What claims are secured? For what amount? In the case at issue, does the novation of the underlying debt lead to the maintenance/ extinguishment of the securities assisting the original debt?
According to the Chinese Property Right Law, secured claims and the amount thereof (unless otherwise agreed by the parties) shall include the following:
(a) principal of the loan plus applicable interest,
(b) contractual or statutory penalty,
(c) damage claims,
(d) expenses for safekeeping of the property used as security and expenses for enforcing the security.
The scope of security may be freely negotiated by the parties in the contract.
Novation of the underlying debt without prior consent by the guarantor does lead to extinguishment of the securities assisting the principal debt. Under Chinese law, the security shall be dependent on the principal debt. If there is novation of the underlying debt without prior consent by the guarantor, the security cannot be automatically assigned to guarantee the new debt but rather a new security shall be created (Arts 175, 192, and 204 of the Property Right Law).
Is it possible to "divert" such securities (namely, the securities in rem) in order for them to act as collateral for other claims, should the original Loan Agreement be terminated?
Under Chinese law, a security contract is attached to a specific principal (loan) contract (Arts 172 and 192 of Property Right Law). Accordingly a security may not be diverted independently from the secured loan contract and secure other claims. For example, for property conveyance in China, the related mortgage always needs to be first released by the original owner and then re-mortgaged by the new owner for financing purposes.
For maximum amount securities (mortgage or pledge), the securities cover all debts incurred during a designated period or even before (if agreed by the parties) the designated period (Arts 203 and 222 of the Property Right Law).
For real property mortgages, re-mortgaging the same property to a third party used to be explicitly prohibited (Art. 35 of PRC Guaranty Law). This prohibition seems to have been liberalized by judicial interpretation (Arts 50 and 51 of SPC Guaranty Law Interpretation). However, since the later published PRC Property Right Law is silent on the topic, the legal validity of re-mortgage is not yet entirely clear (speech by Mr Song Xiaoming, Judge of People's Supreme Court, at an international property right law seminar), and in practice such re-mortgaging is often restricted by banks such that it is available only “within the remaining value”.
