Page 28 - 2021 Policy Watch

Policy Watch: A Milestone in Legal Development: China Promulgates a Civil Code

status of debt performance, mortgagor and mortgaged
property. In the event of determining mortgaged prop-
erty, creditors shall promptly confirm the scope and
value of the mortgaged property with the debtor and
the mortgagor, and perform their rights to mortgage in
a timely manner. For example, the mortgagor transfers
the property at an unreasonable low price that signifi-
cantly depreciate the property, but the term of mort-
gage has not expired. Pursuant to the previous Property
Law, since the mortgagee cannot exercise its right to
the mortgage, the mortgagee may not enjoy the pri-
ority of compensation of property. However, after the
Civil Code revised this provision, if the mortgagor’s acts
are subject to other circumstances with serious effects
on the exercise of the creditor’s rights, the mortgaged
property may be fixed, and the mortgagee may enjoy
the priority of compensation of property.

The previous Law of Property Rights provided that no
fluidity clause shall be established56, namely the mort-
gaged property shall be owned by creditors if the debtor
fails to perform its due debts. Such clause (if any) shall
be invalid. Even if the Civil Code becomes effective, the
fluidity clause remains invalid, but creditors can only
enjoy priority of compensation from mortgaged prop-
erty pursuant to law57.

The Civil Code amends the regulations on the estab-
lishment of right to a pledge. First, it deletes the pro-
visions of the specific registration institution, which
leaves room for the establishment of a unified regis-
tration system for mortgages and the right to pledge
moveable property. Second, it deletes the provision
that “a written contract shall be concluded”. Third, it
provides that the right to pledge shall apply the rules
of “no disposition without consent”, which is different
from the rules for the disposal of mortgaged property
during the mortgage period58. The right to pledge re-
fers to the right obtained by a creditor after a debtor or

(1) that creditor’s right is not exercised upon the expiration of the term
for performing the obligation;
(2) that the mortgagor is declared bankrupt or is dissolved;
(3) that mortgage shall be exercised as agreed upon by the parties;
(4) any other circumstance that seriously affects the exercise of the credi-
tor’s right.
56 Law of Property Rights, Article 186
57 Law of Property Rights, Article 401
58 Civil Code, Article 441 to Article 445

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