On October 13th, 2022, the China Banking and Insurance Regulatory Commission (CBIRC) promulgated the Measures for the Administration of Finance Companies of Enterprise Groups. Set to come into effect on November 13th, 2022, the measures contain chapters dedicated to the risk disposal and market exit of finance companies under enterprise groups.
CAUSE OF RISKS
Based on the Notice on Regulating Business Transactions Between Listed Companies and Finance Companies of Enterprise Groups, released by the China Securities Regulatory Commission (CSRC) and the CBIRC, as well as the verdict on substantive mergers by the Fifth Intermediate People's Court of Chongqing municipality in Panda Autonomous Leasing et al v Lifan Finance et al (2020), the author believes that finance companies incur risks primarily for the following reasons:
- Businesses with other parts of the group are not always conducted on an equal and fair basis.
- Capital dealings with affiliated companies may not involve contracts, with funds occupied but not accruing interest.
- A lack of independence, with fixed assets gratuitously used by affiliates for long periods, and investment, financing, capital, business, company seal and HR matters managed by the actual controller.
- Used by the listed company to transfer capital to the controlling shareholder, actual controller and other affiliates.
- In some cases, overlapping managerial personnel between affiliates.
RISK DISPOSAL
According to the above-mentioned measures, risk disposal of a finance company includes dissolution, regulatory intervention and procedural disposal according to the Enterprise Bankruptcy Law.
Dissolution of finance companies. Under the following circumstances, a finance company should be dissolved, with approval from the CBIRC:
- The enterprise group to which it belongs has dissolved, without the possibility of merger or reorganisation.
- One of the "reasons for dissolution" under the articles of association has occurred.
- A resolution of dissolution has been passed at the shareholders' meeting.
- It ceases to exist after a spin-off or merger.
When dissolving a finance company, the group or company itself should assemble a liquidation team, and the dissolution should proceed according to legal procedures with supervision from the CBIRC. Merger or reorganisation of the group rank as the top reasons for dissolution of finance companies in recent years, based on public information.
In 2019, the finance company under China National Nuclear Corp dissolved after the group merged with China Nuclear E&C Group; in 2021, the finance company under Bensteel Group dissolved after the State-owned Assets Supervision and Administration Commission of Liaoning province transferred 51% of the group's equity at nil value to Ansteel; and in 2022, the finance company under China National Chemical Corp dissolved after CNCC was absorbed by Sinochem Group.
Intervention by the CBIRC. The CBIRC may revoke the licence of finance companies operating illegally or suffering from poor management, or those, if allowed to continue, that would seriously endanger the financial order and the public interest. It may also take over finance companies that already, or may, suffer from a solvency crisis, or find other institutions to do so if they are deemed to seriously threaten creditors' interests and the stability of the financial system. By law, the CBIRC should set up a liquidation group to carry out the liquidation of the revoked finance company.
Lawful entry into bankruptcy. Compared with the version issued in 2006, the new measures provide for finance companies or their creditors to file for bankruptcy. Under article 149 of the Measures for the Implementation of Administrative Licensing Matters Concerning Non-Bank Financial Institutions, non-bank financial institutions, finance companies included, should obtain pre-approval from the CBIRC before filing for bankruptcy. The measures further provide that, with CBIRC approval, finance companies or their creditors may file for bankruptcy if relevant conditions under the Enterprise Bankruptcy Law have been met.
During the bankruptcy procedure, finance companies continue to be supervised by the CBIRC. Where the finance company is reorganised, the reformed entity should comply with the prudential conditions required by the relevant administrative licence for the establishment of a finance company. Finance companies entering bankruptcy are subject to regulatory measures by the CBIRC, including the suspension of its businesses if necessary.
There have been substantive mergers and reorganisations of 11 affiliated finance companies, according to the National Enterprise Bankruptcy Information Disclosure System. These included Lifan Finance and Lifan Holdings, the reorganisation of Founder Group, the substantive merger and reorganisation of Shanghai Huaxin Finance and affiliates, the bankruptcy and liquidation of Zhongwang Group's finance company, and the reorganisation of the finance company of Tewoo Group.
The measures have raised the threshold for establishing a finance company, and enhanced the role of finance companies to independently provide services to affiliates within the group. Finance companies set up before the measures should align with the new standards. If unable to address their risks by standardising their operations, they should refer to the risk disposal requirements under the measures, as well as relevant laws and regulations, or exit the market to prevent the deterioration or proliferation of the risks.
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.
