Finance-related activities are strictly regulated in China. As a
general rule, loans between companies that do not have a licence to
engage in financial services are considered invalid. This includes
intra-group loans. But the People’s Supreme Court of China
recently ruled that loans between two Chinese companies are
permitted if they are short-term and used for operational purposes.
In addition, extending loans should not be the lender’s main
business activity. This new ruling will give Chinese companies more
options in financing their operations.
So far, Chinese courts had based decisions to declare financing
arrangements between companies without licences invalid on two main
legal sources. First, in accordance with the General Rules for
Loans issued by People's Bank of China in 1996, “no
financing business involving lending or borrowing, or lending and
borrowing in a disguised form, may be conducted among companies
without mandatory license”. Second, pursuant to an approval
reply issued by the People’s Supreme Court in 1996,
“loan agreements between companies violate relevant financial
regulations and therefore are invalid”.
The Supreme Court’s recent judgment involved an RMB 80
million loan agreement between lender Zhengzhou Jia De Property
Services Limited and borrower Zhengzhou Guang Xia Real Estate
Limited. The loan agreement had a term of two years and an interest
and surcharge rate of 210 per month. Shareholders of the borrower
provided a guarantee to the lender assuming joint and several
liability. The borrower and its shareholders failed to repay the
loan when it matured, and the lender initiated court
The main subject of dispute in these proceedings was whether the
loan agreement was valid. In deviation from previous judgments, the
Supreme Court surprisingly ruled in favour of the lender and deemed
the loan agreement valid. According to the Supreme Court, a loan
provided by a Chinese company that is not licensed to provide
financial services does not violate China’s financial laws
and regulations and should therefore not be deemed invalid if:
the loan is short term
the regular business of the company is not financing
the purpose of the loan is to provide funds for production or
business operational uses.
Before this ruling, the Supreme Court would be concerned that a
company providing loans without a licence could affect the
State’s financial administration. But the Supreme Court now
seems to have changed its mind. The judgment is, however, specific
to this case. It therefore continues to be important to carefully
plan financing between companies in China.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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