Priority Rules Governing Movable Property Mortgages under Civil Code
Civil Code movable property mortgages rank strictly by Zhongdengwang registration timestamp, defeated only by statutory repair liens and ten-day superpriority.
Floating Mortgage
Meaning
Encumbrance structure established under Chinese civil law that allows an enterprise, agricultural operator or commercial household to grant security over existing and future movable assets without specifying individual physical property. Authorized under article 396 of the Civil Code, the floating mortgage covers raw materials, work in progress, inventory, equipment and production tools held by the debtor during ongoing business operations. Collateral remains unattached, permitting the mortgagor to sell, process or dispose of inventory in the ordinary course of business without prior lender approval.
Specific asset attachment occurs upon the happening of defined crystallization events, such as default, insolvency petition or commercial shutdown. Public filing on the central credit publicity system establishes priority over subsequent general creditors and unfiled security rights.
Crystallization Mechanism
Specific attachment transforms the fluid pool of changing inventory into a fixed security interest over identified physical property. Under the statutory terms governing a floating mortgage, crystallization triggers automatically upon default, initiation of bankruptcy proceedings or court-ordered asset freezing. Prior to crystallization, buyers purchasing inventory in normal business operations acquire clean title free of the encumbrance even if public registration exists.
Foreign trade creditors supplying inventory on credit must register specific purchase money security interests to maintain priority over global floating encumbrances granted to domestic banks.
Priority Weakness
Institutional holders of this encumbrance face significant priority vulnerabilities against specialized third-party claims. Under statutory civil code provisions, a floating mortgage yields priority to subsequent purchase money security interests registered within ten days of equipment delivery, as well as statutory possessory liens for repair and freight services. General execution creditors who obtain court freezing orders over specific assets prior to floating mortgage crystallization also secure senior positions over the un-crystallized security interest.
Creditors relying on floating encumbrances must monitor debtor operations continuously to enforce rapid crystallization upon credit deterioration.
Central Registration
Public registration on the People’s Bank of China credit publicity portal establishes the foundational timestamp for floating mortgage filings. Registration alerts prospective creditors to the existence of the floating encumbrance without preventing normal inventory turnover.