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25 August, 2017
Background
The Fifth National Financial Work Conference (“NFWC”), which convened in mid-July this year, made an overall deployment of principles for financial work. For facilitating the realization of the NFWC’s aims, less than a month after the conference, the Supreme People’s Court of the PRC (“Supreme Court”) issued the Several Opinions on Further Strengthening Trial Work Regarding Financial Cases (Fa Fa [2017] No. 22) ("Opinions"). The Opinions are divided into five parts with thirty provisions in total in accordance with three major tasks as laid out by the NFWC, namely, “serving the real economy”, “preventing financial risks” and “deepening financial reforms”, and thus, to put forward a full range of guiding opinions on trial work regarding financial cases.
The promulgation of the Opinions is of significant importance under the current environment where emphasis is placed on the financial sector to serve the real economy and prevent financial risks, and the Opinions are set to serve as a long-term guide for judicial practice in consideration of China's financial sector. Our brief analysis of the three main parts of the Opinions is set forth as follows.
Part I: Guiding and Regulating Financial Transactions.
This part consists of ten provisions, mainly related to "funding and financing". The purpose of this part is to prevent the funding and financing costs of the real economy from being raised improperly in a disguised form and to urge the financial sector to serve the real economy. The Opinions not only provide guiding principles from a macroscopic view, but also provide definite requirements for the determination of the effectiveness of contracts under certain circumstances.
1. Differentiating various types of financial transaction modes based on purposes and effects. The Opinions put forward that, (1) financial transaction modes which are able to actually reduce transaction costs, realize inclusive finance, and comply with the law and regulations shall be protected; (2) the effect of any illegal behavior that conceals financial risks, circumvents financial regulations, or conducts regulatory arbitrage in the name of financial innovation shall be determined in accordance with the actual legal relationships constituted; (3) any institutions which illegally siphon public savings or conduct fraudulent fundraising in the name of financial innovation (thus constituting crimes) shall be pursued by means of criminal liability. As to the various innovative financial transaction modes emerging in the market, our observation is that the Opinions do not pursue "one size fits all", but require that courts at all levels identify different types of financial transaction modes by conducting a "penetrating examination" according to underlying purposes and effects. The principle of "substance over form" will apply to the trials of financial cases to determine the legal relationship and thereby judge the legal effect.
2. Prohibition exceeding upper limit of loan interest rate in any disguised form. To assist the lowering of financing costs for the real economy, the Opinions provide definite requirements on the specific circumstances under which the interest rate may exceed the upper limit prescribed by judicial opinion. First, a borrower may, at the time of the lender's claim for interest, compound interest, penalty interest, liquidated damages, or other expenses, where overly excessive and deviant from actual losses, request that portions in excess of the annual rate of 24% be reduced. Second, in cases of private lending disputes, where terms and conditions of contract provisions for withholding of principal or interest are disguised means of high interest as used to circumvent the upper limit of the private loan interest rate, such terms and conditions shall be deemed as invalid. Third, where for purposes of online lending a borrower has provided an intermediary a form of payment to avoid the upper limit on the private loan interest rate, such arrangement shall be deemed as invalid.
3. Validating guarantees and financing modes that benefit the real economy. The Opinions put forward that, the contracts of any new-type guarantee shall be deemed valid in accordance with the law, except for those subject to Article 52 of the Contract Law (which provides circumstances for invalid contracts). We understand that the new-type guarantee shall in general refer to the non-typical guarantee modes which are different from the traditional types. As the demand for financing increases, many enterprises use property rights and subjects that are not specified by law as collateral, such as charges over rights like leaseholds, management rights, rights of charging, floating charge, repurchase guarantee, independent guarantee and so forth, the types and forms of which are numerous and vary. Due to the lack of clear laws and regulations or judicial guidance for new-type guarantees, disputes arise easily in practice. We expect that the judgment standards of China's courts in this respect may tend to be unified upon the promulgation of the Opinions, and the legal effect of various new-type guarantees (that comply with compulsory provisions of the law and administrative regulations, do no harm to the public interest, public order or social customs, and have the value and function of promoting transactions, preventing risks and providing financing) may probably be determined valid so as to meet the increasingly complicated and plentiful private financing demands. Meanwhile, the Opinions put forward that the courts shall protect the financing modes that combine the financing capital with the real economy according to the law, such as financial leasing and factoring. However, as for any loan contract executed in the name of a financial leasing contract or a factoring contract, the rights and obligations of each party thereto shall be determined in accordance with the actual relationship constituted thereby, so as to prevent any such party from raising the financing costs of the real economy in disguised forms by withholding the rents or deposits.
4. Prohibiting state-owned enterprises without financial qualifications from conducting financial business in disguised forms. The Opinions put forward that, where a state-owned enterprise without a financial qualification conducts financial business in any disguised form, fraudulently obtains credit funds from financial institutions and then re-loans at a high interest rate, the legal effect of such lending behavior shall be deemed invalid. By providing judicial opinions to the relevant competent authorities, the Opinions restrain the loan channel business of state-owned enterprises and guides them to return to supporting the real economy. We have noticed that, this is the first time that the Supreme Court mentioned the concept of "loan channel business" in an official document. According to the context thereof, the Opinions only require the "regulation" of the loan channel business of state-owned enterprises in accordance with the law, the "restraining" of their fraudulent acquirement of credit funds from financial institutions and re-loaning at high interest rates, and guidance of such entities to return to supporting the real economy. The practice represents the Supreme Court’s prudent attitude towards different types of “channel business" prevalent in the market.
In addition, the Supreme Court especially put forward in this part that, high attention shall be paid to the cases concerning private equity investment, entrusted wealth management, asset management and other new types of financial transactions, and the rights and obligations of each party thereto shall be strictly determined in accordance with the Contract Law, Company Law, Partnership Enterprise Law, Trust Law, and so on. The Supreme Court will unify the judgment standards by publicizing guiding cases and guidance on cases of similar kinds. This represents the Supreme Court's prudent attitude towards the new types of financial cases.
Part II: Preventing and Resolving Financial Risks
This part consists of thirteen provisions, mainly directed at prevention and resolution of financial risks. It covers almost all areas that may trigger financial risks, including enterprise bankruptcy, enforcement of financial claims, negotiable instrument disputes, non-performing loans, illegal fund-raising, real estate market, securities crimes, protection of securities market investors’ rights and interests, illegal trading venues, local government debts as well as the relevant risks arising in the cross-border investment area. Although the Opinions set forth the aforesaid noteworthy risks, they do not provide any specific or conclusive opinion with respect to each point of risk. Therefore, judgment for the direction of judicial practice in these areas will require long-term observation and assessment.
1. Regarding enterprise bankruptcy and enforcement of financial claims. "Zombie Enterprises" shall be bankrupted while the recoverable bankrupt enterprises shall be restructured. However, preventing the bankruptcy cases from triggering financial risks still remains more important. The Opinions specifically put forward that the bankruptcy cases that may incur financial risks or impact social stability shall be carefully handled in accordance with the law, especially those bankruptcy cases in relation to mutual guarantees, guarantee chains, private financing or illegal fund-raising. The Opinions also emphasize promoting the efficiency of the realization of the financial claims as well as lowering the costs of such realization, which is good news for commercial banks.
2. Regarding real estate sector. The Opinions put forward that high attention shall be paid to the influence of real estate sector volatility on financial claims, and therefore effective preventions shall be implemented against the impact to financial stability and financial security caused by the potential risks involving the real estate sector. They also put forward judgment standards regarding the effectiveness of contracts concerning matters such as "purchasing houses under other people's name" to evade the national property-purchasing restriction policy – these standards are to guide the real estate transactions back to the residential orientation. The Opinions do not provide specific guidance on trials of the real estate market related cases, except for the above principle opinions.
3. Regarding protection of the right and interest of securities market investors. Attention shall be paid to four points in the Opinions. First, to support the securities investor protection institution to accept the entrustment of investors as a litigation representative to file a suit or provide professional legal services; second, to explore and establish the attorney's investigation writ regime in civil of tort litigations for securities cases; third, to make full use of expert witnesses and the expert juror system; fourth, to guide the financial product suppliers and service providers to truly fulfill the obligations of investor suitability investigation, information disclosure and maximum loss disclosure. In addition, the Opinions specifically put forward the financial product suppliers and service providers' obligations of investor suitability investigation, information disclosure and maximum loss disclosure, and provide the investors with protections from the perspectives of litigation remedy, investigation and evidence collection. It is foreseeable that investors' willingness and mobility to claim for their rights through judicial means may be enhanced in light of the above principle opinions.
4. Other sectors embedding risks. The Opinions provide different regulations of risk prevention and risk disposition for different sectors. For example, as for the widely-concerned illegal behaviors conducted by a local trading venue without permission or beyond its business scope, the Opinions require such behaviors to be invalidated. However, with regard to the effectiveness of any administrative act or agreement involving the local government's incurring of debts in disguised forms, the Opinions do not provide definite requirement, but only require the drawing of liability boundaries and the effective prevention against risks of a concentration of local governments' debts.
It is worth noting that the Opinions promote the handling of investment cases involving foreign factors in accordance with the law and accurate determination of the legal effect of cross border investments that evade national foreign exchange control policies. This means that the Supreme Court has regarded outbound investment as a noteworthy risk point, and any outbound investment suspected of aiming to evade the foreign exchange control policies may become a focus of attention to the effectiveness issue.
Part III Building a New Mechanism for Judicial Work
This part consists of seven provisions, mainly provides guidance for building a new mechanism for financial trial work from four perspectives, namely, (i) promoting the law-based enforcement of the financial regulatory departments, (ii) enhancing coordination and cooperation with the financial regulatory departments, (iii) introducing external professional resources to improve the diversified dispute resolution mechanism, and (iv) using judicial “big data” to provide information support for risk prevention.
In consideration of the special nature of financial cases and the complexity and dynamism of the financial markets, communications between financial regulatory departments and financial judicial organs are crucial. The Opinions propose to explore and establish a communication mechanism between people's courts and financial regulatory departments for the timely reporting of information including situations of cases concerning financial risk prevention and financial security, so as to strengthen the connection and cohesion for financial supervision and financial trials. We believe that this kind of communication mechanism may become a "new normal" for financial trials and is beneficial to preventing and handling financial risks.
