NPL investors often deal with equipment mortgages, receivables pledges and other security on movables or rights when they are sourcing and investigating NPL portfolios. Although most movables and rights do not provide a higher value compared with standard real estate, some securities on movables and rights may affect a portfolio appraisal because they will also bring about the repayment of loans during an NPL resolution.
Following a decision made by the State Council outlining the unified security registration for movables and rights on 22 December 2020, the People’s Bank of China recently promulgated the Measures for the Unified Security Registration of Movables and Rights (in Chinese, 动产和权利担保统一登记办法) (the “Registration Measures”), which detail the requirements and procedures for registering the security on movables and rights that will come into effect on 1 February 2022.
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What is the purpose of the Registration Measures?
The Registration Measures serve to unify the security registration for certain movables and rights, with a view to further standardizing registration procedures and facilitating business finance.
The Credit Reference Center of the People’s Bank of China has been appointed to administer the registration for security on movables and rights, and all registrations will be processed on the Publicity System for Unified Registration of Movables (https://www.zhongdengwang.org.cn/) (the “Publicity System”). Currently, the following can be registered on the Publicity System in accordance with the Registration Measures: (a) mortgage of manufacturing equipment, raw materials, semi-finished products and finished products; (b) pledge of receivables; (c) pledge of deposit receipts, warehouse receipts and bills of lading; (d) finance leases; (e) factoring; (f) retention of ownership; and (g) other registrable security of movables and rights, except for the mortgage of motor vehicles, ships and aircraft, pledge of bonds, fund interests, and equity and property rights in intellectual property.
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What advantages will the Registration Measures bring to NPL transactions?
The biggest advantage of the Registration Measures for NPL investors during acquisitions is in the phase of legal due diligence. In the past, if an investor intended to investigate a mortgage on manufacturing equipment, they had to attend the local branches (where the collaterals locate) of the State Administration for Market Regulation in person to obtain a search report, which took a lot of time and effort. However, the Registration Measures provide that any legal person, unincorporated organization or natural person may, after registering as a user of the Publicity System, inquire online into the security information of movables and rights, and the Publicity System will issue an inquiry certificate to provide results. This will save significant time and expense for the legal due diligence for NPLs.
Further, if an investor would like to take a new security on movables or rights in a debt restructuring or other financing transaction, the security registration can be completed within a short amount of time because the authority will not conduct substantive examination of the security.
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What should investors be aware of during debt restructuring and other financing transactions?
Where an investor intends to restructure an NPL it has acquired or engage in other financing transactions, and the security on equipment, receivables or other movables or rights will be included in the security package, the investor needs to be aware of some key points for registration:
(1) The Registration Measures allow security registrations for most movables and rights, but it does not apply to the mortgage of motor vehicles, ships and aircraft, the pledge of bonds, fund interests, or equity and property rights in intellectual property, as the aforesaid mortgages and pledges shall be registered with other competent authorities.
(2) The amount of secured debt, security scope and restrictions on collateral transfer should be registered in the Publicity System. It is also advisable to make the description of collaterals specific and accurate; even if a general description of collaterals is required, the description should at least be able to identify the intended collaterals.
(3) The investor needs to extend the security registration before the expiry of the security term.
For further information, please contact:
Qinghui (Catherine) MIAO, Partner, Jun He
miaoqh@junhe.com
