period. Therefore, even if the principal debt is extended without the mortgagor’s consent, the mortgagee can still exercise its mortgage rights—but only within the original statute of limitations applicable to the original debt. This means that if a bank unilaterally extends the loan without obtaining the mortgagor’s consent, it may face the risk of a statute-of-limitations defense when seeking to enforce the mortgage in the future, as the extended term might exceed the original contractual deadline.

Moreover, if the extension of the loan term significantly increases the burden on the principal debt—for example, by raising interest rates or excessively prolonging the interest accrual period—creditors may not enjoy priority in repayment for the increased portion of the claim unless the mortgagor has given their consent. However, under normal circumstances, loan extensions are typically intended to grant the debtor additional time to repay the debt; such extensions themselves do not increase interest rates or the principal amount. On the contrary, they may even help reduce the occurrence of default penalties and late-payment interest. Therefore, loan extensions that have been approved by the mortgagor are generally not considered to constitute an aggravation of the guarantor’s liability; rather, to a certain extent, they can mitigate the mortgagor’s risk.

According to Article 68 of the "Interim Implementation Rules for Real Estate Registration," if the maturity date of a debt is changed, both the mortgagee and the mortgagor shall jointly apply for registration of the amendment to the mortgage right. Therefore, from an administrative perspective, registering the amendment to the mortgage right after a loan extension is a procedure that "must" be carried out. However, regarding whether failure to register the amendment would affect the validity of the mortgage right, judicial practice generally holds a positive view: the validity of the mortgage right is not affected by defects in the amendment registration.

After conducting a case search, the author found that many cases indicate that even if the mortgage registration is not promptly amended after an extension of the loan term, the mortgagee’s priority right to be repaid from the mortgaged property is not lost. For example, in case No. (2019) E0102 Minchu 2158, the court held that the mortgagors had been informed of and agreed to the extension, and the extension did not give rise to a new debt relationship. Although the mortgage amendment registration was not completed, the relevant registration rules are merely administrative regulations; violation of these rules does not necessarily render the mortgage invalid. Therefore, the bank’s mortgage right over the mortgaged property remains valid, and its priority right to be repaid should be protected. Another example is the Jiangxi High People’s Court’s ruling No. (2020) Gan Min Shen 1097, which explicitly stated: A mortgage right can only be extinguished under statutory circumstances, and the extension of a loan is not a statutory ground for extinguishing the mortgage right. If the amendment registration has not been carried out in accordance with the detailed rules, the original mortgage right should be deemed to remain valid and enforceable against third parties. The above-mentioned judicial decisions reflect... The principle of statutory property rights Alignment with Management Regulations: While the public notice of registration plays an important role, even more crucial is the fact that substantive law does not list “failure to register the extension” as a ground for extinguishing a mortgage right. In short, failure to register the extension does not equate to the invalidity of the mortgage right.

Of course, from the perspective of risk control and compliance, banks should still, to the extent possible, cooperate in completing the registration of mortgage changes after the extension, in order to avoid unnecessary disputes. However, if it is objectively impossible to do so—for example, if the mortgaged property has been seized or the registration authority refuses to cooperate—then, in accordance with the aforementioned judicial views, As long as the mortgagor agrees to extend the term and continue providing the guarantee, the priority of repayment of the mortgage right will, in principle, remain unaffected. Precisely because of the potential for a seizure to create registration obstacles, a court has explicitly pointed out that in such circumstances, the mortgage right... Still valid 。

During the extension period, if the bank and the borrower or mortgagor fail to act appropriately, they may also face other legal defects and risks. For example:

Risk of incomplete extension procedures: If the borrower fails to formally submit a request for loan extension before the loan’s maturity date, or if the bank unilaterally approves an extension without following the proper approval procedures, this could violate internal compliance requirements and, legally, may be viewed as a retroactive leniency granted to the overdue loan rather than a valid extension. In such circumstances, once a dispute arises, the validity and nature of the extension agreement could be challenged, which would put the bank at a disadvantage in asserting its rights.

Risk of excessively long exhibition period: The extension of the term should be within a reasonable period. Article 55 of the “Nine Civil Judgments” addresses the issue of the reasonable time frame for creditors to exercise their mortgage rights during the guarantee period. If the extension is repeatedly postponed, significantly delaying the realization of the mortgage rights, it could be criticized by other stakeholders as constituting improper control over the ownership of the mortgaged property, which would undermine the efficient utilization of assets and jeopardize transaction security. However, at present, the law does not explicitly limit either the number of extensions or the cumulative duration; thus, such determinations must be made based on the principle of reasonableness.

Found to be evading regulation: From a regulatory compliance perspective, frequent extensions or disguised extensions may be deemed as attempts to conceal non-performing loans or engage in regulatory arbitrage, thereby violating prudent operating rules. Although this does not directly constitute a legal issue, if an extension triggers a regulatory investigation or penalty, it could still have adverse effects on the bank. Banks must ensure that their extension decisions are based on genuine commercial reasons rather than being made solely for the purpose of extending the loan.

In summary, whether the mortgage right remains valid when a loan extension is processed while the collateral is under seizure depends on factors such as whether the extension procedure is conducted in compliance with regulations and whether the mortgagor consents. In principle, an extension does not alter the continued existence or priority of the mortgage right; however, banks still need to guard against potential enforcement difficulties and compliance risks arising from defects in the extension procedures.

Case ①: A case involving the extension of the seizure of mortgaged property, heard by the Quanzhou Intermediate People's Court. — China Agricultural Bank, Dehua County Branch v. Zheng Shengyan: Dispute over a Financial Loan Contract (Case No.: (2017) Min 05 Min Zhong 3694).

Key points of the judgment: Before the loan matured, the collateral was seized. The bank and the borrower agreed to extend the repayment period. The court held that the extension agreement reflected the true intentions of all parties involved and was legally valid. The mortgage right had been established in accordance with the law well before the seizure and had not been canceled. Although the principal debt was extended, it had not been extinguished. The seizure does not affect the continued existence of the mortgage right nor its priority in repayment. The final judgment ruled that the bank has priority in receiving payment from the mortgaged property that has been seized. (Quanzhou Intermediate People's Court)

Risk Warning: This case confirms the legality of loan extensions under a seizure situation and the continued validity of the mortgage rights. However, it is important to note that this applies only if the extension itself is lawful and valid, and the mortgage right was already established prior to the seizure. If the mortgaged property is seized only after the loan has been granted, the bank—as the mortgagee—will still enjoy priority over other creditors, and the extension will not affect its ranking.

Case ②: The case of an extension not registered, as heard by the Jiang'an District Court in Wuhan. — China Everbright Bank Wuhan Branch v. Wuhan Longfa Steel & Materials Co., Ltd. et al. financial loan contract dispute case (Case No.: (2019) E0102 Minchu 2158).

Key points of the judgment: Before the loan’s maturity date, the bank and the debtor signed a loan extension agreement, thereby postponing the debt’s repayment term. However, no registration was carried out to amend the mortgage right. The mortgagors, including Mr. Lu, all signed and agreed to the extension agreement. The court held that the extension constituted a modification of the original contract but did not create a new debt; therefore, the principal claim remained intact, and the mortgage right continued to exist. Although the amendment registration was not conducted in accordance with the “Interim Implementation Rules for Real Estate Registration,” these rules are administrative in nature, and failure to register does not automatically render the mortgage invalid. Accordingly, China Everbright Bank’s mortgage right over the property involved in the case remains valid and it is entitled to priority payment according to law.

Risk Warning: This case illustrates that... If the mortgagor agrees to extend the term and the creditor’s claim remains valid, failure to promptly amend the registration will not affect the priority of the mortgagee’s right to be repaid. However, from a prudential perspective, banks should retain written proof of the mortgagor’s signed consent to the extension, so as to demonstrate the continued validity of the mortgage security in similar litigation. Meanwhile, promptly completing the registration at an early stage can also help reduce potential disputes.

Case ③: The case concerning the validity of loan extension reviewed by the Weihai Intermediate People's Court — Case of Financial Loan Contract Dispute between Hengfeng Bank Weihai Branch and Chu Mou et al. (Case No.: (2018) Lu 10 Min Zhong 2152).

Key points of the judgment: The bank and the borrower signed a loan extension agreement, renegotiating the loan term and the method for adjusting the interest rate. The guarantor argued that the extension gave rise to a new debt relationship and that the original mortgage guarantee had become invalid. After hearing the case, the court held that although the extension agreement modified the terms of the original loan contract, the original loan claim was not thereby extinguished. The extended claim remained within the scope of the security provided under the original mortgage contract. According to Article 177 of the former Property Law (now Article 393 of the Civil Code), the extinction of a mortgage right is predicated on the extinction of the principal claim. Since the loan extension does not trigger any statutory grounds for the automatic extinction of the mortgage right, there is no need to re-sign the mortgage contract or re-register the mortgage.

Risk Reminder: This case once again confirms the prevailing view that loan extensions do not give rise to a new debt relationship, and emphasizes that an extension does not trigger the statutory conditions for the extinguishment of a mortgage right. For banks, this means that as long as the extension procedure is conducted in compliance with regulations, their mortgage rights will continue to secure the claims arising after the extension, just as before.

The above cases clearly demonstrate that whether a loan extension following the seizure of collateral can maintain the priority of the mortgage depends on the legality and compliance of the procedures involved. As long as the legal requirements are followed, the guarantor’s consent is obtained, and the validity of the mortgage right is continuously ensured, judicial practice generally supports the continuation of the bank’s priority. Conversely, neglecting the necessary procedures and requirements could lead to adverse consequences, such as a downgrade in the priority of the mortgage or even its outright invalidation.

When processing loan extensions in cases where the collateral has been seized, measures should be taken from both legal and compliance perspectives to mitigate potential risks.

The seizure of collateral often indicates that the borrower is facing litigation or a debt crisis. Before deciding whether to extend a loan, banks should comprehensively assess factors such as the borrower’s repayment capacity, the attitudes of other creditors, and changes in the value of the collateral. If the borrower’s creditworthiness has significantly deteriorated and there is substantial pressure from other creditors, rashly extending the loan may only serve to delay the exposure of risks—indeed, it might be better to take timely measures to safeguard the bank’s claims (for example, by applying to participate in the enforcement distribution of seized assets). Loan extensions should be used only in cases where there is reasonable expectation that they can alleviate the borrower’s temporary difficulties, rather than simply masking underlying risks.

Whether the mortgagor is the debtor himself or a third party, written consent from the mortgagor regarding the extension must be obtained. This can be achieved either by having the mortgagor sign and seal the extension agreement or by providing a separate commitment letter. The document should clearly state that the mortgagor agrees to extend the maturity date of the original secured claim to a specified date and is willing to continue assuming担保 liability for the extended claim with the original collateral. In cases where a company provides the mortgage, approval documents from its authorized body (board of directors/shareholders’ meeting) must also be obtained to avoid later claims that the mortgage is invalid on the grounds of lack of authorization.

After signing the extension agreement, the bank should promptly execute a confirmation document with the mortgagor and recalculate the statute of limitations for the principal claim or the period for exercising the security interest. The bank should not relax its management of collection deadlines merely because of the extension. Once the extension period expires and the debt remains unrecovered, the bank should immediately take legal measures—such as filing a lawsuit or applying for enforcement—to prevent the mortgage right from lying dormant for an extended period, thereby avoiding the passive situation of “failure to exercise rights.”

Once the collateral has been seized in another case, even if the bank grants a loan extension, it should continue to pay close attention to the enforcement proceedings. According to the law, the mortgagee has the right to apply to participate in the distribution of assets seized and to assert priority for repayment. By filing an objection to the enforcement or by participating in the distribution procedure, the bank can ensure that its mortgage rights are duly recognized and protected during the court’s enforcement process, thereby preventing it from missing out on the distribution due to the extension or suffering losses caused by misunderstandings on the part of other creditors. When necessary, the bank may communicate and negotiate with the applicant who initiated the seizure, explaining that the loan extension does not infringe upon their rights and interests, thus reducing the likelihood of the applicant obstructing the process or raising objections.