If your debtor defaults on a debt, you can take a lien on the debtor’s chattels (movable property) that you have legal possession of. In other words, the seller can retain ownership of the goods if the buyer fails to pay the price or perform other obligations as scheduled.
This post was first published in CJO GLOBAL, which is committed to providing consulting services in China-related cross-border trade risk management and debt collection. We will explain how debt collection works in China below.
1. What is a lien?
If your debtor defaults on a debt, you can place a lien on the debtor’s chattels that you have legal possession of, and have the right to use those chattels to pay the debt in priority.
For example, if you were a shipping company that has finished a shipment for a Chinese enterprise, and the enterprise has not paid you on time, you could hold the goods valued equally with the shipping costs and use the goods to offset it.
Liens are commonly attached to contracts of carriage, commission, processing, and leasing. In most cases, you will acquire the debtor’s goods for the performance of your job, but you are not the owner of the goods. If the debtor has not paid the debt, you can elect to enforce the lien.
Liens are created by law. Therefore, even if the contract does not contain such a clause, you have the right to do so.
2. What is title retention?
You may agree in a sales contract that the seller will retain title to the goods if the buyer has not paid the price or performed other obligations when due, sometimes even after the buyer has received the goods.
At this point, as the seller, you have the right to take back the goods.
The buyer shall make the payment within a period agreed upon by the parties or ordered by the seller. If so, the buyer can have the goods back.
Otherwise, the seller may sell the goods to a third party at a reasonable price and use the proceeds to satisfy the debts. Meanwhile, the surplus shall be returned by the seller, and the shortfall shall be repaid by the buyer.
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Photo by Yunhao Qian on Unsplash
Contributors: Meng Yu 余萌
