Author: Zhou Xiangen 2016-12-28

[Abstract] Starting from the characteristics of floating charge, this paper points out the matters that lawyers should grasp in the legal practice of floating charge and the specific practices of the relevant classes, so that lawyers can provide high-quality legal services for floating charge parties, ensure the smooth realization of floating charge, and protect the interests of floating mortgagee.

Key words: floating charge legal practice

Article 181 of the Property Law stipulates that, upon the written agreement of the parties, enterprises, self-employed businesses, and agricultural production operators may mortgage existing or to be existing production equipment, raw materials, semi-finished products, and products. If the debtor fails to pay due debts or the parties agree to realize the mortgage right, the creditor has the right to have priority in the payment of the movable property when the mortgage is realized. This article clearly stipulates the subject, object and realization of mortgage of the floating mortgagor. As the floating charge system is a new thing in China, it is a new type of mortgage guarantee created by the Property Law; It was born to effectively promote the economic circulation efficiency of current assets and help expand the financing capacity of enterprises. In view of the floating nature and uncertainty of value of the subject matter of floating charge, this paper tries to discuss how to improve the legal practice of floating charge and smoothly assist the mortgagee to realize the mortgage from the perspective of lawyer practice, in order to teach the peers.

1、 Legal practice of lawyers before signing floating charge contracts

Before the parties sign the floating charge contract, lawyers should assist the mortgagee to carry out legal risk and practical risk feasibility analysis according to the characteristics of the floating charge, which is the key for the mortgagee to decide whether to sign the floating charge contract. The lawyer shall assist the mortgagee in carrying out feasibility analysis from the following aspects:

（1） Legal risk feasibility analysis

Although Article 181 of the Property Law stipulates that licensed enterprises, self-employed businesses and agricultural production operators can set floating mortgages on four types of property, including production equipment, raw materials, semi-finished products and products, lawyers should explain the legal risks of floating mortgages to the mortgagee before assisting the mortgagee in handling floating mortgage business. The legal risks include but are not limited to:

1. Legal risk of floating mortgage property. Due to the floating nature of the floating mortgaged property, it is difficult for the mortgagee to supervise the floating mortgaged property; It is entirely possible for the mortgagor to abuse his rights and illegally transfer or change his property, which makes it impossible for the mortgagee to exercise the mortgage right.

2. Legal risks of other priority security interests. After signing the floating mortgage contract, the mortgagor may set a security interest equal to or prior to the floating mortgagee for other creditors on individual property or all property, resulting in the inability to fully realize the floating mortgage set by the mortgagee.

3. Legal risk of contract invalidity. The floating charge may be set as mortgage by the mortgager's evasion of law, such as using the chattels with lien and not using the productive chattels. In this case, the mortgage contract may be invalid.

4. The legal risk of the mortgagor itself. In our country, there are many individual businesses in the name, and they may not be the real individual businesses specified in the Property Law; At the same time, the law does not give clear provisions on how to define agricultural production operators as stipulated in the Property Law.

（2） Realistic feasibility analysis

On the basis of legal risk feasibility analysis, if the mortgagee intends to accept the mortgagor's mortgage guarantee with floating property, as a lawyer, he should help the mortgagee to carry out a realistic feasibility analysis, which includes but is not limited to:

1. The professional level of the mortgagee's business personnel; Including whether the professional knows the basic legal knowledge of floating charge; Can you fully understand the characteristics of the floating mortgage property and the value creation ability of the movable property; Can you understand the industrial policy guidance and market dynamics of floating mortgage property for production and operation activities.

2. Whether the preliminary credit status of the mortgagor can be judged according to the floating property used as collateral by the mortgagor, and whether the mortgagor's asset and credit investigation report can be proposed from a professional perspective according to the mortgagor's credit status.

3. According to the movable property mortgage information provided by the mortgagor, whether the mortgagor's asset ownership status and its ability to acquire property in the future can be preliminarily verified, and whether the ownership acquisition is legal and sufficient.

4. According to the information provided by the mortgagor, can we determine whether the mortgagor has clear property rights, orderly management and operation, certain free funds, low debt ratio, good product growth, timely withdrawal of product sales funds, and bad records.

2、 Legal Practice of Lawyers in Drafting and Examining Floating Mortgage Contracts

According to Article 181 of the Property Law, a floating charge contract must be in writing. Article 185 of the Property Law and Article 39 of the Guarantee Law have made directive provisions on the terms that mortgage contracts should have. At present, each mortgagee has a complete standard contract text for various mortgage guarantee methods stipulated in the Guarantee Law. Because of the particularity of floating charge, it is impossible to operate according to the general mortgage contract. Therefore, as a lawyer, when drafting and reviewing the floating charge contract, it is necessary to grasp the key issues of floating charge according to the particularity of floating charge and provide a relatively complete contract for the mortgagee. When drafting and reviewing the floating charge contract, lawyers should focus on the following aspects:

（1） Clarify the scope of floating mortgagor. Article 181 of the Property Law stipulates that the subjects of floating mortgagors are only enterprises, self-employed businesses and agricultural production operators. Therefore, according to this article, in the floating charge contract, the following subjects are not floating mortgagors:

1. Branches and offices of enterprises that have obtained business licenses.

2. Individual citizens who engage in business activities in the name of individuals but have not obtained the business license for individual businesses.

3. Individual farmers in rural and urban areas who are not engaged in agricultural production and operation.

（2） Determine the scope of the subject matter of floating charge. According to Article 181 of the Property Law of the People's Republic of China, the property that can be used as a floating mortgage is only four types of movable property owned or to be owned by the floating mortgagor, including production equipment, raw materials, semi-finished products and products; This precludes the following properties from being the subject matter of a floating charge contract:

1. Non production movable property includes but is not limited to office equipment, living appliances, low value consumables, semi-finished products and finished products in stock to be disposed.

2. The movable property that can only exercise the lien and does not enjoy the ownership, such as customized products.

3. Leasing movable property.

4. Consignment of movable property.

5. Purchase and sale of movable property on a commission basis.

6. Creditor's rights receivable.

7. Income from disposal of floating mortgage property, etc.

（3） Grasp the definition standard of the real right of floating mortgage subject matter. On the basis of reviewing the scope of the subject matter of the floating charge, the lawyer must determine that the property that can be used as the subject matter of the floating charge must be the property owned by the mortgagor. For this reason, it is necessary to require the mortgagor to provide relevant evidentiary materials at the time of signing the contract or after signing the contract, so as to ensure that the mortgagor's property source has corresponding legal vouchers and create conditions for the mortgagee to successfully realize the mortgage right. The scope of the data includes but is not limited to:

1. The basis for obtaining property ownership, such as contracts and invoices.

2. For the movable property to be acquired in the future, the contract basis or corresponding consideration basis or the basis for obtaining the ownership achievement conditions, such as the movable property under financial lease and the movable property with ownership retained by the seller, shall be provided.

3. Detailed accounts shall be kept to ensure that the mortgage right can understand and grasp the changes and changes of the subject matter of the floating mortgage.

（4） Determine the value range of the subject matter of floating charge. As the floating charge system allows the mortgagor to dispose of all the floating charge property during the period of floating charge in the normal production and operation process, the second paragraph of Article 189 of the Property Law has stipulated that "if the mortgage is conducted in accordance with Article 181 of this Law, the buyer who has paid reasonable price and obtained property in normal business activities shall not be subject to the mortgage"; Therefore, the property that can be used as floating charge not only changes its form frequently, but also increases or decreases its value normally, so it is necessary to clarify in the floating charge contract:

1. The value of the floating mortgage property when signing the floating mortgage.

2. During the period of floating charge, if the form, value and change of the floating mortgaged property occur, can the mortgagee request the mortgagor to supplement when the floating mortgaged property changes, so as to maintain the appropriate value range of the floating mortgaged property.

（5） Determine the type and scope of floating mortgage movable property. Many scholars believe that it is not necessary to make a list of property directories when setting up a floating charge, which is only for the specific situation of floating charge property. As a floating charge property, it is not realistic to make a detailed list because it is in a changing state. However, Article 181 of the Property Law stipulates that there are four categories of property that can be used as floating mortgage. These four categories of property can be mortgaged separately or jointly. Therefore, it is necessary for lawyers to clarify the types and scope of floating mortgage property in specific practical operations, such as production equipment property, which equipment should be used for the production of which products; The same should be true for raw materials, semi-finished products and finished products; Determining the list of floating mortgage property categories is also a basic requirement specified in Article 185 of the Property Law, because Article 185 of the Property Law requires the parties to specify the name, quantity, quality, status, location, ownership or use right of the mortgaged property in the mortgage contract.

（6） Setting of restrictive clauses. The purpose of setting restrictive clauses is to protect the interests of the mortgagee. In the floating charge contract, the restrictive clauses should include the following aspects:

1. Whether the property with floating charge can be set equal to or other priority security interests for individual property or all property, which involves the protection of the interests of the mortgagee.

2. Whether the mortgagee requires the mortgagor to implement the timely reporting system when the mortgagee disposes of the floating mortgage property, including the floating mortgage property executed due to effective legal documents, involves the property status determined by the mortgagee when exercising the mortgage right.

（7） Realize the determination of the floating mortgage agreement. Article 181 of the Property Law stipulates that if the debtor fails to perform the due debt or the situation of realizing the mortgage agreed by the parties occurs, the creditor's right has the priority to be compensated for the movable property when realizing the mortgage. Article 196 of the Law stipulates that if a mortgage is created in accordance with Article 181 of the Law, the mortgaged property shall be determined when one of the following circumstances occurs: first, the debt performance period expires and the creditor's rights have not been realized; Second, the mortgagor is declared bankrupt or revoked; The third is the situation of realizing the mortgage agreed by the parties; Fourth, other circumstances that seriously affect the realization of creditor's rights. According to the above legal provisions, in a floating charge contract, the parties may agree on the circumstances for realizing the mortgage right on their own, including but not limited to:

1. The mortgagor disposes of the floating mortgage property at an obviously unreasonable price in the normal course of business, or transfers it free of charge or disposes of it as a gift, or has an obviously unreasonable way of recovering the price.

2. Violating the restrictive provisions, setting equivalent or other priority security interests on the floating mortgage property or violating the agreement on the value status of the floating mortgage property in the contract.

3. The mortgagor fails to properly arrange the mortgage claims in the floating charge contract due to merger, division, merger or shareholding reform.

4. Major changes in the mortgagor's business mode, such as contracting and leasing, may affect the mortgagee's realization of the mortgage.

5. If the mortgagor changes its business direction, the floating mortgage property cannot be used or produced normally.

6. The mortgagor's equity or senior personnel have undergone major changes that affect the normal business activities of the enterprise.

7. The mortgagor transfers the non floating mortgage property, which causes the floating mortgage property to be idle, stagnant or unable to be used normally; The mortgagor transfers property or withdraws funds.

8. The mortgagor is closed down, dissolved, suspended for rectification, whose business license is revoked or cancelled.

9. The mortgagor has serious difficulties in production and operation due to illegal activities or major litigation, deterioration of financial situation, market and other reasons.

10. The mortgagor is unable to operate or has operating difficulties due to the adjustment of national industrial policies.

11. Other activities that affect the production and operation of the mortgagor and may lead to the realization of the mortgage right of the mortgagee.

（8） Agree on the way to realize the floating mortgage. Article 195 of the Property Law stipulates the ways to realize the mortgage, that is, the way to realize by agreement and the way to realize by litigation. In view of the particularity of the floating mortgaged property, the parties can agree in the contract that the mortgagee can send a custodian to the floating mortgaged property when the mortgagee exercises the mortgage, so that the mortgagee can understand the financial account status of the mortgagor, timely check the mortgagor's property or continue to operate the mortgagor's property, so as to increase the value of the floating mortgaged property and ensure the full realization of the mortgage, This is also a common practice in the legislation or judicial practice of many countries that implement floating charge.

3、 Lawyers' legal practice after signing the floating charge contract

After the parties signed the floating charge contract, the lawyer did not complete with the signing of the contract. In the process of the parties' performance of the floating charge contract, the lawyer still has the corresponding legal practice, which includes but is not limited to:

（1） Assist the Mortgagee to check whether the Mortgagor has provided the property ownership certificate and relevant financial information in accordance with the contract.

（2） According to the provisions of the floating charge contract, after the mortgagor has provided the materials according to the contract, timely assist the mortgagee to review whether the property ownership basis provided by the mortgagor is reasonable and valid, and according to Article 189 of the Property Law, go through the registration procedures of the floating charge contract with the local industrial and commercial administrative department where the mortgagor is located.

（3） Assist the mortgagee to check whether the mortgagor disposes of the floating mortgage property in normal business activities according to the provisions of the floating mortgage contract; If it is found that the mortgagor fails to dispose the floating mortgage property as required in the normal business activities, it shall timely assist the mortgagee to send a written warning letter to the mortgagor, requiring the mortgagor to correct it; At the same time, check whether the mortgagor has adopted a timely reporting system to the mortgagee according to the provisions of the contract and verified the report of the mortgagor during the performance of the floating charge contract.

（4） If the mortgagor has realized the mortgage right specified in the statutory or floating mortgage contract in the process of performing the floating mortgage contract, it shall timely assist the mortgagee to fix the floating mortgage property and require the mortgagee and the mortgagor to list and fix the floating mortgage property in a signed list; At the same time, the way to realize the mortgage was negotiated.

（5） In the event that the two parties fail to reach an agreement due to the realization of the mortgage right, timely assist the mortgagee in taking judicial relief measures, such as pre litigation preservation, litigation, etc.

4、 Conclusion

The floating charge system was born in the Anglo American case law, and its life lies in efficiency. With the development of market economy and capital market in China, the Property Law has confirmed the guarantee system in a legislative way, which has added new vitality to the financing activities of enterprises, self-employed businesses and agricultural production operators; As a practitioner and operator of the law, lawyers should actively participate in the structural design and practical operation of the system, so as to ensure the legality and safety of the specific security transactions of floating charge, and to make up for or avoid the defects caused by insufficient legal provisions.

Bibliography

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