PRC Law Review

1. Rolmax Law Review
January 2010
Shipping
Impact of Property Law on Possessory Lien on Vessel
Builder or repairer can exercise a lien on the vessel for unpaid building or repairing cost as per
Maritime Code. Such a possessory lien will extinguish if the vessel is not longer in the
possession of the builder of repairer. There are two restrictions. First, only a builder or a repair
can exercise such a possessory lien. Second, the vessel must be the one in the possession of
the builder or repair according to the building/repairing contract. In other words, if a builder has
built two vessels under separate contracts for the same owner, the builder is not able to
exercise a lien on the vessel for the unpaid cost for another vessel.
According to the Property Law enacted in 2007, an enterprise creditor can exercise a lien on
the movable property of an enterprise debtor lawfully in its possession, no matter whether the
movable property is under the same contractual relationship with the unpaid cost. There is a
debate over whether a builder can exercise a lien on a vessel under construction for the
unpaid cost for a vessel under another contract if these two vessels are ordered by the same
owners. The prevailing view is that since Maritime Code is a special law concerning vessels,
builders/repairers are still subject to the restrictions of the Maritime Code when exercising
possessory lien.
However, the Property Law does allow more parties to exercise lien on vessels, such as port
operator, salvagers and bare-boat charterer. According the Property Law, these parties are
free to detain vessels owned by an enterprise debtor lawfully in their possession. In practice
this means that the sister ship registered under the same name of an owner may be detained
by port operator, salvagers or bare-boat chatterers in China for the debts of owner, without the
need to apply to the court for ship arrest. It is important for the owners to agree in the contract
to exclude the right of lien, which is permitted by the Property Law.
The Maritime Code does not specify the ways of enforcing the lien. It was generally believed
that the party exercising the lien needs to apply to a relevant maritime court for selling the
vessel. The Property Law however provides that the party exercising the lien can enforce the
lien by any of the following ways: agree with the debtor to take the vessel at an agreed value,
to apply to the court for a public auction or to apply to the court for a private sale.
Shanghai Beijing Guangzhou Ningbo

2. Finance
Enterprises Borrowing Loans from Foreign Governments or International Financial
Organizations not Exempted from Bankruptcy Proceedings
The new Enterprise Bankruptcy Law of China takes effect from 1 June 2007. Ever since, there
have been some uncertainties regarding the issue of whether an enterprise having borrowed
loans from foreign governments or international financial organizations (including the World
Bank and the Asian Development Bank) can be subject to bankruptcy proceedings. Before,
the Supreme Court had circular to the effect that the loans to those enterprises were
guaranteed by the Chinese government and before the loan was repaid in full no insolvency
petition can be made against such enterprises.
From 1 June 2007, however, insolvency petition can be made against such enterprises.
According to the Bankruptcy Law, insolvency petition can be made against an enterprise
unable to discharge its due and outstanding debts. The court can not reject an insolvency
petition because the target enterprise has unpaid loan toward foreign government or
international financial organizations.
However, since the majority of such loans are guaranteed by governments at various levels,
the bankruptcy proceeding will not affect the liability of the guarantor towards the foreign
governments or international financial organizations.
Corporate/FDI
China Tightens Controls over Collection of Enterprise Income Tax for Equity Transfer by
Non-resident Enterprises
The State Administration of Taxation issued its Circular [2009]No.698 in December 2009,
which is retroactively effective from 1 January 2008. This Circular imposes tax filing obligations
on a non-resident enterprise transfers its shares in a PRC resident enterprise if there is no
withholding agent (as in the situation where the buyer of the shares is also a non-resident
enterprise) or the withholding agent fails to fulfill the withholding agent.
The above part of the Circular is less controversial. However, the Circular also require a
non-resident enterprise to disclose documents when it transfers an offshore company holding
a PRC resident enterprise if the jurisdiction of the offshore holding company is less than 12.5%
or if the jurisdiction does not ax its residents on such foreign sourced income. The documents
required to be disclosed include: (a) share transfer agreement, (b) the relationship between
the transferor and the offshore holding company in relation to fund, operation, purchase and
marketing activities, (c) the operation, management, personnel and properties of the offshore
holding company, (d) the relationship between the offshore holding company and the PRC
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3. target enterprises in relation to fund, operation, purchase and marketing activities, (e)
evidence that there is a reasonable business purpose on setting up the offshore holding
company and (f) other documents required by the tax authorities.
If the tax authority is convinced that the non-resident transferor has abused the offshore
holding structure without reasonable purpose just in order to indirectly transfer the PRC
resident enterprise to avoid PRC tax liabilities, it may, subject to approval from the State
Administration of Taxation, treat the transfer of an offshore holding company as transfer of the
PRC resident enterprise and thus impose PRC enterprise income tax on such transfer.
The effect of enforcing such a Circular remains to be seen. However, with the general anti
avoidance rules laid down in the Enterprise Income Tax Law, China’s tax authority will
increase its control over non-resident enterprise. Foreign investors who were advised to use
offshore holding structure to take benefits of lower tax in some jurisdictions need to review
their investment structure and make changes if necessary.
Employment
Guangzhou Court Issues Guidance on Hearing Labor Disputes
Guangzhou Intermediate Court issued its Guidance on Hearing Labor Dispute in October 2009.
Though this Guidance is an internal document for internal reference, the district courts and
Guangzhou Intermediate Court will follow the provisions in this Guidance when hearing labor
disputes. While reiterating or clarifying most of the provisions of the Labor Contract Law, the
Guidance has also made some controversial provisions which seem to be conflicting with the
Labor Contract Law.
For example, the Guidance allows the employer and employee to agree on the basis salary for
calculating overtime pay.
The Guidance also allow employees to work overtime for more than 36 hours per month. The
Guidance also imposes preliminary burden of proof on the employees regarding the claim for
overtime pay. The Guidance also allow employers to deduct the rest time and dining time from
the overtime.
The Guidance also recognizes the attendance records unsigned by employees as evidence of
attendance if there are other circumstantial evidence.
The Guidance clarifies that if the employer has made the double severance payment as per
Article 87 of the Labor Contract Law, there is no need to make the payment in lieu of notice.
Shanghai Beijing Guangzhou Ningbo

4. The Guidance allows employee to apply to the court to attach the property of the employer as
security after the labor arbitration has commenced.
What may come as a surprise is that, employee during breastfeeding period may also be
terminated and the employer is only obligated to pay a limited amount per month (at 20% of
the involved employee’s monthly average salary over the preceding year) till the baby is one
year’s old. Under the Labor Contract Law, employees during breastfeeding period is protected
and can not be dismissed.
There are more provisions which do not seem exactly matching the provision of the Labor
Contract Law. This Guidance is seen as efforts of the court to balance interests of employers
and employee. Employers litigating or operating in Guangzhou are advised to take further
legal advice in this respect.
The Guidance clarifies that if the employer has made the double severance payment as per
Article 87 of the Labor Contract Law, there is no need to make the payment in lieu of notice.
The Guidance allows employee to apply to the court to attach the property of the employer as
security after the labor arbitration has commenced.
What may come as a surprise is that, employee during breastfeeding period may also be
terminated and the employer is only obligated to pay a limited amount per month (at 20% of
the involved employee’s monthly average salary over the preceding year) till the baby is one
year’s old. Under the Labor Contract Law, employees during breastfeeding period is protected
and can not be dismissed.
There are more provisions which do not seem exactly matching the provision of the Labor
Contract Law. This Guidance is seen as efforts of the court to balance interests of employers
and employee. Employers litigating or operating in Guangzhou are advised to take further
legal advice in this respect.
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Information contained in this newsletter should not be applied to any set of facts without seeking legal advice.