Chapter XVII Interest Acquired Through Pledge

Section 1 Interest Acquired Through Pledge of Movables

Article 208 Where to guarantee the repayment of debts, the debtor or a third party pledges his movables to the creditor, if the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise, the creditor shall be entitled to the priority in having his claim paid with the pledged movables.

As mentioned in the preceding paragraph, the debtor or the third party is the pledgor, the creditor is the pledgee, and the movables delivered are the pledged property.

Article 209 Movables the transfer of which is prohibited by laws or administrative regulations shall not be pledged.

Article 210 To create the interest of a pledge, the parties concerned shall conclude a pledge contract in written form.

A pledge contract generally includes the following particulars:

(1) the kind and amount of the claim secured;

(2) the time limit for the debtor to repay his debts;

(3) the name, quantity, quality and conditions of the pledged property;

(4) the scope of the secured interest; and

(5) the time for delivery of the pledged property.

Article 211 Before the maturity of the debts, the pledgee shall not conclude an agreement with the pledgor that ownership of the pledged property go to the pledgee if the debtor defaults.

Article 212 The interest of a pledge is established upon delivery of the pledged property by the pledgor.

Article 213 The pledgee shall have the right to collect the fruits accrued from the pledged property, unless otherwise stipulated in the contract.

The fruits specified in the preceding paragraph shall first be used to pay off the expenses for collecting the fruits.

Article 214 If, without the consent of the pledgor, the pledgee uses or disposes of the pledged property during the existence of the pledge interest, thus causing losses to the pledgor, he shall be liable for compensation.

Article 215 The pledgee has the duty to safekeep the pledged property. If the pledged property is damaged, destroyed or lost due to improper keeping, the pledgee shall be liable for compensation.

Where the action of the pledgee will likely cause damage, destruction or loss of the pledged property, the pledgor may request the pledgee to deposit the pledged property with a third party, or to offer to clear his debts in advance and return the pledged property.

Article 216 Where due to no fault of the pledgee, the pledged property is likely to be so damaged or destroyed or its value to be depreciated so markedly as to undermine the rights of the pledgee, the pledgee shall have the right to demand that the pledgor provide an appropriate security. If the pledgor refuses to do so, the pledgee may have the pledged property auctioned or sold and may, through agreement with the pledgor, use the proceeds therefrom to repay the debts in advance or deposit the proceeds with a third party.

Article 217 If, during the existence of the interest of a pledge, the pledgee repledges the pledged property to a third party without the consent of the pledgor, thus causing damage, destruction or loss of the property, the pledgee shall be liable for compensation.

Article 218 The pledgee may waive his interest to the pledge. Where the debtor pledges his own property and the pledgee waives his interest to the pledge, the other guarantors may be exempted from suretyship to the extent that the pledgee forfeits his rights and interests in terms of the priority in being paid off, unless the guarantors are still committed to the suretyship.

Article 219 Where the debtor repays the debts or the pledgor pays off in advance the debts he guaranteed, the pledgee shall return the pledged property.

If the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise, the pledgee may conclude an agreement with the pledgor that the pledged property be converted into money, or he may enjoy the priority in having his claim paid with the proceeds obtained from auction or sale of the pledged property.

The pledged property shall be converted into money or be sold off by referring to its market price.

Article 220 The pledgor may request the pledgee to enforce his interest to the pledge in a timely manner at the maturity of the debts. Where the pledgee fails to do so, the pledgor may request the people’s court to have the pledged property auctioned or sold.

Where the pledgor requests the pledgee to enforce his interest to the pledge in a timely manner, the pledgee slacks in doing so, thus causing losses, he shall be liable for compensation.

Article 221 If, after the pledged property is converted into money or auctioned or sold, the proceeds therefrom exceed the amount of the claim, the balance shall go to the pledgor, and if they are insufficient to cover the debts, the difference shall be paid by the debtor.

Article 222 The pledgor and the pledgee may create the maximum pledge interest by agreement.

Apart from the relevant provisions of this Section, the provisions in Section 2 of Chapter 16 of this Law on maximum mortgage interest shall be applicable mutantis mutandis.

Section 2 Interests Acquired Through Pledge of Rights

Article 223 The following rights that a debtor or a third party is entitled to dispose of may be pledged:

(1) bills of exchange, cheques, promissory notes;

(2) bonds, certificates of deposit;

(3) warehouse receipts, bills of lading;

(4) portions of funds or certificates of stocks which are transferable;

(5) proprietary rights consisted in the intellectual property rights, such as the right to exclusive use of registered trademarks, the patents and copyrights, which are transferable;

(6) accounts receivable; and

(7) other property rights which may be pledged as provided for by laws and administrative regulations.

Article 224 Where a bill of exchange, cheque, promissory note, bond, certificate of deposit, warehouse receipt or bill of lading is pledged, the parties concerned shall conclude a contract in written form. The interest to the pledge is created at the time when the certificate of right is delivered to the pledgee; if there is no such certificate, the interest is created at the time when the pledge is registered with the relevant authority.

Article 225 Where the date of payment or of delivery of goods in respect of a pledged bill of exchange, cheque, promissory note, bond, certificate of deposit, warehouse receipt or bill of lading is matured prior to the date of maturity of the principal claim, the pledgee may accept the payment or the goods delivered and may conclude an agreement with the pledgor that the payment or the goods accepted be used to pay the debts in advance or be deposited with a third party.

Article 226 Where portions of funds or shares are pledged, the parties concerned shall conclude a contract in written form. Where portions of funds or the shares that are registered with the securities registration and settlement authority are pledged, the interest to the pledge is established at the time when the pledge is registered with the securities registration and settlement authority. Where other kinds of shares are pledged, the interest to the pledge is established at the time when the pledge is registered with the administration department for industry and commerce.

The portions of funds or the shares that are pledged may not be transferred, unless otherwise agreed upon by the pledgor and the pledgee. The proceeds the pledgor obtained from the transfer of the portions of funds or shares shall be used in advance to pay the debts owed to the pledgee or be deposited with a third party.

Article 227 Where the proprietary rights consisted in the intellectual property rights, such as the right to exclusive use of registered trademarks, the patents and copyrights, are pledged, the parties concerned shall conclude a contract in written form. The interest to the pledge is perfected at the time when the pledge is registered with the relevant authority.

If the proprietary rights consisted in the intellectual property rights are pledged, the pledgor may not transfer or permit another person to use such rights, unless otherwise agreed upon by the pledgor and the pledgee through consultation. The proceeds obtained by the pledgor through transfer of such rights or through permitting another person to use such rights shall be used in advance to pay the debts owed to the pledgee or be deposited with a third party.

Article 228 Where the accounts receivable are pledged, the parties concerned shall conclude a contract in written form. The interest to the pledge is created at the time when the pledge is registered with the credit information service.

The pledged accounts receivable may not be transferred, unless otherwise agreed upon by the pledgor and the pledgee through consultation. The proceeds obtained by the pledgor from the transfer of the accounts receivable shall be used in advance to pay the debts owed to the pledge or be deposited with a third party.

Article 229 The interests acquired through pledge of rights are governed, apart from by the provisions of this Section, by those under Section 1 of this Chapter on interests acquired through pledge.