Chattel Financing Lease Transaction Security Law Studies

After nearly sixty years’development, the world wide financial leasing industry has grown substantially in terms of size, and in western developed countries it has become the second largest source of financing following bank facilities. The financial leasing in China grows quickly as well although its development only recently began. As there are no specifically applicable legal provisions many issues arose from the financial leasing transactions affecting the security of such transactions since the first introduction of financial leasing into China in80’s of last century. Among such issues, the issue of protecting lessors’lawful rights is particularly important. It is of both practical and theoretical importance for the healthy development of financial leasing in China to analyze the circumstances in which lessors’transaction security could be threatened and hence to put forth the corresponding policy proposals to solve the problems.This Article first analyzes the fundamentals of financial leasing, defines the financial leasing and, in particular, discusses the special feature of chattel financial leasing and its types.Secondly, this Article analyzes the legal issues relating to the lessor’s transaction security that exist in chattel financial leasing transactions. The actions that cause practical detrimental to a lessor’s property right to the subject chattel under financial leasing include the following:a lessee, on his own initiative, sells, subleases, creates mortgage over the subject chattel under the financial leasing and when a creditor exercises lien against (by disposing) the subject chattel under the financial leasing.This Article then continues by analyzing the reasons for the above transaction security issues on the basis of legal theory. The primary causes leading to lessors’ transaction security issues lie in the method in which property right in chattel is transferred, the imperfection in the institution of public notice and deemed notice as well as the loss of property right in subject chattel under the financial leasing caused by the rule of bona fide acquisition. Last, this Article articulates certain proposals based on the practice developments of financial leasing registration system established by the credit reference center of the People’s Bank of China. Firstly, to recognize that the registration of chattel financial leasing can prevent a third party from acquiring the property right in the subject chattel by rule of bona fide acquisition; secondly, with respect to the financial leasing for which registration is not applicable or appropriate, the author recommends preventive measures including affixation of markings on the subject chattel, chattel mortgage, punitive damages and contract breach liabilities.