An Introduction to "Measures for the Registration of Pledged Account Receivables"

Llinks Banking Law Bulletin
November 2007

An Introduction to “Measures for the Registration of Pledged


Account Receivables”

By Charles Qin and Michael Mei

The PRC Property Law of People’s Republic of China (Property Law)
came into effect on 1 October 2007. At the same time Measures for
the Registration of Pledged Account Receivables (Measures),
formulated by the People’s Bank of China, became effective as well.
The registration procedure embodied in the Measures aims to facilitate
the pledge of account receivables stipulated in Article 228 of the
Property Law. Since the general legislation and supportive registration
measures on pledge of account receivables have been in place, a new
channel has been made available to facilitate debt financing, especially
for medium and small-sized companies.

The definition of account receivables in the Measures and
the guideline significance thereof

Article 228 of the Property Law keeps silent on the definition of account
receivables which makes it difficult in practice to create pledge over
account receivables.

Aiming to fill in the aforesaid vacancy, Article 4 of the Measures, by
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way of illustrating and listing, defines account receivables as follows.
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The term ‘account receivables’, as mentioned in the Measures, refers to
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the right to require the debtor to make payments which are obtained by
the creditor for offering goods, services or facilities, including existing
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and prospective monetary claims and the proceeds thereof, but not

including the right to claim payments incurred from bills or other
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negotiable instruments. Based on the above definition we may
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conclude a general understanding concerning the legal meaning of

account receivables to be “existing and prospective monetary claim, not
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including the right to claim a payment incurred from bills or other
negotiable instruments”.
This publication is for general guidance only and is not intended to provide legal advice in any specific case. We expressly
disclaim any liability for the consequences of action or non-action based on this publication. All rights reserved.

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An I

ntroduction to “Measures for the Registration of Pledged Account Receivables”

Before the Property Law came into effect, transfer of receivables and assignment by way of security of
receivables have long been applied in practice for financing purpose.1 Account receivables, as a form of
monetary claim, are identical to other claims whose transfer shall be regulated by rules of claim transfer
stipulated in Articles 79 to 83 of the PRC Contract Law. However, we reckon before promulgation of the
Property Law, the basis on which account receivables are regarded as subject matter of pledge of rights can be
found in Article 75 of the 1995 PRC Security Law (Security Law). The aforesaid Article 75 stipulates various
subject matter of pledge of rights including: 1) securities claims, 2) shares, 3) property rights of intellectual
property and 4) general claims. Account receivables shall belong to “other rights that can be pledged according
to laws” provided in the fourth item of Article 75.

There is no express regulation on pledge of general claims in the Guarantee Law. Since general claims
including account receivables are very common, it is impossible to neglect pledge of rights whose subject matter
is general claim. In December 2000, the Supreme People’s Court promulgated the Judicial Interpretation on
Some Issues Regarding the Application of the Security Law (Interpretation). However, the Interpretation is
silent on how general claims including account receivables can be pledged.

According to a survey carried out by the People’s Bank of China among 70 financial institutions, 15 guarantee
institutions and 29 registration institutions, seventy-four percent of all the financial institutions accepted single
installment or multiple installments of pledged account receivables. The amount of loans secured by single
installment or installments of account receivables accounts for 0.9 percent of the total amount of the secured
loans of all surveyed financial institutions.2 However, for the time being it is uncertain whether the basic
characteristic of security of account receivables will be pledge or mortgage.3

The above facts highlight the importance of the Measures’ definition of account receivables. The Measures
lists five types of account receivables and also provides that account receivables shall not be limited to the above
five types, which leaves space for other types of account receivables generating in the future.

To specify, the five types of account receivables include: 1) claims from sale, including sale of goods, supply of
water, power, gas and heat, and license of intellectual property; 2) claims from lease, including lease of movable
and immovable property; 3) claims from rendering services; 4) right to charge fees for immovable property such
as toll roads, bridges, tunnels, ferries etc. and 5) claims from granting loans or other credit. The above five
types of account receivables are applicable to the pledge of account receivables and registration formalities.

The significance of registration of pledged account receivables

For the purpose of taking pledge over securities claims, a debtor or a third party may transfer the possession of
bills of exchange, cheques, promissory notes and other negotiable instruments in accordance with law to a
creditor. A negotiable instrument represents rights within its own paper form and transferring possession of
aforesaid paper is equal to transfer of possession of rights. According to Section 17 of the Property Law,
account receivables shall be a kind of rights which can be pledged.. Since there is no right certificate for
account receivables, it is difficult for the creation of pledge of rights to be achieved by transfer possession.
Public registration is therefore necessary to compensate for the vacancy, and so “the parties shall enter into a
written contract and the pledge shall come into being once the credit centre carries out the procedure for
registration of the pledge”.
This publication is for general guidance only and is not intended to provide legal advice in any specific case. We expressly
disclaim any liability for the consequences of action or non-action based on this publication. All rights reserved.

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An I

ntroduction to “Measures for the Registration of Pledged Account Receivables”

Article 228 of the Property Law specifies the registration institution for pledge of account receivables to read “If
account receivables are pledged, the parties shall enter into a written contract. The pledge shall come into
being once the credit centre carries out the procedure for registration of the pledge.” Based on the explanation
from the Legislation Committee of the National People’s Congress, “credit centre” refers to the Credit Centre of
the People’s Bank of China. The Measures provides the function of credit centre, “the Credit Centre of the
People’s Bank of China (Center) is the registration authority for pledge of account receivables. The Center
shall establish a system for publicizing registration information of pledge of account receivables (System).”
This article may be regarded as a bridge between the Measures and Article 228 of the Property Law.

The distinguishing features of the Measures in practice

While formulating the Measures, the People’s Bank of China publicly and extensively sought comments.
Establishing the System on Internet and specifying registration rules for pledge of account receivables will
arouse enthusiasm for financing secured by account receivables, which offers a new choice for both medium and
small-sized companies to raise money.

According to the Measures, registration of pledged account receivables shall be handled through the System.
On 8 October 2007, the People’s Bank of China held a press conference to introduce online operations of the
System. Searching for registration information of pledged account receivables can be easily achieved by
logging on to the Center’s website. That morning, Bank of Communications Ltd., Wuhan Branch successfully
registered pledged account receivables through the System for the first time.

The registration procedure of pledged account receivables stipulated in the Measures aims to inherit the best
practice worldwide, which shows “accuracy, quickness, ease of connectivity, low cost and convenience”. To
specify, user information can be accurately input and published, registration and search can be promptly
achieved; the database can be easily accessed and low fees incurred, all despite time and location. In addition,
the Measures includes the following features:


The person who owns the right to register

According to the Measures, a pledgee is entitled to register. Before registering a pledgee shall sign an
agreement with a pledgor concerning pledge registration, which provides that the registration of pledged
account receivables shall be handled by the pledgee. We understand that according to the Property Law,
registration is a pre-condition for pledge over account receivables to become effective, and thus relates to
the pledgee’s substantial rights. Therefore, a pledgee is sure to actively promote the registration of
pledged account receivables. The regulation that a pledgee, other than a pledgee and a pledgor jointly,
shall handle the pledge registration is more beneficial for pledged account receivables to become
effective.


The content to be registered

Article 10 of the Measures provides that the contents to be registered shall include basic information
about the pledgee and the pledgor, description of account receivables and valid period of the registration.
The valid period of registration shall be decided by both parties; however, the period shall not exceed five
years. The set period may remind the pledgee and the pledgor to exercise the pledge rights or to
discharge the pledge over account receivables. Otherwise, the pledgee shall apply for renewal 90 days
prior to expiration of the period to maintain the validity of registration of pledge over account receivables.
This publication is for general guidance only and is not intended to provide legal advice in any specific case. We expressly
disclaim any liability for the consequences of action or non-action based on this publication. All rights reserved.

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An Intr
oduction to “Measures for the Registration of Pledged Account Receivables”

In addition to the above registration items, the pledgee shall also submit the agreement signed by both
parties concerning pledge registration as an appendix to the System. We understand the submission of
aforesaid agreement as an appendix is for the purpose of further assuring that the pledgee owns the right
to register and avoids registration with bad faith as well as abuse of registration, which helps to
compensate for the System’s absence of substantial supervision.

A pledgee and a pledgor may also decide to register and publish other information, for example, the
amount of primary claim. Since this information may reveal trade secrets, whether to publish or not
shall be subject to both parties’ agreement. This Article 10 is flexible in regulating the scope within
which information shall be published. It therefore settles the contradiction between publication and trade
secrets and is of great significance in practice.


Demurrer registration

Demurrer registration offers the pledgor and other stakeholders a chance to remedy pledgee’s mistakes or
his/her registration with bad faith. In case the pledgor or other stakeholders reckon that registered
information contains inaccurate information, he/she/they is/are entitled to require the pledgee to make
alteration or deregistration. On condition that the pledgee refuses to comply, the pledgor or other
stakeholders may handle demurrer registration.

Compared with the consultative draft, the Measures contains a new article stating that the pledgor or other
stakeholders may deregister the demurrer registration at his/her own will. The article adds flexibility to
demurrer registration, stating that once the pledgor and the pledgee compromise on demurrer, he/she may
deregister the demurrer registration, and litigation procedure is not indispensable here for settlement of
disputes.

However, if there is no settlement to be reached, the pledgor or other stakeholders shall bring litigation 15
days after demurrer registration, otherwise the Center will deregister the demurrer registration. We
understand that the 15-day period of demurrer registration offers the pledgor and other stakeholders
different alternatives. Lawsuit is the second choice after settlement through consultation.


Register truthfully

The Measures stipulates that the pledgor, the pledgee and other stakeholders shall fill in items truthfully
under the guidelines of the System. The pledgee, while registering, altering and deregistering the
registration, or the pledgor and other stakeholders, while handling demurrer registration, shall not take
advantage of the System’s absence of substantial supervision to register with bad faith. Compared with
the consultative draft, there is a new article in the Measures stating “if the pledgor or the pledgee provides
false materials in handling the registration formalities, which brings damage to other people, he/she shall
assume corresponding legal liability”. The article specifies that if the pledgor and the pledgee provide
false information they may assume legal liability.

We may conclude that the Measures promulgated after the consultative draft, with the System inheriting
the best practice worldwide, expressly represents features such as pledgee leading registration formalities,
discretion on the part of scope of publishing and demurrer registration of the pledgor and stakeholders,
and that the Measures will push forward the civil and commercial practice in pledge over account
receivables after the Property Law has come into effect.
This publication is for general guidance only and is not intended to provide legal advice in any specific case. We expressly
disclaim any liability for the consequences of action or non-action based on this publication. All rights reserved.

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An Intr
oduction to “Measures for the Registration of Pledged Account Receivables”


Contact Details

If you would like to know more information about the subjects covered in this publication, please feel free to
contact the following people or your usual Llinks contact.

Charles Qin
Tel: (86 21) 6881 8100 - 6612 (86 10) 6655 5020
Charles.Qin@llinkslaw.com
David Yu
Tel: (86 21) 6881 8100 - 6635
David.Yu@llinkslaw.com
Michael Mei
Tel: (86 21) 6881 8100 - 6639
Michael.Mei@llinkslaw.com





This article was first published in LexisNexis: China Legal Review, October 2007.




1 These two financing methods can be accordingly categorized into “assignment by way of outright sale” and
“assignment by way of security” as described in the International Convention on the Assignment of Receivables.
2 Page 96, the Security Rights of Movable Property and Development of Credit Market in P.R..C. (CITIC Press,
2006)
3 Article 18 of the Measures on Mortgage Registration with Notary Public Offices adopted by the Ministry of
Justice of P.R.C. on 20 February 2002 provides that account receivables can be mortgaged and mortgage
registration shall be handled with notary public offices. The Interim Measures on Accounting Concerning
Financing by Way of Receivable Claims between Enterprises and Banks and other Financial Institutions
promulgated by the Ministry of Finance of P.R.C. confirms that the nature of security over account receivables is
a pledge.
This publication is for general guidance only and is not intended to provide legal advice in any specific case. We expressly
disclaim any liability for the consequences of action or non-action based on this publication. All rights reserved.

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