Creditor’s subrogation and rescission rights form the debt preservation system. Subrogation refers to cases where, due to the debtor’s failure to exercise their rights or associated ancillary rights, the realization of the creditor’s due claim is compromised, allowing the creditor to request the court to exercise the debtor’s rights against a third party in the creditor’s name. The subrogation system plays a vital role in preserving and realizing creditors' claims. However, before the enactment of the "Civil Code," the "Contract Law" required that subrogation could only be exercised after the claim’s due date, leaving early claims less protected. Article 536 of the "Civil Code" introduced the right of subrogation preservation for creditors, thereby enhancing the remedial dimensions of China’s subrogation system.

I. Acts of Enforcement vs. Acts of Preservation

In traditional civil law, the creditor's right of subrogation can be categorized into acts of enforcement and acts of preservation, depending on the nature of the rights being exercised.

Unlike acts of enforcement, acts of preservation are intended to maintain the status of rights and prevent their erosion. Acts of preservation are often subject to time limitations, beyond which rights may be irreparably damaged. For instance, once the statute of limitations expires, the creditor may no longer interrupt the statute of limitations by asserting the right; similarly, if the deadline for filing a claim in bankruptcy has passed, even if the creditor files the claim before the final distribution of bankruptcy assets, they cannot claim additional distribution for what has already been allocated. If the debtor’s claim maturity date falls after the expiration of these deadlines, requiring the creditor to wait until the debt matures to exercise subrogation would render the debt preservation system ineffective. This is a key reason for the "Civil Code" granting creditors the right of subrogation preservation.

II. Provisions on the Creditor’s Right of Subrogation Preservation in the "Civil Code"

Article 536 of the "Civil Code" provides that if the statute of limitations on a debtor's claim or ancillary rights related to such a claim is close to expiration or if bankruptcy claims are not timely filed, thereby affecting the realization of the creditor’s claim, the creditor may, on behalf of the debtor, request the third party fulfill obligations to the debtor, file a claim with the bankruptcy administrator, or take other necessary actions.

Through this provision, the "Civil Code" explicitly defines the creditor’s right of subrogation preservation. Although similar to the right of subrogation in its purpose of debt preservation, there are notable differences between the two, as outlined below:

1. Exercising the Right of Subrogation Preservation Does Not Require Debt Maturity  

This is the primary distinction between the right of subrogation and the right of subrogation preservation. The former requires the creditor's claim to be due, primarily to maintain the principle of privity of contract and prevent creditors from abusing subrogation to harm the debtor’s interests. However, the legal effect of exercising the right of subrogation preservation is to maintain the debtor’s rights, acting in the debtor’s favor without interfering with their interests. Given the urgency associated with exercising the right of subrogation preservation, it is not bound by the requirement of claim maturity.

2. The Right of Subrogation Preservation Can Be Exercised Outside of Litigation  

While the right of subrogation can only be exercised through court action, the right of subrogation preservation is not limited to litigation and may be exercised through other means, such as requesting the third party fulfill obligations to the debtor or filing a claim with the bankruptcy administrator. In cases where the statute of limitations is near expiration, the creditor's aim in exercising subrogation preservation is solely to interrupt the statute of limitations, which can be achieved by requesting performance from the obligor. Requiring court action in such cases would unduly burden judicial resources. For filing claims in bankruptcy, since the action is already part of the bankruptcy process, litigation would not be appropriate.

3. Exercising the Right of Subrogation Preservation is Done in the Debtor’s Name  

When a creditor exercises subrogation, they do so in their own name, and the obligor is required to fulfill obligations directly to the creditor. In contrast, the right of subrogation preservation is essentially a statutory agency right, exercised in the debtor's name. Therefore, the obligor should fulfill obligations directly to the debtor, not to the creditor.

4. Subrogation Preservation Eliminates Only the Debt Relationship Between the Debtor and the Third Party  

The legal effect of exercising the right of subrogation is that the debt relationships between the creditor and the debtor, as well as between the debtor and the third party, are extinguished simultaneously. However, exercising the right of subrogation preservation only extinguishes the debt relationship between the debtor and the third party. To prevent abuse of the subrogation preservation right, it is generally believed that creditors who exercise subrogation preservation do not have priority over the assets involved when obtaining repayment.

Practical Tip  

In interpreting “impending expiration of the statute of limitations” in Article 536 of the "Civil Code," it is crucial to avoid excessive interference in the debtor’s right to autonomy by the creditor and to avoid overly rigidly requiring creditors to wait until near expiration of the statute of limitations. If the third party shows signs of transferring or concealing assets or if their financial status deteriorates significantly, the creditor should be permitted to exercise subrogation preservation immediately.