A Guide to China's Cross-Border Guarantees

Cross-border guarantees have become an increasingly common financial instrument, facilitating international transactions and providing security for business operations across different jurisdictions. However, the legal landscapes of each country can vary significantly, leading to unique challenges and considerations when it comes to cross-border guarantees. In this newsletter, we will explore the key aspects that foreign enterprises should be aware of when accepting cross-border guarantees from Chinese entities.

Q1：Why emphasize the regulatory requirements of cross-border guarantees?

Understanding the regulatory requirements for cross-border guarantees is essential to mitigate the risks associated with the invalidity of Chinese guarantees and the potential inability to receive payment from Chinese guarantors. Furthermore, China has specific foreign exchange controls that govern the flow of capital in and out of the country. Compliance with these controls is necessary to ensure that payments under the guarantee can be made and received without delay.

Q2：Why is it essential to examine Chinese guarantor’s internal authorizations?

The examination of internal authorizations is crucial as it directly affects the validity of the guarantee. Here are two court judgments on guarantees considered invalid in China:

(2021) Supreme Court Civil Final No. 687As the guarantor’s articles of association expressly prohibit the guarantor from providing guarantees for others, and the guarantee has not been approved by the board or the shareholders’ meeting, thus, the guarantee constitutes an act of exceeding authority. In this case, the creditor/beneficiary failed to conduct the necessary review of the guarantor’s resolutions and, therefore cannot demonstrate good faith. Accordingly, the guarantee in question shall be invalid.(2020)Supreme Court Civil Final No. 1143Although the guarantee was signed by the guarantor’s legal representative and stamped with the guarantor’s company seal, it was not approved by the board of directors or the shareholders’ meeting of the guarantor. The legal representative’s unauthorized provision of guarantee constitutes an act of exceeding authority, therefore, the guarantee shall be invalid.

From the above, if the guarantee is not properly authorized, the Chinese guarantor might disclaim the guarantee obligation. To establish good faith and receive greater legal protection, it is advisable for the beneficiary to request the corporate authorizations of the guarantor and reasonably examine such documents. Generally, there is no need to examine the internal authorizations of a financial institution as long as they are licensed to conduct the business of issuing guarantees.

Q3：What authorizations should the beneficiary examine?

The Chinese guarantor needs to provide documents proving the following:

1.The guarantee is authorized by its competent authority (board or shareholders meeting, depending on its articles of association);

2.The guarantee amount is within the authorized limit provided by its articles of association;

3.The voting requirements for providing external guarantee are met in accordance with its articles of association.

A publicly listed guarantor may also need to publicly disclose the external guarantee in accordance with listing requirements. In such cases, the beneficiary can rely on the publicly disclosed information that the guarantee is approved by the board of directors or the shareholders’ meeting of the publicly listed guarantor.

Q4：What is registration of cross-border guarantee?

In China, the cross-border flow of funds is overseen by the State Administration of Foreign Exchange (SAFE). Cross border guarantees typically involve the movement of funds across borders, making it necessary for them to be registered with SAFE. It is important to note that SAFE registration is not a precondition for the guarantee’s validity. However, registration is imperative to ensure that the guarantor can remit funds outside or into China if the guarantee is invoked.

The following two types of cross-border guarantees must undergo registration with SAFE; while other types of guarantees are exempt from registration.

1.Offshore Loans under Onshore Guarantee: where the guarantor is an onshore company in China while the creditor and debtor are both offshore companies.

2.Onshore Loans under Offshore Guarantee: where the guarantor is an offshore company while the creditor and debtor are both registered in China.

Q5：What is the process of SAFE registration?

1.For onshore PRC guarantor:

If the guarantor is a bank, the registration process can be done by the bank guarantor via its data interface programs with the local SAFE.

If the guarantor is either a non-bank financial institution or a company, the registration should be done within 15 working days after execution of the guarantee with the relevant SAFE where the guarantor is domiciled.

2.For offshore guarantor:

If the guarantor is an offshore company and the debtor is in China, the onshore financial institution issuing the loan will handle the registration.

Upon successful registration, SAFE will provide the guarantor with a registration certificate. This certificate, when presented to a PRC bank for payment under the guarantee obligation, enables the guarantor to make payments to the creditor in USD or other foreign currencies, within the registered value of the guarantee.

Q6：When is it necessary to update the registration?

Change to the main terms of the guarantee or the underlying contract shall be updated with SAFE within 15 business days following such change, including:

renewal of underlying contract,change of the amount or duration of the guarantee or underlying contract, andchange of the beneficiary.

Q7：When is it necessary to cancel the registration?

A guarantor must apply for cancellation of a cross-border guarantee registration within 15 days after:

the debts under the guarantee are settled,the guarantor’s payment obligation expires, orthe guarantee is invoked and discharged.

Q8：Additional considerations for the enforcement of cross-border guarantees.

1.Independent guarantee:China generally recognizes independent, on-demand guarantees issued by banks and qualified financial institutions under UCP600, ISP98, URGD758 and other model rules governing independent guarantee.

2.Corporate guarantee:beneficiaries may consider including the guarantor’s “joint and severable liability” into the guarantee. This allows the beneficiary to enforce the guarantee without first claiming on the underlying contract.

3.Governing law:generally, the governing law of cross-border guarantees can be foreign law, such as English law, with certain exceptions. For instance, in case of real property security, the governing law shall be the law of the place of the real property.

4.Dispute resolution:If the governing law of the guarantee is Chinese law, litigation before Chinese courts may be an option. However, if the governing law is foreign law, Chinese courts must first ascertain the foreign law, which may cause delays in the litigation process. Arbitration, on the other hand, offers distinct advantages:

Parties can choose arbitrators familiar with foreign law.Arbitration can be conducted in foreign languages, saving time and costs for translating documents into Chinese.Arbitration process and awards remain confidential.There is no appeal on arbitral awards, making arbitration more efficient than litigation.

In summary, it is crucial for foreign enterprises to understand the legal frameworks and adopt effective risk mitigation strategies when dealing with cross-border guarantees in China. Keeping up-to-date with regulatory changes and seeking expert guidance can significantly improve the chances of achieving positive outcomes in cross-border guarantee transactions.

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