Haworth & Lexon Law Newsletter (11)
Haworth & Lexon Law Newsletter
No.7, 2002 (Total:No.11) July 20th, 2002
Edited by Haworth & Lexon

"Haworth & Lexon Law Newsletter" is issued every month, mainly introducing the legal change in the fields of Corporate, Securities, Foreign investment, Intellectual property rights, International trade etc. with necessary comment. All the comments do not mean the legal opinion of our firm and the firm does not have any legal liability for such comment. Should you have any interest in any topics or any questions please feel free to contact the firm. You will be expected to have satisfactory response from the professional attorney of our firm.

★ Trust industry is on the way to regulation and market economy ------- Interim Rules on the Administration of Money Trust Business of Trust and Investment Companies was made by People's Bank of China
★ Latest Laws and Regulations
The Official Reply of the Supreme People's Court on the Priority Right for the Reimbursement of Construction Cost;
The Official Reply of the Supreme People's Court on validity of mortgage contract signed by state-owned industrial enterprises and creditors, with machine equipment and other properties as mortgage
Foreign investment in civil aviation has new regulations
Law on Promoting Medium-Small Enterprises was promulgated
The Interim Regulations for the Administration of Internet Publishing were promulgated.

Trust industry is on the way to regulation and market economy

"Interim Rules on the Administration of Money Trust Business of Trust and Investment Companies" came into force on July 18, 2002, which was made by the PBOC. The rules contribute trust industry to carry out business on the way to regulation and market economy.

1. Indirect supervision: The rules regulated the indirect supervision by disclosure of risks, inner control, systems of examining jobholder and investigating liabilities of major managers, instead of the management mode that trust companies set up new types of trust business should be approved by people's Bank of China.

2. Flexible assets: The rules don't cover special limited regulations on characters, utilizable ways and investment directions of trust assets. Trust companies may flexibly utilize trust assets to make various investments in accordance with trust document signed by trust company and trustor.

3. Rational investment: the rules specially make out the provisions abided by trust companies transacting money trust business. It will be viewed as illegal fund raising because of companies' breach, and investors will suffer the losses. The rules also regulate following provisions: Trust contracts should stipulate disclosure of risks; Trust companies should sign the risks description on management and utilization for trust assets at the same time of signing the trust contract. Above provisions aim to cultivate rational investors to protect their legal rights.

4. Regulated operation: the rules regulate principle provisions on information disposure, constitution settings, responsibility system for major manager etc, and set up better inner control system to regulate operation. (1) The report involving such trust affairs as management, application and profit etc. should inform trustor in written form according to trust documents, and the materials involving business reports, financial statements etc. should report timely as requirements of People's Bank of China. (2) Trust company should set up special department engaging in utilization of trust assets, disposal of information to transact money trust business. (3) If trust companies breach appointments in trust documents to manage, utilize, dispose of trust assets, which result in the losses of trust assets, trust companies may claim their directors, supervisors and senior managers to bear liability for compensation in accordance with Company Law.

It was reported that Shanghai AJ Trust Company has uncovered the sinfonia of formal implementation to the rules by its fiduciary agreement on July 18, 2002. The company won the tender of right of investment operation to outside ring cross-river tunnel project in Huangpu River, and general amount of investment of the project is RMB 1,734,000,000. Besides asking the bank for a loan, parts of the huge capital were invested in the project as trust assets.

The Official Reply of the Supreme People's Court on the Priority Right for the Reimbursement of Construction Cost came into force on Jun.27th 2002, after approval from the judicial committee of the supreme people's court on Jun.11th 2002.

The Reply states that, according to Article 286 of the PRC Contract Law, in any real property case and relevant execution case, courts shall establish that the priority right of the contractor for the construction cost of the real property shall be reimbursed prior to the debts secured by mortgage, pledge or other securities. In addition, in the case where the consumer has paid all or major part of the purchase price of a commercial house, the contractor shall not claim the said priority right against such consumer. According to the Reply, construction cost includes the remunerations to the workers, the cost of materials and other costs actually paid for the construction, but not including the losses suffered by the contractor because of the contract issuer's breach. The period for contractors to exercise their priority right is limited to six months counted from the date when the construction is completed or the completion date stipulated in relevant construction contract. The core of the judicial interpretation resolves the issue of the compensation order accepted by creditors related to construction cost, emphasizing the special protection for the buyers' rights. That means, when the offeror can't pay the expired liability, the order is house buyers, contractors, persons entitled hypothec, ordinary creditors. Another significance of the judicial explanation is to confirm house buyers are consumers. Certainly, the house buyers are only defined to those who buy the house to live in according to Consumer Protection Law. It's a debatable issue whether Consumer Protection Law can be applied to the house business or not. At present, most local courts deem it can't be.

The official Reply of the Supreme People's Court on validity of mortgage contract signed by state-owned industrial enterprises and creditors, with machine equipment and other properties as mortgage came into forth on Jun 22nd, 2002. According to the judicial interpretation, the mortgage contract signed by state-owned industrial enterprises and creditors, with machine equipment, workshop, and other properties as mortgage should not be considered invalid only because of there not being approval of the authority, if there don't exist any other legal invalid conditions.

The Regulations on Foreign Investment in Civil Aviation were issued by the Civil Aviation Administration of China, the Ministry of Foreign Trade and Economic Cooperation and the State Development Planning Commission, after approval from the State Council, which shall come into force on August 1, 2002. According to the Regulations, the scope, ways, proportion, power of management of foreign investment in civil aviation will be enlarged further. It is noticed that if foreign investors invest in general aviation enterprises involving public air transport, general-purpose aviation and air journey in the form of cooperative business operation, it should be a legal person in China.

Law on Promoting Medium-Small Enterprises shall come into force on Jan 1st 2003, after approval from NPC Standing Committee on Jun 29th 2002.

The law establishes the legal position of medium-small enterprises in national economy, confirms the duty of government administration department, and makes the major policy on supporting and promoting medium-small enterprises to level of law.
(1) Purpose of legislation: the law emphasizes that the government protects the legal rights of medium-small enterprises and their investors, and any unite isn't allowed to break the law to charge and fine medium-small enterprises;
(2) Support for setting up business: The law puts forward clearly that the government will establish funds for medium-small enterprises development, and give more support on finance and revenue etc.
(3) Capital support: the government encourages the commercial banks to adjust the credit structure , encourages any surety institution to provide credit surety for medium-small enterprises, and encourages medium-small enterprises to carry out various mutual financing surety. (4)Tax preference: State department and provincial government grant the qualified medium-small enterprises tax preference during a certain time limit according to different conditions.
(5) Technological innovation: The government encourages medium-small enterprises to enhance technological innovation and to take advanced technology, manufacture techniques and equipments by means of discount interest and other measures.
(6) Enterprises cooperation: government supports the large-scale enterprises to collaborate with medium-small enterprises on material supply, technological development, manufacture and sales, etc.

The Interim Regulations for the Administration of Internet Publishing, promulgated by the State Press and Publications Administration and the Ministry of Information, shall come into force on August 1, 2002.

The regulations state that administration approval must be obtained for the conduct of Internet publishing activities. Besides conforming with" Measures for Administration of Internet Information Service", it is required for the conduct of Internet publishing activities to meet such conditions as definitive publishing scope, legal constitution, necessary publishing institution and professionals, as well as capital, equipment, site for publishing business. According to the regulations, if the content of Internet publishing involves national social security, social stabilization, etc, it must be filed in the State Press and Publications Administration. The regulations also contain provisions on prohibited content, especially emphasizing the content that mustn't allure minors to imitate the actions breaching social morality and illegal actions, and that is harmful to minors' physical and mental health. In order to ensure the legal publishing content, Internet publishing institution should carry out the responsibility system for editors as required, demanding special editors to examine the content. In addition, the regulations also made the detailed penalty provisions for publishing activities unapproved.

The regulations aim to contribute Internet publishing activities to develop healthily and orderly. However, the provisions for Internet publishing activities are relatively strict and trivial, strengthening administration approval, which might be against the further development of Internet publishing activities.