Focus on what constitutes a guaranteed redemption

Authors: Li Xinqian / Ren Guobing

(This article was first published on China Business Law Journal column "Asset Management", authorised reprint)

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.

请输入标题     abcdefg

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.

资产管理专栏往期文章

作者介绍
任国兵 

合伙人

010-5809 1175

[e-mail]

任国兵律师毕业于中国政法大学，获得法学学士学位。任律师专注于金融机构资产管理业务、家族信托与慈善信托业务及资产证券化业务。在加入竞天公诚之前，任律师曾分别在某知名律所金融信托部及某知名信托公司法律合规管理总部工作多年，担任过法规专业总监等职务，现担任某信托公司独立董事。

任律师服务的客户覆盖国内领先信托公司、商业银行及银行理财子公司、保险资产管理公司等几十家金融资产管理机构，任律师领导的律师团队已为超过1000支不同类型的资产管理产品提供过法律服务并擅长资产管理业务相关的风险处置与争议解决。任律师荣登2018年度LEGALBAND“中国律界俊杰30强”榜单，并于2019年及2020年连续两年荣获LEGALBAND中国顶级律师排行榜推荐律师。

任国兵律师历史文章

 李昕倩  

合伙人

010-5809 1168

[e-mail]

李昕倩律师主要从事金融、公司等领域的诉讼和仲裁。李律师主办了多起由最高人民法院和各级法院、中国国际经济贸易仲裁委员会、北京仲裁委员会等仲裁机构审理的重大案件，熟悉法院和仲裁机构的运作方式和裁判思维。李律师负责案件处理方案的筹划和实施，具有丰富的庭审经验。

在金融纠纷领域，李律师处理过的案件类型包括银行金融、信托、基金、债券、金融衍生品等，曾服务过的金融机构客户包括国家开发银行、中国银行、中国建设银行、北京银行、民生银行、兴业银行、信达资产等，并为高瓴资本、嘉实基金、华平投资等多个境内外基金客户提供法律服务。

在公司纠纷领域，李律师在上市公司违规担保、公司控制权争议等领域为客户提供法律服务，并协助企业处理因股权投资、上市公司股权激励等引发的纠纷案件。此外，李律师还具有为能源类客户提供法律服务的丰富业绩，服务过的客户包括华电集团、国家能源集团、国电电力、兖矿集团、许继集团等。

李昕倩律师历史文章

声明 DISCLAIMER

本文观点仅供参考，不可视为竞天公诚律师事务所及其律师对有关问题出具的正式法律意见。如您有任何法律问题或需要法律意见，请与本所联系。

This article is for your reference only and not to be deemed as formal legal advice given by Jingtian & Gongcheng or its lawyers. Please contact us directly for formal legal advice or further discussion about the relevant issues.