All questions

Security and enforcement

i China's rights registration regime in asset financeAircraft

The following rights and security interest can be registered with the CAAC Rights Register:

  1. owner's title to the aircraft;
  2. mortgagee's mortgage right to the aircraft;
  3. priority right to the aircraft; and
  4. lessee's possessory right to the aircraft under a lease duration that is no less than six months.

According to the Civil Aviation Law, it is not a mandatory requirement to register the title of, mortgage or possessory right in a civil aircraft with the CAAC Rights Register, but without such registration, the title, mortgage or possessory rights have no legal effect against other bona fide third parties; and without registration with the CAAC Rights Register, the relevant party's priority right shall terminate on the date falling three months after the occurrence of the event out of which such priority right arose.

The priority rights to a civil aircraft shall have priority over the security interest in the civil aircraft in relation to compensation concerning such civil aircraft.

After the Cape Town Convention took effect in China, the CAAC Rights Register and the International Registry function in parallel. Filing with the International Registry is a must if the creditor wishes to retain its priority under the Cape Town Convention and the registration with CAAC is necessary to preserve its priority under Chinese domestic security law.


The following rights and security interest can be registered in the register book maintained by the MSA:

  1. the owner's title to a completed vessel or a vessel under construction, and, if applied by the owner, the vessel's funnel mark or house flag;
  2. the mortgagee's mortgage right to the vessel; and
  3. the bareboat charter.

According to the Regulations on Vessel Registration of China and the rules issued by the MSA, it is not a mandatory requirement to register the title of or the mortgage right in a vessel with the MSA but without such registration, the title or mortgage rights have no force against other bona fide third parties. It is a mandatory requirement to register the bareboat charter if the bareboat charter is related to: (1) a domestic charterer chartering a Chinese-flagged vessel; (2) a domestic charterer chartering a foreign-flagged vessel; or (3) a foreign charterer chartering a Chinese-flagged vessel. During the period of the charter, the charterer cannot register the re-letting of the vessel without the prior consent of the vessel owner. Additionally, the mortgage rights over a vessel under a registered bareboat charter can only be registered if the registered charterer's consent has been obtained.

As to the international conventions on the property rights and the security interests, China has signed the International Convention on Maritime Liens and Mortgages on 18 August 1994. However, this Convention has not been ratified yet and is not effective in China.


China does not maintain a register of title or other rights in respect of rolling stock. The mortgage over rail stock is treated as a mortgage over movables.

The mortgage over movables can be registered with the local office of the State Administration of Industry and Commerce (which maintains the company registry in China) where the mortgagor is registered.

ii Financing of contractsAircraft

In China's market, the financers of Chinese airlines include ECAs, Chinese banks (including both commercial banks and policy banks), foreign commercial banks, Chinese lessors and foreign lessors. The financing may take the form of direct lending, financial leases, operating leases, ECA financings and other structured financings. Recently, the lease-in, lease-out structure is also very popular in the market, in which the offshore lessor head leases the aircraft to a special purpose company set up in a Chinese tax bonded area and then this special purpose vehicle subleases the aircraft to the Chinese airline. The risk profile and the detailed legal documentation for this structure differs depending on whether the special purpose company in the tax bonded area is set up by the offshore lessor or the Chinese airline.

The typical security package to the financer of the aircraft may consist of:

  1. mortgage over the aircraft;
  2. assignment of insurances;
  3. airframe and engine warranties assignments;
  4. assignment of lease agreement;
  5. pledge over receivables in respect of the aircraft;
  6. guarantee from the parent company;
  7. escrow and pledge over the relevant bank accounts; and
  8. pledge over the equity of the special purpose project company.

Chinese law permits a mortgage over a ship under construction. A Chinese shipbuilder may mortgage its ship under construction to a financial institution in China to obtain finance, and such mortgage can be registered with MSA's ship registry. The shipowners are not allowed to mortgage the ship under construction yet.

Normally, the account bank of the Chinese shipbuilder can issue a pre-delivery payments refund guarantee in favour of the shipowner, and the shipowner can assign such guarantee together with its interests and rights under the shipbuilding contract to its financer as security of the pre-delivery payments finance.

The typical security to the financer of the ship may consist of: (1) mortgage over the ship; (2) the general pledge and assignment of insurances, ship charters etc.; and (3) pledge over receivables in respect of the ship.


Typically, the CRC will contract with the rolling stock manufacturers for purchase and finance the purchase of rolling stock through its financers.

iii Enforcement

Chinese law does not expressly accept 'self-help' remedies or equivalent concepts. However, if the debtor or mortgagor does not cooperate, the creditor may have to enforce its rights through legal actions of the court.

The mortgage agreement can provide for the circumstances in which the mortgage may be enforced and contractual rights that the mortgagee may have upon enforcement. The typical trigger events that would result in enforcement of the mortgage include the failure to pay any amount due under the financing or the occurrence and continuance of other event of default.

In addition to the mortgagee's contractual enforcement rights under the mortgage agreement, the Security Law of China and the Property Law of China also provide for certain statutory rights for the mortgagee to enforce the mortgage, which include the auction of the mortgaged property, the transfer of the ownership of the mortgaged property to the mortgagee with consent of the mortgagor after the enforcement to satisfy the debt, and the private sale of the mortgaged property with consent of the mortgagor. Under Chinese law, it is not lawful to set forth in the mortgage agreement that the mortgagee can foreclose the mortgaged directly upon enforcement.

iv Arrest and judicial saleArrest

Under Chinese law, a creditor may petition to the competent Chinese court to arrest the aircraft, ship or the rolling stock upon enforcement:

  1. either before the litigation, if the creditor can show to the court that the circumstances are urgent and the creditor's lawful rights and interests will suffer un-remediable harms without immediate preservation of the aircraft, ship or rolling stock; or
  2. during the litigation process, if the creditor can show to the court that without arrest of the aircraft, ship or rolling stock, it will be impossible or difficult to enforce the subsequent court judgment or order or will cause other damages to the creditor because of the actions of the mortgagor or other reasons.

If the petition is raised before the litigation, the creditor shall provide security, or the court will reject the petition.

If the action is brought up against the mortgagor in a foreign court rather than a Chinese court, it would be very difficult for the Chinese court to order asset preservation against the mortgaged property in China.

The arrest of the ships is not dealt with by the ordinary people's court in China, but is subject to the jurisdiction of a maritime court of China (which is a special type of court formed to hear maritime litigations).

Judicial sale

If the debtor is not cooperative upon enforcement, the creditor may sue the debtor and petition to the court to enforce its rights. Set out below is a general description of the typical civil litigation procedures in China.

A bill of complaint is submitted to the appropriate court, setting forth the name and address of the defendant, the claim and the facts and legal bases of the case and the evidence that will support it. The Chinese court in the location of the domicile of the defendant, the place where the contract is performed, or the place chosen by the parties through written agreement and having actual connections with the dispute would have jurisdiction.

If the Chinese court finds the bill of complaint acceptable (within seven days), it will file the case and will send a copy of the bill of complaint to the defendant (within five days from such filing). For the party that files the lawsuit, a court fee will be payable as well as the usual litigation costs.

The defendant should file a bill of defence with the court (within 15 days). However, failure by the defendant to file a bill of defence shall not affect the hearing of the case by the court.

After the court determines the date of trial, a trial will be held and a judgment rendered (within an extendable six-month period), although appeals to higher courts are permitted.

With the enforcement of General Provisions of the Civil Law since 1 October 2017, the general period of limitation of actions on a request to the Chinese court for the protection of civil rights is three years, such period being calculated from the time it was known, or should have been known, that a right was infringed upon. If more than 20 years have passed since the date of the infringement of the right, the Chinese court shall offer no protection.

In addition to the above, parties to a dispute may reach a settlement agreement at any time before judgment (therefore, a court-approved mediation settlement is permitted to be entered into between a foreign lessor and a Chinese airline). If a settlement agreement is reached, the court will draw up a mediation decision. If a judgment or mediation decision requires enforcement, additional court fees as well as actual expenses for enforcement must be paid by the party seeking enforcement.

To facilitate enforcement of security interest and improve protection of the creditor, the Civil Procedure Law of China (Civil Procedure Law) also provides for a fast-track procedure for enforcement of security interest. According to the Section 7 of Chapter 15 of the Civil Procedure Law, provided that there is no substantive dispute, the holder of the security interest may petition to the court for auction or sale of the property subject to the security interest. In this fast-track procedure, the court would review and determine whether the conditions for enforcement of the security have been satisfied and if they have, the court will make an enforcement order within 30 days.

As to those security documents that are submitted to the jurisdiction of foreign court, in the event that a final and conclusive judgment is obtained from the foreign court, such judgment can be recognised and enforced in China without re-examination or re-litigation on the subject matter thereof, if the following conditions are met:

  1. the judgment is made by a foreign court with competent jurisdiction and is final and conclusive;
  2. the jurisdiction of the foreign court is not precluded by any law, order or treaty;
  3. service of process for any proceeding against the Chinese party in the jurisdiction of the competent court has been lawfully effected on the Chinese party (other than by public notice), or the Chinese party has appeared and responded on the merits of the case in the relevant proceedings without receiving service thereof;
  4. the court of China is satisfied that the judgment neither contradicts the basic principles of the laws of China nor violates China's state sovereignty, security and public interest; and
  5. judgments of Chinese courts receive reciprocal treatment in the jurisdiction of the foreign court; as a matter of Chinese law, this means that there exists a bilateral or multilateral treaty concluded or acceded to by China and the jurisdiction of the foreign court as to the mutual recognition and enforcement of judgments. To date, there has been no bilateral or multilateral treaty between China and the United Kingdom or United States in connection with the recognition or enforcement of court judgments; therefore, the judgments made by US or UK courts cannot be enforced in China directly.