PRC Law Review-February Issue

1. Rolmax Law Review
February 2010
Shipping
Ship Arrest in China
Ship arrest used as a way to take security prior to proceedings can be traced back to 1986
when the Supreme Court imitated International Convention Relating to the Arrest of Sea-Going
Ships, 1952 and the International Convention on the Arrest of Ships drafted by CMI in 1985
and issued its Regulations on Arrest of Ship Prior to Proceedings.
The current authority on ship arrest is the Maritime Procedure Law (‘MPL”) with effect from 1
July 2000.
(1) For what purpose
MPL allows ships to be arrested for taking security prior to or during proceedings only for 22
specified maritime claims, which are more or less same as those listed under the International
Convention on the Arrest of Ships 1999. However, ships can be arrested for fulfilling effective
judgments/awards without the “maritime claims” restrictions.
(2) Competent courts
For purpose of obtaining security prior to proceedings, application for arrest of ship can only be
made to the maritime court at the place where the ship is located. For purpose of obtaining
security during proceedings, application can only be made to the maritime court hearing the
substantive dispute. The courts are not allowed to arrest ships. Even if a civil court has to
arrest a ship for the purpose of fulfilling an effective court judgment/award, the civil court has to
entrust the maritime court at the place of the port of registry or where the ship is located. Within
Shanghai Beijing Guangzhou Ningbo

2. 30 days after the ship is arrested, the party should commerce lawsuit or arbitration, or else the
ship or the security provided will be released.
(3) Sister ships arrestable
The sister ships which can be arrested by maritime courts are those ships, at time of arresting,
owned by the shipowner, bare-boat charterer, time charterer or voyage charterer who are
allegedly liable for a maritime claim (except for those in connection with ownership or
possession of a ship), which is in substance similar to the International Convention on the
Arrest of Ships 1999.
(4) Security and counter-security
The purpose of arresting a ship is to obtain security for fulfilling future judgment/award.
After a ship is arrested, the owner or charterer of the ship will need to post a security in order to
get the ship released. The amount of security requested by the claimant will be limited to the
amount of claim and also the value of the ship. The security normally will be in form a
guarantee issued or endorsed by a financial institution operating in China. It could also be in
cash or other forms of security such as mortgage and pledge over property.
The party applying for ship arrest will also need to post a counter-security to the court, to
compensate the owner/charterer in case the ship arrest proves to be a wrongful one. The
amount of counter-security is normally equivalent to the possible losses that may have been
caused to the owner/charterer if case of wrongful arrest. In practice, this amount is usually
determined to be 30 day’s hire of the ship. The court will also request the applying party to
advance some costs for guarding the ship.
The test of a “wrongful arrest” is whether the maritime claim of the applying party has prevailed
before the court or arbitrational tribunal. If the maritime claim does not sustain, the applying
party need to compensate the owner/charterer of the ship the losses the maintenance charges
and expenses occurred during the period of berth when the ship is detained, the loss of sailing
period as a result of detainment of the ship, and the expenses incurred to the respondent to
provide security to release the ship.
Shanghai Beijing Guangzhou Ningbo

3. (5) Procedure
a. The applying party submits application, specifying claims, grounds, the ship to be arrested
and the amount of security requested, supported by prima facie evidence.
b. The applying party posts counter-security to the court.
c. The court makes preliminary examination on the application.
d. The court makes a ruling to arrest or not to arrest the ship, within 48 hours after accepting
the application. Within 5 days after the ruling is issued, the owner/charterer can apply to
the court for challenging the ruling.
e. The court issues and serve ship arrest order on the ship, issued notices for assistance to
the maritime safety administration and the frontier inspection authority.
f. The court releases the ship if (i) the owner/charterer posts security as per the ruling, (ii) the
owner/charterer successfully challenges the ruling or (iii) the applying party fails to
commence lawsuit or arbitration within 30 days.
Finance
Impact of Conflict between Different Laws on Share Pledge
It is difficult for foreign lenders to take security from PRC entities due to restrictions on PRC
entities’ capability to provide corporate guarantees. More and more foreign lenders find taking
security over shares of a foreign invested enterprise (“FIE”) a relatively effective way to secure
the borrowing to the parent companies of the FIE.
According to the Provisions on Change of Shares of FIE (1997) (“Provisions”), share pledge
will be valid only after it has been approved by the approval authority (Bureau of Commence)
that approved the establishment of the FIE. However, according to the Property Law (2007),
pledge of shares (except those registered in Securities Registration and Settlement
Organizations) takes effect form the date it is registered in the company registry
(Administration for Industry and Commerce). There has been controversies over whether
pledge over shares of a FIE is valid and effective if no approval has been obtained from the
approval authority.
Shanghai Beijing Guangzhou Ningbo

4. According to Article 52 of the Contract Law (1999), a contract is invalid if it is against the
`mandatory provisions of laws or administrative regulations. The Supreme Court’s Judicial
Interpretations on the Contract Law (2009) further clarifies that “the mandatory provisions”
referred to in the Article 52 of the Contract Law is limited to those mandatory provisions on
“effectiveness”. In other words, a share pledge contract can be held as invalid if it is against
the mandatory provisions of “laws and administrative regulations”. The Provisions are not a
piece of law or administrative regulations, but only the regulations issued by ministries.
Therefore, the Provisions can not set restriction on the effectiveness of a share pledge
contract.
In practice, the company registry, basing on the Provisions, only register those pledges over
shares of FIEs that have been approved by the approval authority. This means in practice the
Provisions which are not law or administrative regulations restrict the effectiveness of a
commercial contract.
The Supreme Court has made efforts to address this. In its consultation draft of the Provisions
on Hearing Disputes Relating to FIEs, it is clearly provided that the share pledge contract
takes effect from the moment it is signed and the courts will not support arguments that the
share pledge contract is not effective because it is not approved by the approval authority.
Corporate / FDI
Foreign Invested Partnership Allowed
The State Council issued its Administrative Measures for Establishment of Partnership
Enterprises in China by Foreign Enterprises or Individuals (“Measures”). With effect from 1
March 2010, the Measures will allow foreign investors to become partners of partnerships
(both general partnerships and limited partnerships) in China.
This appears to be a piece of good news for international PE/VC who found difficult to raise
RMB fund from domestic investors due to current restrictions where foreign investors are not
allowed to set up a partnership in China. However, the Measures also say that for foreign
investors establishing partnerships in China with investment as primary business, special
Shanghai Beijing Guangzhou Ningbo

5. regulations (it is not clear what set of regulations) will apply. So whether and how PE/VC could
take advantage of this newly allowed commercial presence remains to be seen.
No approval from Ministry of Commerce or its local offices is required for establishing a
foreign-invested partnership. The local offices of Administration for Industry and Commerce
are designated to register the foreign-invested partnership and notify the corresponding local
offices of Ministry of Commerce after registration.
Control Tightened over Foreign Enterprises’ Representative Offices in China
China recently issued a new notice on further strengthening administration of registration of
foreign enterprises’ permanent representative office in China. The notice with effect from 4
January 2010 reiterates the following requirements:
(a) A representative office (except for those approved to engage in some of the professions
such as legal consulting) is not allowed to engage in business activities that will generate
profits. Its function is strictly limited to do marking search or liaison work.
(b) At the time of opening a representative office or changing the name of an existing
representative office, the foreign enterprise must provide documents proving that the
foreign enterprise has been in operation for more than 2 years, credit reference letter
issued by the bank of the foreign enterprise. All these documents must be notarized and
then legalized by the Chinese Embassy/Consulate in the country of that foreign enterprise.
(c) The term of the certificate of registration certificate is strictly limited to 1 year. For
registration certificates that were issued for a term longer than 1 year, they must be
replaced by a 1-year term registration certificate at the time of filing application for change
or extension.
(d) The number of representatives (including the chief representative) is limited to 4. For an
existing representative office that has more than 4 representatives, it is only allowed to
replace or remove a registered representative, but not to add new representative.
(e) With 3 months after a representative office is established, the local counterparts of the
Shanghai Beijing Guangzhou Ningbo

6. Administration for Industry and Commerce will conduct a site inspection on the
representative office and will impose severe sanctions if violations are found.
Most interestingly, this notice was jointly issued by Administration for Industry and Commence
and the Ministry of Public Security. This appears to be quite unusual as Ministry of Public
Security is not involved in the registration of foreign representative offices in China. According
to this notice, the local office of Administration of Industry and Commerce will regularly notify
the correspondent office of exit and entry administration of the registration information of
foreign representative offices and any noncompliance. In case a representative is found
illegally conducting business (i.e. conducting the business not granted under the registration
certificate), the administration of industry and commerce will hand over to the public security
authority for investigation and further action.
The public security authority in turn will notify the administration for industry and commence of
irregularities relating to a foreign representative office such as using a fake address to register
the office, doing business outside of the place of registration or omission to comply with the
registration or annual inspection requirements, for further investigation and action.
In light of the above new developments, foreign investors who are not sure whether their
representative offices comply with the requirements or whether their business plan in China
can be implemented through a representative office are recommended to seek legal advice in
this respect.
Employment
Wizardry in Making a Binding and Enforceable Employee Handbook
The provisions in an Employee handbook, if properly made and issued, can be relied upon by
employer as legal basis for terminating employment contract or imposing disciplinary actions
and can be taken by the courts or labor dispute arbitration commission as “authority” in hearing
labor disputes. However, there have been a lot of reported cases where employers (relying
upon employee handbook) lost a seemingly strong case.
The trick is how the employee handbook is made and issued. According to Article 4 of the
Shanghai Beijing Guangzhou Ningbo

7. Labor Contract Law 2008, the employer should establish and maintain employment bylaws to
ensure employee’s compliance with employment obligations. When preparing, amending
bylaws or deciding on important issues which may have a direct impact on the interests of the
employees such as salary, working hours, leave and holiday, labor safety, insurance and
welfare, training, workplace discipline etc., the employer should (1) discuss with employees
representatives conference or all employees of the company, (2) propose an initial draft of the
handbook, (3) determine the final version after discussion with trade union or employees’
representatives and (4) post the handbook or otherwise notify all the employees.
According to the various guidance opinions issued by high courts in different parts of China
regarding the validity of employee handbook, if an employee handbook was made before 1
January 2008 and was announced to the employees, and if its content is not against the
relevant laws, regulations or policies, such employee handbook can be relied upon employer
as basis for administering employment. But for employee handbooks made after 1 January
2008, if it is not made through the so-called “democratic procedures” as described above, as a
general principle, such employee handbook can not be relied upon by the employer for
administering the employment or imposing disciplinary action or terminating employment
contract.
Most of foreign invested enterprises in China do not have a grass-root trade union organization
or employees’ representative conference within their companies. So how can they follow this
procedure? If an employer has records to show that it has taken the following steps to make its
employee handbook, validity of the employment handbook is difficult to be challenged: (a) the
company proposes an initial draft, (b) the company sends the draft to all employees by email
and/or by distribution of hard copies asking for opinion, signature required to prove receipt, (c)
the company finalizes the handbook according to the feedback received from the employees
and (d) the company publishes the handbook to all employees, signature required to prove
receipt.
Who has the final say? Though the employer has to consult the employees for making the
employee handbook, the employer has the final say in determining its content. In other words,
as long as the employer has followed the procedures to ask for opinion of the employees, the
employer does not have to incorporate such opinion into the employee handbook, always
provided that the content of the employee handbook is not against the relevant laws,
Shanghai Beijing Guangzhou Ningbo

8. regulations or polices.
Employers are advised to seek professional advice in preparing, amending and issuing a
legally binding and enforceable employee handbook.
At this time of the year, we extend our warmest regards to each of our clients and readers and
wish you all a Happy, Healthy and Prosperous New Year of the Tiger!
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.