徐可

In actual debtor-creditor relationship， the information about the debtor that creditors grasp is asymmetric with the fact， which leads to the inaccurate evaluation on debtors economic situation by creditors before the loan and inadequate supervision over the utilization of capital after the loan. Creditors， if there is no other alternative， often tend to obtain higher interest rates， to be compensated in the case of the debtors failure in credit standing and respectability. However， the result of this tendency may have a reverse impact—creditworthy debtors no longer raise loans from creditors as they cannot accept exorbitant interest rates， which leaves over debtors of low credit in credit market， as a result， creditors will have to raise interest rates once again. Such a vicious spiral， with creditors only choose “credit rationing”， may bring about stagnation of the whole credit market. In this case， hypothec， including the security right discussed in this paper， is an available tool to balance information asymmetry between parties involved. It has following advantages：

1. Bringing Benefits to Creditors

1.1 Ensuring the Performance of the Debt Every creditor， when raises a loan， will considers the possibility of debtors default of his obligation. On the one hand， the creditor is not well informed of debtors economic foundation and repayment willingness；on the other hand， even the debtor himself usually cannot accurately predict the risks and returns of investment projects. In this sense， security right reflects creditors distrust towards debtors performance ability and willingness. Therefore， it is necessary to set up certain security rights when making loans.

When the lender is the only creditor of the debtor， it is of little significance to require security right， because the debtor， together with all his property， will be responsible for the only creditor. But this situation seldom appears， for one thing， the creditor could not prevent the debtor from engaging new deals and getting new loans， on the other hand， under the principle of equality on creditors right， the property of the debtor should be utilized as equal repayment， without priority. Therefore， the main function of the security right in bankruptcy is to ensure that the obligee can be paid in priority when one debtor has multiple creditors.

1.2 Limiting further debts For the gross property of the debtor is limited， providing security to some creditors inevitably means the decreasing of property volume provided as security for others. Therefore， the demand of security right can decrease debtors liabilities， thereby ensures more benefits for enterprises in terms of their property.In practice， creditors can impose restrictions on the debtors behavior， including prohibiting further debts， through concluding and signing restrictive covenants with the debtor. But this contractual arrangement is not binding on the third party. The implementation of the covenant requires that creditors can effectively supervise the debtor， which is difficult to achieve when the debtor is of small and medium-sized enterprises， and which can be achieved only at the expense of high cost.

1.3 Reducing Entrustment Cost of the Loan contract Principal-agent relationship， in essence， is a contract， indicating that one partys welfare depends on the other partys behavior. Under the contract， the bailor pays certain remuneration to the agent， who will conduct certain behavior for the bailor. A loan contract can also be explained in this pattern—in a contractual relationship， where the lender is the bailor and the borrower is the agent， the bailor delivers his right of using capitals to the agent， excepting capital appreciation， i.e. obtaining interest returns. According to this principle-agent relationship theory， in case of the bailor wants to protect his interests， he needs to “sift” agents （debtors） who have inferior credit standing and respectability by screening information before making the loan， and to detect and regulate agents （debtors） misbehavior by monitoring after issuing the loan. If some agent cant be supervised effectively， the bailor will “discharge” the agents as the only option. In a specific contractual relationship， if the lender is not convinced that the borrower will perform obligation， he will choose not to trade with the borrower （not to raise a loan）， or to require high interest rates even if he provides the loan to offset the risk of lending.

In corporate financing market， borrowers are usually limited companies or joint-stock companies. According to the classical theory of corporate law， compared with any individual or partner， the company owner tends to make decisions which would bring over the maximum benefits， and which would transfer adverse consequences of mismanagement to creditors to bear. Because in case the company goes bankrupt due to failed speculation， the ultimate party which bears corporate deficit is not the corporate owner himself， but creditors who claim equities on principal and interest. In a loan contract， the undue behaviors of the debtor， as a corporation， are mainly manifested in two aspects， one is transferring properties；the other is improving operational risk. The former refers that the corporate property， instead of being applied for the overall interests of the corporation， is embezzled for personal purposes， or is directly transferred into personal account by corporation owners；the latter refers that after the sign of a loan contract， the debtor may invest with the capital he obtained in high-risk business. These possibilities are primary causes for creditors， as bailors in principal-agent relationship， to take proper measures to limit the agent （debtor）.

After making the loan， in terms of restraint， the creditor （bailor） can supervise the debtor （agent） in widest range， to prevent any improper behavior conducted by the debtor as much as possible， or at least， to respond more quickly than other creditors in case the debtor goes bankrupt. However， the overall supervision is costly. The alternative approach is to require the debtor to provide security for the loan. With collateral security， creditors rights can be realized as long as it is not physically damaged by any violation or speculative behavior conducted by the debtor. Of course， creditors shall not completely rely on security right without any supervision over the debtor. Creditors can narrow the range of supervision correspondingly as enjoying the security right. The cost differential between overall supervision and respective supervision is the benefits brought by security right.

1.4 Saving implementation cost If some debtors have the ability to fulfill obligations， then it seems that creditors do not have to claim any security right. Its may not true. If the security right， against the background of bankruptcy， is to grant certain creditor the priority right to be paid over other creditors， then out of the bankruptcy， the main role of the security right is to reduce the cost of general civil litigation. For example， creditors can directly realize mortgage rights without civil procedure in accordance with compulsory execution clauses of mortgage contract. Similarly， as for the cession of the obligatory security right， the obligee can directly exercise his security right without enforcement. Generally speaking， security right is of avail for creditors in and beyond bankruptcy proceedings.

2. Benefits for the Debtor Granted by the Security Right

One benefit for the debtor is obviously the obtaining of necessary loan， and lowering loan interest is another one. Based on the said that the security right brings considerable benefits to creditors， there naturally comes a conclusion：secured loans are often “cheaper” than unsecured loans， i.e. creditors would offer a discount in interest for the debtor. Therefore setting up a security right is also beneficial to the debtor.In addition， in consideration that some creditors are more skillful and experienced in supervision than other creditors， establishing a financial system， which can effectively allocate supervisory duties between secured creditors and unsecured creditors， is necessary to lower loan interest of whole financial system through letting unsecured creditors， instead of secured creditors with experience and ability， request more guarantees.

3. Welfare of Whole Society

It could be said that the existence of the security right will certainly contribute to the welfare of whole society. Because enterprises may initiate， expend or sustain their operation， increase investment in research and development as soon as they obtain the credit and loan， to promote their ability in innovation and competitiveness. Without financial support， any enterprise is of difficulty to scale up rapidly， and correspondingly， the social economic growth will be greatly slowed down. In particular， developing countries in their early stage of economic development extremely lack of capitals， but security right system conduces to eliminate “fears” of internal and external funds entering into the market， hereby it is an important auxiliary contributing to economic growth. In this sense， the security right will generate a “positive” and “external” effect.

In general， the security right is efficient and has solid foundation in existence.

References：

[1]A.Keay，Insolvency Law：A Matter of Public Interest？51 Northern Ireland Legal Quarterly，（2000）.

[2]Bebchuk and Fried，The Uneasy Case for the Priority of Secured Claims in Bankruptcy，105 Yale Law Journal，857，934（1996）.

[3]Hudson，The Case Against Secured Lending，15 International Review of Law and Economics 47，54（1995）.