Hulk’s Heavy Lifting: The Guangdong Dumbbell Dilemma

Once upon a time in the land of Dongguan, where factories puff like dragons and the Pearl River flows like silk, there stood a modest temple of iron known as Hulk’s Dumbbell Emporium. Now, Hulk, the burly master of metal, found himself in the midst of a pandemic pickle. With the coronavirus doing its unwelcome viral vogue across the globe, the once bustling gyms stood as ghostly as forgotten locker rooms, and the spandex-clad warriors sought refuge in their living quarters.

Lo and behold, the cry for home-bound hefting echoed far and wide, and Hulk’s iron offspring – the dumbbells – were summoned to the rescue. Yet, Hulk’s forge was not built for the Herculean task that lay before him, for he needed more space, more hands, and more gear to quadruple the clang and bang of dumbbell birth.

With pockets as empty as a barbell without plates, Hulk flexed his financial muscles at the local money temple – the bank. With a thunderous handshake that would make Thor envious, they struck a deal. Hulk would hock everything but his green skin: machines that roared, materials that waited, and dumbbells that gleamed, all for a hefty half-million RMB treasure chest to fuel his metallic crusade for one full turn of the calendar.

The pact was inked on the first of June, with the seal of officialdom stamped on the first of July. Now, should Hulk’s fiscal fitness falter next year, the bankers could swoop in like vultures on a kettlebell, claiming their due from Hulk’s iron jungle.

As for the mortgage’s mighty grip, it clamped down the moment the registrar’s ink dried. And should our green entrepreneur dare to auction off a machine in the sultry heat of August, he’d find himself juggling legal dumbbells, for those were the bank’s collateral in this iron game of loans.

Law In A Minute

Such a mortgage is referred to as a floating charge and it becomes effective on the date the contract is signed.

Floating charges provide entrepreneurs with the opportunity to secure financing through assets that are continually changing or circulating within the business. Typically, these assets are current assets that a company expects to turn over within one year. The floating charge attaches to these fluctuating assets, granting the company the flexibility to utilize them in daily business operations while they serve as collateral.

Take, for instance, a company’s inventory pledged as security for a loan. The business retains the ability to sell and replenish its stock, which means the inventory’s value and quantity can vary over time—essentially, it ‘floats’.

Should Hulk be unable to service his debts come next year, a process known as ‘crystallization’ is triggered. Crystallization is the transformation of a floating charge into a fixed charge. This typically occurs when the company defaults on the loan or enters into liquidation; the floating charge ‘crystallizes’ or solidifies into a fixed charge. Once fixed, the charge locks down the assets in question, preventing the company from utilizing or disposing of them.

Additionally, crystallization may be initiated if the company ceases operations, or if legal proceedings result in the court appointing a receiver. Following crystallization, the secured assets are no longer transferable, and the lender may assume control over them.

It’s important to note that for chattels, registration does not constitute the definitive factor in the validity of a mortgage. Hence, despite the registration occurring in July, the mortgage’s effect took place in June. The image above shows the website utilized for registering such mortgages.

Lastly, a purchaser is entitled to acquire the machinery provided that they have paid a fair market price and the sale constitutes a normal business transaction. Therefore, despite the machinery’s inclusion in the registered floating charge, the buyer is permitted to take possession after paying an equitable price.

Legal Basis

Civil Code

Article 396

Enterprises, sole proprietors, and agricultural operators are entitled to pledge both their current and prospective production equipment, raw materials, semi-finished, and finished goods as collateral. In the event that the debtor does not perform the matured obligations, or circumstances occur as stipulated by the parties for the enforcement of the mortgage rights, the creditor shall have the preferential right to satisfaction from the movable property as appraised at the time of the mortgage’s inception.

Article 403

In the case of a chattel mortgage, the right of the mortgage is established upon the effectiveness of the mortgage contract; however, without registration, it cannot be asserted against a bona fide third party.

Article 404

In the case of a chattel mortgage, the mortgage may not be asserted against a purchaser who has acquired the mortgaged property in the course of ordinary business activities and has paid reasonable consideration for it.