CHINA Law and Practice Contributed by: Nelson Zhou, Yifeng Yuan, Jianwei Yang and Jingbo Zhou, JunHe LLP
rower, pursuant to the enforcement of the equity pledge. The objectives of taking enforcement steps offshore are to: • seek to obtain control over the WFOE through taking control of the offshore borrower (or other offshore obligors, if any); and • ring-fence and preserve the assets of the WFOE (in particular, the real property) with a view to assessing the feasibility of a consen- sual restructuring, or alternatively disposing of the assets. These objectives are driven by the fact that substantially all the valuable assets of the group obligors are held by the WFOE. However, the offshore lenders do not have any direct security over such assets, nor do they have the right to share in any recoveries from the enforcement of the onshore security documents. Subject to the stipulations under the borrower share charge and the applicable laws in the foreign jurisdiction where the borrower is incor- porated, the offshore lender typically has con- tractual rights under the borrower share charge to effect certain self-help remedies to sell the shares of the offshore holding company to a third party. This would be the quickest method, if the offshore lender can locate a third-party purchaser ready to close the deal. Option 2: Sale of the Onshore Business/ Assets in Connection With Exercising the Offshore Security By enforcing the security over the shares in the offshore borrower (by appointment of a receiver or, if permitted, sale to a nominee of the offshore security agent), the offshore lender can effec- tively control the borrower and the WFOE from offshore.
The benefit of obtaining management control of the WFOE is that it will give greater flexibil- ity for the offshore and onshore lenders to co- operate to effect a consensual enforcement of the onshore securities (rather than a court-based enforcement). In the event that enforcement action is taken onshore, it will also be neces- sary for the offshore lender to have control of the WFOE in order to control the upstreaming of any excess proceeds from the enforcement (after discharge of the onshore loan) to repay the offshore loan. In particular, upon taking such control, the off- shore lender can: • assess the financial position of the WFOE; • seek to control cash flow and prevent the incurrence of further liabilities or the dissipa- tion of assets by the WFOE; • initiate the onshore sale of the business/ assets; • to the extent possible, repatriate sale pro- ceeds by way of dividend; • cause the WFOE to repay the shareholder loan in full, if there is one; or • cause the directors of the WFOE to com- mence onshore liquidation and repatriate the remaining funds after the liquidation proceed- ing. Option 3: Enforcement of the Onshore Property Mortgage This involves enforcement of the first-priority mortgage over onshore assets (including real property and other movable assets) and then the repayment of the onshore loan and repa- triation of the sale proceeds outside the PRC to repay the offshore loan through repayment of a shareholder loan, a declaration of dividends or the winding-up of the WFOE.
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