A recent news involving the court auction of a Guizhou Bank’s equity exceeding RMB 100 million caught widespread public attention. JAVY’s Gao Feng Esq. commented on the issue on media and also explained the legal risks of banks’ equity pledge.
Equity pledge is a common practice among banks. However, in recent years, the authority has tightened the supervision on financial institutions in China, such as restricting the proportion of the pledge, as well as forbidden the banks from accepting its own equity as pledge.
Mr. Gao pointed out that section 142 of the Company Law of the People's Republic of China has strictly forbidden joint stock companies from accepting its own equity as pledge, this includes commercial banks.
Mr. Gao advised business owners to always consider whether the equity can be legally transferred first, if the equity has defect of capital contribution, they should think twice before accepting the offer, also taking into consideration that local governments may have enacted their own restrictions on equity pledge, due diligence should be performed beforehand to prevent risk & loss.
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