Payment Terms

Compliance with SME payment guarantee regulations

youIn conscientiously settling arrears to SMEs, the State Council’s Public Assets Supervision and Administration Commission (SASAC) recently reminded central public enterprises and high-level market players of their obligations under the Regulation on guarantee of payments to small and medium-sized enterprises. medium-sized enterprises (SMEs), issued in 2020.

Based on the regulations and the recall notice issued on December 31, 2021, this article discusses the main compliance issues of government bodies, public institutions and large companies in the purchase and payment of goods, projects and services to SMEs – as well as establishing in-house arrears prevention systems.

Q: What is the scope of the Rules and Notice?

A: Government bodies, public institutions and large companies are required to comply with regulations governing payment to SMEs for the purchase of goods, projects and services.

Q: How can suppliers know if they are SMEs and therefore claim the relevant rights set out in the regulations?

A: SMEs are currently defined by the National Bureau of Statistics, in the Measures for the Statistical Definitions of Large, Medium, Small and Micro Enterprises, formulated in 2011, in accordance with the opinion of the Ministry of Industry and Technology of l Information, National Bureau of Statistics, National Development and Reform Commission and Ministry of Finance on the publication of provisions on classification criteria of small and medium-sized enterprises and industrial classification for national economic activities, published in June 2017.

Taking into account the characteristics of different industries, the aforementioned measures divide SMEs into three categories – medium, small and mini – and define the size of the company based on three main criteria: the number of employees; business income; and total assets. Companies can refer to the metrics for their ranking.

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

Jason Chan
AnJie Law Firm

A: First, prior to contract conclusion, compliance monitoring personnel in government bodies, public institutions, and large corporations should review project budgets and ensure that project funds are in place. Projects must be executed strictly within the approved budget, with no unbudgeted or over-budget purchases.

Second, companies should strengthen contract management, remove any unfairness clauses from contract templates, and consider: whether contract terms – particularly terms relating to payments and settlement methods – reflect the principle of ‘equity ; whether there is an inequality of rights and obligations; if there is abuse of a dominant position in the market to establish unreasonable terms of payment and delay; or if there are unreasonable situations such as tying up SME funds. This avoids, as far as possible, the risk of “invalidity of the relevant provisions due to the violation of the mandatory provisions of effectiveness” resulting from the violation of the regulations.

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

A: Supplier compliance officers can assess the size of their own business before entering into a contract and, if the business is an SME, should take the initiative to inform the buyer at the time of signing the contract and actively assert relevant rights and interests.

Additionally, for state-funded projects, a prepayment clause may be requested by construction units to be included during contract preparation and negotiation, instead of advancing its own funds.

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

Compliance with SME Payment Guarantee Regulations Zhou Zizhao AnJie Law Firm
Zhou Zizhao
AnJie Law Firm

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

The regulations also require that both contracting parties agree on a reasonable period of time for inspection and acceptance, and complete them in accordance with the contract. If government bodies, public institutions and large enterprises delay the inspection and acceptance, the payment term will be counted from the expiration date of the agreed term.

A number of prohibited acts are also clearly defined, such as disguised extensions of payment terms using negotiable instruments or other non-cash settlements, without explicit agreement.

For central public companies, from 2022, trade acceptances and supply chain debt certificates with a duration of more than six months will in principle no longer be issued, unless agreed in writing in the initial contract. Payments to SMEs should not be declined or delayed due to change of responsibility, execution of internal payment processes, pending approval of acceptance of completion or final audit accounts.

Q: What are the compliance requirements for “security deposits” under the Settlement and Notice?

A: Except for the bid bond, performance bond, project quality bond and legally established migrant worker wage bond, no other deposits will be collected in the construction of the project – and the proportion of the deposit collected must comply with the provisions. Government bodies, public institutions and large companies should not limit deposit to cash and should accept guarantees provided by SMEs in the form of letters of guarantee from financial institutions. The deposit should be verified and settled with the SME promptly upon expiry of the warranty period.

Q: What are the compliance obligations for companies that implement an internal arrears prevention system?

A: First, companies must eliminate any non-compliance with regulations in current contract management and payment processes, in order to identify and thoroughly investigate hidden risks of arrears. Second, companies need to improve channels for complaints, evaluation and supervision, and accountability.

For central state-owned enterprises, groups and subsidiaries at all levels should disclose the channels for arrears complaints and reports to important posts, such as official websites or WeChat official accounts, and inform the consideration in writing of the methods of accepting complaints of arrears in advance or in the contract.

Finally, companies should ensure that payment information is public, implement a payment information disclosure system, and actively accept oversight from all parties involved.

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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