After the revision of the PRC Civil Procedural Law (the "Civil Procedural Law")(1)many of our clients, especially financial institutions, have asked us to explain the new special procedure for realizing security interests (the "Realization Procedure"). We have been preparing a test case and have delved into recent updates of judicial practice on the Realization Procedure. This article describes some key points about the Realization Procedure based on our latest research and banking litigation experience.

1. Who can file for a Realization Procedure

According to Article 196 of the Civil Procedural Law, security interest holders and other parties with enforcement rights are entitled to apply to realize a security interest.Recent cases, though rare, show that mortgagees may file to realize their security interest.However, it is debatable that the scope of security interest holders should be restricted to mortgagees only. Those who believe that eligible applicants should be limited to mortgagees hold the view that the Civil Procedural Law is just a procedural law, only available to claimants who have rights to the procedure under substantive law.(2)The PRC Property Law (the "Property Law")(3) does not explicitly provide that pledgees and lienees can apply to the court for auction or sale of the guaranteed property. Thus, it could be argued that pledgees and lienees cannot use the Realization Procedure.Others maintain that although the Property Law is silent on the pledgees or lienees' right to apply to the courts for auction or sale of property, "the laws allows them to reach an agreement with the pledgors or lienors on the auction or sale of the property; and therefore the pledges/lienees should not be barred from filing with the courts to realize their security interest."(4)

We agree with the latter point of view.Because pledges/lienees are entitled to realize their security interest by self-help, e.g., auction or sale of the property without a procedural requirement, it can be inferred that pledges/lienees may also file for judicial remedies to realize security interests. The most recent and only local Judicial Opinion on the Realization Procedure Rendered by the Zhejiang Supreme Courts (the "Zhejiang Supreme Court's Opinion") also holds the same view.

The less debatable scope of "other qualified applicants" includes pledgors and lienors, as defined in theProperty Law, and real estate developers under Article 286 of the PRC Contract Law (the "Contract Law")(5). The Zhejiang Supreme Court's Opinionalso extends the scope to mortgagors.

2. Venues and jurisdictions

TheCivil Procedural Law states that applicants may file a Realization Procedure with the district court where 1) the property is situated, or 2) the security interest is registered. The district courts, therefore, have jurisdiction over the Realization Procedure, regardless of value of the property or the existence of foreign connections.

The competent venue should be decided based on the type of the security interest. 1) Foreclosure of real property may be filed with the court where the property is located and registered. 2) As for realization of pledged rights, if there are documents evidencing such rights, the applicants may file with the court where the pledges are located.This is because the pledges become effective upon the pledgees' possession of the documents, and accordingly the domicile of the pledgee is the same as that of the pledged rights. In the absence of documents evidencing such rights, the applicant may file with the court where the pledged rights are registered, if the law requires such pledge to be registered. 3) As there is no registration requirement for liens, the proper venue will be the location of retained property. 4) Chattel or floating mortgages may or may not be recorded as they are not required to be recorded to take legal effect.If recorded, the Realization Procedure may be filed with either the court where the chattel/floating mortgages are recorded or the property is situated.(6)As per the Zhejiang Supreme Court's Opinion, the court which first accepts the case will be the proper venue. 5) In the case of property that is separable and scattered at different places, the Supreme Court may allow the applicant to file with a single court to realize the security interest on the property as a whole.

In addition, we consider that respondents may not move to dispute the jurisdiction/venue. This is because the revised Civil Procedural Law gives the right to dispute jurisdiction/venue in Article 127, of Chapter 12 Trial Procedure, Subsection Pre-trial Preparation. This implies that objection to jurisdiction/venue can only be raised in trial procedure, but not in special procedures such as the Realization Procedure. This is also consistent with the legislators' intent that the Realization Procedure is to speed the security interest holders' right to collect their entitlement.

3. Application fee

As per the Measures on the Payment of Litigation Costs, filing for special procedures does not require payment of litigation fees. The Zhejiang Supreme Court's Opinion, also confirmed that applicants using the Realization Procedure are not required to pay a litigation fee.

4. Can the respondents be served by public notice

Chapter 15 of the Civil Procedural Law, states that the court shall decide special procedure cases within 30 days after the case is docketed or after the expiration of the public announcement period(7).

Some courts have said that in event of difficulty serving respondents, instead of service by public notice, the application should be dismissed, in the same manner as in the Urging Repayment Procedure<(8). The court holds this point of view for two reasons: first, both the Urging Payment Procedure and the Realization Procedure are non-litigious procedures and judicial efficiency oriented; second, the respondent's right to raise objection should be protected, although the law does not require the court to hold a hearing or to inquire the respondents' opinion in person.

We consider, however, that service by public notice should be permissible in the Realization Procedure. First, the public notice period could be excluded from time limitation for the Realization Procedure, and thus it would not affect the 30-days limitation on deciding special procedure cases. Second, some applicants file for the Special Procedure because the whereabouts of the respondent is unknown. And third, even if a case is dismissed on the ground of failure to serve in person, most likely the applicant will then file for trial by regular procedure, where service by public notice may not be avoided.Therefore, service by public notice should be applicable in the Realization Procedure.

5. Property attachment

Neither the Understanding and Application of the Revision of Civil Procedural Law published by the Supreme Court nor its column article in the People's Court's Daily mention whether an applicant may file for property attachment. In a recent case we filed using the Realization Procedure, the court denied our application to attach the property.We think property attachment should be allowed in the Realization Procedure.

First, in the structure of the Civil Procedural Law the rules for property attachment are in the General rules. The General rules govern all the procedures, including trial and special procedures.Second, the legislators introduced the Realization Procedure to safeguard the security interest holders' entitlement to dispose of property efficiently by providing a clearer and cleaner judicial remedy. If the mechanism allows property, like chattels, to be attached at an early stage, this will prevent improper transfer or concealment, and enforcement of such property is more likely to be realized.

6. Procedure

Currently, Realization Procedure cases are numbered starting with "商特" or "民特".The trial courts generally review cases after they have been docketed.Cases may be reviewed by a sole judge or a panel. According to the general rule in Chapter 15 of the Civil Procedural Law, cases are generally reviewed by a sole judge, except those involving significant or complicated situations. The Zhejiang Supreme Court's Opinion holds that the threshold for "significant" is where the subject matter value exceeds the monetary limitation for the district court. However, it is up to the court's discretion as to whether a case is complicated.

7. How the courts conduct reviews on the respondents' challenge to the authenticity/validity of the debt or security interest in question

The Realization Procedure is a non-litigious proceeding, so the court, in its discretion, may conduct a prima facie review of the evidence submitted to prove the debt and security interest. There is polarized court and academic discussion of the situation arising in the event of a substantial dispute raised by a respondent.Before the revision of the Civil Procedural Law, the Law Committee of the National People's Congress, Civil Division reported in Understanding of the Property Law, that if parties do not dispute the default of the debt but merely cannot agree on how to dispose of the guaranteed property, then the courts may still rule on sale of the property. However, if the repayment of the debt or validity of the security interest is disputed, then the case must go to trial.(9)

After the promulgation of the revised Civil Procedural Law, the courts tend to a strict standard in conducting the prima facie review. In the most recent cases where the courts have ordered the auction or sale of the guaranteed property, either the debt has been confirmed by the court, or the respondents have not raised a dispute. The Zhejiang Supreme Court's Opinionhas not provide a clear attitude: the court may decide to sell the property if the debt is undisputed; however, if there is a real dispute about the debt, then the application will be dismissed. The court in its discretion will inform the parties that the matter will be dealt with by initiating a trial procedure. The interpretation of "real dispute" to some extent rests on the courts' discretion.

The Supreme Court, in its article published in the People's Court Daily, has been inclined to allow the courts to have a certain degree of substantial discretion: "the courts shall review disputes raised by respondents, but not dismiss cases merely based on the fact that an objection has been raised. Otherwise legislators' efforts to adopt the Realization Procedure would be negated. If the courts find a valid dispute brought by a respondent, the application should be dismissed accordingly."(10)

In our view, if the courts adopt a prima facie review of a dispute raised by a respondent, then the respondent's interests will be better protected. Such practice may also reduce the risk associated with wrongful enforcement. However, a more substantial review of a dispute would benefit judicial efficiency, by preventing the Realization Procedure becoming futile. For the same reason, we agree with the view that some extent of substantial review should be allowed.Furthermore, the Realization Procedure is new, allowing the courts to have some degree of judicial discretion of the substantial review would help in revealing potential issues, which can be settled later by judicial interpretation. If there was no room for material review and the use of judicial discretion then cases would have to be dismissed because of any objection by respondents and the process would become ineffective.