The Ins and Outs of Branch Offices in China

Llinks Law Office

This month's bulletin deals with unincorporated branch offices set up by PRC registered enterprise legal persons (including companies incorporated in accordance with the PRC Company Law )  (中华人民共和国公司法) and those set up by foreign companies in accordance with Chapter 9 of the Company Law.

Business Licences vs Enterprise Legal Person Business Licences
Enterprise legal persons meeting the requirements set out by the PRC, Civil Law General Principles (including companies established in accordance with the Company Law) will be granted enterprise legal person business licences, while unincorporated branch offices will be granted business licences. It is worth mentioning that sometimes, in particular when dealing with State-owned import and export companies, a business that looks like a branch office from its name may have its own articles of association and enterprise legal person business licence and thus may be treated as an independent legal entity in legal proceedings.
In practice, business licences are not only granted to branch offices but also to associated enterprises(联营企业), foreign invested cooperative joint ventures (CJVs) and wholly foreign owned enterprises (WFOEs) without separate legal entity status, although the overwhelming majority of CJVs and WFOEs are granted enterprise legal person business licences.
Foreign companies duly authorized to do business in China on a project basis will be granted business licences as well.

Branch Offices Established by Foreign Companies
According to Chapter 9 of the PRC, Company Law (中华人民共和国公司法) , a foreign company may establish a branch office in the PRC to do business. Article 200 of thePRC, Company Law (中华人民共和国公司法) provides that the State Council shall be responsible for setting out measures for examination and approval of branches of foreign companies.
Currently, only foreign commercial banks, insurance companies and petroleum companies are permitted to set up branch offices in China.

Capacity to Contract
Generally, branches have capacity to enter into contracts provided that the formation of contracts does not violate their business scope.
In this regard, attention should be drawn to Article 29 of the PRC, Security Law (中华人民共和国担保法), which provides that, if a guarantee is provided by a branch of an enterprise legal person without the written authorization of the legal person or beyond such authorization, the guarantee shall be null and void (wholly or partly as the case may be). Under these circumstances the creditor or beneficiary may suffer losses if it is found to be at fault.

Capacity in Legal Proceedings
Under PRC law, a branch office may sue and be sued in its own name in a civil lawsuit in China. In many cases, the PRC court may entertain a lawsuit launched against both the branch office and head office as co-defendants or after having entertained a lawsuit against a branch office and, upon the application of the plaintiff, list the head office of the original defendant as an additional defendant. However, if the defendant is a branch office of a commercial bank or insurance company, it is doubtful that the head office or even another branch office at a higher level will be listed as a co-defendant. Article 124 of the Supreme People's Court, Several Issues Concerning the Application of the < PRC Security Law > Interpretations gives a very good example. According to Article 124: "If a branch of an enterprise legal person provides a guarantee for a third party, the people's court may, when hearing a dispute over the guarantee, designate the enterprise legal person as a co-defendant in the action. However, this provision does not apply to branches of commercial banks and branches of insurance companies." Whether the head office could be recognized as a co-defendant will have impact when (i) the court where the head office is located may have jurisdiction over the dispute; and (ii) the assets of the head office are subject to property preservation measures which are widely taken in civil proceedings in China.

From the perspective of protection of creditors' rights, the provisions of Article 78 of the July 1998 Supreme People's Court, Several Questions Concerning People's Court Enforcement Work Provisions (Trial Implementation) cannot be ignored, which specifies that, if a branch of an enterprise legal person, as the entity subject to execution, cannot discharge its obligations using the property dealt in and managed by itself, the court may directly render a ruling to carry out enforcement against the property of the enterprise legal person. If the property directly dealt in and managed by the enterprise legal person is still insufficient, the property of other branches may be drawn on for enforcement purposes.
What may be reasonably inferred from Article 78 above is that, during the trial procedure of a lawsuit against a branch office, it could be very difficult to list any sister branch office of the defendant as a co-defendant.

By Charles Qin and Sidney Qin
Llinks Law Office,
Shanghai