Compliance with regulations on ensuring SME payments

By Jason Chan and Zhou Zizhao, Anjie Law Firm
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Urging conscientious clearing of outstanding payments to SMEs, the State Council’s State-owned Assets Supervision and Administration Commission (SASAC) recently reminded central state-owned enterprises and high-tiered market players of their obligations under the Regulations on Ensuring Payments to Small and Medium-sized Enterprises (SMEs), issued in 2020.

On the basis of the regulations and the reminder notice issued on 31 December 2021, this article addresses key compliance issues of government organs, public institutions and large enterprises in purchasing and payment for goods, projects and services from SMEs – as well establishing in-house arrears prevention systems.

Q: What is the application scope of the regulations and notice?

A: Government organs, public institutions and large enterprises are obliged to abide by the regulations governing payment to SMEs for the purchase of goods, projects and services.

Q: How can suppliers tell if they are SMEs, and accordingly claim relevant rights defined in the regulations?

A: SMEs are currently defined by the National Bureau of Statistics, in the Measures for Statistical Definitions of Large, Medium, Small and Micro Enterprises, formulated in 2011, in accordance with the Notice of Ministry of Industry and Information Technology, National Bureau of Statistics, National Development and Reform Commission and Ministry of Finance on Issuing the Provisions on Criteria for Classifying Small and Medium-sized Enterprises and the Industrial Classification for National Economic Activities, issued in June 2017.

Taking into account the characteristics of different industries, the above-mentioned measures divide SMEs into three categories – medium, small and mini – and define enterprise scale from three main criteria: number of employees; business revenue; and total assets. Enterprises can refer to the measures for their classification.

Q: What aspects of compliance obligations should government organs, public institutions and large enterprises pay attention to in the early stages of contract conclusion?

Compliance with regulations on ensuring SME payments Jason Chan AnJie Law Firm
Jason Chan
Partner
AnJie Law Firm

A: First, before contract conclusion, personnel in charge of compliance supervision in government organs, public institutions and large enterprises must review project budgets and ensure that project funds are in place. Projects should be carried out in strict accordance with the approved budget, without conducting unbudgeted or over-budgeted procurement.

Second, enterprises should strengthen contract management, delete any imparity clause in contract templates, and review: whether the contract clauses – especially terms relating to payments and settlement methods – reflect the principle of fairness; whether there is any inequality of rights and obligations; whether there is any abuse of dominant market position to establish unreasonable payment conditions and time limit; or whether there are any unreasonable situations such as tying up funds of SMEs. This avoids, as far as possible, the risk of “invalidity of relevant provisions due to violation of mandatory provisions on effectiveness” arising from violating the regulations.

Q: How can suppliers claim their rights and interests as defined by the regulations?

A: Suppliers’ compliance officers can assess the size of their own enterprises before entering into a contract and, if the enterprise is an SME, should take the initiative to inform the purchaser at the time of signing the contract and actively claim relevant rights and interests.

In addition, for government-funded projects, an advance payment clause can be requested by construction units for inclusion during contract preparation and negotiation, instead of advancing its own funds.

Q: What are compliance requirements on specific contract clauses under the regulations?

Compliance with regulations on ensuring SME payments Zhou Zizhao AnJie Law Firm
Zhou Zizhao
Paralegal
AnJie Law Firm

A: The regulations clarify that the contract period should be reasonably agreed in accordance with industry norms and trading practices. For contracts with settlement methods in the form of progressive or periodic settlement, the payment term begins from the date of confirmation of settlement amount by both parties. In principle, government organs and public institutions shall make payments within 30 days from the date of goods, projects and/or services delivery – and if otherwise agreed, the maximum payment term shall not exceed 60 days.

Regulations also require both contract parties to agree on a reasonable period for inspection and acceptance, and complete them in accordance with the contract. If government organs, public institutions and large enterprises delay inspection and acceptance, the payment term shall be counted from the date of expiration of the agreed period.

A number of prohibited acts are also clearly outlined, such as disguised extensions of payment terms by using commercial bills or other non-cash settlement, without explicit agreement.

For central state-owned enterprises, from 2022 onwards, commercial acceptances and supply chain debt certificates of a period over six months will no longer be issued in principle, unless agreed in writing in the original contract. Payments to SMEs should not be refused or delayed on the grounds of changing of person in charge, fulfilment of internal payment processes, waiting for approval of completion acceptance, or final account audit.

Q: What are the compliance requirements on “security deposits” under the regulations and the notice?

A: Except for lawfully established bid bond, performance bond, project quality deposit and migrant workers’ wage deposit, no other deposits shall be collected in the project construction – and the proportion of the deposit collected shall comply with the provisions. Government organs, public institutions and large enterprises shall not limit the deposit to cash, and shall accept guarantees provided by SMEs in the form of letters of guarantee from financial institutions. Deposit shall be verified and settled with SMEs promptly upon the expiration of the guarantee period.

Q: What are the compliance obligations of enterprises establishing an in-house arrears prevention system?

A: First, enterprises need to weed out any non-compliance with the regulations in current contract management and payment processes, to identify and comprehensively investigate hidden risks of arrears. Second, enterprises need to improve channels for complaints, assessment and supervision, and accountability.

For central state-owned enterprises, groups and subsidiaries at all levels should disclose the channels for arrears complaints and reporting in prominent positions, such as on official websites or WeChat official accounts, and inform the counterparty in writing of the methods for acceptance of arrears complaints in advance or in the contract.

Finally, enterprises should ensure that the payment information is public, establish a payment information disclosure system, and actively accept supervision from all concerned parties.

Jason Chan is a partner and Zhou Zizhao is a paralegal at AnJie Law Firm

Dong Xiao Zhao Huili AnJie Law Firm International arbitration

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