Despite the liberalisation of the PRC government’s control over cross-border security via the Regulation on Foreign Exchange Administration of Cross-border Security (together with its operational guidelines, the Rules) published by SAFE in 2014, there are still various requirements that may need to be satisfied to ensure that cross-border security/guarantees granted by PRC entities are duly registered with SAFE.
This article sets out some of the practical steps that can be taken to help ensure that a cross-border security/guarantee is duly registered with SAFE. It is worth noting, however, that the Rules are complex and the SAFE requirements applicable to any given cross-border security/guarantee should be considered on a case-by-case basis.3
1. Include a power of attorney and ‘further assurances’ type language in the relevant security/guarantee agreement.
Generally, it is the provider of the security/guarantee – as opposed to the beneficiary – that is tasked with complying with the relevant approval/registration/filing formalities. As a result, the beneficiary risks having little to no visibility over the SAFE registration process (and whether the security/guarantee has, in fact, been duly registered with SAFE).
By including a power of attorney granted by the provider of the security/guarantee in favour of the beneficiary in the relevant security/guarantee agreement, as well as imposing a contractual obligation on the provider of the security/guarantee to take whatever steps are necessary to protect the security/guarantee in question, the beneficiary could in theory seek to mitigate this risk.
However, there may be practical difficulties in seeking to rely on an English law power of attorney and ‘further assurances’ clause in the PRC. From experience, local SAFE authorities are generally accustomed to liaising with the PRC provider of security/guarantee only, and may refuse to communicate with the beneficiary or their lawyers.
2. Require evidence of SAFE registration of the relevant security/guarantee as a condition precedent (CP) to effectiveness of, or drawdown under, the relevant finance/transaction documents.
Where the provider of security/guarantee is a bank, SAFE registration may be conducted by submitting the relevant information relating to the security/guarantee to SAFE’s capital account information system through data interface programmes or other methods.
Where the provider of security/guarantee is a non-bank financial institution or enterprise, it should handle the registration procedure with the local SAFE authority within 15 working days after signing the security/guarantee. From experience, upon receipt of the relevant registration materials, the local SAFE authority will usually issue a receipt evidencing acceptance of the registration application. This does not, however, guarantee successful registration – during SAFE’s ‘procedural examination’ of the registration application (which could take up to a month or so), it may raise queries about the authenticity, commercial reasonableness, compliance, or performance of the guarantee/security, and may turn down the registration application if no satisfactory explanation is provided.
Due to the beneficiary’s lack of control and certainty over the registration process, it would be advisable to require evidence of SAFE registration completion as a CP to the effectiveness of, or drawdown under, the relevant finance/transaction documents.
Once the security/guarantee has been duly registered with SAFE, a registration certificate (业务登记凭证) attaching a table of registration particulars (对外担保登记表) is usually provided by SAFE. It is advisable for the beneficiary of the security/guarantee in question (ideally in conjunction with their lawyers and PRC counsel) to review this document to check that it actually relates to the relevant security/guarantee, and that the registered particulars are accurate.
3. Ensure that the application submitted to SAFE includes a value and a duration assigned to the security/guarantee.
Even if registration certificates have been issued, the security/guarantee may not be duly registered with SAFE if no value (担保金额) or period (担保期限) is assigned to that security/guarantee in the registration application. Lack of an assigned value/period may cause issues if the beneficiary needs to enforce the security/guarantee, as PRC banks may refuse requests from the security/guarantee provider to effect payments out of the PRC under that security/guarantee, without their being able to check the amounts of those payments against the relevant assigned value/period.
When assigning a security/guarantee value, SAFE usually require this to be evidenced by the relevant specific provisions in the underlying agreements, which set out quantifiable liabilities and/or payment obligations. Care should be taken to include a realistic amount for the security/guarantee value, as it is unclear whether SAFE will permit payment being made under a security/guarantee for any amount in excess of the security/guarantee value registered with SAFE. In practice, however, it is not uncommon for SAFE to allow the registered security/guarantee value to be exceeded (for example, in the case of interest accruing on the principal amount of a loan).
It would be advisable to set out expressly in the security/guarantee the maximum liability and the security/guarantee period thereunder.
For the purpose of SAFE registration and in the absence of an express term in the security/guarantee, the security/guarantee period will typically be two years from the latest date on which the secured/guaranteed obligations can become due and/or payable.
Aside from the above, additional steps may need to be taken to ensure that the security/guarantee in question has been duly registered with SAFE, particularly as each locality (and its respective SAFE office) may have its own approach to approval/registration/filing formalities.
Accordingly, it is important to consider engaging PRC counsel from the outset of any transaction that involves Chinese counterparties (and which is likely to involve cross-border security granted by a PRC entity).
Reed Smith’s Hong Kong office has PRC-registered lawyers who can advise on SAFE-related issues and provide initial assistance. Our Shanghai office also routinely advises on all aspects of SAFE-related regulatory issues. If a need for any local assistance arises, Reed Smith also has strong relationships with a number of PRC law firms, with whom we can work together to advise on SAFE-related issues.
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For further information on the current SAFE regulatory regime, please see Reed Smith Client Alert: A brief guide to how SAFE monitors and regulates PRC companies and their cross-border trading activities.
- Whether it is necessary for the security/guarantee in question to be approved, registered and/or filed with SAFE is not always a straightforward question to answer – please see Reed Smith Client Alert: Relaxation of PRC cross-border security and guarantee restrictions by SAFE’s New Rules for further information on this issue.
- This article relates only to ‘outbound security’ (Nei Bao Wai Dai or 内保外贷), that is, any security/guarantee provided by a PRC entity in favour of a non-PRC beneficiary to secure repayment of a debt/performance of an obligation incurred by a PRC entity; it does not cover the issues concerning security/guarantees provided to a PRC entity by a non-PRC entity in respect of debt/obligations owed by a PRC entity (Wai Bao Nei Dai or 外保内贷) or any other form of cross-border security.
Client Alert 2017-181
