How to determine the interruption of the period of limitation of action for secured debt in the assignment of distressed debt involving financial institutions

Keywords: assignment of creditor's rights | interruption of prescription | guarantee

Basic Case: In December 2015, a company borrowed 3.8 million yuan from a branch of Huishang Bank with a term of 12 months. Anhui XX Financing Guarantee Company provided the maximum amount of joint and several liability guarantee for the loan. The guarantee period agreed in the guarantee contract shall expire two years after the expiration date of the performance period of the master contract, that is, the expiration date of the guarantee period shall be December 2018. Where the borrower fails to repay the loan within the agreed time limit, the guarantor fails to pay off the loan for the borrower.

In December 2016, a branch of Huishang Bank and Anhui Branch of China Cinda Asset Management Co., Ltd. (hereinafter referred to as "Cinda Anhui Branch") signed a Claim Transfer Agreement, pursuant to which one branch of Huishang Bank transferred the principal and interest of the claims of more than 20 million yuan it was entitled to from a company (including the principal of 3.8 million yuan claimed in this case) to Cinda Anhui Branch, and published the Joint Announcement on Assignment of Claim & Debt Collection in Anhui Business News in April 2017, notifying the debtor and the guarantor. In December 2019, Cinda Anhui Branch and an investment company in Huzhou signed a Claim Transfer Agreement in respect of the claims in this case. In January 2020, both parties published a joint announcement on debt assignment and debt collection in Anhui Legal News, notifying the debtor and the guarantor. In February 2020, an investment company in Huzhou transferred the claim to the plaintiff Zhang, and published a joint announcement on debt assignment and debt collection in Anhui Legal News, at the same time, served the "Notice on debt assignment and collection" to the debtor and the guarantor through EMS Express. In the same month, the plaintiff sued to the court to demand that the debtor repay the loan, interest and other expenses, and the guarantor assumed joint and several guarantee liability.

Trial situation: For a number of claims of the plaintiff, the debtor and the guarantor have put forward the corresponding grounds of defense. At present, the case is undecided.

This case belongs to a dispute over assignment of non-performing financial claims with both the debtor and the guarantor. This paper only analyzes whether the defense served on some guarantors is tenable or not. The reasons for the guarantor's defense in this section are mainly two aspects: First, the guarantor's whereabouts are unknown, and the content of the announcement is not directly served on the guarantor. The current judicial interpretations do not stipulate that the guarantor may be notified of the transfer of debt and the collection of debt by a newspaper announcement when transferring the non-performing financial debts. Therefore, none of the three announcements has legal effect, and the guarantor should not bear the guarantee liability. Secondly, Huishang Bank is not a state-owned bank, and therefore is not subject to Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases Involving Assets Formed in the Acquisition, Management and Disposal of Non-performing Loans of State-owned Banks by Financial Asset Management Companies. The joint announcement has no legal effect on the principal debtor, nor on the guarantor's interpellation. Where the guarantee period expired by the time when a lawsuit is instituted in this case, the guarantor will no longer bear the guarantee liability.

In a word, the essence of the guarantor's defense is that the Joint Announcement on Assignment of Creditor's Rights and Collection of Debt published in Anhui Commercial Daily by a branch of Huishang Bank and Cinda Anhui Branch in April 2017 have no legal effect on the guarantor, so it cannot result in the legal consequence of discontinuing the limitation of action for the guaranteed creditor's right, so the guarantee liability shall be exempted. Secondly, Huishang Bank is not a state-owned bank, so the service of announcement is not subject to the Provisions, and therefore has no legal effect on the principal debtor and the guarantor.

The guarantor's defense actually raises the issue of how to effectively serve the document on the guarantor in the assignment of non-performing financial debts in order to cause the discontinuance of the limitation of action for the guaranteed creditor's right. The non-performing financial debts are a kind of non-performing debts arising from financial loan contracts. The Contract Law does not specifically prescribe how to assign non-performing financial debts. The "obligation of notifying the assignment of claims" set out in Article 80 of the Contract Law does not distinguish the nature of claims, and all assignable claims can be applied. Under the circumstance of guarantee, in addition to complying with the relevant provisions of the Contract Law, what are the different provisions on the determination of the delivery of assignment notice and the discontinuance of limitation of action, and how will the judicial practice be affected?

I. How to determine the discontinuance of the limitation of action for guaranteed creditor's rights

（I）Whether to notify the guarantor of the assignment of a general claim

To distinguish financial non-performing financial debts, we define the claims other than financial non-performing financial debts as "general claims" for the time being. From the provisions of Article 80 of the Contract Law on the "obligation of notifying the assignment of claims" and Article 81 of the Contract Law on the "transfer of subordinate rights", we can see that the Contract Law provides that notification shall be given to the debtor for the assignment of a claim. Where notification is not given, the assignment will have no effect on the debtor, but there is no need to notify the guarantor. The subordinate nature of the guarantee determines the assignment of the claim together with the assignment of the principal claim. In the trial practice, it is also clarified that notification to the guarantor is not a condition for the transfer of a guarantee right. The Provisions on Notification of Assignment of Claims in Article 546 of the Civil Code specifies that "where a creditor assigns a claim without notifying the debtor of the assignment, the assignment will have no effect on the debtor."It is thus clear that the provision "shall notify the debtor" in Article 80 of the Contract Law has been deleted by the Civil Code, which only stipulates that where an assignment of a claim without notifying the debtor, it will have no effect on the debtor. Article 547 of the Civil Code also continues to apply the provision that ancillary rights are assigned together with the assignment of the principal claim.

(II) How to determine the discontinuance of the limitation of action for guaranteed creditor's rights in the assignment of general claims

According to the above analysis, there is no need to notify the guarantor of the assignment, does it mean the creditor can directly claim from the guarantor? The answer is no. Based on the probability of guarantee liability, whether the guarantee liability really arises depends on whether the principal debtor repays the debt according to the agreement or not, on the other hand, whether the creditor claims the right against the guarantor in the legal way during the guarantee period. That is, the guarantee liability is that when the debtor is unable to repay the debt, the creditor needs to actively claim the guarantee right against the guarantor, and does not need the guarantor to actively perform his guarantee liability against the creditor. Therefore, if the creditor claims the guarantor to assume the guarantee liability, he needs to claim the right against the guarantor in the legal way during the guarantee period.

Paragraph 1 of Article 19 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the System of Limitation of Action in the Trial of Civil Cases (Fa Shi [2008] No. 11) clearly stipulates that: "Where a claim is assigned, the limitation of action shall be deemed to be discontinued as of the date when the notification of the assignment of claim reaches the debtor."Paragraph 1 of Article 36 of the Judicial Interpretation of Guarantee Law provides that: "In general guarantees, if the limitation of action for the principal debt is interrupted, the limitation of action for the guarantee debt is interrupted; in joint and several liability guarantees, if the limitation of action for the principal debt is interrupted, the limitation of action for the guarantee debt is not interrupted."

In this case, the creditor and the guarantor entered into a maximum amount joint and several liability guarantee contract, and the discontinuance of the limitation of action for the principal debt does not cause the effect of discontinuance of the limitation of action for the guarantee debt. Therefore, only when the creditor requests the joint and several liability guarantor to assume the guarantee liability in the legal way can the discontinuance of the limitation of action for the guarantee debt be caused. According to Article 25 and Article 26 of the Security Law, in a general guarantee, the creditor must require the principal debtor to assume liability by way of bringing a lawsuit against the debtor or applying for arbitration; in a joint and several guarantee, the creditor must "require the guarantor to assume guarantee liability", and in respect of the manner in which the creditor should "require the guarantor to assume guarantee liability", it is generally believed that the expression "require the guarantor to assume guarantee liability" in Article 26 of the Security Law is equivalent to the meaning used by "a party makes a request" in Article 140 of the General Principles of the Civil Law and "an obligee requests the obligor for performance" in Article 195 of the General Principles of the Civil Law, and can be cross-referenced as the meaning of the circumstances of discontinuance of limitation of action prescribed in Article 195 of the General Principles of the Civil Law.

In the previous judicial practice, the Second Civil Tribunal of the Supreme People's Court unify the judicial standards on this issue in its Request for Instructions on the Ways and Procedures of the Creditor's Claim against the Guarantor during the Guarantee Period ([2002] Min Er Ta Zi No.32) dated November 22, 2002. The reply clarifies that the ways for the creditor to claim against the guarantor include "bringing a lawsuit" and "serving a notice of collection", among which the "service" may be served by the creditor himself or by a public notary agency entrusted by the creditor or by way of public announcement (the public announcement on collection of creditor's rights shall be published in influential national or provincial newspapers).

Accordingly, in a joint and several liability guarantee, the way for the creditor to claim against the guarantor can refer to Article 140 of the General Principles of the Civil Law which provides that "the limitation of action shall be discontinued if a lawsuit is brought and either party makes a claim for or agrees to perform the obligation. The limitation of action shall commence anew from the time of discontinuance "or Article 195 of the General Rules of the Civil Law which provides that" if any of the following circumstances occurs, a limitation of action shall commence anew from the time of discontinuance or termination of the relevant procedure: (1) the obligee claims performance against the obligor ", which provides that if a creditor claims his right against the guarantor during the guarantee period by way of filing a lawsuit, applying for arbitration or directly or by way of entrustment or by way of public announcement of collection, or if the guarantor agrees to perform the guarantee, the legal effect of terminating the guarantee period and commencing the calculation of the limitation of action may be brought about.

The problem is that service by way of public announcement is not actual service, but is only legally recognized as service, and it shall be legally effective only when it is in compliance with the law. According to Article 10 (4) of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the System of Limitation of Action in the Trial of Civil Cases, "The effect of discontinuance of the limitation of action shall be brought about if a party concerned whose whereabouts are unknown and the other party concerned publishes a public announcement in an influential national medium or any of the media at the provincial level in the place where the missing party concerned has his domicile".

It can be seen that according to the law, service by way of public announcement can be deemed only when the whereabouts of the party concerned are unknown. This is also the legal rationale for the guarantor's first defense in this case. Under the circumstances that the guarantor's whereabouts are not unknown, service by way of public announcement shall not apply.

II. How to determine the discontinuance of the limitation of action for secured claims in the assignment of non-performing financial claims

（I） Relevant provisions on the assignment of non-performing financial claims

1. Provisions of the Supreme People's Court on Several Issues Concerning the Laws Applicable to the Trial of Cases Involving Assets Formed in the Acquisition, Management and Disposal of Non-performing Loans of the State-owned Banks by Financial Asset Management Companies (Fa Shi [2001] No.12)Paragraph 1 of Article 6 "After the creditor's rights of the state-owned banks are assigned to a financial asset management company, if the original creditor bank issues an announcement or notice on the assignment of creditor's rights in influential national or provincial newspapers, the people's court may determine that the creditor has performed the notification obligations specified in Paragraph 1 of Article 80 of the Contract Law of the People's Republic of China."Article 10 Where a debtor signs or seals on an agreement on the assignment of creditor's rights or a notice on the assignment of creditor's rights or a notice on the collection of debts, the limitation of action shall be discontinued. Where the announcement or notice on the assignment of creditor's rights published by the original creditor bank in influential national or provincial newspapers contains the content of collecting debts, the announcement or notice can be used as evidence for the discontinuance of limitation of action. "As can be seen from the above provisions, the announcement on the assignment of creditor's rights or the notice on the collection of debts made by the original creditor bank in influential national or provincial newspapers constitutes an important condition for notification specified in Article 81 of the Contract Law and the limitation of action shall be discontinued. However, Article 12 of the Provisions only applies to the trial of cases involving assets formed in the acquisition, management and disposal of non-performing loans of the state-owned banks by financial asset management companies.

2. Reply of the Supreme People's Court to the Letter on Issues Concerning the Implementation of the "12 Articles" Judicial Interpretations of the Supreme People's Court (Fa Han [2002] No.3)According to the Reply, "in order to preserve state-owned assets to the maximum extent, the discontinuance of limitation of action constituted by the announcement or notice on the assignment of creditor's rights with collection content published by the financial asset management companies in influential national or provincial newspapers can be retroactive to the date when the financial asset management companies transfer the creditor's rights of the original creditor; for the creditor's rights that it has already undertaken, the financial asset management companies may obtain the evidence of discontinuance of limitation of action (claim rights) by publishing announcement of collection in the aforesaid newspapers. The above reply further clarifies that the limitation of action on how financial asset management companies claim the discontinuance of limitation of action for the creditor's rights it has already undertaken, but it does not involve the issue of the guarantee contract and guarantee term.

3. Supplementary Notice of the Supreme People's Court on Issues Concerning the Acquisition and Disposal of Non-performing Assets of Banks by Financial Asset Management Companies (Fa [2005] No.62)Article 1 "Where a state-owned commercial bank (including state holding banks) assigns its non-performing loans to a financial asset management company, or a financial asset management company disposes of the non-performing assets by assignment of creditor's rights after the non-performing loans assigned to it, the above-mentioned provisions issued by this Court are applicable."Article 2 "Where a state-owned commercial bank (including state holding banks) assigns its non-performing loans to a financial asset management company, or a financial asset management company acquires or disposes of the non-performing loans, the secured creditor's rights shall be assigned at the same time without the consent of the guarantor, and the guarantor shall continue to bear the guarantee liabilities to the assignee within the original scope of guarantee. The agreement in a guarantee contract that any change to the contract shall be subject to the consent of the guarantor has no binding force on the assignment of creditor's rights by the creditor. "The Supplementary Circular extends the scope of "state-owned banks" provided in the 2001 Provisions to state-owned commercial banks (including state holding banks), with both transfer in the primary market (from banks to financial asset management companies) and in the secondary market (from financial asset management companies). The Supplementary Circular also provides that the secured creditor's rights shall be assigned at the same time without the consent of the guarantor. This actually denies the principle of agreement by parties concerned under the Guarantee Law, which is contrary to the Guarantee Law. It can be understood as the special provisions that have been formulated by the state to prevent the loss of state-owned assets during special periods.

4. Minutes of the Symposium on Hearing Cases Concerning Assignment of Distressed Claims Involving Financial Institutions (also known as Minutes of the Symposium in Hainan) (Fa Fa [2009] No. 19). The above-mentioned provisions are applicable where a state-owned bank assigns its non-performing loans to a financial asset management company, or a financial asset management company disposes of the non-performing assets by assignment of creditor's rights after the non-performing loans assigned to it,The above-mentioned provisions shall not apply if the assignee re-assigns the distressed claim after obtaining it. Except where the assignee is a relevant local people's government or an organization or department that performs the duties of an investor on behalf of the people's government at the same level or the group company that holds the state-owned capital of the SOE debtor. "

If a state-owned bank or financial asset management company issues a notice or announcement containing collection content on a national or provincial influential newspaper in accordance with the provisions of the Reply to Article 12, the date of the announcement or notice shall be the actual discontinuance date of the limitation of action, and the aforesaid announcement or notice shall have the same effect on the limitation of action for the contract of guaranty. Compared with the previous Provisions, Reply and Supplementary Circular, the Summary clarifies that announcement or notice has the same effect on the limitation of action for the contract of guaranty. However, it only concerns the limitation of action, not the term of guaranty.

5. In the Reply to the Request for Instructions on Several Issues Concerning How to Understand the Meeting Minutes (Fa Fa [2009] No.19) issued by the Supreme People's Court (Fa Fa [2009] No.19) (Min Er Ta Zi [2009] No.21), the Supreme People's Court gave the reply to the Request for Instructions on Several Issues Concerning How to Understand the Meeting Minutes (Fa Fa [2009] No.19) issued by the Higher People's Court of Yunnan Province as follows: "The problem to be solved by this court in the Summary of the Symposium on the Trial of Cases Involving Assignment of Distressed Claims Involving Financial Institutions (Fa Fa [2009] No.19) issued by this court on April 3, 2009 is actually how to solve and resolve the problems left over from history during the planned economy period. The main objective of the Interpretation is to regulate the assignment of distressed claims involving financial institutions, maintain the stability of enterprises and society, prevent the loss of state-owned assets and protect the national economic security. According to the spirit and purpose of the Summary, the provisions of the Summary shall also apply mutatis mutandis to the cases involving disputes over the assignment of distressed claims involving non-SOEs debtors. "The Reply has clarified that the provisions of the Summary shall apply mutatis mutandis to the assignment of distressed claims involving financial institutions by non-SOEs debtors.

6. Administrative Measures on Batch Transfer of Non-performing Assets of Financial Enterprises (Cai Jin [2012] No.6) promulgated by the Ministry of Finance and the CBRC. Article 2 "For the purpose of the Measures, financial enterprises refer to state-owned and state-controlled commercial banks, policy banks, trust and investment companies, finance companies, urban credit cooperatives and rural credit cooperatives established in the People's Republic of China in accordance with the law, as well as other state-owned and state-controlled financial enterprises (excluding financial asset management companies) subject to the supervision and administration by the China Banking Regulatory Commission (hereinafter referred to as the" CBRC ") in accordance with the law. The Measures apply mutatis mutandis to other Chinese-funded financial enterprises. "Article 19" Issuance of transfer announcement. For the transfer of debt assets, the financial enterprise and the transferee asset management company shall, within the time limit as agreed, issue the notice on transfer of debt assets, namely the announcement on debt collection, on national or provincial influential newspapers, notifying the debtors and the corresponding guarantors. The expenses for the announcement shall be borne by both parties. Exceptions shall be applied to notify the debtors in other methods as agreed by both parties. "However, as can be seen from the title, the Measures apply to the circumstances of batch transfer, and specify the batch transfer in Paragraph 3, Article 3 thereof. "Batch transfer refers to the act of financial enterprises to package a certain scale of non-performing assets (more than ten packs/items) and directly transfer them to asset management companies."Does this mean that the primary market for the disposal (batch) of more than ten non-performing assets can only target specific subjects and the disposal (non-batch) of less than ten non-performing assets can be transferred to social investors? As can be seen from the above, the Measures also stipulate that the subject for implementation by reference to the Measures is other Chinese-funded financial enterprises, which in fact limits the assignment subjects to state-owned banks or state-owned commercial banks to state-owned banks. It is also clarified that both of the above subjects and the transferee asset management company may agree to issue the notice on transfer of debt assets, namely the announcement on debt collection, on national or provincial influential newspapers together with notification and collection. As the regulatory authorities of financial enterprises, the Ministry of Finance and the CBRC indicate that such regulatory authorities have recognized the way of service by announcement.

(II) Application of the above provisions in judicial practice

The provisions of Fa Shi [2001] No. 12 on the discontinuance of the limitation of action are made in respect of cases heard by people's courts involving assets formed in the acquisition, management and disposal of non-performing loans of the state-owned banks by financial asset management companies, and are special provisions compared to Fa Shi [2008] No. 11, and Paragraph 4, Article 10 of the Fa Shi [2008] No. 11 clearly stipulates that "if there are other special provisions in laws and judicial interpretations, such provisions shall apply."It can be seen that the discontinuance of the limitation of action for the assignment of non-performing financial debts shall be governed by the provisions of Fa Shi [2001] No. 12.

From the aforesaid provisions on the assignment of non-performing financial debts listed above, we can see that in a special historical period, due to the rising rate of non-performing financial debts, provisions on assignment of non-performing financial debts have been mended and corrected in order to prevent the loss of state-owned assets, with obvious policy dominance. For example, the subjects of service by announcement are limited to "state-owned banks" and "state-owned commercial banks" and there is no clear definition of the "state-owned" nature, resulting in different understanding of it in judicial practice. For example, in its Civil Judgment (2014) Yi Zhong Min (Shang) Zhong Zi No.7677) of the Beijing First Intermediate People's Court holds that Beijing Rural Commercial Bank is a state-owned bank as specified in the Minutes of the Hainan Symposium, the discontinuance of the limitation of action may be effected by announcement in a newspaper. However, in its Civil Judgment (2015) San Zhong Min Zhong Zi No.@@Nb1 04283) of the same type heard by the Beijing Third Intermediate People's Court, it is held that Beijing Rural Commercial Bank is not a state-owned bank as specified in the Minutes of the Hainan Symposium, and that service by announcement in a newspaper could not effect the discontinuance of the limitation of action. In the "Jiangxi Branch of China Cinda Asset Management Co., Ltd. and Nanchang County Huaqiang Rice Industry Co., Ltd. (Gan 01 Min Zhong [2019] No. 2991)", the Nanchang People's Court at the first and second instances did not elaborate on the nature of the original creditor bank, Bank of Beijing, but only held that Cinda could not provide that it had required the guarantor to bear the guarantee liability by other means before the announcement, in the case that no change of address or contact information had been made by the guarantors, but only relied on a piece of announcement as evidence for the interruption of limitation of action for the guaranteed claim, which did not conform to the relevant legal provisions.

As can be seen from the above cases, some courts recognize that the discontinuance of the limitation of action caused by service by announcement and collection, while some courts do not recognize the discontinuance of the limitation of action, and some courts recognize the debtor but do not recognize the guarantor.

According to the relevant financial asset management companies, in reality, many NPL assets were transferred from the banks to non-financial institutions and natural persons via the Four Asset Management Companies, and almost all of them were served by announcement. It is not difficult to understand that with the social development, the rate of commercial NPLs keeps rising. If the banks with the original creditor and the financial asset management companies cannot directly serve the NPL by announcement, they are required to directly serve the NPL documents to all the debtors and guarantors in the NPL package. As there are a large number of claims in the NPL package and there are a large number of debtors and guarantors, direct or mailing service would greatly increase the workload of the banks with the original creditor and the asset management companies, thus affecting the disposal efficiency of NPL.

After reviewing the judicial interpretations of the Supreme People's Court in the past three years, there are "the Interpretation on Several Issues Concerning the Application of Law in the Trial of Cases Involving the Acquisition, Management and Disposal of NPL by Financial Asset Management Companies". However, in the past three years, the project has not been approved yet. Three years of continuous project approval shows that the Supreme People's Court has long realized that in recent years, due to the rising rate of NPLs of banks and the activity of the primary and secondary markets for the acquisition, management and disposal of NPLs, the repair and improvement during a special historical period have been unable to adapt to the development of the society. Therefore, it is extremely urgent to promulgate new judicial interpretations in this area. The author believes that the new judicial interpretations will have more changes compared with the existing judicial interpretations, and will clarify the inconsistencies and ambiguities in the past judicial practice. It is expected that the new judicial interpretations will be promulgated as soon as possible, so as to regulate the transfer market of financial NPLs and unify the judgment criteria and criteria.