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Checking creditworthiness
A check of creditworthiness of the potential Chinese business
partner through banks or credit management companies before sealing a business
contract is crucial.
In China, it is necessary to look beyond a buyer’s accounts.
Financial information on former state-owned companies can be sparse and, in some
cases, of dubious accuracy.
It should be checked that the business partner is not a shell
subsidiary of a larger company, otherwise it may be difficult to collect from
the parent company in case of default.
Small Chinese firms are often family-owned, sometimes with
undisclosed inter-family debts and loans.
It is also advisable when selling to Chinese customers to make
sure that the exact terms of payment, performance standards and timelines are
stated unequivocally in writing in the contract.
It is recommended to check the correct name of the buyer,
together with its registration number to ensure that it is legally entitled to
enter into the contract.
It is also a good idea to determine either with a lawyer or
trade association the usual payment terms that are customary for a
certain type of transaction.
The terminology used in China is also different. For example, an
invoice is known as a payment note whereas an invoice is, in fact, a receipt.
Other concepts such as a receiver/manager are not (yet)
recognised.
Instead, the functions of a receiver/manager are exercised by a
liquidation committee appointed by the People’s Court.
Out of court
As said above, it might be recommendable to seek a solution by negotiation
first.
If a consignment is shipped on open account and if the buyer fails to make
payment on the due date, then supplier should not, under any circumstances
whatsoever, offer extended repayment terms, thereby changing the original
contract terms and compromising any possible claim in the courts.
It may be advisable to consult a local collections agent as soon as possible, as
time is of essence in South African collection cases. A collection agent will
usually try to negotiate repayments without changing or compromising
the original contract terms and also monitor the repayment programme.
In case of ongoing default it may be necessary to threaten with legal action.
But if the legal process has not yet started and the Buyer makes an offer of
compromise, then the offer has to be considered along with the buyer's financial
circumstances and a decision arrived at.
At any case, a compromise offered should only be considered along when obtaining
firm securities (e.g. written acknowledge
of debt, directors or shareholders personal suretyships, notarial bonds and
mortgage bonds etc).
Default interests can only be recovered if a clause is included in the original
contract. In the absence of a costs clause,
then interests can only be claimed in a legal summons from the date of the
summons.
Letters of Credit
Letters of Credit are the most popular form of payment when
doing business with China.
Besides the Bank of China and the other reliable state-owned
major banks (Agricultural Bank of China, Industrial & Commercial Bank of China &
China Construction Bank), most Chinese commercial banks have the authority to
issue Letters of Credit for imports.
In order to prevent defaults, the issuing bank should be
carefully chosen regarding its financial strengths and market reputation, such
as Bank of Communications or CITIC Group.
It is strongly recommended to comply with the terms of the
Letter of Credit, paying special attention in presenting the necessary
documents in exactly the correct form to the bank.
Otherwise, delays in payment might be expected, or worse losing
the security of the Letter of Credit and being forced to convert to an open
account transaction.
There have been cases in which even slight differences in the
documentation (e.g. transport documentation not translated or abbreviated names
and addresses) were allegedly used as a pretext by
Chinese buyers for not fulfilling their obligations.
Letters of Credit should never by claused in the buyer’s favour.
Retention of Title
Retention of title clauses are legally valid according to the
Chinese Contract Law. They should be stipulated in writing.
A retention of title is insolvency resistant, but protection in
case of acquisition in good faith by a third party is not yet clearly regulated
by the law.
Therefore, it is essential to have some means of identifying the
supplied goods at hand.
A problem might be getting goods re-exported from China
(especially if originally imported through an agent/distributor).
Documentary collection
This method of payment provides
rather thin coverage against default when trading with a new Chinese customer.
It may be useful for already existing business relationships
which have proven trustful.
Mortgages
Mortgages are applicable to estate, buildings, land use rights,
machines, means of transportation and other debtor-owned goods.
Any mortgage declaration has to be notified and registered with
the respective local register.
Guarantees There are various types of payment
guarantees.
It is vital that the wording of any guarantee is checked with a local lawyer to ensure that the guarantee can be called with the need
to obtain judgement against the original debtor.
Collection of receivables in China
Safeguarding your credit sales in China
Protecting your credit sales in other countries
Reproduced by kind permission of Atradius
Atradius copyright. The statements and recommendations made herein are for
informational purposes only and should not be utilised as a substitute for
professional advice in specific situations. Therefore we ask for your
comprehension that we can't take over any liability for this report. If legal
advice or other expert assistance is required the services of a professional
should be sought.
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