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Commitments and Contingencies
 3 Months Ended
Dec. 31, 2013
Commitments and Contingencies [Text Block]

17. Commitments and Contingencies

(i)

Capital Commitments

As of September 30, 2013 and December 31, 2013, the Company had the following contracted capital commitments:

    September 30,     December 31,  
    2013     2013  

For construction of buildings

 $ 321,668   $ 325,233  

For purchases of equipment

   1,174,695     1,384,179  

Capital injection to Dalian BAK Power (Note 1)

   -     30,000,000  

 

 $ 1,496,363   $ 31,709,412  
(ii)

Land Use Rights and Property Ownership Certificate

As of September 30, 2013 and December 31, 2013, the Company had not obtained property ownership certificates relating to certain buildings of the BAK Industrial Park in Shenzhen with carrying amounts of $18,179,147 and $17,821,699, respectively. The application for these property ownership certificates is still in process.

As of December 31, 2013, the Company had not obtained property ownership certificate relating to the Research and Development Test Centre in Shenzhen which was completed in July 2013. The carrying amount of this centre (buildings portion) was $45,505,135 as of December 31, 2013. In January 9, 2014, the Company obtained the property ownership certificate and is in the process of purchasing an insurance policy for the building.

On July 26, 2013, the Company purchased a new insurance policy for its manufacturing facilities at BAK Industrial Park in Shenzhen, China. Under the new insurance policy entered into with Ping An Property & Casualty Insurance Company of China, Ltd, the insured amount for the manufacturing facilities at BAK Industrial Park is RMB663,612,000 (approximately $109.6 million) for the period from July 27, 2013 to July 26, 2014.

On July 2, 2013, the Company also acquired an insurance policy from Ping An Property & Casualty Insurance Company of China, Ltd. for the Company’s manufacturing facilities in Tianjin in the amount of RMB243,093,819 (approximately $40.2 million) for the period from July 2, 2013 to July 2, 2014.

(iii)

Guarantees

In order to secure the supplies of certain raw materials and equipment and upon the request of suppliers, the Company has given guarantees of bank borrowings with a maximum obligation period of from one to three years to certain parties to the maximum extent as follows:

 

   September 30,     December 31,        

Guarantee for

  2013     2013     Guarantee Period  

 

                  

Tianjin Huaxiahongyuan Ltd. – a non-related party

 $ 2,450,540   $ 2,477,701     5/22/13-5/21/16  

Shenzhen Yasu Technology Co. Ltd. – a non-related party

   8,985,314     9,084,903     5/25/12-6/24/16  

Shenzhen Langjin – a non-related party

   9,802,159     9,910,802     8/15/11-8/14/14  

Hubei Yanguang Energy Technology Co. Ltd. – a non-related party

   4,901,080     4,955,401     4/3/13-4/2/16  

Tianjin BAK New Energy Research Institute Co., Ltd. – a related party

   4,901,080     4,955,401     7/11/13-7/10/16  

 

 $ 31,040,173   $ 31,384,208        

On April 25, 2012, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from China Minsheng Banking Corp., Ltd, in the amount of $2.5 million by Tianjin Huaxiahongyuan Ltd. (“Tianjin Huaxiahongyuan”), one of the Company’s prospective suppliers of chemical raw materials such as lithium cobalt oxides, for the period from April 25, 2012 to April 25, 2015. On May 17, 2013, the Company executed a new guarantee contract with Bank of Dalian to replace the existing guarantee contract with the same terms and conditions from May 22, 2013 to May 21, 2016. Under this guarantee contract, the Company shall perform all obligations of Tianjin Huaxiahongyuan under the loan contract if Tianjin Huaxiahongyuan fails to perform its obligations as set forth in the loan contract.

On May 25, 2012, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Bank of China Shenzhen Branch in the amount of $3.2 million by Shenzhen Yasu Technology Co. Ltd. (“Shenzhen Yasu”), one of the Company’s prospective suppliers of chemical raw materials such as lithium cobalt oxides, for the period from May 25, 2012 to May 25, 2015. Under this guarantee contract, the Company shall perform all obligations of Shenzhen Yasu under the loan contract if Shenzhen Yasu fails to perform its obligations as set forth in the loan contract.

The Company renewed a guarantee contract to serve as the guarantor for the bank loan which expired on June 20, 2013, borrowed from Ping An Bank (Shenzhen Pinghu Branch) in the amount of $5.8 million by Shenzhen Yasu one of the Company’s prospective suppliers of chemical raw materials such as lithium cobalt oxides, originally for the period from June 25, 2012 to June 25, 2015 and extended to June 24, 2016. Under this guarantee contract, the Company shall perform all obligations of Shenzhen Yasu under the loan contract if Shenzhen Yasu fails to perform its obligations as set forth in the loan contract.

On August 15, 2011, the Company entered into a guarantee contract to serve as the guarantor for the bank loan borrowed from Agricultural Bank of China Shenzhen Branch in the amount of $9.7 million by Shenzhen Langjin Technology Development Co. Ltd. (“Shenzhen Langjin”), one of the Company’s prospective suppliers of chemical raw materials such as battery separator paper, for the period from August 15, 2011 to August 14, 2014. Under this guarantee contract, the Company shall perform all obligations of Shenzhen Langjin under the loan contract if Shenzhen Langjin fails to perform its obligations as set forth in the loan contract.

On April 3, 2013, the Company entered into a guarantee agreement with Jilin Province Trust & Investment Co., Ltd, under which the Company agrees to guarantee loans to its chemical raw material supplier, Hubei Yanguang Energy Technology Co. Ltd., a non-related party, to the extent of RMB30 million (approximately $5.0 million) that it owes to other parties. The guarantee period is from April 3, 2013 to April 2, 2016. The Company believes that Hubei Yanguang Energy Technology Co. Ltd owns assets including land use rights covering an area of approximately 1,330,000 square meters and buildings thereon in Hubei, the PRC, and should be financially capable to repay the above mentioned loans upon maturity in April 2014.

It is a common practice among companies in the region of China where the Company is located to provide guarantees for bank debts of existing or prospective business partners with no consideration given. It is considered a “favor for favor” business practice and is commonly required by the lending banks in these cases.

The Company has also guaranteed the loans of a related party under the common control of Mr. Xiangqian Li in the amount of approximately $4.9 million and $5.0 million as of September 30, 2013 and December 31, 2013, respectively.

Tianjin BAK New Energy Research Institute Co., Ltd (“Tianjin BAK”) is a company under the common control of Mr Xianqian Li, the Company’s CEO. The Company entered into various guarantee contracts to serve as the guarantor for the bank loans borrowed from Bank of Dalian by Tianjin BAK in the amount of $5.0 million with the guarantee period from July 11, 2013 to July 10, 2016.

On January 5, 2013, the Company received a notice that the Shenzhen Langjin Technology Development Co. Ltd. had defaulted on their loan guaranteed by the Company and two other companies and demanded immediate payment of the full guaranteed amount RMB60 million (US$9.7 million) from the Company and two other co-guarantors. As the two other co-guarantors had the ability to pay RMB14 million (US$2.3 million) only, the Company was demanded to pay the remaining balance. During fiscal 2013, the Company has paid China Agricultural Bank an amount of RMB46,490,253 ($7.5 million). The Company was able to recover an indemnification amount from Shenzhen Langjin that totaled RMB46,456,681($7.5 million).

During the three months ended December 31, 2012 and 2013, the Company recorded a net loss arising from loan guarantees of $7.4 million and nil, respectively.

As of December 31, 2013 and as of the filing date of this form 10-Q, the Company has assessed the performance risk of these guarantees and the fair value of the obligation arising there from and has considered it is immaterial to the consolidated financial statements. Therefore, except for the obligations relating to Shenzhen Langjin, no obligations in respect of the above guarantees were recognized as of December 31, 2013.

(iv)

Outstanding Discounted Bills and Transferred Bills

From time to time, the Company factors bills receivable to banks and endorses the bank acceptance bills received to its suppliers, vendors or other parties for settlement of its liabilities to these creditors. At the time of the factoring and transfer, all rights and privileges of holding the receivables are transferred to the banks and the creditors. The Company removes the assets from its books and records a corresponding expense for the amount of the discount.

The Company's outstanding discounted and transferred bills as of September 30, 2013 and December 31, 2013 are summarized as follows:

    September 30,     December 31,  
    2013     2013  
Bank acceptance bills $ 20,307,818   $ 6,857,269  
   
(v)

Litigation

From time to time, The Company may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. Other than the legal proceeding set forth below, the Company is currently not aware of any such legal proceedings or claims that the Company believe will have an adverse effect on our business, financial condition or operating results:

China BAK Battery, Inc. has been named as a second defendant in the case of Safeco Ins. Co. of Am. v. Hewlett-Packard Co. et al., filed in the Superior Court of the State of California, County of Ventura. It is an action for negligence and strict product liability. The plaintiff alleges that a product manufactured by the Company was used in a Hewlett Packard laptop, which malfunctioned and caused fire damage in the home of a consumer (the Plaintiff’s insured). The total damages sought are $126,978, plus interest and fees. The Company believes that the plaintiff's claims are without merit and intends to vigorously defend itself in this lawsuit.