Borrowing against art in China

Borrowing against art

In your jurisdiction what is the usual type of security interest taken against art, antiques and collectibles?

Among the general types of security (ie, guarantee, mortgage, pledge, lien and deposit), pledge is the most common security interest taken against art, antiques and collectibles. However, it is still not widely used in practice, owing to challenges and risks that arise from uncertainty, complexity and a lack of transparency about appraisal, storage of the art objects, and costs, processes and risk control involved. In some cases, lien may be used in transportation of artwork, storage, custody, repair and restoration, or in a brokerage relationship.

If the borrower borrowing against art assets in your jurisdiction qualifies as a consumer, does the loan automatically qualify as a consumer loan, and are there any exemptions allowing the lender to make a non-consumer loan to a private borrower?

No. In China, a consumer loan has a clear definition given by law, which is a loan for consumption granted to a borrower by consumer finance companies. Therefore, a loan will not automatically qualify as a consumer loan just because the borrower is a consumer. There is no legal restriction prohibiting the lender from granting a loan to a private borrower, or prohibiting the lender from granting a loan for the purpose of acquiring art assets. However, Chinese laws explicitly provide that each loan shall be granted with a legitimate purpose, and the loan facilities shall be used only for that purpose. In practice, it is not popular for lenders to grant loans for art assets, mainly because most lenders are concerned about uncertainty and risk control complexity, unless sufficient security is provided.

Is there a public register where security interests over art, antiques or collectibles can be registered? What is the effect of registration? Is the security interest registered against the borrower or the art?

No, although law does not prohibit art, antiques or collectibles (excluding cultural relics that are prohibited by law) to be mortgaged or pledged, there is no official public register for it. However, in case of pledge of the copyright or patent vested in the art, antiques or collectibles (if any), it is possible to get the pledge registered with the National Copyright Administration for copyright and with the State Intellectual Property Office for patents.

Can the lender against art collateral perfect its security interest without taking physical possession of the art?

In general, it can be very difficult for the lender against art collateral to perfect its security interest without taking physical possession of the art. As mentioned in question 20, there is no official public register for the mortgage of artworks, although there is no explicit law or regulation that may prevent it from doing so, especially as there is an official public register in China for mortgage of movable assets. In practice, to perfect its security interest, it is advisable for the lender to consider taking physical possession of the artwork, if manageable.

If the borrower defaults on the loan, may the lender sell the collateral under the loan agreement, or must the lender seek permission from the courts?

When the borrower defaults on the loan, the lender cannot directly sell the collateral, but may agree an alternative method of payment with the borrower. If an agreement is not reached with the borrower, the lender may file a lawsuit in a people’s court. After the collateral has been converted into cash, or auctioned or sold off, the lender may enjoy the proceeds.

Does the lender with a valid and perfected first-priority security interest over the art collateral take precedence over all other creditors?

In general, the lender with a valid and perfected first-priority security interest may take precedence over other creditors. However, if the tax default by the borrower occurred before the mortgage, pledge or lien was created, the tax authority shall have priority over the lender. In case of bankruptcy of the debtor, the priority the lender enjoys will not be impacted, as the security interest is not insolvent property according to law.