Registration of onshore guarantees for offshore indebtedness

Onshore guarantees for offshore indebtedness – commonly known as Nei Bao Wai Dai (NBWD) – refers to cross-border arrangements where a guarantee is provided by an onshore guarantor for a debt owed by an offshore debtor to an offshore creditor. Non-bank institutions and individuals in China involved in NBWD arrangements are required to complete statutory registration with the competent local counterpart of the State Administration of Foreign Exchange (SAFE) within the prescribed time period; otherwise performance of the guarantee contract in question may not be achieved due to the potential failure of remittance of funds, even with a court judgment or arbitral award. This article offers some views on commonly encountered issues.

Requirements imposed on the parties concerned

The SAFE is scrutinizing applications, requiring applicants to disclose the debtor’s capital status and the source of funds for repayment, and disclose the debtor’s shareholding structure and the actual controller. In this respect, the following three issues are worth noting.

First, non-compliance in respect of incorporation of the offshore debtor. Despite the multiple layers of the shareholding structure, as long as the offshore debtor’s ultimate controller is a domestic institution or individual, this controller will be required to have already completed all procedures for outbound investment, failing which the SAFE will not accept the application for NBWD registration. This is more restrictive to domestic individuals. Strictly speaking, apart from certain exceptional circumstances permitted by the SAFE, there’s no nationwide legal path for PRC individuals to engage in outbound investment. Therefore, when PRC individuals intend to offer guarantees to those offshore entities under their actual control, they need to pay special attention to the SAFE’s compliance requirement in respect of incorporation of the offshore entities in question.

Jessie Fang is an associate of AllBright Law Offices