Issues related to Debt Repayment in Kind
In recent years, debt disputes have occurred frequently. Many companies are short of cash flow, and choose to repay debts with real estate, vehicles, goods, and other items. Many creditors are unwilling to accept debt repayment in kind. Compared with cash, debt repayment in kind involves many risks. However, under the current economic situation, if the risks of debt repayment in kind are fully considered in advance, it can still be a second-best option.
Generally speaking, debt repayment in kind mainly involves risks in four aspects:
- Ownership of the Item
Before accepting debt repayment in kind, the creditor should carefully check the ownership and status of the item used for debt repayment. In order to avoid risks related to the unclear ownership, incomplete certificates, or any restriction to the transaction of the item, for registered assets such as real estate and vehicles, it is necessary to confirm whether the registered owner is the debtor, whether there are co-owners, whether security interests such as mortgages or pledges have been established, whether the item has been seized or frozen by the court, and investigate the actual possession situation. In the case of (2023) Yue Min Zhong No. 2241, Company A used its real estate to repay debts to C, the actual beneficial owner of Company B. However, due to debt issues between Company A and Company D, the real estate was seized by the court, and C then filed an action for objection to execution. In the end, the Guangdong High People’s Court, after considering factors such as the date of the agreement, the remarks on the payment voucher, and the determination of the creditor-debt relationship, held that C did not have civil rights to exclude compulsory execution.
- Value of the Item
The price of the item used for debt repayment should be fair and reasonable. If the price is significantly different from the normal market price, the court will focus on identifying whether it is a false lawsuit and may revoke or adjust the price. It is recommended to entrust a third-party institution to conduct an evaluation of the item. When determining the price of the item, the creditor should also fully consider its market value, for example, by conducting multiple price inquiries and market comparisons for cross-verification, reasonably estimating the holding costs and tax burdens, and retaining relevant evidence. Special attention should be paid to real estate. Due to factors such as purchase restrictions and real estate taxes, more factors need to be considered in terms of the item’s value.
- Procedures for Transfer of Ownership of the Item
After accepting debt repayment in kind, the creditor should promptly complete the procedures for the change of property rights. According to the third paragraph of Article 27 of the “Judicial Interpretation of the General Provisions of the Contract Book of the Civil Code”: ” Where the agreement on the expiation of debts in kind as prescribed in the preceding paragraph is confirmed by the court or a mediation document is prepared by the court according to the agreement on the expiation of debts in kind concluded by the parties, the court shall not uphold the claim of the creditor that the property rights have been modified or have the effect against a bona fide third party upon the effectiveness of the confirmation document or the mediation document.” It can be seen that reaching an agreement on debt repayment in kind, or having it confirmed or mediated by a court, cannot oppose a bona fide third party. In other words, for such agreement signed after the performance period of the underlying debt has expired, the creditor holds an ordinary claim and does not enjoy priority in compensation before the change of property rights. Therefore, the creditor should promptly complete the procedures for the change of property rights. For real estate and special movable properties such as vehicles, registration change procedures should be completed (specifics can be consulted with the local real estate transaction center, vehicle management office, etc.); for ordinary movable properties, possession should usually be transferred. Considering that the requirements for registration change procedures may vary across cities, it is recommended to confirm the required documents with the relevant departments in advance.
- Risk of Failure to Perform the Debt Repayment in Kind
The second paragraph of Article 27 of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the General Principles of Contract Part of the Civil Code” stipulates: ” After the debtor or the third party performs the agreement on the expiation of debts in kind, the court shall hold that the corresponding original debts are extinguished at the same time; where the debtor or the third party fails to perform the agreement on the expiation of debts in kind as agreed and still fails to perform it within a reasonable time limit after being urged, and the creditor chooses to request for performance of the original debts or the agreement on the expiation of debts in kind, the court shall uphold such request, unless it is otherwise stipulated by laws or agreed upon by the parties.” It can be seen that if the debt repayment in kind fails to be performed, the creditor has the statutory right to choose between the two options. However, if the relevant agreement contains a clause such as “From the date of signing this agreement, the creditor shall no longer claim any rights against the debtor,” which shall be regarded as an agreement between the parties, then the creditor could not request for performance of the original debts. Under such circumstance, if the debt repayment in kind cannot be performed, the creditor would lose the right to require the debtor to continue performing the original debt and can only pursue the liability of the relevant parties based on the agreement on debt repayment in kind.