Application of Escrow

accepted the term of Escrow and applied it into related legislation. A typical case of Escrow can be seen in Clause 3, Article 49 of China's Guarantee Law: "Proceeds from the transfer of the collateral during the period of guarantee shall first be used for early repayment of the secured credit or be deposited to a third party agreed by both the guarantor and the guaranteed." Because the guarantee automatically ceases when the collateral is transferred, it is justifiable that the creditor requires early repayment of all the secured credit. But early repayment is obviously against the interest of the guarantor, especially when the guarantor is one other than the debtor and reluctant to make the early repayment for the debtor. In this regard, the law permits the guarantor to deposit proceeds from the transfer of the collateral to a third party, instead of making an early repayment, to settle the credit. Only when the credit period expires and the debtor fails to liquidate the debt shall the third party hand over the proceeds to the creditor to settle the debt. Local law-bridge.net/english/ target=_blank>lawyers engaged in new practice areas like capital reshuffle and share transfer use Escrow more frequently than before in China. Here is an example. Company A was having difficulty transferring its shares in company C, a project company established by company A and another company. Pursuant to China's real estate law, the shares were not transferable because company C had completed less than 25 per cent of its total amount of investment. To facilitate the transfer, we proposed a plan based on Escrow: Company A and Company B should enter into a share transfer contract concerning Company A's shares in company C. Since the shares were not transferable, both parties should agree to deposit the land licence owned by Company A and the payment to be made by Company B to Company A to the law firm (the Escrow Agent) who acts as a stakeholder. After the signing of the contract, Company B should take over Company A's power in Company C's operation. When transfer conditions are met, the law firm (Escrow Agent) and Company B should co-operate to go through required proceedings to complete the stock transfer. Since this plan protects the interests of both Company A and Company B, and prevents the project from being delayed, it was immediately agreed to and accepted by both parties. Law firms are playing a more and more active role as Escrow Agents in sales contracts. When the buyer deposits goods payment to a special account (Escrow Account) established by the law firm, the law firm issues a law-bridge.net/english/ target=_blank>lawyer's letter to the seller, notifying the arrival of the payment. The seller then begins to deliver goods and claim payment from the law firm with valid documents. This new practice is worth recommending, especially in today's business environment that is lacking of credit in performing contracts. Through the discussion above, we are now clear that the mechanism of Escrow is "deposit" and "(conditional) delivery." In practice, we can design various plans for our clients in light of such a mechanism. Although there are no statutory restraints at present, it shall be noted that related parties shall make it clear in the contract responsibilities of the Escrow Agent, so as to minimize the risks invoked by negligence of the Escrow Agent. This is one of the reasons that some overseas clients request government departments to be the Escrow Agent. (This article is first been published in China Daily, July 16, 2002))