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30 November 2015
China | Client Alert | 30 November 2015
BACKGROUND
New private lending rules that went into effect on 1 September 2015 will permit companies in China to borrow from each other. The Provisions on Certain Issues regarding the Application of Law in Trials of Private Lending Cases (最高人民法院关于审理民间借贷案件适用法律若干问题的规定, Fa Shi [2015] No. 18), issued by the Supreme People’s Court on 6 August 2015 (the “Provisions”), recognize for the first time the legality of intercompany loans and more generally provide a legal framework for private lending within the People’s Republic of China.
ANALYSIS
I. Intercompany loans
The Provisions define “private lending” as lending activities between individuals, legal persons and/or other non-financial entities. This definition notably excludes lending activities involving financial institutions, but includes for the first time lending activities between companies that are not financial institutions. In line with this definition, the Provisions further provide in their Article 11 that, subject to some limited exceptions, courts must recognise as valid intercompany loans entered into between companies for the needs of production or business operations.
Such recognition of intercompany loans is a major development in the PRC, as since 1996, non-financial institutions have been banned from extending loans to affiliates or third parties, with or without interest, under the General Rules for Loans (贷款通则) promulgated by the People’s Bank of China. In a reply issued 23 September 1996, the Supreme People’s Court confirmed that intercompany loan agreements were null and void because they constituted a violation of financial laws and regulations. As a result and in practice, companies turned to entrusted loans to borrow from each other. Such entrusted loan arrangement required the lending company to deposit the loan amount with a bank, which would extend the same amount as a loan to the borrower company and charge a fee.
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