Anhui Branch of Agricultural Development Bank of China v. Zhang Dabiao and Anhui Changjiang Financing Guarantee Group Co,. Ltd. (Dispute over the Lawsuit to Object to Execution)
Resources from:2016 LexisNexis
  
If the parties concerned open a special guarantee deposit account for the pledged money as agreed and the pledgee acquires the possession and control of the special account, which conforms to the requirement for the specification of fund and transfer of possession, even if the balance in the account fluctuates, the establishment of the monetary pledge will not be affected
Adopted upon discussion by the Judicial Committee of the Supreme People's Court and released on November 19, 2015
 
Relevant Regulations

Article 212 of the Real Rights Law of the People's Republic of China
 
Basic Case Facts

The plaintiff the Anhui Branch of Agricultural Development Bank of China, (hereinafter referred to as the "ADB-Anhui Branch") complained that: it cooperated with the third party Anhui Changjiang Financing Guarantee Group Co., Ltd. (hereinafter referred to as the "Changjiang Guarantee Company") on credit guarantee business according to the Cooperation Agreement on Credit Guarantee concluded by and between them. The fund in the special guarantee deposit account opened by Changjiang Guarantee Company with ADB-Anhui Branch was actually the pledge guarantee provided by Changjiang Guarantee Company to ADB-Anhui Branch. ADB-Anhui Branch requested the court to order that it should be entitled to the pledge regarding the fund in the account.
The defendant Zhang Dabiao argues that, the Cooperation Agreement for Credit Guarantee Business signed between the ADB-Anhui Branch and the third party Changjiang Guarantee Company did not manifest the intention of pledge; the fund in the account in question fluctuated, which did not conform to the requirement on specification of fund, and the ADB-Anhui Branch should not be entitled to the pledge regarding the funds in the account in question.

The third party Changjiang Guarantee Company agreed upon the opinion of ADB-Anhui Branch concerning the entitlement to the pledge regarding the fund in the account in question.

The court has ascertained through hearing this case: the ADB-Anhui Branch and Changjiang Guarantee Company signed a Cooperation Agreement for Credit Guarantee Business on April 7, 2009, and Article 3 "Guarantee Forms and Liability" thereof stipulates: the security for the guarantee provided by Party A (Changjiang Guarantee Company) to Party B (ADB-Anhui Branch) is joint and several liability guarantee; the scope of the guarantee covers the principal creditor's right and interest, liquidated damages, expenses to realize the creditor's right, etc.; Article 4 "Guarantee Deposit" thereof stipulates: Party A shall open a special guarantee deposit account with Party B, and the bank of the said special account shall be the business department of ADB-Anhui Branch, with the last four digits of the said account number 9511; Party A shall deposit the deposit as agree for the specific guarantee business in the said special account prior to the signing of the contract on guarantee, and the deposit to be deposited by Party A shall be not less than 10% of the amount of the loan; Party A shall not employ the fund in the special account without the permission of Party B; Article 6 "Loan Collection and Extension as well as Assumption of Guarantee Liability" thereof stipulates: if the borrower fails to repay the loan in full within the specified time limit, Party A shall take the guarantee liability to Party within five days after receiving the written notice from Party B in accordance with the provisions of Article 3, and deposit the corresponding payment into the account specified by Party B; Article 8 "Liability for Breach of Contract" thereof stipulates: where the balance of the special guarantee account opened by Party A with Party B is less than the agreed amount for any reason, Party A shall make up for the difference within three working days after receiving the notice from Party B, and Party B may suspend the business under the agreement before the making-up. If Party A fails to perform the guarantee liability on time which results in the breach of Article 6 of the agreement, Party B has the right to deduct the corresponding payment from the special guarantee fund account or any other account opened by Party A with it. The ADB-Anhui Branch and Changjiang Guarantee Company also signed another two Cooperation Agreements on Credit Guarantee with contents similar to the above agreement respectively on October 30, 2009 and October 30, 2010.

After the signing of the above agreements, the ADB-Anhui Branch and Changjiang Guarantee Company carried out the cooperation on the credit guarantee business, and Changjiang Guarantee Company opened a guarantee deposit account with the ADB-Anhui Branch with the last four digits of the account number 9511. Changjiang Guarantee Company deposited the guarantee deposit at the specific rate as agreed in the agreements in the account, and provided the joint and several liability to guarantee for loans with appropriate amounts. From April 3, 2009 to December 31, 2012, there were 107 transactions recorded in the account, and the credit business involved the deposit deposited by Changjiang Guarantee Company, while the debit business mainly covered two types. The first type involved the application of Changjiang Guarantee Company to the ADB-Anhui Branch for returning the deposit after repayment of the loan, and part of the deposit was returned to the account of the debtor; and the second was the deposits deducted from the account by the ADB-Anhui Branch for overdue loans.

On December 19, 2011, the Intermediate People's Court in Hefei City, Anhui Province, when hearing the dispute case of Zhang Dabiao v. Anhui Liuben Food Co., Ltd. and Changjiang Guarantee Company (Dispute over Private Lending), took preservative measures against the fund with amount of CNY14,957,852 in the said special guarantee account of Changjiang Guarantee Company at the request of Zhang Dabiao. After the judgment for the dispute came into effect, the Intermediate People's Court in Hefei City transferred CNY13, 383,132.57 from the said guarantee account into the court's account. The ADB-Anhui Branch proposed the objection to execution as a third party, and the Intermediate People's Court in Hefei City ruled to dismiss the objection on November 2, 2012. Later, the ADB-Anhui Branch filed the lawsuit due to the dispute over objection to execution with the defendant Zhang Dabiao and the third party Changjiang Guarantee Company.
 
Results of Judgment

The Intermediate People's Court in Hefei City, Anhui Province made the civil judgment (He Min Yi Chu Zi [2012] No.505) on March 28, 2013: to dismiss the claims of the ADB-Anhui Branch. The ADB-Anhui Branch lodged an appeal after the judgment was pronounced. The Anhui High People's Court made the civil judgment (Wan Min Er Zhong Zi [2013] No.261) on November 19, 2013: 1. to revoke the judgment (He Min Yi Chu Zi [2012] No.505) made by the Intermediate People's Court in Hefei City, Anhui Province; 2. the ADB-Anhui Branch is entitled to the pledge regarding the fund with the amount of CNY13,383,132.57 in the account (last four digit of the account number: 9511) of Changjiang Guarantee Company.
 
Reasons for Judgment

The effective judgment of the court holds: the focus of dispute during the second instance of this case is on whether the ADB-Anhui Branch is entitled to the pledge regarding the fund in the account in question. The investigation shall be conducted in two aspects, namely, whether there is a pledge relationship between the ADB-Anhui Branch and Changjiang Guarantee Company and whether the pledge has been established.

I. Whether there is a pledge relationship between the ADB-Anhui Branch and Changjiang Guarantee Company
Article 210 of the Real Rights Law of the People's Republic of China (hereinafter referred to as the "Real Rights Law") stipulates that: "For establishing the pledge, parties concerned shall enter into a written contract. A pledge contract shall generally contain the following items: 1. the category and amount of the obligee's rights secured; 2. the term for the obligor to settle debts; 3. the name, quantity, quality and condition of the pledged property; 4. the scope of guarantee; and 5. the time of delivery of the pledged property." In this case, though the ADB-Anhui Branch and Changjiang Guarantee Company did not conclude a contract with the word "pledge" separately, according to the provisions of Articles 4, 6 and 8 of the relevant agreement, the ADB-Anhui Branch and Changjiang Guarantee Company reached a consensus on the following matters through negotiation: Changjiang Guarantee Company shall open a guarantee deposit account for the fund deposited for the guarantee business, and deposit the fund at a certain proportion of the amount of the loan; the ADB-Anhui Branch as the bank of deposit shall acquire the control of the deposit in the account deposited by Changjiang Guarantee Company, and without permission, Changjiang Guarantee Company is not allowed to use the fund in the account according to its own will; where Changjiang Guarantee Company fails to perform the guarantee liability, the ADB-Anhui Branch shall be entitled to deduct the appropriate amount from the account. Such consensus expressly specified the type and amount of the guaranteed pledge, period for the performance of the debt, quantity of the collateral and time of delivery, scope of guarantee and the conditions for exercising the right of pledge, containing the general provisions on pledge contract as provided in Article 210 of the Real Rights Law. Therefore, it shall be deemed that the ADB-Anhui Branch and Changjiang Guarantee Company have entered into a written pledge contract.

II. Whether the pledge in question has been established
Article 212 of the Real Rights Law stipulates "The pledge shall be established as of the date when the pledgee delivers the pledged property." Article 85 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of the Security Law of the People's Republic of China stipulates that where a debtor or third party transfers possession of a special account, sum of money, guaranteed sum or other specification form of money to his creditor as security for the creditor's claim, the creditor shall be entitled to priority of compensation by using such money in the event that the debtor does not perform his obligation. According to provisions of the said law and judicial interpretation, money, as a type of special movable property, can be used for pledge. Monetary pledge as special pledge with movable property is different from the pledge with immovable property and the pledge of rights, and two additional essential conditions including specification of fund and transfer of the possession to the creditor should also be satisfied, so that the money may be distinct from other properties of the pledger and be independent of the properties of the pledgee.

In this case, firstly, the money was made specified in the form of deposit. On April 3, 2009, Changjiang Guarantee Company opened an account with the ADB-Anhui Branch, and the account number was in line with the one specified in the Cooperation Contract for Credit Guarantee Business, which meant the parties opened the special guarantee deposit account for the pledged money as agreed by the agreement. After the special guarantee deposit account was opened, the funds transferred into this account were the deposit paid by Changjiang Guarantee Company for the guaranteed loan at a certain proportion of the amount of the loan; the funds transferred out of the account represented the return and deduction of the guarantee deposit made by the ADB-Anhui Branch, and the account was not used for the daily clearing; therefore, the requirement for specification of fund in forms of the special account and other forms provided in Article 85 of the Interpretation of the Supreme People's Court on Several Issues concerning the Application of the Security Law of the People's Republic of China is satisfied. Secondly, the specified fund was transferred to the creditor for possession. Possession refers to the actual status of controlling and managing an item. The guarantee deposit account in question was opened with the ADB-Anhui Branch, and Changjiang Guarantee Company should have had the right to withdraw the fund in the account freely as the owner of the fund in the account; however, the Cooperation Contract for Credit Guarantee Business specified that Changjiang Guarantee Company shall not use the fund in the special guarantee deposit account without the permission of the ADB-Anhui Branch. Meanwhile, the said contract specified that the ADB-Anhui Branch shall have the right to directly deduct the fund in the special guarantee deposit account when the guaranteed loan due fails to be paid off on time; the ADB-Anhui Branch as the creditor obtained the control of the account in question and practically controlled and managed the account. Such type of transfer of control conforms to the requirement to transfer the pledged money to the creditor for possession. Therefore, it should be deemed that the parties have established the pledge with the fund in the account in question.

Issues concerning whether the fluctuation of the fund in the account will affect the specification of fund. The specification of the deposit in the form of a special account does not equal to immobilization. In using the account in question, the balance of the account fluctuates with the development of the guarantee business. When the guarantee company carries out a new loan guarantee business, it shall place the deposit in the account at a certain proportion as agreed, which will inevitably lead to the increase of the fund in the account; when the guaranteed loan of the guarantee company due fails to be paid off on time, the deduction of the fund in the account will inevitably lead to the decrease of the fund in the account. Although the fund in the account fluctuates upon occurrence of transactions, the fluctuations is corresponding to the transactions related to the guarantee deposit, and except for the payment of the deposit, the expenditures are used for the return and deduction of the guarantee deposit, rather than being used for the daily clearing for transactions related to items other than the guarantee deposit. That is to say, the ADB-Anhui Branch can control the account, and Changjiang Guarantee Company is subject to limitations on the use of the fund in the account. Therefore, the fluctuation of the fund in the account still conforms to the requirement of the pledge on specification and transfer of possession, which does not affect the establishment of the monetary pledge.

(Resources from 2016 LexisNexis)