Strengthened ownership protections for leasing companies

Background

Until recently, leasing companies in China faced the possible risk that their assets might be transferred or sold without their consent. In 2020, a court in Ningbo ruled that a leasing company was not the legal owner of its asset, despite the firm having purchased it under a sale-and-leaseback contract (through which an asset that has been sold is leased back by the original owner). 

Why did this happen?

Article 745 of the Civil Code indicates that in order to safeguard the ownership of leased assets, the lessor should register the ownership publicly. Failing to do so means that the lessor cannot claim the leased asset back in the event that it is transferred or sold to a third party by the lessee.

In 2020, Zhongdengwang, the People’s Bank of China’s (PBOC’s) Credit Reference Centre of Moveable Financing Registry Platform, was designated as the unified centre for registering financial leasing transactions. This effectively safeguarded a leasing company’s ownership rights for general equipment. However, the situation remained more complex for leased vehicles.

When leasing a vehicle, registration with the Department of Motor Vehicles (DMV) was made in the name of the lessee. In the case of sale-and-leaseback contracts, the name of the lessor was not mentioned in the registration certificate, which placed leasing companies at risk of the registration certificate being transferred to one or more third parties without their consent. This is what happened in the Ningbo case.

To avoid losing ownership of their assets, leasing companies often practiced ‘double registration’ – registering a mortgage on the vehicle in the DMV platform (mortgage of self-owned property) and registering the vehicle in the Zhongdengwang. This process increased their costs, thereby negatively impacting financing pricing.

Advocacy efforts

The Non-banking Financial Institutions Working Group (WG) advocated for improvements to the Zhongdengwang platform in line with international practices, where registration platforms containing fields for entering invoice numbers and additional unique identifiers of assets help avoid duplicate registrations. The WG recommended establishing links between the DMV and the Zhongdengwang to enable checks for existing ownership rights on a vehicle to be carried out, and to obtain consent from the legal owner prior to authorising any change in ownership/registration.

Since 2020, the WG has regularly communicated with the Chinese authorities and relevant associations, including the National Financial Regulatory Administration (formerly the China Banking and Insurance Regulatory Commission), local financial regulators in Beijing and Shanghai, and the China Leasing Business Association. The issue was also brought to the attention of European stakeholders, including the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA); the Economic and Trade Counsellors of the European Union (EU) Delegation to China; and EU Member States.

In March 2024, the issue was presented to John Berrigan, director general of DG FISMA, ahead of the EU-China Working Group on Financial Cooperation, co-chaired by Berrigan and Vice Governor Xuan Changneng of the PBOC. It was also presented at the China-EU Financial Services Roundtable.

Advocacy Success

In early 2024, a dedicated field was added to the Zhongdengwang registration system for entering invoice numbers and additional unique identifiers of assets. Regulators have confirmed that this change to the system will enable leasing companies to protect their assets (including vehicles), even under sale-and-leaseback contracts. By rescinding the requirement for additional collateral registration on vehicles, the operational burden for industry players has been significantly reduced.

In cases of a defaulted asset, whereby a leasing company must initiate recovery proceedings, this protection and dedicated new registration field provides a favourable basis for a court to confirm the asset’s return.