Factors in the acquisition of NPLs in China

By Xu Bangwei and Bai Lijie, Jingtian & Gongcheng

The transfer of non-performing debts is in nature debt transfer governed by the Contract Law. Unless otherwise provided by laws and regulations, the general rules on debt transfer should apply. However, in practice, in addition to applying the general rules of transfer of creditor’s rights, particular attention should be paid to the special provisions of laws and regulations on state-owned assets, guarantees and other issues, along with the consideration of policy impact.

Xu Bangwei
Jingtian & Gongcheng

In accordance with relevant laws, regulations and policies, combined with the views of the Supreme Court in some cases, this article discusses some factors for domestic and foreign investors to consider when acquiring non-performing loans (NPLs) in China.

Special factors

The debtor is a state-owned enterprise (SOE). In practice, courts’ opinions vary with respect to whether an SOE debtor can claim the invalidity of an NPL transfer contract on the ground that it impairs the interests of the state. When the debtor is an SOE, therefore, the NPL acquirer is advised to, during the due diligence phase, evaluate the possibility that any related state-owned asset administration, or the SOE debtor, will claim the invalidity of an assignment on the ground that the transfer is made at an unfairly low price that impairs the interests of the state, pursuant to article 52 of the Contract Law, and taking into account investment project particulars.

Bai Lijie
Jingtian & Gongcheng

The debtor or guarantor is a state organ. According to the Supreme People’s Court’s opinion in its [2018] SPC Civil Retrial Judgment No. 273, where the debtor or guarantor of an NPL transferred by a financial assets management company is a state organ, the court shall hold the transfer contract invalid for impairing the state or public interest, or violating mandatory provisions of laws and administrative regulations. In addition, even if the guarantor is not a state organ, when the debt in question comes into existence but later becomes a state organ, the debt assignment contract will also be deemed invalid under article 6 of the Minutes on Non-performing Loans Assignment.

The loan assets involve the right to use allocated state-owned land. If the loan asset in non-performing credit assignment involves the right to use allocated state-owned land, the acquirer is advised to check whether the subject matter of the assignment agreement is assignment of creditor’s rights or disposal of the land use right. If the agreement explicitly defines the disposal of the state-owned land use right as a form of in-kind debt settlement, the acquirer is advised to evaluate the risk in terms of the probability of enforcement of such an agreement being invalidated for violation of mandatory legal requirements to use allocated state-owned land without obtaining government approval, or without paying the land premium.

If the agreement defines the subject matter of the assignment agreement as the assignment of creditor’s rights, instead of a transfer of the land use right and attached real property, the agreement is usually deemed valid, as long as the contract provisions do not violate the mandatory requirements on validity set out in state laws and regulations. It is advisable to evaluate the realizable value of NPL investment prior to accepting an assignment, and to prevent hidden risks of loss caused by unenforceable creditor’s rights in terms of the transfer of state-owned land use rights.

Unauthorized guarantees

According to the Minutes of the National Courts’ Civil and Commercial Trial Work Conference, issued by the Supreme People’s Court in November 2019, if the legal representative or other staff of a company violates legal or company’s internal procedure to provide external guarantees in the name of the company without a resolution of the shareholders’ meeting or the board of directors, and the creditor does not examine the resolution of the shareholders’ meeting or the board of directors in carrying out due diligence, the external guarantee and debt joining are very likely to be invalidated.

Therefore, the acquirer is advised to review resolutions, articles of association and other relevant documents of the guarantor company during due diligence process, and check the validity of such documents to ensure the validity of the guarantee. If a guarantee contract is held invalid, and the guarantor is at fault, the creditor is entitled to claim compensation from the guarantor proportionate to its fault.

Unregistered creditor’s right

According to the minutes, if a real estate mortgage contract has legitimately come into effect, but the security interest has not been registered on time, the creditor may still proceed to request the mortgagor to co-operate in mortgage registration. If registration is impossible due to the loss of collateral, or transfer of collateral to any third party, the creditor may request the mortgagor to assume liability to the extent of the collateral value within the scope of the mortgagor’s liability, defined when the mortgagee’s right is created by the contract.


If NPLs are transferred and acquired in an asset portfolio, the portfolio shall be indivisible. Usually a claim for partial termination of an NPL portfolio transfer contract, after purchaser’s disposal of an asset of higher value in the package, will hardly be supported by the court. The contract can only be terminated as a whole, and the portfolio shall be returned in its entirety.

Policy impacts

Unlike the assignment of creditor’s rights between civil subjects, the assignment of creditor’s rights of commercial banks to divest NPLs is featured by strong policy guidance, high risk and high yield. The Supreme People’s Court explicitly requires, in the Minutes on Non-performing Loans Assignment, that the court hearing such cases shall take into account such factors as legal rules, state policies, financial market supervision and social impact, thereby ensuring the legal and social effects of the trial are consistent. Thus the acquirer is advised to consider the relevant policy background of the specific investment project in making its investment decision.

To sum up, NPL transfer has its particularities in terms of contractual validity and legal risk prevention measures to be taken. The acquirer is advised to pay due attention in this regard, and contact legal professionals for advice in complex and challenging NPL transactions.

Xu Bangwei is a partner and Bai Lijie is a trainee at Jingtian & Gongcheng


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