Research Study On The Application Of Purchase Money Security Interest In China

The purchase money security interest(PMSI)is stipulated in Article 416 of the Civil Code of China,but it is seldom quoted in the adjudication due to its abstract and obscure provisions,and the current judicial cases invoking the system of the purchase money security interest as the basis for adjudication have also revealed many problems in the application of PMSI in China.These problems can be attributed to two aspects:the lack of clear understanding of the applicable conditions and the simplicity of the subordination rule.The super-priority effect of the purchase money security interest system means that once a PMSI is established,the purchase money secured party has priority over other security rights holders except the lien holder.The purchase money security protects the rights and interests of the purchase money secured party,but also breaks the general rule of subordination of rights in chattels secured by mortgages,so strict restrictions need to be imposed on the conditions of application of PMSI.Specifically,the conditions for the application of PMSI include four aspects: firstly,the scope of the mortgage is limited to movable assets;secondly,when the mortgage is a movable asset other than personal consumer goods,the application of PMSI shall be subject to the movable floating charge,and if the mortgage is personal consumer goods,its application is not restricted by the movable floating charge;thirdly,the principal claim of PMSI shall be the price of the mortgaged movable asset.Lastly,the establishment of PMSI must satisfy the formal requirements such as delivery and registration within the grace period.In addition,in order to improve the application of PMSI system,Article57 of the Judicial Interpretation of the Security System further explains and provides for the system,specifying that atypical financing security methods such as financial leasing and retention of title can be applied with reference to the system of PMSI.It should be noted,however,that the system of PMSI cannot be applied to leaseback business,because in the case of leaseback,the mortgaged movable property is neither necessary for delivery nor does it increase the overall scope of the debtor’s property.The rule of subordination of rights in a movable security is intended to address the issue of how to determine the order of exercise of rights in cases where there are multiple security rights holders in the same movable asset.As a special type of chattel mortgage,the subordination rule of rights of PMSI is mainly stipulated in Article 57(3)of the Judicial Interpretation of the Security System.According to the Judicial Interpretation,when there are multiple purchase money secured parties on the same mortgaged movable property,the subordination of their rights is determined in accordance with the chronological order of registration of each price claim mortgage.In addition,Article 404 of the Civil Code provides for the rule of BIOC,which,combined with Article 56 of the Judicial Interpretation of the Security System,is also applicable to the system of PMSI.Therefore,in practice,it is too simple to confirm the subordination of PMSI only by the order of registration.The subordination of PMSI should be determined by combining the rule of “first registration,first subordination”and the rule of BIOC.In addition,it is necessary to consider the agreement of the parties on the subordination of the rights of PMSI and the special circumstances when the BIOC rule applies to the system of PMSI when the collateral is personal consumer goods.