With regard to disputes over asset management, the Minutes of the National Working Conference on the Trial of Civil and Commercial Cases by Courts, issued by the Supreme People’s Court (SPC) in November 2019, clearly provide that “guaranteed return or redemption clauses are invalid”. However, there seems to be no consensus on what is a guaranteed return or redemption clause in judicial practice.
Not long ago, the second instance judgment of Hunan High People’s Court decided that the trust beneficiary rights transfer agreement made between a trust company and the beneficiary was an agreement of guaranteed redemption, and should be invalid. This judgment once again triggered discussion on how to understand guaranteed return or redemption clauses.
Regardless of the forms of guaranteed return or redemption clauses, as long as they meet the characteristics of “guaranteeing a fixed return on principal and interest, and guaranteeing no loss of principal”, they may constitute invalid clauses. The invalid guaranteed return or redemption clauses provided in article 92 of the above-mentioned minutes may be embodied in the form of guarantee, difference compensation commitment, acquisition/transfer agreement, repurchase agreement, etc.
Whatever the form, in accordance with the rules of determining “conspired false expression of intent” in the Civil Code, and the provisions of the minutes, as long as the clauses meet the characteristics of “guaranteeing a fixed return on principal and interest, and guaranteeing no loss of principal”, they shall be determined invalid.
In the case before Hunan High People’s Court, the arrangement determined to constitute guaranteed redemption was in the form of a trust beneficiary rights transfer agreement. Trust beneficiary right can be transferred, which is clearly provided in article 48 of the Trust Law, and conforms to the legal provisions. However, because its pricing is not based on the value of the underlying assets, but on a fixed price agreed in advance, it constitutes an invalid guaranteed return or redemption arrangement.
The “subject” who causes the contract to be invalid by guaranteed return or redemption, is generally the “issuer or manager” of the asset management product. In accordance with the minutes, the guaranteed return or redemption contracts concluded by “trust companies, commercial banks and other financial institutions as trustees of asset management products” are invalid. In the case before Hunan High People’s Court, it was because the trust company concluded the trust beneficiary rights transfer agreement as the “trustee” of trust products that the agreement was determined invalid by the court.
The regulatory rules also provide that other subjects may not conduct guaranteed redemption. Article 20 of the Securities Investment Fund Law provides that a fund manager of publicly offered funds and its “directors, supervisors, officers and other practitioners” shall not unlawfully promise benefits or bear losses. Recently, the China Securities Regulatory Commission (CSRC) issued its Several Provisions on Strengthening the Supervision of Private Investment Funds, which, on the basis of the Interim Measures for the Supervision and Administration of Private Investment Funds, provides that “sales organisations of private investment funds and their practitioners” shall not promise guaranteed principal or return.
In judicial practice, these situations may be interpreted as fiduciary acts or apparent agency, which are finally recognised as guaranteed return or redemption commitments made by the issuer or the manager, thus being determined invalid.
The above-mentioned provisions also provide that, “the investor, actual controller and related party of the manager” shall not promise, or promise in disguised form, guaranteed principal or return. This situation is prohibited by regulation, but is not an invalid transaction arrangement explicitly pointed out in the minutes, and its validity remains to be tested in judicial practice.
Invalid guaranteed return or redemption arrangements are generally arranged for investors on the “product side” rather than on the “asset side”. These arrangements, clearly pointed out in the minutes, are those provided to the “beneficiaries” (generally investors) of asset management products. In the Hunan High People’s Court case, the trust company signed the trust beneficiary rights transfer agreement with the beneficiary of the trust, and provided investors with guaranteed return or redemption arrangements on the “product side”, which was determined invalid.
Guaranteed return or redemption arrangements on the “asset side” are not invalid arrangements explicitly provided for by judicial authorities. This situation is generally manifested in various credit enhancement measures taken by the fund-raising party, or by related parties for the fund-raising party.
Such enhancement measures include: (1) measures provided to the creditors of the fund-raising party, i.e., the arrangement in which the credit enhancement party directly pays funds to the creditors or assumes security liability; and (2) direct liquidity support to the fund-raising party, i.e., the credit enhancement party directly provides financial support to the fund-raising party.
These credit enhancement measures are a blessing to the net value of products, which are not regulated by the New Regulations on Asset Management, and will generally not be determined invalid.
In practice, there are situations where the related parties of the issuer or the manager provide credit enhancement on the “asset side”. In the context of penetrating trial thinking, this situation may be deemed “conspired false expression of intent”, thus interpreted as the arrangement of guaranteed return or redemption on the “product side”. However, since it is not guaranteed return or redemption directly provided by the issuer or the manager, its validity remains to be tested in judicial practice.
If a listed company provides guaranteed return or redemption arrangements, it may be exempted from civil liability. Article 92 of the minutes provides that, after the guaranteed return or redemption arrangement is determined invalid, the investor may request the trustee to bear compensation liabilities. However, if the trustee is a listed company, it may claim exemption from compensation liability.
On 31 December 2020, the SPC issued the Interpretation on the Application of Security System in the Civil Code of the People’s Republic of China, providing that if the guaranteed return or redemption arrangement provided by a listed company is deemed as security or debt accession, and the listed company has not made a resolution and an announcement on the arrangement according to law, the listed company will not only not bear the liability agreed in the arrangement, but also may be exempted from the compensation liability.
Li Xinqian and Ren Guobing are partners at Jingtian & Gongcheng
Jingtian & Gongcheng
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