Facts:

The Chinese enterprise A has defaulted on the payment for goods in the cross-border trade with enterprise B from another country. Due to the large investment in reproduction, A is unable to make the payment to B in short period of time. Nevertheless B is optimistic about A’s future development and wishes to further cooperating with A. After negotiation with A, B decided to convert the debt as increasing capital of A and then B will be a shareholder of A.

Case Study:

In accordance with the PRC Company Law, a shareholder may make capital contributions in cash, or intellectual property right, land usage right or other non-monetary properties that could be assessed and be transferred according to the law. It is complied with law to convert debt into shares among domestic enterprises. Since the foreign exchange management system related to the foreign currency has made a difference between the capital account and international trade account, only the registered foreign debt can be converted into capital contribution. However, on November 22, 2010, the Industrial and Commercial Bureau of Guangdong promulgated the "opinions on further serving the development of foreign-funded enterprises in Guangdong" (Yue Gong Shang Wai Qi Zi [2010] No. 674), which Article 1(2) provided that “......Restrictions on foreign-funded enterprises making capital contributions will be lifted. Investors of foreign-funded enterprises are allowed to convert their creditor's rights arising from the transaction of movable property such as raw materials, equipment and products during the operation of the enterprise, into capital contributions of the company and increase the registered capital of the company.

The authenticity of transaction regarding to creditors’ rights occurred during international trade must be verified when the enterprise registers the shares according to the said provisions, which is different from registration of foreign debt into capital contributions. Therefore both A and B shall prepare all the related documents during international trade, including but not limited to contract, bill of lading, cargo customs declaration, and other transaction evidences of import and export etc. Furthermore, pursuant to the Article 27 of the PRC Company Law, “the value of the non-monetary properties as capital contributions shall be assessed and verified, which shall not be over-valued or under-valued.” The creditors’ rights created during trading shall be verified and evaluated by the appraisal agency before they can be converted into the capital contributions.

- Team Members -

YANG Qi (Angel Young) 

Partner

E-mail：yangqi@zlwd.com

Ms. Yang holds Master of Law degree from Renmin University of China, Bachelor in Engineering from Changsha University of Science and Technology and Diploma in Legal Studies from Hong Kong University.

Ms. Yang worked for many large corporations, such as Shenzhen Credit Guarantee Group Co., Ltd and China Council for The Promotion of International Trade, etc.

Ms. Yang’s practice areas are cross-border investment, private equity investment and financial technology.

WANG Lingru  

Partner  

E-mail：wanglingru@zlwd.com

Ms. Wang graduated from Sichuan University with Master of Law Degree. She holds Certificate of Tax Agents and was qualified as enterprise legal advisor.

Ms. Wang worked as director of legal department at a large state-owned finance enterprise for years. 

Ms. Wang is expertise is in the construction of transaction structure combining tax, finance and law, as well as M&A and cross-border tax analysis etc.

CAI Yun  

Partner  

E-mail：caiyun@zlwd.com

Ms. Cai graduated from Zhongnan University of Economics and Law with bachelor in law and Sun Yat-sen University with master degree in economic law. 

Ms. Cai has previously worked for the People’s Bank of China, China Banking Regulatory Commission, Economic and Trade Bureau, Health Bureau etc.

She has extensive experiences in financial sector and compliance and risk management of financial products. She is also familiar with government operating system.

WANG Shuyun   

Attorney at Law  

E-mail：wangshuyun@zlwd.com

Miss Wang graduated from Zhongnan University of Economics and Law with bachelor in law in 2016. She holds qualifications for practicing law, securities and fund.

Miss Wang is mainly engaged in general corporate legal practice, securities, finance law and civil litigation. 

NING Ning

Paralegal

E-mail：ningning@zlwd.com

Miss Ning graduated from University of Reading with bachelor in law and University of Edinburgh with LLM in International Banking Law and Finance. She also passed Legal Practice Course in England.

Her main practice areas are foreign-related business, M&A and IPO etc.