With the successive promulgation of the Civil Code and its judicial interpretations, and the general implementation of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference in judicial practice, the adjudication approaches and standards in banking-related disputes became increasingly aligned in 2021. In this context, based on trending issues in the banking industry inciting wide public concern in 2021, the authors have selected certain model cases tried by the Supreme People’s Court (SPC) to analyse the abbreviature of adjudication. The basic facts, focus of dispute, and application of the law for these model cases will be of significance to similar cases, especially with wide implementation of the Retrieval of Similar Cases system.
Strict court examination of disguised and non-compliance fees charged by financial institutions, such as service and consulting fees. In financial borrowing transactions between banks and borrowers, it is common practice for the parties to agree for the borrowers to pay service, consulting, advisory, management and other similar fees to financial institutions. In some cases, the fees are a disguised form of interest charge by the financial institution, and their legitimacy is controversial.
To promote financial institutions servicing the real economy and reduce corporate financing costs, the above-mentioned minutes expressly provide that if a borrower believes the financial institution charged interest in the name of service, consulting, advisory, or management fees, and that such fees charged by the financial institution or by its designee are unreasonable, the court may decide at its discretion whether the borrower should pay the fees or whether the fees should be reduced according to the circumstances.
For example, in the 2021 financial borrowing contract dispute involving the Export-Import Bank of China, Ganjingzi branch of China Construction Bank and an ecological company, the SPC held that courts should strictly examine disguised and non-compliance fees charged by financial institutions. In the second-instance hearing of the case, evidence presented by the bank was deemed insufficient to prove it provided services independent from the syndicated loan and with substantive content, but showed it took advantage of its dominant position as the loan issuer to charge unreasonable fees, therefore the disputed fees were not supported.
Company’s external guarantee is not effective unless approved as a resolution, even with the official seal and signature of the legal representative. In bank loan services for corporate borrowers, in addition to requiring the borrower and guarantor to affix the official seal on the contract and their legal representatives to provide signatures, banks often also require from the borrower and guarantor a resolution from an internal authority about the loan and guarantee matters in accordance with the Company Law.
In past SPC adjudication rules, this provision was regarded as a regulatory norm and not mandatory. Providing the company’s official seal was fixed, the external guarantee was in principle considered valid. However, with the successive promulgation of the minutes, the Civil Code and related judicial interpretations, adjudication rules for companies’ external guarantee have undergone significant changes. In cases where the guarantee contract is only signed by the legal representative and affixed with the company’s official seal, but has not been approved as a resolution by the company’s shareholders’ general meeting, the board of directors or other corporate decision-making bodies, according to the current, recognised judgment criterion, the legal representative has overstepped his/her authority and the guarantee contract should be deemed invalid.
For example, in Hubei Runda Engineering Machinery et al v Xiamen XGMA Machinery (2020), the SPC held that the guarantee should not be solely decided by the legal representative, but must be authorised in the form of a resolution by the company’s shareholders’ general meeting, board of directors or other corporate decision-making bodies. The provision of a guarantee by the legal representative without due authorisation would be overstepping their authority. Therefore, the Letter of Third-party Guarantee in this case should be deemed invalid.
Pledge right cannot be effectively established by merely giving a general description of the pledged accounts receivable. A pledge of accounts receivable by a borrower is a common form of guarantee among bank loans. In practice, the pledgor and the pledgee sometimes do not make a specific agreement on the pledged accounts receivable, but settle for a general description.
For example, both parties agree that the pledgor provides a guarantee with all its accounts receivable within a certain period of time. Such agreement is more or less similar to the agreement on the cap of the maximum guarantee, which, ostensibly, seems to be in line with legal provisions. However, an in-depth analysis of the legal provisions on pledging accounts receivable indicates that the accounts receivable used for the pledge should be expressly defined and specific. If the pledgee and the pledgor only give a general description of the pledged accounts receivable when registering, an effective pledge right cannot be established.
In a 2020 third-party revocation dispute involving the Linyi branch of Shanghai Pudong Development Bank and the Yishui branch of the Bank of China, the SPC held that the contract on pledge of accounts receivable should specify the relevant elements of accounts receivable in detail, including the amount, the term of pledge, the
payment method, the name and address of the debtor, the underlying contract from which the accounts receivable arose, and the performance of the underlying contract. If the accounts receivable cannot be specified, its dominance and exclusivity cannot be realised for the right holder, in which case the pledge right cannot be effectively established due to the lack of a clear and specific subject matter.
The analysed model cases and 2021 judicial opinions identify issues that banks often encounter in their operations. Through studying past cases, model cases in the SPC gazette and guiding examples, the authors hope to improve banks’ ability to anticipate, prevent and control such risks.
Yao Xiaomin is a partner and Yuan Yuhui is an associate at Lantai Partners
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