On May 28, 2020, China’s top legislature, the 13th National People’s Congress, passed the long-expected Civil Code of the People’s Republic of China (the Civil Code), which will take effect from January 1, 2021. A general introduction to the Civil Code can be found in our client alert dated June 3, 2020.
Among the changes, the Civil Code has made changes and improvements to the law on guarantees and security, which will be the focus of this article.
Overall framework and terminology
Under the current legal framework, the Security Law of the People’s Republic of China of 1995 (the Security Law) and the Property Law of the People’s Republic of China of 2007 (the Property Law) govern security (担保). By definition, “security” is comprised of guarantees (保证), mortgages (抵押), pledges (质押), possessory liens (留置) and security deposits (定金). To the extent there is any inconsistency between the provisions of the Property Law and the Security Law in respect of security over assets (a legal concept covering mortgages, pledges and possessory liens), the provisions of the Property Law prevail.
Upon the Civil Code taking effect, the Security Law and the Property Law will be repealed. The Civil Code thus consolidates the Security Law and the Property Law, and codifies or lays down the legislative framework in this area of law. We set out below a summary of some of the key changes and clarifications made by the Civil Code in this area of law.