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Requirements for Valid Cross-border Guarantees in Onshore Guarantees for Offshore Loans Cases

The State Administration of Foreign Exchange issued “Provisions on Foreign Exchange Control for Cross-border Guarantees” (“the Provisions”) on June 1, 2014, provided that cross-border guarantees refers to a legally binding guarantee made in writing by the guarantor to the creditor, which undertakes performance of the relevant payment obligation pursuant to the agreement in the guarantee contract, and undertakes guarantee a possible international balance of payment transaction such as cross-border payment of funds or cross-border transfer of ownership of assets etc.

In accordance with the Provisions, the guarantors shall register and file at the State Administration of Foreign Exchange when they conduct onshore guarantees for .offshore loans. Nonetheless the Article 6 of the Provisions stated that “approval, registration or filing of a cross-border guarantee contract by the foreign exchange bureau, as well as other administrative matters and  requirements specified in the Provisions shall not constitute a key condition for the cross-border guarantee contract to take effect.”

Article 31 of the Provision also provided that for cross-border guarantee transactions which fail to comply with the Provisions and the relevant provisions, the foreign exchange bureau shall impose punishment pursuant to the PRC Foreign Exchange Control Regulations. In other words, the State Administration of Foreign Exchange has clarified that procedures like registration or recordation are not provisions for validity, but for administration purpose, and any violation to the Provisions will subject to administrative penalties.

Meanwhile, although foreign exchange control policy may not affect the effectiveness of a guarantee contract, it may affect the enforceability of the contract. Pursuant to Article 5 of the “Notice of the People's Bank of China on Simplifying the Process of Cross-border RMB Services and Improving Relevant Policies (Yin Fa [2013] No.168)” (“the Notice”), domestic non-financial institutions may provide RMB guarantee to overseas clients in accordance with the PRC Property Law, PRC Guarantee Law and other relative laws. The People’s Bank of China has not issued any regulations or policies on RMB guarantees provided by domestic citizens at present. Moreover, the Notice also stated that where a domestic non-financial institution performs a contract with RMB in overseas guarantee, the domestic bank concerned shall, after carefully conducting the authenticity review, process RMB settlement for the domestic non-financial institution, and submit the relevant information to the cross-border RMB collection and payment information management system, and the funds used for performing the contract may also be paid directly by the domestic non-financial institution with the RMB funds retained by it overseas. This means that the the performance of RMB payment shall be paid directly to the overseas creditors by the domestic guarantor.

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