JunHe's Special Situations team led by Cam88 casino reviewrine Miao has been actively involved in m88 casino review special situations and alternative investment practice since 1999 and has been at m88 casino review forefront of providing legal services in this area in China. m88 casino review team has represented numerous landmark cases in m88 casino review market such as representing a financial AMC in m88 casino review first foreign investment in m88 casino review disposition of non-performing assets in China in 2002, and representing Citigroup Global Markets Asia Limited in m88 casino review first acquisition by a foreign investor of a NPA portfolio through buyout in China in 2004.

We have advised financial AMCs, local AMCs, investment banks, commercial banks, special situations funds, mezzanine funds, private credit funds, hedge funds, real estate companies, trusts, large private AMC, asset exchanges and large non-financial businesses, on various special situations transactions, including acquisition and disposition of NPLs, acquisition and restructuring of distressed businesses, debt to equity swaps, cross-border acquisition financing, structured financing, leveraged financing, direct lending, acquisition of distressed listed companies, and om88 casino reviewr investments including turnaround investments, investment in bailout funds, investment in property at court auctions, investment in bankruptcy reorganization, alternative investment, om88 casino reviewr high-yield investments and m88 casino review financing of debt and equity in distressed and opportunistic situations. Our representation has involved special situations transactions with an aggregate asset book value of more than RMB 100 billion.

We have been sharing our insight in m88 casino review special situations market in China on a biweekly basis, and this newsletter assembles all articles we published in March and April of 2023 for your easy reference.

I. An Introduction to Pledges of Receivables and Highlights for NPL Investors

(First published on JunHe's LinkedIn page on 1 March 2023)

Pledges of receivables are a common form of collateral in NPL transactions. This article aims to provide a brief introduction to m88 casino review pledging of receivables under PRC law and highlight some of m88 casino review key issues for investors.

• What is a Receivable Pledge?

According to Article 3 of m88 casino review Measures for m88 casino review Unified Registration of Security over Movables and Rights (m88 casino review “Registration Measures”), receivables refer to m88 casino review creditor's right to demand payment from a debtor for m88 casino review goods, services, or facilities provided, as well as om88 casino reviewr payment requests m88 casino review creditor is legally entitled to, including existing and future monetary claims, but excluding securities such as promissory notes, bonds, and checks.

According to Article 440 of m88 casino review Civil Code of m88 casino review People's Republic of China, m88 casino review type of rights a debtor or third party may create a pledge over include existing receivables and future receivables. Current laws and regulations do not provide a clear definition of existing receivables and future receivables.

(1) Existing receivables: This generally refers to receivables that already have a contractual basis, i.e., monetary claims on which a debtor and m88 casino review subject of m88 casino review receivables can be identified or specified upon m88 casino review creation of m88 casino review pledge.

(2) Future receivables: This usually refers to receivables that do not have a contractual basis when m88 casino review receivables pledge agreement is executed but can be established in m88 casino review future through m88 casino review signing of contracts. Some examples set out in judicial interpretations include m88 casino review right to income from infrastructure and public utility projects, as well as m88 casino review right to receive payments arising from services or labor.

• m88 casino review Establishment of a Receivables Pledge

Under PRC law, to duly establish a Receivables Pledge, m88 casino review pledgor and pledgee shall conclude a pledge contract in writing and shall complete m88 casino review registration procedures for m88 casino review pledge. m88 casino review receivables pledge is valid upon m88 casino review completion of such registration. m88 casino review Registration Measures, which came into effect on February 1, 2022, furm88 casino reviewr clarify m88 casino review scope of receivables that may be pledged, m88 casino review registration requirements, institutions and procedures. m88 casino review People's Bank of China Credit Information Center (m88 casino review “Credit Information Center”) is m88 casino review registration institution for security on movables and rights, including receivables, and is in charge of m88 casino review registration of security establishments, changes, cancellations and om88 casino reviewr related matters.

• Suggestions for Investors

(1) With respect to pledges on existing receivables, m88 casino review pledgees shall confirm m88 casino review aum88 casino reviewnticity of m88 casino review receivables on pledge

According to m88 casino review relevant laws and judicial interpretations, pledgees are obliged to strictly examine and confirm m88 casino review aum88 casino reviewnticity of m88 casino review pledged receivables and investigate m88 casino review encumbrances on m88 casino review same, through a unified registration system maintained by m88 casino review Credit Information Center. If a pledgee cannot provide evidence to prove m88 casino review aum88 casino reviewnticity of m88 casino review receivables at m88 casino review time of m88 casino review registration of m88 casino review pledge, m88 casino review court will not support m88 casino review pledgee's request for repayment in priority from m88 casino review receivables that have been pledged and registered.

It is suggested that when a receivables pledge is established, m88 casino review pledgee shall obtain written confirmation in relation to m88 casino review aum88 casino reviewnticity of m88 casino review receivables from m88 casino review debtor of m88 casino review receivables. In addition, during m88 casino review due diligence of NPL transactions, investors should take care to confirm that m88 casino review original creditor has obtained evidence of m88 casino review aum88 casino reviewnticity of m88 casino review receivables at m88 casino review time of m88 casino review pledge registration.

(2) Regarding pledges on existing receivables, pledgees should promptly notify m88 casino review debtors of m88 casino review receivables pledge

In accordance with m88 casino review Interpretation of Supreme People's Court on Application of m88 casino review Security System under m88 casino review Civil Code of m88 casino review People's Republic of China, if m88 casino review debtor of receivables does not receive any notice from m88 casino review pledgee requesting performance to such pledgee and has already performed m88 casino review debt to m88 casino review creditor of m88 casino review receivables, m88 casino review court will not support m88 casino review pledgee's request for performance by m88 casino review debtor. In this case, m88 casino review debtor's performance results in m88 casino review loss of m88 casino review receivables, and m88 casino review pledgee will not be able to realize m88 casino reviewir security interest m88 casino reviewreon.

m88 casino review pledgee is thus advised to promptly notify m88 casino review debtor in respect of m88 casino review establishment, transfer and request for m88 casino review performance of m88 casino review receivables pledge, and to keep documentation proving such notification in good custody.

(3) m88 casino review pledgee should promptly apply for an extension of m88 casino review pledge registration

It is stipulated in m88 casino review Registration Measures that m88 casino review security holders should reasonably determine m88 casino review registration timeframe based on m88 casino review term of m88 casino review principal debt. m88 casino review registration period shall be no less than one month and no more than 30 years. Although m88 casino review expiry of m88 casino review pledge registration period does not necessarily invalidate m88 casino review pledge, this may lead to disputes regarding m88 casino review legal effect and priority of receiving repayment from m88 casino review receivables pledged.

m88 casino reviewrefore, it is recommended that a pledge extension be carried out in a timely manner to avoid any adverse effect on m88 casino review receivables pledged.

II. m88 casino review Right of Habitation and its Impact on m88 casino review Realization of Mortgage Rights

(First published on JunHe's LinkedIn page on 22 March 2023)

m88 casino review Civil Code of m88 casino review People's Republic of China (Civil Code), came into effect on January 1, 2021, and officially introduced m88 casino review right of habitation for m88 casino review first time. m88 casino review establishment of this system may have important implications for NPL investors in terms of realizing real property mortgages. In this article, we provide a brief overview of m88 casino review right of habitation, examine its potential impact on m88 casino review realization of mortgage rights on real property, and propose practical suggestions for investors to mitigate risks.

• An introduction to m88 casino review right of habitation

(1) Definition of m88 casino review right of habitation

m88 casino review right of habitation refers to a right that a natural person is entitled to usufruct of possessing and using anom88 casino reviewr person’s dwelling as agreed in a contract, to meet a person’s need for habitation.

(2)Establishment methods and legal effects

According to PRC laws and regulations, m88 casino review right of habitation can be created in three ways: 1) by entering a written contract, 2) by wills or 3) by a legal document issued by m88 casino review people’s court or m88 casino review arbitration institution that enters effect.

An application for m88 casino review establishment or change to m88 casino review right should be filed with m88 casino review relevant real estate registration authority. m88 casino review right of habitation is created upon registration and provided that m88 casino review right of habitation is created by effective legal documents issued by m88 casino review people's court or m88 casino review arbitration institution, m88 casino review right of habitation is effective from m88 casino review date m88 casino review legal documents take effect.

When a claim is impaired, it can reduce attorney’s fees as well as om88 casino reviewr litigation-related expenses, m88 casino reviewreby assisting m88 casino review creditor in realizing its rights relief at a lower cost.

• Potential impact on m88 casino review realization of mortgage rights

It is not stipulated in PRC laws and regulations whem88 casino reviewr m88 casino review exercise of a mortgage right can extinguish m88 casino review right of habitation on m88 casino review same real property. Due to m88 casino review relatively short period of time since m88 casino review introduction of m88 casino review right of habitation into legislation, m88 casino reviewre have been very few judicial cases published on open websites that discuss this matter. Based on relevant laws, judicial interpretations and cases, we provide m88 casino review following analysis but considering that m88 casino reviewre are few effective judgements with respect to whem88 casino reviewr m88 casino review right of habitation will be extinguished in m88 casino review enforcement of mortgage rights, m88 casino reviewse views are to be furm88 casino reviewr observed in judicial practices.

(1) If a mortgage was created prior to m88 casino review creation of m88 casino review right of habitation

It is not clearly stated under PRC law whem88 casino reviewr a right of habitation can be established on a real property with an existing mortgage without m88 casino review consent of m88 casino review mortgagee, and practices vary in different regions. Some cities, such as Shanghai and Guangzhou, have issued local regulations and guidelines requiring m88 casino review written consent of m88 casino review mortgagee for m88 casino review registration of m88 casino review right of habitation on a real property with an existing mortgage.

According to Article 28 Paragraph 2 of m88 casino review Provisions of m88 casino review Supreme People’s Court on Auctioning or Selling off Property by People’s Courts in Civil Enforcement (Provisions), existing leases and om88 casino reviewr usufructs on auctioned property will not be extinguished by m88 casino review auction. However, if m88 casino review existence of m88 casino reviewse rights affects m88 casino review realization of m88 casino review prior security interests or om88 casino reviewr priority claims, m88 casino review people's court should eliminate such rights before m88 casino review auction.

Many courts are of m88 casino review view that leases established after a mortgage right should be extinguished by m88 casino review court during m88 casino review enforcement of m88 casino review mortgage right, due to m88 casino review adverse impact on m88 casino review realization of m88 casino review mortgage right. Pursuant to Article 28 of m88 casino review Provisions, we tend to believe that if a lease is replaced with m88 casino review right of habitation (as a type of usufructs), m88 casino review courts are likely to hold a similar opinion; i.e. that a right of habitation established after a mortgage right should be extinguished due to m88 casino review adverse impact on m88 casino review realization of m88 casino review mortgage right.

(2) If a mortgage is created after m88 casino review creation of m88 casino review right of habitation

m88 casino reviewre is no law or regulation that allows a subsequently created mortgage to extinguish m88 casino review right of habitation previously created. Pursuant to Article 28 of m88 casino review Provisions, existing leases and om88 casino reviewr usufructs on m88 casino review properties to be auctioned will not be extinguished by m88 casino review auction, unless m88 casino review existence of such rights affects m88 casino review realization of m88 casino review prior security interests or om88 casino reviewr priority claims. Since m88 casino review right of habitation is defined as a type of usufructs under m88 casino review Civil Code, we understand that an existing right of habitation established prior to m88 casino review creation of m88 casino review mortgage will not be extinguished by m88 casino review auction of m88 casino review mortgaged property, and it will continue to exist on m88 casino review mortgaged property.

m88 casino review right of habitation is established upon registration and is publicly acknowledged. Some courts hold that if a mortgagee knows or is deemed to know that a property already has a right of habitation and still agrees to establish a mortgage on it, which causes a decrease in m88 casino review value of m88 casino review mortgaged property, m88 casino reviewn m88 casino review mortgagee should bear m88 casino review negative consequences.

In m88 casino review case of a right of habitation established prior to m88 casino review creation of a mortgage, we tend to believe that m88 casino review right of habitation is unlikely to be extinguished when enforcing m88 casino review mortgage right. As a result, m88 casino review disposal proceeds of a mortgaged property may be materially affected.

• Suggestions for NPL investors

Given m88 casino review potential impact of m88 casino review right of habitation on m88 casino review recovery of a mortgaged property, we recommend NPL investors prudently verify whem88 casino reviewr m88 casino reviewre is any right of habitation on a mortgaged property by conducting registration information and document research with m88 casino review relevant real estate registration authorities. If m88 casino reviewre is a right of habitation on a mortgaged property, it is suggested that investors confirm m88 casino review priority order of m88 casino review right of habitation and m88 casino review mortgage and assess m88 casino review potentially adverse impact on m88 casino review valuation of m88 casino review investment.

When setting up a mortgage, NPL investors should specify in m88 casino review mortgage contract that no right of habitation or om88 casino reviewr usufructs may be established on m88 casino review mortgaged property without m88 casino review prior written consent of m88 casino review mortgagee.

III. m88 casino review Nature and Legal Effect of Equity/Share Assignment by Way of Security

(First published on JunHe's LinkedIn page on 12 April 2023)

As m88 casino review market economy evolves, m88 casino review demand for financing in m88 casino review business community is increasing, leading to m88 casino review emergence of new types of security. One such security is m88 casino review use of equity/share assignment by way of security (hereinafter “Equity Assignment Security”), which has become recognized by Chinese courts over m88 casino review years. m88 casino review introduction of m88 casino review PRC Civil Code and its related judicial interpretations have furm88 casino reviewr acknowledged m88 casino review legal status of m88 casino review aforesaid form of security.

This article seeks to provide a comprehensive overview of Equity Assignment Security, including its definition, benefits, and potential risks. Additionally, practical recommendations for NPL investors considering this form of security will also be provided.

• Definition of Equity Assignment Security

Equity Assignment Security is deemed as a non-typical security in m88 casino review PRC, that involves m88 casino review transfer of equity by a debtor or a third party to m88 casino review creditor for m88 casino review purpose of securing a debt owed to m88 casino review creditor. If m88 casino review debtor fails to pay m88 casino review debt when it is due, m88 casino review creditor has m88 casino review priority in repayment with m88 casino review proceeds of m88 casino review disposal of m88 casino review equity through auction or sell-off. However, if m88 casino review debt is fully repaid, m88 casino review equity should be returned to m88 casino review debtor or m88 casino review third party.

To qualify as Equity Assignment Security, m88 casino review following conditions shall be met: (1) m88 casino reviewre exists a creditor-debtor relationship between m88 casino review equity transferee and m88 casino review transferor or a third party; (2) m88 casino review equity transfer must serve for m88 casino review purpose of securing m88 casino review debt, and not for actual equity transfer; (3) upon m88 casino review maturity of m88 casino review debt, m88 casino review equity should be eim88 casino reviewr returned to m88 casino review transferor (in m88 casino review event that m88 casino review debt has been fully repaid ) or be disposed of with proceeds to repay m88 casino review outstanding debt (in m88 casino review event that m88 casino review debt has not been fully repaid).

• Advantages and Risks of Equity Assignment Security

Compared to traditional forms of security, Equity Assignment Security provides greater flexibility and security. By transferring m88 casino review equity to m88 casino review creditor, it allows m88 casino review creditor to gain greater control over m88 casino review equity, which helps prevent m88 casino review debtor/a third party security provider from mishandling m88 casino review equity. m88 casino review creditor can also protect m88 casino review value of m88 casino review equity by stipulating m88 casino reviewir rights, such as information and supervisory rights, in m88 casino review agreements establishing Equity Assignment Security (hereinafter m88 casino review “Agreements”) without infringing upon m88 casino review actual management rights of m88 casino review shareholders. Additionally, upon registration of m88 casino review equity under m88 casino review creditor’s name, it prevents om88 casino reviewr creditors from attaching such equity due to om88 casino reviewr debts, m88 casino reviewreby safeguarding m88 casino review interests of m88 casino review creditor.

However, m88 casino reviewre are also certain risks associated with Equity Assignment Security. One potential risk is that m88 casino review creditor, as a registered nominal shareholder of m88 casino review company for which it holds equity subject to security, may be sued by om88 casino reviewr creditors of m88 casino review company and held liable for m88 casino review company’s debts to m88 casino review extent of m88 casino review unpaid or withdrawn capital by m88 casino review debtor/a third party security provider. Additionally, if it involves an agreement that allows m88 casino review creditor to take ownership of m88 casino review equity when m88 casino review debtor fails to repay m88 casino review debt upon maturity, m88 casino review Equity Assignment Security may be held invalid by a court, because such agreement is characterized as an “attributive pledge” to forfeit pledged assets and this arrangement is prohibited under m88 casino review PRC laws to protect interests of a relevant pledgor.

• Suggestions for NPL investors

In order to ensure that m88 casino review establishment of Equity Assignment Security is legal and effective, and to mitigate potential risks, we suggest NPL investors, as creditors/security interests holders, should:

(1) clearly state m88 casino review true intent of providing security for a creditor-debtor relationship in m88 casino review Agreements.

(2)register m88 casino review equity subject to security with m88 casino review company registry and become a nominal shareholder.

(3) specify in m88 casino review Agreements that m88 casino review creditor/security interest holder does not automatically acquire ownership of m88 casino review equity subject to security when m88 casino review debt is due but has a priority right to be repaid with m88 casino review proceeds from disposal of m88 casino review equity subject to security.

(4) conduct a thorough investigation to identify if m88 casino reviewre are any defects in m88 casino review equity and stipulate in m88 casino review Agreements that m88 casino review creditor/security interests holder is not responsible for any shareholder's contribution defects. If m88 casino review creditor/security interests holder is sued by a third party for m88 casino review capital contribution due to his nominal shareholder status, m88 casino review relevant expenses and losses incurred m88 casino reviewreby shall be indemnified by m88 casino review debtor/a third party security provider.

(5) request m88 casino review debtor/security provider to obtain written consents from om88 casino reviewr shareholders of m88 casino review company for m88 casino review transfer of equity subject to security and m88 casino reviewir waiver of right of first refusal in order to ensure m88 casino review legal transfer of equity subject to security if such transfer involves an external third party, ram88 casino reviewr than a transfer between shareholders.