First, the formulation of questions

In the course of providing project legal services to trust companies, the author's team often encounters arrangements for projects involving overseas entities to provide guarantee guarantees.

The Administrative Provisions on Cross-border Guaranteed Foreign Exchange (Huifa [2014] No. 29) and its Operational Guidelines (hereinafter referred to as the "Cross-border Guarantee Provisions") issued by the State Administration of Foreign Exchange and implemented on June 1, 2014 stipulates:

External guarantee and domestic loan refers to a cross-border guarantee in which the guarantor is registered overseas and the debtor and creditor are registered in China.

If a domestic non-financial institution borrows a loan or obtains a credit line from a domestic financial institution, it may accept the guarantee provided by the overseas institution or individual and sign an external guarantee domestic loan contract on its own provided that the following conditions are met:

(1) the debtor is a non-financial institution registered and operating in China;

(2) the creditor is a financial institution registered and operating in China;

(3) the subject matter of the guarantee is a domestic or foreign currency loan (excluding entrusted loans) or a binding credit line provided by a financial institution;

(4) The form of guarantee complies with domestic and foreign laws and regulations.

Without approval, domestic institutions shall not go beyond the above scope to handle external guarantee and domestic loan business.

If a domestic debtor engages in the business of foreign guarantee and domestic loan, the domestic financial institution that issued the loan or provided the credit line shall submit the data of the foreign guarantee domestic loan business to the capital account system of the SAFE.

According to the Cross-border Guarantee Provisions, if the trust project handled by a trust company involves external guarantee and domestic loan business, the trust company shall report the data of external guarantee and domestic loan business to the SAFE.

Second, the practical dilemma

According to the author's team, some trust companies have not reported foreign guarantee and domestic loan business data to the SAFE in accordance with the Cross-border Guarantee Provisions in the operation of specific projects, mainly for the following reasons:

1. According to the Cross-border Guarantee Provisions, the subject matter of guarantee needs to be a domestic and foreign currency loan (excluding entrusted loans) or a binding credit line provided by a financial institution, but in practice, many trust projects do not adopt a simple loan model, and whether the subject matter of guarantee meets the requirements of the Cross-border Guarantee Provisions depends on the specific determination of SAFE.

2. According to the Cross-border Guarantee Provisions, domestic financial institutions that issue loans or provide credit lines submit data on foreign guarantee and domestic loans to the capital account system of SAFE. The author's team once consulted the relevant foreign exchange bureau by telephone on matters related to the data submitted by trust companies to foreign guarantee domestic loan business, and received the reply that the data reporting of external guarantee domestic loan business should be submitted through the internal reporting system of financial institutions. As most trust companies have not installed the relevant internal reporting system, they are unable to report the data of foreign guarantee and domestic loan business to the capital account system of SAFE as required by the Cross-border Guarantee Provisions. As far as the author understands, in practice, some trust companies submit foreign guarantee and domestic loan business data to the SAFE through written submission, which depends on the SAFE approval of their reporting methods.

III. Impact

01. The impact of effectiveness

According to the Cross-border Guarantee Provisions, the approval, registration or filing of cross-border guarantee contracts by SAFE and other administrative matters and administrative requirements specified in these Provisions do not constitute the requirements for the validity of cross-border guarantee contracts.

Therefore, the validity of the guarantee contract signed by the overseas entity or the guarantee letter issued by the foreign entity shall not be affected by the violation of the Cross-border Guarantee Provisions and other administrative requirements of the SAFE on cross-border guarantees.

02. The impact of foreign exchange settlement

According to the Cross-border Guarantee Provisions, the specific procedures for financial institutions to perform contracts for external and domestic loans are as follows:

Applications for settlement (or purchase of foreign exchange) submitted by financial institutions for overseas guaranteed performance payments shall be accepted by the capital project management department of the SAFE Bureau. If there are no irregularities when a financial institution signs a loan guarantee contract as a creditor, the SAFE may approve the settlement (or purchase of foreign exchange) of the guarantee performance money. If the violation of a financial institution is a procedural violation such as failure to go through the centralized registration of creditors, the SAFE may first allow it to settle foreign exchange (or purchase foreign exchange), and then deal with it in accordance with relevant laws and regulations; If the violation of a financial institution is a substantive violation beyond the scope permitted by the current policy and the financial institution should bear corresponding responsibilities, the SAFE shall first transfer it to the foreign exchange inspection department before approving its foreign exchange settlement (or purchase).

Therefore, in the case that the trust company does not handle the data submission of the external guarantee and domestic loan business in accordance with the Cross-border Guarantee Provisions, it will not affect its final foreign exchange settlement, but it may be affected in time, and the trust company may be investigated for relevant responsibilities by the foreign exchange authorities for failing to handle the data reporting of the external guarantee and domestic loan business, of course, if it is not the trust company's subjective reasons for not handling the data submission, but the foreign exchange authority does not accept the trust company's data submission, the author's team believes that it is unreasonable to determine that the trust company violates the law.

4. Operation suggestions

Regarding the issues related to external guarantee and domestic loans involved in trust projects, the author's team suggests the following:

01. Communicate with the competent foreign exchange authority to confirm whether to accept the trust company's submission of relevant data for external guarantee and domestic loan business, and try to obtain the foreign exchange competent authority to accept the trust company's submission when feasible. If the local foreign exchange authority insists on not accepting it, it is recommended to retain the relevant instructions and materials for communication with the foreign exchange authority in the company's internal processes.

02. Where the provision of guarantees for overseas entities involves litigation or arbitration procedures, it is recommended that the people's court or arbitration institution with jurisdiction in China be selected as the dispute resolution institution in the relevant contract, and the applicable Chinese laws are selected. If the enforcement of overseas property is involved, it is also necessary to apply for recognition and enforcement of judgments (depending on whether there is a relevant judicial assistance treaty between the local area and China), etc., the relevant procedures and procedures are relatively complex and cumbersome, it is recommended to give priority to the assets (if any) of the overseas entity in China, pay attention to examining and understanding the assets of the overseas guarantor in China, and carefully assess the risk protection role of the overseas guarantee.

03. It is recommended to fully disclose the risks of the trust company accepting overseas guarantees in the trust document, including but not limited to the risk of not being able to handle the data submission of external guarantee and domestic loan business, and the risk that the implementation procedures and processes are more complicated.

(This article is translated by software translator for reference only.)