For the development of an enterprise, three core elements are indispensable: capital, talents, and technology. Capital is of great significance to the development of enterprises. Especially in the early stage of development, private enterprises, besides the capital investment from shareholders, find it difficult to obtain financing through other means. Therefore, it is common for enterprises to support each other and work together.

Fund borrowing and lending initially mainly referred to the credit activity of banks or other financial institutions adjusting inter-bank liquidity funds during their operation, which belongs to a temporary regulatory lending business. As referred to in this article, fund borrowing and lending between non-financial enterprises means that in normal market economic activities, one enterprise lends its temporarily idle funds to another enterprise for use at a certain market price. For Pre-IPO enterprises, if such fund borrowing and lending behaviors are found in their business activities, intermediary institutions are generally required to clearly express their opinions on the reasons for the enterprise's fund borrowing and lending, the specific content of cooperation between the two parties, the form of capital transactions, the pricing and basis of capital occupation fees, as well as the legality and compliance of the fund borrowing and lending behavior, i.e., whether it will bring potential risks to the company.

I. Legal Effectiveness of Fund Borrowing and Lending Between Non-Financial Enterprises

According to Article 52 of the Contract Law of the People's Republic of China, a contract shall be null and void if it falls under any of the following circumstances:

(1) It is concluded by one party through fraud or coercion and harms the interests of the state;

(2) It is concluded by malicious collusion and harms the interests of the state, a collective or a third party;

(3) It is concluded under the guise of a legal form to conceal an illegal purpose;

(4) It harms public interests;

(5) It violates the mandatory provisions of laws and administrative regulations.

According to the provisions of Article 4 of the Interpretation (I) of the Supreme People's Court on Several Issues Concerning the Application of the Contract Law of the People's Republic of China:

After the implementation of the Contract Law, when a people's court confirms a contract as null and void, it shall take the laws formulated by the National People's Congress and its Standing Committee and the administrative regulations formulated by the State Council as the basis, and shall not take local regulations or administrative rules as the basis.

At this stage, the documents that explicitly prohibit fund borrowing and lending between non-financial enterprises include:

1. Article 61 of the General Rules on Loans stipulates: "All levels of administrative departments, enterprises and institutions, supply and marketing cooperatives and other cooperative economic organizations, rural cooperative foundations and other foundations shall not engage in financial businesses such as deposit and loan business. Enterprises shall not handle lending or disguised lending and financing business in violation of state regulations."

2. Reply of the People's Bank of China on the Issue of Lending Between Enterprises stipulates: "According to the provisions of Article 4 of the Interim Regulations on the Administration of Banks of the People's Republic of China, non-financial institutions are prohibited from engaging in financial businesses. Lending belongs to financial business, so non-financial enterprises shall not lend to each other."

From the perspective of legislative validity level, neither the General Rules on Loans nor the Reply of the People's Bank of China on the Issue of Lending Between Enterprises are laws formulated by the National People's Congress and its Standing Committee or administrative regulations formulated by the State Council, so it cannot be determined that the fund borrowing and lending behavior between non-financial enterprises is invalid on this basis.

In addition, Article 11 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Private Lending Cases (Fa Shi〔2015〕No.18) stipulates:

A private lending contract concluded between legal persons, between other organizations, or between them for the needs of production and operation shall be supported by the people's court if the parties claim the contract to be valid, except in the circumstances specified in Article 52 of the Contract Law and Article 14 of these Provisions.

Article 14 stipulates:

A people's court shall determine a private lending contract to be null and void if it falls under any of the following circumstances:

(1) The lender obtains credit funds from a financial institution and relends them to the borrower at a high interest rate, and the borrower knows or ought to know this in advance;

(2) The lender obtains funds by borrowing from other enterprises or raising funds from its own employees and relends them to the borrower for profit, and the borrower knows or ought to know this in advance;

(3) The lender knows or ought to know in advance that the borrower will use the borrowed funds for illegal or criminal activities but still provides the loan;

(4) It violates public order and good morals;

(5) It violates the validity mandatory provisions of laws and administrative regulations in other circumstances.

In addition, from a tax perspective, according to the provisions of Article 14 of the Implementation Measures for the Pilot Program of Converting Business Tax to Value-Added Tax (Annex 1 to the Notice of the Ministry of Finance and the State Taxation Administration on Comprehensively Launching the Pilot Program of Converting Business Tax to Value-Added Tax (Cai Shui〔2016〕No.36)), all income from the occupation or borrowing of funds, including income from capital occupation fees, shall be subject to value-added tax in accordance with loan services. Fund borrowing and lending between non-financial enterprises shall pay value-added tax in accordance with the above provisions.

To sum up, in accordance with the current laws, regulations and policies, fund borrowing and lending between non-financial enterprises is not necessarily invalid, and at the same time, it involves the payment of enterprise value-added tax.

II. Response Strategies for Pre-IPO Enterprises

According to the research and statistics of relevant past cases (such as 300505 Chuannuojin, 300488 Hengfeng Tools, etc.), the China Securities Regulatory Commission (CSRC) is relatively tolerant of the historical fund borrowing and lending issues of non-financial enterprises. Generally, it is acceptable to clean up the issues (with proper explanations) before filing the application. The general ideas are as follows:

1. Fully Disclose and Explain the Reasons for Fund Borrowing and Lending

It is usually disclosed as the enterprise conducting temporary capital turnover or providing mutual assistance for the operational needs between enterprises.

2. Supplement and Confirm the Procedures for Fund Borrowing and Lending

Pre-IPO enterprises usually fail to perform the corresponding internal decision-making procedures for historical fund borrowing and lending behaviors, i.e., obtain the approval of the company's board of directors or shareholders' meeting in accordance with the articles of association. In such cases, it is usually possible to take the measure that after the enterprise is restructured into a joint-stock company as a whole, the shareholders' general meeting shall supplementarily confirm the historical fund borrowing and lending behaviors, and the independent directors shall issue relevant opinions.

3. Obtain Indemnity Commitments from Controlling Shareholders or Actual Controllers

For historical fund borrowing and lending matters, after completing the above procedures, it is also necessary to obtain an indemnity commitment issued by the company's controlling shareholder or actual controller, promising that if the company suffers economic losses due to penalties resulting from fund borrowing and lending behaviors, all losses shall be borne by them and have nothing to do with the company.