PRC Law Review

1. Rolmax Law Review
March 2010
Shipping
Mortgage on Ship under Construction
The Maritime Safety Administration (the ship registry in PRC) issued its interim measures on
registration of the mortgage on ship under construction ("Measures") last year. This has been
seen as initiative of the Chinese government to boost shipbuilding industry in China by
providing more financing channels for shipyards. The Measures have cleared up the issues
related to ownership, identification and value of ships under construction as well as
procedures of registration of such mortgage.
Actually Maritime Code of PRC 1993 long before allows mortgage to be put on a ship under
construction (“SUC”). As lots of uncertainties (including ownership of the SUC, value of the
SUC, scope of mortgage and registration of such mortgage) have not been clarified by either
the Maritime Code or other rules and regulations. As a result, mortgage on SUC has not been
used as an effective financing means for shipyards in China. The Property Law 2007 does not
help much in this respect. The Property Law reaffirms that mortgage can be established on
ships (as well as aircraft and buildings) under construction and that such mortgage if
unregistered is unable to act against a third party. Registration is the key element to make the
mortgage on SUC. But the Ship Registrations Rules of PRC 1994 (supplemented in 1998) do
not lay down specific procedures or documentary requirements for registration of mortgage on
SUC.
Over the past years, some shipbuilding hubs in China such as Shandong (construction centers:
Qingdao, Yantai and Weihai), Jiangshu (construction centers: Nanjing, Yangzhou and
Taizhou), Liaoning (construction centers: Dalian, Huludao, Yinkou), Zhejiang (Zhoushan,
Ningbo, Wenzhou) and Jiangxi, have issued their own rules in respect of registration of
mortgage on SUC.
Shanghai Beijing Guangzhou Ningbo

2. These local rules are not fully consistent with each other. For example, while the Shandong
rules require the ownership of SUC to be registered in the first place, the Jiangsu rules and
Liaoning rules do not have such a requirement.
The Measures have unified the conditions and set forth the procedures for establishing a
mortgage on a SUC. To establish a mortgage on a SUC, the mortgagor can only be the
shipyards and the mortgagee can only be a financial institution that is able to extend a loan.
The mortgagor should have independent ownership to the SUC. Only when the keel has
been laid or at least one segment has been completed can the shipyards set a mortgage over
the SUC. The amount to be secured cannot be more than the value of the SUC assessed by a
qualified evaluation body. The Measures particularly require a certificate from the ship
inspection body regarding the stage of construction and also 5 photos of the SUC from
different angles to show the status of the SUC.
To prove its ownership to the SUC, the shipyard needs to provide the ownership registration
certificate or shipbuilding contract. If the shipbuilding contract is not clear as to whether the
shipyard has title to the SUC, then a written statement jointly issued by the shipyard and the
buyer under the shipbuilding contract is necessary.
The Measures require that before delivery of a newly built ship, if mortgage has been set up on
the ship when under construction, the mortgagor and mortgagee need to de-register the
mortgage. The Measures also require that when registering a newly built ship in China, the
owner should declare to the Ship Registry whether there has been registration of mortgage
and ownership when the ship is under construction and should provide the de-registration
certificates.
Buyers in China should be more careful than before in examining the delivery documents
given the possibility that the shipyard may have a mortgage registered on the ship.
BIMCO NEWBUILDCON Resisted in China
It looks like BIMCO NEWBUILDCON is not so welcome in China. Many builders here in China
think the NEWBUILDCON will increase risks and costs for them.
To name a few,
Shanghai Beijing Guangzhou Ningbo

3. (a) Documents: If builder fails to provide final certificates within a reasonable time, builder
shall compensate the buyer for any loss incurred as a consequence thereof including loss
of time. The requirement of IMO Hazardous Material Inventory Statement of Compliance
and requirement on notarization and legalization for some documents are also seen more
stringent than a usual contract.
(b) Late delivery: A unified 30 days is fixed as the grace period for late delivery and the
maximum delay permissible is 180 days.
(c) Refund guarantee: The term of refund guarantee is extended to at least 300 days after the
contractual date of delivery or 30 days after the final resolution of any dispute whichever is
later. This will increase extra difficulties for builders in China to get a refund guarantee
from the bank. Normally the refund guarantee will be returned when the ship has been
delivered and accepted. The Chinese banks are not willing to be bound for a period of
termination which is unpredictable.
(d) Legal: Governing law can be English law unless another law (usually the law of a third
country) is agreed upon. Expert determination clause is added, but whether an expert
decision can be enforced cross-border like an arbitration award is uncertain.
(e) Costs: Requirement to minimize the use of potentially hazardous materials, compulsory
application of IMO PSPC, compulsory requirement or buyer's requirement to implement
changes in requirements or application of the Classification Society, buyer's requirement
to identify the country of origin of all the main components and to provide Green Passport
Statement of Compliance are viewed to increase costs for the builders. Requirement to
effect and maintain insurance in the joint names of the builder and the buyer but without no
cost to the buyer and the provision that any savings obtained from builder's minor
modification and/or change shall be credited to the buyer while the buyer is not required to
pay any extra for the modification and change are also seen in favor of buyer.
(f) Production cycle: Maximum date for buyers to provide supplies is 30 days, which is higher
than the usual requirement of 21 days. This may further prolong the production cycle.
China is set to issue its own standard form. A drafting panel consisting of representatives from
Shanghai Beijing Guangzhou Ningbo

4. shipbuilding industry, banks and maritime lawyers has recently come up with its initial draft.
However, this draft has not received welcome in the shipyards. The China Association of
National Shipbuilding Industry (CANSI) does not seem to agree to use the recommended form
as standard form. They prefer to use the current one, i.e., the CSTC form made by China
Shipbuilding Trading Co. Ltd, which is more or less an imitation of the SAJ Form. At the end of
the day, which form is to be used may depend on the bargaining powers of the builders and
buyers in the relevant market condition.
Finance
Taking Securities from PRC Subsidiaries
The current regime for PRC entities giving outbound security was set up in 1996/ 1998. It
allows Chinese funded companies in PRC to give security for their non-PRC affiliates in which
PRC guarantor has an equity interest, subject to the usual requirements including (a) the
guarantee amount should not be higher than either 50% of the guarantor's net assets of the
last fiscal year or the foreign exchange income of the last fiscal year and (b) the principal
(guaranteed party) is not at loss etc. ("General Requirement").
It also allows FIEs (JV, WFOE) to give security for their Non-parent or sister affiliates if the
beneficiary is a PRC entity, subject to the General Requirement. But if the beneficiary is also a
non-PRC entity (like a non-PRC bank as in most of the cases), then the FIEs can only give
security if the guaranteed party is a non-PRC entity in which a PRC entity has an equity
interest. It does not allow PRC entities to give security to secure the borrowings of non-PRC
parent or sister affiliates if the lender is a non-PRC entity ("Equity Interest Requirement").
There has been some arguments that according to an explanation document of SAFE in 1999,
a WFOE is not restricted by the Equity Interest Requirement and can provide security for any
entity it deems fit as long as the General Requirement is met. But the test of this position – the
practice in the various local branches of the SAFE- shows that it is difficult to change the minds
of the SAFE officials that for a WFOE the Equity Interest Requirement is not applicable.
The amendment to the Measures on PRC Entities Providing Outbound Security 1996
expected this year may change this regime described above. We need to see to what extent
Shanghai Beijing Guangzhou Ningbo

5. will the new Measures unleash the current restrictions. But as China has not fully unlashed
foreign exchange control for capital account transaction according to the main piece of
legislation for foreign exchange control (Foreign Exchange Administration Regulations
amended in 2008), it seems the current restrictions will not be fully lifted in the near future.
Corporate / FDI
Headquarter enterprises Encouraged in Guangzhou
Guangzhou recently issued a new policy to increase incentives for companies to set up
headquarters in Guangzhou. Numerous preferential treatments are promised to the
recognized headquarter enterprises in Guangzhou:
(a) Priority in using land
Priority is given to ensure headquarter enterprises’ use of land. If a stand-alone R&D center or
product design center is to be set up, the land can be assigned to the headquarter enterprise
by agreement instead of public auction. Headquarter enterprises are allowed to pay the land
use fee in installments and may be given more flexible term of the assignment.
(b) More financing means
Financial institutions are encouraged to extend loan, syndicated loans to headquarter
enterprises. Headquarter enterprises are allowed to pledge over their intellectual property
rights, right to collect money or warehouse receipt for commodities as security. Headquarter
enterprises are encouraged to list their subsidiaries in the stock exchange or issue bonds or
establish private equity fund.
(c) Technological innovation encouraged
R&D costs incurred by headquarter enterprises for developing new technology, new product or
new technique are allowed to be deducted for calculating payable tax.
(d) More HR support
Shanghai Beijing Guangzhou Ningbo

6. Headquarter enterprises whose annual tax (including VAT, business tax and income tax)
reaches RMB50 million (around USD7.3 million) have chances to enjoy the benefits: expatriate
employees can apply for stay in China for 1-5 years or apply for long term residence permit in
Guangdong, have convenience of entry to and exit from China.
(e) Monetary reward or subsidy granted
A headquarter enterprise set up in 2010 or later can receive a lump-sum reward
equivalent to 50% of its total tax paid in the year when it is recognized as a
headquarter enterprise, capped at RMB 50 million.
A headquarter enterprise whose annual paid-in tax reaches RMB10 million or more
and has increased by RMB5 million or more over the last year can receive a
lump-sum reward equivalent to 30% of the increased amount of tax, capped at RMB
5 million.
A headquarter enterprise who continuously receives reward of RMB5 million for 5
years can receiver another lump-sum reward of RMB10 million.
A headquarter enterprise whose increased amount of paid-in tax ranks top 10 of all
the headquarters in Guangzhou can have one of its key executives to receive from
the government a lump-sum of RMB1 million (after-tax) as reward for him/her.
A headquarter enterprise moving to Guangzhou can receive rent subsidy for its
self-used office in the designated area in a lump-sum equivalent to 30% of the
market price of the yearly rent.
A headquarter enterprise newly set up in Guangzhou can receive subsidy in sums
equivalent to 30% of its paid-in real property tax for its built or purchased office within
3 years after the office is built, capped at RMB5 million. Offices can not be sold or
used for other purpose during the period of receiving subsidy.
To qualify as a headquarter enterprise, the enterprise must meet the following conditions at the
same time:
(1) The enterprise is registered in Guangzhou as a legal entity.
(2) The enterprise has not less than 3 subsidiaries in China or abroad and is responsible for
the management and service for these subsidies. And
Shanghai Beijing Guangzhou Ningbo

7. (3) The enterprise must fall within one of the following circumstances:
An company or its subsidiary within the list of Fortune 500 of the last year,
Regional headquarter recognized or recorded by Ministry of Commerce (as per the
Provisions on the Establishment of Investment Companies by Foreign Investors
2004),
A company within the list of China Enterprise 500 or China Private Business 500 or
China Chain Enterprise 100,
Big enterprises determined by the central government or ministries,
Other enterprises determined by the qualification authority as headquarter
enterprises.
Employment
Is a Non-competition Clause without Consideration Valid ?
Labor Contract Law (2008) provides that employer and employee (with confidentiality
obligations) can agree on a non-competition clause/agreement under which the employee
accepts prohibition of business strife for up to 2 years after termination of employment contract,
in consideration of monthly payment of agreed amount of compensation from the employer.
Employer will have a claim for liquidated damages against the employee if the latter is in
violation of his/her non-competition obligation.
In practice, some employers do not actually make the compensation to the employee or try to
avoid payment obligation by not including a compensation obligation or amount into the
non-competition clause/agreement or by incorporating some wording like “the amount of
compensation has been included into the normal salary payments made to the employee
during employment period”. Will such a non-competition clause/agreement still be valid?
In Guangdong Province, the High Court and the Provincial Labor Disputes Arbitration
Commission jointly issued a guidance opinion on hearing labor disputes. According to this
guidance opinion, the non-competition clause/agreement will be invalid and not binding on the
employees if, by the time when the hand-over has been completed, the employer fails to
Shanghai Beijing Guangzhou Ningbo

8. undertake to make the compensation to the employee.
In Shanghai, the High Court has its own guidance opinion on hearing labor disputes.
According to this guidance opinion, if the employer and employee have not agreed on the
amount of compensation, such clause/agreement will still be binding. The parties will be
required to continue to negotiate and agree on the amount of compensation. If no agreement
can be reached, the monthly payment should be in the range of 20%-50% of the employee’s
normal salary during the employment period.
In Beijing, the High Court and Beijing Labor Bureau also jointly issued a guidance opinion on
hearing labor disputes. According to this opinion, if the amount of compensation is not agreed,
the parties should continue to negotiate and agree on the amount of compensation. If no
agreement can be reached, the monthly payment should be in the range of 20%-60% of the
employee’s salary immediately preceding the termination of employment contract. If the
employer expressly indicates that no compensation will be made, the non-competition
clause/agreement will not be binding on the employee.
In Zhejiang Province, the Provincial Labor Dispute Arbitration Commission also has its
guidance opinion. According to this guidance opinion, if no compensation is agreed or if the
amount is obviously low and not sufficient to maintain the minimum living standard for the
employee, or if the employer fails to make the payment as agreed, the non-competition clause
is not binding on the employee.
Employers intending to bind its employees under non-competition clause/agreement should be
aware of the different practice in different parts of China and make sure that the
clause/agreement agreed is binding and enforceable.
Publication of Rolmax Law Office
Edited by Rolmax Guangzhou
3205-3206, East Tower, Tianyu Business Plaza, Dong Feng Dong Road, Guangzhou, P.R. China
Tel : (86) 20 2281 6900 Fax : (86) 20 2281 6920 Website: www.rolmax.com Email: Guangzhou@rolmax.com
Information contained in this newsletter should not be applied to any set of facts without seeking legal advice.