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Due diligence

Demonstrating title or legal ownership

How does one demonstrate title to or legal ownership of a vessel registered under the laws of your jurisdiction?

In China, title or legal ownership of a vessel is demonstrated by the certificate of ownership issued by the vessel’s registry, namely, a branch of the Maritime Safety Administration (MSA) under the Ministry of Transport or the MSA under local government according to their respective authority.

Liens

How can one determine whether there are any liens recorded over a vessel?

Under Chinese law, neither a possessory lien nor a maritime lien is recorded over a vessel. However, one may apply to a maritime court to obtain access to such information after a vessel has been arrested by that court and the procedure of registration of claims has been finished. In addition, the buyer of a vessel may apply to a maritime court with jurisdiction for the public summons of maritime lien by which any claimant whose claim is secured by a maritime lien shall register his or her claim with that maritime court within the period of 60 days after a public notice issued by that court as provided for in the Chinese Special Maritime Procedure Law. Failing such registration, the unregistered maritime lien shall be extinguished. Therefore, the buyer may have access to any maritime lien registered during the period of registration.

How does one determine whether there are any security agreements, liens, charges or other encumbrances granted by a vessel owner or affiliated party who might be a borrower, guarantor or other credit party in connection with a vessel finance transaction?

Such information is private and confidential, and if a party does not voluntarily disclose it, others generally have no access to such information. However, if a mortgage on a vessel is duly registered, one can obtain access to such information from the vessel’s registry.

Public registry searches

Can one determine whether an obligor registered in your jurisdiction is duly organised and in good standing from a search of a public registry?

Yes. The company’s registry, namely, the State Administration of Industry and Commerce (SAIC) or local branch, allows the public to have access to a company’s registration information and operational status upon application for a search and an inquiry.

Can the shareholders or other equity interest holders, directors and officers or other authorised signatories of an obligor organised in your jurisdiction be determined from a search of a public registry? If not, how are these parties customarily identified?

Any person or entity may apply to the company’s registry to obtain the basic registration information of an obligor’s company organised and registered in China. The basic registration information contains information regarding, inter alia, the shareholders and their ratio of contributions, the legal representative of the company and a list of the directors. Generally, the authorised signature is that of the legal representative of the company, who is the chairman of the board of directors or a director. The name and identity of the legal representative is also indicated on the business licence issued by the company’s registry.

Debt obligation

What corporate or other entity action is necessary for an obligor to enter into or guarantee a debt obligation? When is action by the board of directors or other governing body required? Must shareholders approve a guarantee?

The authority of entering into a debt obligation or provision of guarantee is subject to the provisions of the articles of association of a corporate or other entity. Where a corporate or other entity intends to enter into a debt obligation or provide a guarantee, according to the provisions of its articles of association, it may be decided by the general manager with his or her power, or shall be decided at a meeting of the board of directors or a shareholders’ meeting, as the case may be. The articles of association prescribe any limit on the total amount of the guarantees or on the amount of a single guarantee to be decided by the general manager, or at a meeting of the board of directors or a shareholders’ meeting. Where a corporate intends to provide a guarantee to a shareholder or actual controller of the corporation and it shall be decided by a meeting of the board of directors or a shareholders’ meeting, the shareholder or shareholders with interests shall not participate in voting on the matter. Where entering into a debt obligation or provision of guarantee that shall be decided at a meeting of the board of directors or a shareholders’ meeting, the affirmative votes required are provided for in the articles of association of a corporate or other entity.

Obligations of foreign lenders

Must foreign lenders qualify to do business in your jurisdiction to extend credit to a borrower organised in your jurisdiction? Will foreign creditors be deemed resident as a consequence of making a loan or other extension of credit to an obligor within your jurisdiction?

Any party that plans to establish a solely foreign-funded bank or a Sino-foreign joint equity bank, or a foreign bank that plans to establish a branch or representative office, must satisfy the following qualifications and be subject to approval of the banking regulatory institution of the State Council:

  • it has the capability of making profits continuously and a good credit standing, and does not have any record of serious violation of any law or regulation;
  • the shareholder that plans to establish a solely foreign-funded bank, the foreign shareholders of a foreign-funded equity joint bank and the foreign bank that plans to establish a branch or representative office must have international financial experience;
  • it has an effective anti-money laundering system;
  • the shareholder that plans to establish a solely foreign-funded bank, the foreign shareholders of a Sino-foreign joint equity bank and a foreign bank that plans to establish a branch or representative office must be under the effective supervision of the financial regulatory authority of the country or region where it is located, and its application shall have been approved by the financial regulatory authority of the country or region where it is located;
  • it must have a perfect financial regulatory system and its financial regulatory authority must have a good mechanism of supervision and cooperation with the banking regulatory institution of the State Council; and
  • other prudent conditions as prescribed by the banking regulatory institution of the State Council.

A solely foreign-funded bank, a Sino-foreign joint equity bank or a branch of a foreign bank duly established in China is a Chinese legal person and is allowed to do business, such as making loans or other extensions of credit to obligors, within the scope of operation as prescribed on the licence of business. However, a representative office of a foreign bank is not allowed to do such business as making loans or other extensions of credit to obligors.

Repayment

Central bank and regulatory approval

Is central bank or other regulatory approval required for repayment of a loan in foreign currency?

The State Administration of Foreign Exchange (SAFE) will supervise the repayment of a loan in foreign currency. All foreign exchange receipts of domestic entities for current account transactions must be repatriated and must not be deposited abroad in violation of the relevant governmental regulations without authorisation. Meanwhile, all foreign exchange receipts for current account transactions must be sold to the designated foreign exchange banks in accordance with the regulations issued by the State Council on the sale or purchase of foreign exchange and making payments in foreign exchange and such receipts may also, upon approval, be deposited in the foreign exchange account at the designated banks for foreign exchange operations. Also, SAFE promulgated regulations in February 2016 to further tighten the rules on foreign-currency policy in a bid to control the flows of hot money into the country. Under very limited circumstances, domestic entities have the right to receive payment or repayment by cash in foreign currency.

Usury laws

Do usury laws limit the interest payable to a lender in respect of a vessel financing?

Usury is not allowed under current Chinese law. The various basic interest rates together with allowable margins are promulgated by the central bank, namely, the People’s Bank of China. Meanwhile, according to the judicial interpretations promulgated by the Supreme People’s Court, the rate of private lending, namely, lending by an individual person to another individual person or to a company may be higher than the interest rate promulgated by the central bank, but cannot exceed four times the basic rate promulgated by the central bank rate over the same period. Beyond such limit, this part of interest will not be protected by law and shall be confiscated. Lending by a company to another company is not allowed and any interest shall be confiscated.

Withholding taxes

Are withholding taxes payable on principal or interest payments to non-resident lenders?

Withholding taxes are payable on the interest payments to non-resident lenders. Pursuant to the Corporate Income Tax Law, a non-resident enterprise that does not have any establishment or place of business within China or that has an establishment or place of business in China but whose income is not effectively connected with such establishment or place of business shall pay corporate income tax on its China-sourced income. In this regard, the interest payments to non-resident lenders shall be deemed as China-sourced income. The tax rate applicable to non-resident enterprises deriving income is 20 per cent. Corporate income tax payable by a non-resident enterprise on the income shall be withheld at source and the payer shall be the withholding agent. The withholding agent shall withhold the tax from the amount paid or payable at the time the amount is paid or becomes due.

Registration of vessels

Eligibility for registration

What vessels are eligible for registration under the flag of your country? Are offshore drilling rigs or mobile offshore drilling units considered vessels under the laws of your jurisdiction? What is the effect of registration?

As required by the Regulations on the Registration of Vessels (2014 Revision), the following vessels are eligible for registration under the flag of China:

  • vessels owned by Chinese citizens who have residences or their principal places of business in China;
  • vessels owned by corporate legal persons that have been established in accordance with Chinese law and have their principal places of business in China, provided, however, that where the registered capital of a legal person has foreign investment, the amount of investment of the Chinese investor must not be less than 50 per cent except for a Sino-foreign company registered in the China (Shanghai) Pilot Free Trade Zone and engaged in international transport, in which case, the foreign investment may exceed 50 per cent;
  • vessels used for public service in China; and
  • other vessels that the MSA deems should be registered. The registration of military vessels, fishing vessels and sporting vessels is governed by other regulations.

In terms of the Chinese Maritime Code, a vessel means a seagoing vessel or other mobile unit at sea. Thus, an offshore drilling rig or mobile offshore drilling unit can be considered a vessel under Chinese law only where the rig or unit features self-navigability and maintains a seagoing state as in such an instance when the rig or unit falls into the category of other mobile unit at sea.

The registration of a vessel’s nationality entitles a vessel registered to navigate by flying the flag of China. The registration of a vessel’s ownership entitles the registered shipowner to exert its ownership of the vessel as against a third party or, in other words, no acquisition, transfer or extinction of the ownership of a vessel shall act against a third party acting in good faith unless registered.

Who may register a vessel in your jurisdiction?

The Measures for the Registration of Vessels was published in December 2016, which makes the conditions for the registration in China more relaxed compared with the Regulations on the Registration of Vessels published previously. Pursuant to the Measures for the Registration of Vessels, the following citizens or companies may apply to register a vessel in China:

  • Chinese citizens whose residences or principal places of business are located within the territory of China;
  • enterprises or companies with legal-person status established under the laws of China and whose principal places of business are located within the territory thereof, provided that where foreign investment is involved, the proportion of registered capital contributed to by a Chinese investor or investors shall not be less than 50 per cent;
  • Chinese enterprises or companies with legal-person status whose wharf boat or floating dock is for their internal production use, not engaged in waterway transportation operations;
  • Chinese governmental institutions whose vessels are to be engaged in public services and other institutions with legal-person status; and
  • enterprises or companies registered in the China Pilot Free Trade Zone and engaged in international transport.

In addition, the owners of other vessels that the MSA determines to be subject to registration in China may register these vessels. The registration of military vessels, fishing vessels and sporting vessels is governed by other regulations.

Registry for international shipping operations

Is there an alternate registry for international shipping operations?

Currently, there are eight alternate registries for vessels engaged in international transport pursuant to the regulatory document in respect of registry in the Free Trade Zone published by the MSA in March 2017.

In order to attract vessels invested by Chinese companies and flying flags of convenience to be changed to the flag of China, vessels actually owned or bareboat-chartered by the companies registered in the Yangshan Bonded Port of Shanghai are allowed to be registered in Yangshan Port without payment of import tax. The vessels so registered are allowed to fly the flag of China and to be engaged in international transport.

Similarly, vessels invested in by Chinese companies and flying flags of convenience can be registered in the following seven ports in the Free Trade Zone to change to the flag of China:

  • Dongjiang Bonded Port Area of Tianjin;
  • Fuzhou Free Trade Zone of Fujian;
  • Xiamen Free Trade Zone of Fujian;
  • Pingtan Free Trade Zone of Fujian;
  • Nansha Free Trade Zone of Guangdong;
  • Hengqin Free Trade Zone; and
  • Qianhai Bonded Port Area of China.

In addition, while reserving the limit that foreign investment in a vessel shall be less than 50 per cent to fly the flag of China, investment made in a company invested in by a Sino-foreign joint venture company shall be deemed as investment made by a Chinese company. The vessels so registered must be engaged in international transport. Upon approval of the MSA, foreign crew members not exceeding a total of 30 per cent can be employed on board such vessels.

Ship mortgages and other liens over vessels

Types of ship mortgage

What types of ship mortgages exist and what obligations may a ship mortgage secure? Can contingent obligations, including swap obligations, be secured? Are there standardised forms?

There are no specific types of ship mortgages prescribed in Chinese law. Ship mortgages exist as a general means to secure fulfilment of lawful obligations. In principle, contingent obligations can be secured by a ship mortgage, provided that the obligation to be secured actually exists.

Required form

Give details of any required form for ship mortgages in your jurisdiction.

Where a mortgage is established in respect of a vessel of 20 tons of gross tonnage or more, the following documents are required by the Regulations on the Registration of Vessels (2014 Revision):

  • a written application signed by both mortgagee and mortgagor;
  • a certificate of vessel’s ownership or shipbuilding contract; and
  • a contract of ship mortgage and a principal contract.

In addition, if there is another mortgage that has already been established on a vessel, the relevant certificate must also be submitted.

Where a mortgage is established on a jointly owned vessel, the joint owners shall, in addition, submit a document evidencing the agreement by the joint owners holding more than two-thirds of shares of the vessel.

Registration of mortgages

Who maintains the register of mortgages? What information does it contain and where are such filings to be made? What is the effect of registration?

The local branches of the MSA, as the vessel registers, maintain the register of ship mortgages. The following information is recorded in the register of a branch of the MSA with respect to a single ship mortgage:

  • the name and address of the mortgagee and the mortgagor of a vessel;
  • the name and nationality of the mortgaged vessel and the authority that issued the certificate of ownership and the certificate number thereof; and
  • the amount of debt secured, the interest rate and the period for repayment of the debt.

The effect of registration of a ship mortgage is that no ship mortgage shall be effective against a third party acting in good faith unless duly registered.

Must the total amount of the mortgage be stated therein? Must the mortgage contain a maturity date? Must the underlying debt instrument be filed with or attached to the recorded mortgage?

Yes. The total amount of the mortgage shall be stated in the certificate of ship mortgage issued by a branch of the MSA and be recorded in the register of the branch of the MSA. The period for repayment of the debt shall be the same as contained in the contract of ship mortgage and the principal contract and be indicated in the certificate of ship mortgage issued by the branch of the MSA, as well as being recorded in the register of the branch of the MSA. The underlying contract of the ship mortgage and the principal contract shall be attached to the recorded mortgage.

Can a mortgage be registered in the name of an agent or trustee for the benefit of multiple lenders?

A ship mortgage cannot be registered in the name of an agent or trustee for the benefit of multiple lenders. The name of the actual mortgagee or mortgagees identical to that of those contained in the principal contract and the contract of mortgage must be recorded.

Filings on transfer

If the mortgagee is an agent or trustee for a lending syndicate, must any filings be made upon transfer of a portion of the underlying debt among existing lenders or to a new lender?

The ship mortgagee cannot be an agent or trustee for a lending syndicate because current Chinese law does not recognise the validity of a syndicate. If a portion of the underlying debt is to be transferred among existing lenders or to a new lender, the supporting document or documents, such as a contract of transfer of the creditor’s right, must be filed with the registry.

If the mortgagee transfers its interest to a new lender, agent or trustee what filings are required? Is the mortgagor’s consent required?

The mortgagee’s interest to the mortgage can be transferred to a new lender or other third person and consequently the transferee acquires the transferred mortgage interest. However, the transferee is required to apply for registration of the transferred mortgage by filing an application together with the relevant underlying contract that stipulates the transfer of the creditor’s right from the mortgagee to a new lender with the branch of the MSA at which the mortgage is registered. Without such registration, the transfer of mortgage interest cannot act against a third party acting in good faith.

Where the mortgagee transfers its interest, the mortgagor’s consent is not required, but the mortgagee must notify the mortgagor of the transfer.

Maritime liens

What other maritime liens over vessels are recognised in your jurisdiction? Do these claims give rise to a right to arrest a vessel? In what circumstances may associated ships be arrested?

As defined in article 21 of the Chinese Maritime Code, a maritime lien is the right of the claimant to take priority in compensation against the shipowners, bareboat charterers or ship operators with respect to the vessel that gave rise to the said claim. The following maritime claims are secured by maritime liens as provided for in article 22 of the Maritime Code:

  • payment claims for wages, other remuneration, crew repatriation and social insurance costs made by the master, crew members and other members of the vessel’s complement in accordance with the relevant labour laws, administrative rules and regulations or labour contracts;
  • claims in respect of loss of life or personal injury occurring in the operation of the vessel;
  • payment claims for the vessel’s tonnage dues, pilotage dues, harbour dues and other port charges;
  • payment claims for salvage payment; and
  • compensation claims for loss of or damage to property resulting from a tortious act in the course of the operation of the vessel.

However, as provided for in article 22 of the Chinese Maritime Code, claims for oil pollution damage caused by a vessel carrying more than 2,000 tons of oil in bulk as cargo that has a valid certificate attesting that the vessel has oil pollution liability insurance coverage or other appropriate financial security are not secured by a maritime lien. As a matter of construction, other claims that are secured by liability insurance coverage or other appropriate financial security are also not secured by a maritime lien.

These maritime liens do give rise to a right to arrest a vessel. In accordance with article 28 of the Chinese Maritime Code, a maritime lien shall be exercised by application to the court for arresting the ship.

A maritime court may, upon application filed by a maritime claimant, arrest another vessel that, when the arrest is effected, is owned by the shipowner, demise charterer, time charterer or voyage charterer of the offending vessel who is liable for the maritime claim, except for claims with respect to ownership or possession of a vessel, in which case only the vessel in dispute is subject to arrest.

What maritime liens rank higher than a mortgage lien?

According to article 25 of the Chinese Maritime Code, a maritime lien shall have priority over a possessory lien, and a possessory lien shall have priority over a ship mortgage. Therefore, maritime liens and possessory liens rank higher than a ship mortgage. A possessory lien is limited to the right of a vessel repairer and shipbuilder over the vessel repaired or built on the condition that when it exercises possessory lien the vessel is in its possession.

Non-mortgage liens

May non-mortgage liens be recorded over a vessel?

Non-mortgage liens may not be recorded over a vessel in the vessel’s registry under Chinese law.

Foreign’ flag vessels

Will mortgages on ‘foreign’ flag vessels be recognised in your jurisdiction? If so, do they share the same priority as those on vessels registered under the laws of your jurisdiction?

In principle, mortgages on foreign flag vessels will be recognised in China. In particular, in judicial practice in China, where a mortgage on a foreign-flagged vessel was confirmed by an enforceable legal instrument such as a civil ruling issued by a foreign court or a foreign arbitral award, and if this legal instrument has been recognised by a Chinese court, the mortgage will be recognised.

Enforcement of mortgages

What is the procedure for enforcing a mortgage in your jurisdiction by way of foreclosure? Are interlocutory sales permitted? How long does a judicial sale take? What are the associated court costs and how are they calculated?

To enforce a mortgage on a vessel, the mortgagee shall apply to a maritime court for arrest of the vessel and then apply to the court for an auction sale of the vessel.

There is no concept of interlocutory sale under Chinese law. According to article 70 of the Supreme Court’s Interpretation on Several Issues Concerning the Application of Guarantee Law, where the act of the mortgagor may devalue the mortgage and the mortgagee’s request for reinstatement or security is rejected, the mortgagee is entitled to demand that the debtor repay the debt or request to enforce the mortgage in advance. Theoretically, therefore, interlocutory sales of vessels are permitted. In judicial practice, however, such sales seldom occur.

Usually, a judicial sale will take at least three months, mainly depending on how many rounds of auction it takes for the vessel to be sold. A ship as collateral may be sold if two rounds of auctions have been abortive. The sale price shall not be lower than 50 per cent of the assessed value.

The auction costs, including the auctioneer’s fees, auction venue rental, security cost, watch-keeping fees, survey fees, evaluation fees and berthing fees etc, are calculated on the basis of the actual costs incurred.

Sale by mortgagee

May a vessel be sold privately by a mortgagee? Will the sale discharge liens over the vessel?

The mortgagee is not allowed to sell the mortgaged vessel privately, nor will a private sale of a mortgaged vessel discharge possessory liens or maritime liens over the vessel.

Default under mortgage

Will the courts of your jurisdiction enforce mortgage provisions stipulating the appointment of a receiver on default under the mortgage?

Limitations on rights of self-help

What are the limitations on rights of self-help by a mortgagee?

Current Chinese law does not have any provision for the right of self-help by a mortgagee.

Duties to owner or third-party creditors

What duties does a mortgagee owe to an owner or third-party creditors?

There is no such provision in current Chinese law. In legal theory, a mortgagee has the obligation not to interfere with the normal operation of the mortgaged vessel conducted by the owner, a third-party operator or bareboat charterer.

Collateral

Finance leases

May finance leases or other charters be recorded over vessels flagged under the laws of your jurisdiction?

Currently, there is no express provision regarding registration of vessel finance leases in the Chinese Maritime Code or the Regulations on the Registration of Vessels (2014 Revision). A finance lease consists of a sale of a vessel between the lessor and the seller of the vessel and a bareboat charter between the lessor (shipowner) and the lessee (charterer). Thus, the ownership of a vessel of the lessor and the bareboat charter between the lessor and the lessee are registered in practice as required by the Regulations on the Registration of Vessels.

As required by the Regulations on the Registration of Vessels (2014 Revision), the shipowner and the charterer shall apply for registration of a bareboat charter in one of the following cases:

  • a vessel of Chinese nationality bareboat-chartered to a Chinese company or Chinese citizens;
  • a foreign vessel bareboat-chartered to a Chinese company; or
  • a vessel of Chinese nationality bareboat-chartered to a foreign company.

These requirements for registration of a bareboat charter apply to finance leases.

May finance leases be recharacterised by a court as a financing contract? If so, is there any procedure for protecting the lessor’s interest against third-party creditors?

There is no definition of a financing contract under current Chinese law. In a broad sense, a finance lease can be understood as a means of finance and, consequently, it is possible that a finance lease contract may be recharacterised by a court as a financing contract.

Under a finance lease contract, the lessor is the owner of the vessel or other lease item. In the case of a finance lease of a vessel, therefore, the lessor may apply to the vessel’s registry (MSA) for registration of the vessel’s ownership. Being registered as the shipowner, the lessor can assert its ownership of the vessel against a third party. However, where the law provides that the registered shipowner shall be liable for a maritime claim, for example, a maritime claim secured by a maritime lien, the lessor will be held liable for the claim and cannot avail of the finance lease as a defence, but the lessor may make a recourse claim against the lessee under the finance lease contract.

Security interests

How is a security interest created over earnings of a vessel, charter contracts, insurances, etc? How are these security interests perfected?

Under current Chinese law, this kind of security interest cannot be created, nor can it be perfected.

Must security interests against non-vessel collateral be registered to be enforceable? If so, where are such filings made?

Under current Chinese law, security interests against non-vessel collateral cannot be registered.

How is a security interest over a deposit account established? How is a security interest perfected?

A security interest over a deposit account can be established by mutual agreement of the parties concerned and can be perfected by means of applying to a court for freezing of the account and enforcement, but it cannot be enforced against a third-party creditor.

How are security interests in non-vessel collateral enforced?

Such security interests cannot be enforceable against a third party. The creditor’s right secured by non-vessel collateral is an ordinary creditor’s right. Thus, the claimant may apply to the court for attachment on the property, and after the claimant has obtained a civil ruling or arbitral award in his or her favour, he or she may apply to the court for enforcement of the same.

Share pledges

How are share pledges for vessel financings established? Are share pledges or share charges common in your jurisdiction?

According to the Registration Methods on a Share Pledge promulgated by the SAIC, the items to be registered include the names of the pledgor and pledgee, the name of the company whose shares are to be pledged and the amount of the shares to be pledged.

In application for registration of a share pledge, the following documents must be filed:

  • an application for registration of the share pledge signed or stamped by the applicant;
  • a copy of the limited liability company’s list of shareholders that records the name of the pledgor and his or her amount of shareholding, or a copy of the share certificate held by the pledgor, all of which must be stamped by the company;
  • the pledge contract;
  • copies of the business licences of the pledgor and pledgee or, in the case of a natural person, his or her identity card stamped by the company or signed by the natural person; and
  • other materials required by the SAIC.

While the shares are under pledge, the shareholder’s right to make decisions will not be affected, but the transfer of the pledged shares is not allowed.

So far, share pledges or share charges are not very common in China.

Is there a risk that a pledgee, before or after exercise of the share pledge, may be exposed to debts or other liabilities of the pledged company?

There is no risk that the pledgee may be exposed to the debts or other liabilities of the pledged company before or after exercise of the share pledge. However, if the state of operation of the pledged company is not good, there is a risk that the pledgee’s right may not be fully secured because the value of the share pledged will be prejudiced when the pledgee exercises the pledge by selling the shares pledged.

Tax considerations for vessel owners

Domestic taxation

Is the income earned by the owners of vessels registered in your jurisdiction subject to domestic taxation? At what rate?

Yes. If a vessel is engaged in domestic transport, the owners shall pay VAT at the rate of 11 per cent on the earned income. Currently, however, if the shipowning company is registered in the Yangshan Bonded Port of Shanghai or Dongjiang Bonded Port Area of Tianjin, the VAT paid by the owners may be returned. If a vessel is engaged in international transport or transport among Hong Kong, Macao and Taiwan, the owners are exempted from paying VAT.

Tonnage tax

Is there an optional tonnage tax exempting vessel owners from tax on income?

No. In China, tonnage tax and the tax on income are different. Tonnage tax (tonnage dues) is levied on vessels, both Chinese and foreign, engaged in international transport, which call at Chinese ports in accordance with the Interim Regulations on Vessel Tonnage Tax (2011).

It should be noted that the Law of the People’s Republic of China on Vessel Tonnage Tax was adopted at the 31st session of the 12th Standing Committee of the National People’s Congress on 27 December 2017 and is issued with effect from 1 July 2018. Once the Law on Vessel Tonnage Tax comes into force on 1 July 2018, the Interim Regulations on Vessel Tonnage Tax issued by the State Council in 2011 will be abolished at the same time. According to the Law on Vessel Tonnage Tax, any vessel entering a domestic port of China from an overseas port shall be subject to vessel tonnage tax.

Payment of tonnage tax cannot exempt the owners of a vessel engaged in international transport from paying tax on income.

Tax incentives

What special tax incentives are available to shipowners registering vessels in your jurisdiction?

There is now no national tax incentive generally available to the owners of vessels registered in China. However, some local governments offer special tax incentives to the owners of vessels registered in the ports in their jurisdiction as approved by the Ministry of Finance. For instance, the owners of vessels registered in the Dongjiang Bonded Port Area of Tianjin can get financial support from the local government by means of refunding of VAT. A similar preferred policy is being carried out for shipping companies registered in the Yangshan Bonded Port of Shanghai. Nevertheless, there are restrictions on foreign investors seeking to register their vessels in these areas and other places in China (see question 12).

Other tax provisions

Are there any other noteworthy tax provisions specifically applicable to shipping, shipping income or ship finance?

Ship finance companies registered in the China (Shanghai) Pilot Free Trade Zone can establish special purpose vehicles (SPVs) without restrictions on the minimum registered capital. Ship finance companies and SPVs are entitled to benefit from the policy of export tax rebates.

Insolvency and restructuring

General scheme of reorganisation or insolvency administration

Is there a general scheme of reorganisation or insolvency administration in your jurisdiction?

Yes. The Enterprise Bankruptcy Law regulates reorganisation and insolvency administration. Both the debtor and the creditor can directly file an application to the people’s courts with jurisdiction for the reorganisation of the debtor’s company. After the court has accepted the case, the court will appoint a debtor’s property administrator, which is normally a firm of accountants or a law firm that will take over all the debtor’s properties on behalf of the court. During the period of reorganisation, the exercise of the security right over the specific property of the debtor shall be suspended. However, in the case of possible damage or marked depreciation of the value of the security, which may impair the secured creditor’s right, the secured creditor may apply to the people’s court for the resumption of the exercise of his or her security right. Such a scheme also applies to a ship mortgage. The law does not specify whether the procedure for enforcement shall be suspended if the people’s court only accepts an application for reorganisation. However, after a people’s court accepts an application for bankruptcy, the procedure for enforcement shall be suspended and payment of debts made by the debtor to individual creditors shall be invalid.

Foreign court rulings

Will the courts of your jurisdiction respect the rulings of a foreign court presiding over reorganisation or liquidation proceedings?

No. Such rulings cannot be directly enforced in China. This matter, in essence, is one of recognition and enforcement of a ruling issued by a foreign court. Where such a ruling involves a debtor’s property within the territory of China and the creditor or creditors apply to the Chinese court with jurisdiction for recognition and enforcement of the ruling, the Chinese court shall conduct an examination of the ruling according to the relevant international or bilateral treaty that China has concluded or acceded to or, without such a treaty, on the basis of the principle of reciprocity. Only when the Chinese court believes that recognition and enforcement of the ruling is in conformity with the above-mentioned treaty or the principle of reciprocity, and that the ruling in question does not violate the basic principles of the laws of China, jeopardise the sovereignty and security of the state or public interest, or undermine the legitimate rights and interests of the creditors within the territory of China, may the Chinese court decide to recognise and enforce the ruling.

Model Law on Cross-Border Insolvency

Has your jurisdiction adopted the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law?

No, China has not adopted the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law so far. That is to say, Chinese jurisdiction will generally not approve a foreign corporation’s application for insolvency protection unless the Chinese court decides to recognise and enforce the ruling of insolvency issued by a foreign court based on the relevant international or bilateral treaty and the principle of reciprocity (see question 42).

Order of priority

What is the order of priority among creditors? In what circumstances will creditors be required to disgorge payments from an insolvent company?

The order of priority among creditors’ registered credits in the liquidation of the debtor’s properties as provided for in the Enterprise Bankruptcy Law is as follows after the expenses for bankruptcy proceedings are defrayed and the debts incurred for the common interests of creditors are repaid first:

  • a creditor who is in debt to the debtor before the application for bankruptcy is accepted. The creditor may lodge a claim with the administrator for offsetting the debts. However, the debts specified in article 40 of the Enterprise Bankruptcy Law shall not be offset;
  • wages, subsidies for medical treatment, injuries and disability and pensions for the disabled and the families of the deceased that the bankrupt debtor owes, the basic old-age insurance premiums and the basic medical insurance premiums that the bankrupt debtor owes and fails to enter in the employees’ personal accounts and the compensations that should be paid to the employees as prescribed by the relevant laws and administrative regulations;
  • social insurance premiums other than those specified in the preceding item that the debtor fails to pay and the taxes that the debtor fails to pay; and
  • ordinary bankruptcy claims other than the secured claims.

Where a bankruptcy property is not sufficient to satisfy the demands for repayment that rank in the same group, it shall be distributed on a pro rata basis. The amount of payments distributed in a liquidation is upon agreement among all the creditors. Where no such agreement can be reached, the distribution shall be decided by the court. Any property that is the subject matter of security such as a ship mortgage, a possessory lien or a maritime lien shall not fall within the debtor’s properties in the liquidation.

If a creditor obtained payment of a debt after a people’s court accepted an application for bankruptcy, such payment shall be disgorged, unless the same is paid under the circumstance specified in articles 14-16 of the Certain Provisions of the Supreme People’s Court on the Application of the Enterprise Bankruptcy Law.

In addition, a creditor who is in debt to the bankrupt debtor before the application for bankruptcy was accepted by the court may lodge a claim with the administrator for offsetting the debts, but a debt specified in article 40 of the Enterprise Bankruptcy Law cannot be offset. However, if such a creditor offset the debt before the application for bankruptcy was accepted by the court, and if the credit and debt cannot be offset under article 40 of the Enterprise Bankruptcy Law, the amount of offsetting shall also be disgorged.

Security provision by vessel owner

May a vessel owner provide security on behalf of other related or unrelated companies? What are the requirements for it to be enforceable?

The vessel owner can provide security on behalf of another related or unrelated company. However, if the vessel owner provides security for and on behalf of, and in favour of, a company registered outside China, such security shall be approved by or registered with the Foreign Exchange Administration, while such approval or registration shall not be deemed as a condition precedent of the validity of the security. Therefore, the security is enforceable once it satisfies the stipulation of itself and the applicable law.

Law of fraudulent transfer

Is there a law of fraudulent transfer that permits a third-party creditor to challenge, for example, the grant of a mortgage because of insolvency of the mortgagor or insufficient consideration received by the mortgagor in exchange for the grant of the mortgage?

Yes. According to article 74 of the Contract Law, a third-party creditor can file a claim with a competent court to challenge and nullify the action of fraudulent transfer taken by the debtor.

Petitions by creditors

How may a creditor petition the courts of your jurisdiction to declare a debtor bankrupt or compel liquidation of an insolvent obligor?

According to article 7 of the Enterprise Bankruptcy Law, where a debtor cannot pay off his or her debt that is due, the creditor may make an application to the people’s court at the place where the debtor resides for the debtor’s bankruptcy liquidation.

Model Netting Act

Has your jurisdiction adopted the Model Netting Act of the International Swaps and Derivatives Association (ISDA)? If not, may a swap provider exercise its close-out netting rights under an ISDA master agreement despite an obligor’s insolvency?

No. The Enterprise Bankruptcy Law does not specify the effect of close-out netting right and there is no such precedent in judicial practice in China. According to the Enterprise Bankruptcy Law, if an obligor is under an insolvency procedure, the swap provider may not exercise its close-out netting rights under an ISDA master agreement in China.

In accordance with article 18 of the Enterprise Bankruptcy Law, the administrator of the debtor’s properties appointed by the court has the right to decide to either rescind or continue to perform a contract that was concluded before the court accepted an application for bankruptcy and has not been fulfilled. Such an option is different from the right of automatic termination of the close-out netting regime. Further, according to article 40 of the Law, the swap provider as the creditor has the right to lodge a claim with the administrator for offsetting the debts, but such debts shall be those that occurred before the application for bankruptcy was accepted by the court. However, the debts under the close-out netting may not satisfy the requirement. Moreover, according to article 32 of the Law, the close-out netting may mean that the obligor makes a repayment to an individual creditor, and then the administrator shall have the right to request the court to nullify it.

Therefore, the close-out netting rights may not be automatically applied and enforceable under current Chinese law.

Update and trends

Current developments

Are there any emerging trends or hot topics that may affect shipping finance law and regulation in your jurisdiction in the foreseeable future?

The Belt and Road Initiative (an abbreviation of Silk Road Economic Belt and 21st Century Maritime Silk Road) proposed by Chinese President Xi Jinping, which is aimed at advancing international and regional cooperation, brings increasing opportunities for shipping finance and also promotes the amendment of the Chinese Maritime Code. The latter was implemented in 1993 and has remained in force for more than 20 years. In recent years, especially since the implementation of the Belt and Road Initiative, both shipping practice and the legislative environment in China have changed dramatically, leading to impending amendments to the Chinese Maritime Code to comply with the trends. Moreover, since the Belt and Road Initiative aims to promote international trade, the shipping industry will be further enhanced.