The Supreme People's Court of China has issued new rules
concerning the judicial interpretation of private lending disputes.
The rules, known as "Provision 18″, took effect on 1
September 2015. Provision 18 ensures that, subject to certain
exceptions, private loan agreements between non-financial legal
entities are recognised by all courts in China. This means that
intercompany loans between Chinese group companies are now
Provision 18 puts an end to the need of "shadow"
lending practices in China where a bank is engaged to act as an
intermediary. Under the old financing regulations, lending between
Chinese non-financial legal entities was not permitted. This meant
that courts in China generally denied validity to private loan
agreements between non-financial legal entities. That has now
changed. Provision 18 confirms that, subject to a limited number of
exceptions, a private loan between non-financial legal entities
entered into for production or business operation purposes will be
regarded as valid by Chinese courts. However, a private loan
agreement entered into by a lender (not being a financial
institution) that carries out moneylending activities on such a
scale that this activity has become its main source of income, is
still likely to be declared null and void.
Provision 18 has also set fixed ranges for interest rates under
private loans. As of September 2015, a private loan agreement with
an annual interest rate of 24% or less will be regarded as valid by
Chinese courts. If the annual interest rate exceeds 24%, but not
more than 36%, the lender's claim to pay the part of the
interest exceeding 24% will not be supported by Chinese courts. But
if the borrower has paid the interest, the lender cannot be
compelled to return it. If the annual interest rate in private loan
agreements exceeds 36%, the excess interest will be deemed null and
void, and a borrower may reclaim any excess amounts paid.
As a result of Provision 18, intercompany loans between Chinese
companies are now allowed. Multinational groups with multiple
subsidiaries in China can therefore use this additional means of
funding in their intragroup financing strategy. Provision 18 also
creates more flexibility for the funding of Sino-foreign joint
ventures as the new regulations now allow loans from the Chinese
joint venture partner to the joint venture company.
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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