CHINA Law and Practice Contributed by: Chen Yanhong, Beijing DHH Law Firm
mission and the Ministry of Commerce, and projects exceeding USD5 million require submission of funding sources and risk assessment reports. 3.4 Restrictions on the Borrower’s Use of Proceeds Under the PRC General Rules on Loans, the Civil Code and financial regulatory provisions, the borrow- er must use the loan proceeds in accordance with the purpose agreed in the loan contract and shall not misappropriate them without authorisation. Common restrictions include: • no use of loans for equity investments (unless explicitly permitted in the contract); • no illegal refinancing for profit; and • no use for state-prohibited business activities (eg, illegal financial activities). If the borrower violates these restrictions, the lender has the right to demand early repayment, charge liq- uidated damages, and serious violations may affect the borrower’s credit record. 3.5 Agent and Trust Concepts PRC law explicitly recognises the concepts of agency and trust. The “Agency” chapter of the Civil Code stip- ulates rules on entrusted agency and statutory agency, where civil legal acts performed by an agent within the authorised scope in the principal’s name are binding on the principal. The Trust Law regulates core matters such as trust establishment and the independence of trust property. In practice, common alternative struc- tures to agency or trust include entrustment contracts (focused on affair handling, distinct from the property management nature of trusts) and third-party service agreements (eg, fund supervision agreements), which are often used to simplify procedures or avoid specific trust requirements. 3.6 Loan Transfer Mechanisms Loan transfer mechanisms in the PRC mainly include assignment of claims and assumption of debts. For assignment of claims: • the assignor and assignee shall sign a claim assignment agreement; and
• the debtor shall be notified in writing (failure to notify renders it ineffective against the debtor). Assumption of debts requires the creditor’s consent, otherwise it is invalid. The transfer of associated secu- rity interests follows the “accessory follows principal” principle: if the principal claim is assigned, the secu- rity interest is transferred together (unless otherwise agreed by the parties). If the security is registered (eg, real estate mortgage, equity pledge), a change of reg- istration must be completed with the original registra- tion authority; failure to register prevents the security interest from being enforced against bona fide third parties. 3.7 Debt Buyback PRC law does not prohibit debt buyback by the bor- rower or sponsor, but two core requirements must be met: • compliance with the terms of the loan/debt secu- rities contract (if the contract explicitly prohibits buyback, it shall not be implemented); and • no harm to the legitimate rights of creditors or public interests, eg, no evasion of debts through buyback, and no violation of antitrust or financial regulatory provisions (eg, buyback of debt instru- ments issued by financial institutions must comply with the specific requirements of the PBOC and CBIRC). In practice, buyback requires necessary internal deci- sion-making procedures (eg, a company’s buyback The China Securities Regulatory Commission (CSRC) requires that, in public acquisitions, the acquirer dis- close the legality of fund sources, prove funds are “certainly available” (eg, provide bank credit letters, fund certificates), and prohibit false capital contribu- tion or misappropriation of illegal funds. This provision is standard in public acquisitions and contract-based in private acquisitions. For documentation, long-form documents (with detailed fund terms and security arrangements) are common in public acquisitions; acquisition reports and financial advisor reports must needs shareholder/board approval). 3.8 Public Acquisition Finance “Certain Funds” Rules
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