Part Four Security Interest in Property

Chapter XV General Stipulations

Article 170 Unless otherwise stipulated by law, the holder of security interests shall have the priority in having his claim paid if a debtor defaults or if the conditions for enforcement of the said interests, as agreed upon by the parties concerned, arise.

Article 171 Where, in the making of loans, in business transactions or other civil activities, a creditor needs a guarantee to have his claim honored, a security interest may be created in accordance with the provisions of this Law and other laws.

Where a third party provides a guarantee to a creditor for a debtor, the third party may require the debtor to provide him with a counter-guarantee. The relevant provisions of this Law and other laws shall be applicable to counter-guarantee.

Article 172 For creation of a security interest, a guarantee contract shall be concluded in accordance with the provisions of this Law and other laws. A guarantee contract is an ancillary contract of the principal claim-debt contract. When the principal claim-debt contract is null and void, the guarantee contract shall be null and void accordingly, unless otherwise provided for by law.

After it is confirmed that a guarantee contract is nullified, the debtor, the guarantor and the creditor who are in fault shall, on the merits of each case, bear civil liability respectively.

Article 173 The scope of security interest embraces the principal creditor’s right and the interest therefrom, penalty, damages and expenses for safekeeping of the property used as security and for enforcing security interest. Where the parties concerned agree otherwise, their agreement shall prevail.

Article 174 In case of damage or destruction, loss or requisition of the mortgaged property during the period of guarantee, the holder of the security interest shall have priority in having his claim paid with the insurance monies, compensations or indemnities. The holder of security interest may also have the insurance monies, compensation payment or indemnities deposited with a third party before the time limit for payment of the guaranteed claim expires.

Article 175 Where a guarantee is provided by a third party, if the creditor permits the debtor to transfer part or all of his debts without the consent of the third party in written form, the guarantor shall not undertake the corresponding suretyship liability.

Article 176 Where both security and suretyship are provided to guarantee for the same claim, the creditor shall have his claim paid as agreed upon, if the debtor defaults or the conditions for enforcement of the interest, as agreed upon by the parties concerned, arise; where there is no such agreement or the agreement is indefinite in this respect, if the debtor himself provides property as security, the creditor shall have his claim paid with such property first; where a third party provides property as security, the creditor may either have his claim paid with such property or request the guarantor to undertake the suretyship. After the third party has borne the suretyship, he shall have the right of recourse against the debtor.

Article 177 The security interest shall extinguish under one of following circumstances:

(1) The principal claim extinguishes;

(2) The security interest is enforced;

(3) The creditor waives the security interest; or

(4)Other circumstances provided for by law under which the security interest extinguishes.

Article 178 In case of any inconsistencies between the provisions of the Guarantee Law and of this Law, those of this Law shall prevail.