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The Basic Flow of External Guarantees by Wholly Foreign-owned Enterprises
During the former blog, we have briefly analyzed the legal issues on wholly foreign-owned enterprises in China providing guarantees to foreign institutions. In this article, taking that wholly foreign-owned enterprise intends to mortgage or guarantee its house property to a third party for instance, we want to introduce the basic operation process of external guarantees by wholly foreign-owned enterprises.
1. The basic flow
1) Obtain the approval to authorize the guarantor to put up his own house property or land as an external guarantee from the Foreign Trade and Economic Committee (Department) in the place where the guarantor is domiciled. (When the local foreign exchange administration agency do not need the document of approval, shall apply to foreign exchange bureau for Registration of External Guarantee at the same time.)
2) Submit matters of external guarantee to industrial and commercial bureau in the place where the guarantor is domiciled for records;
3) Apply to foreign exchange bureau in the place where the guarantor is domiciled for Registration of External Guarantee and obtain the Registration Certificate for External Guarantee;
4) Apply to the administration departments of house and land in the place where the mortgaged property locates for guaranty registration, after obtaining the Registration Certificate for External Guarantee;
5) If the borrower fails to perform the obligation of repayment, the guarantor shall carry out the procedures for examination and approval of the performance of external guarantee in the foreign exchange administration agency;
6) If the borrower fulfils the obligation of repayment, nullify this registration of external guarantee at maturity.
2. The application process of external guarantee registration
In the foregoing flow, registration of external guarantee is a key step; we will hereby explain it in detail.
1) Mortgagors (guarantors), borrowers (guarantees) and mortgagees (beneficiaries, lenders) sign on mortgage loan contract jointly. As is often the case, borrowers and mortgagees have signed on loan contract and guaranty contract (or similar contract) overseas. If the loan contracts and guaranty contracts are in foreign languages, Chinese translation of the main clause with the unit's official seals shall be submitted. Meanwhile, the contracts signed overseas shall be notarized by the approved notary offices. There is no uniform provision for whether the contracts signed in China need to be notarized. All localities and departments have no uniform requirement, if there is a need; contract notarization shall be made through local notary agency.
2) Obtain Registration Form for External Guarantee from Administration of Foreign Exchange in the place where it is located and prepare registration documents within 15 days after signing the contract. The main documents required:
① an application of mortgages from mortgagor;
② a contract on mortgages and loans;
③ an evidence on ownership of the property mortgaged;
④ an appraisal report of the property mortgaged. For the appraisal report, usually the report parties have had the appraisal report issued by the valuation and appraisal organization overseas. Whether such report can be accepted, all localities have no uniform requirement. According to the Article 26 of Administration of the Provision of Security to Foreign Entities by Domestic Institutions Procedures Implementing Rules, property mortgaged to a foreign party shall undergo appraisal of its present value by a domestic valuation and appraisal organization. So it is the strict practice to entrust domestic valuation and appraisal organization to issue an appraisal report;
⑤ a certificate of foreign exchange receipt and payment for the previous year from mortgagor. When signing the guaranty contract, the guaranteed amount shall not exceed the mortgagor's foreign exchange earnings in the previous year;
⑥ an audit report of mortgagor. For audit report, some require the report for the previous year; some also demand the past three years'. It all depends on the requirements of the Administration of Foreign Exchange in the place where it is located. When signing the guaranty contract, the guaranteed amount shall not exceed 50% of the mortgagor's net assets.
⑦ an audit report of borrowers. If it is in English, Chinese translation shall be required. Different localities might have different requirements on whether to provide audit report for the last one or last three years, but since the borrowers are located abroad, it is not convenient to obtain and translate the audit report, providing the past three years' audit report is recommended. If the borrower was loss-making institutions, it shall not be approved for registration.
3) Aforementioned documents shall be submitted to the Management Department of Foreign Exchange to apply for registration of external guarantee. The Management department of Foreign Exchange will check and issue Registration Certificate for External Guarantee, and then the wholly foreign-owned enterprises can carry out the guaranty registration from the administration department of house and land.
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