On August 4, 2017, the Supreme People’s Court issued the Opinions on Further Enhancement of Judicial Work in the Financial Sector (the “Opinions”) to provide guidance on the trials involving the financial sector. The Opinions were promulgated primarily to “serve physical economy, prevent and control financial risks and deepen financial reform,” which include five categories of contents, namely, carrying out the spirit of communication in the National Financial Work Conference, guiding and regulating financial transactions, preventing and resolving financial risks, creating and improving new mechanisms required for accommodating judicial work in the financial sector, and raising the level professionalism of such judicial work. The specifics involve proceedings in the following types of cases:
1. Financial innovation cases
According to the explanations in Paragraphs 1, 3 and 8 of Article 2 of the Opinions, the court is in principle supportive of new financial transaction models and will protect lawful and compliant financial transaction models as the law requires. For instance, the legal effects of new types of guarantees have been recognized, and there is greater research on the new circumstances and issues encountered in resolving bad debts under the current new circumstances. However, with respect to financial violations under the pretext of financial innovation to cover up risks, evade supervision and engage in institutional arbitrage, the court will determine the legal effects and the rights and obligations of all parties based on their actual legal relationship present. The Opinions also point out that there should be greater research and method of response with respect to new type financial matters, while strictly applying the law in accordance with the above principles and maintain uniform standard in rendering decision.
2. Usury cases
According to the explanations in Paragraphs 2, 4, 7, 9 and 10 of Article 2 of the Opinions, the court will still strictly restrict usury behavior. For cases involving excessive interest rates, advance deduction of the principal and de facto high interest rate clauses are very likely not be supported by the courts. With respect to financing and leasing contracts or factoring contracts which are in essence lending contracts, the rights and obligations of the parties are likely to be determined based on the actual contractual relationship formed to prevent the use of advance deduction of rents and deposits for an increase in economic financing costs in effect. As for lending information intermediaries and lenders who evade the legal cap on private lending rates through the use of brokerage fees, those practices are likely to be deemed invalid in the future. The Opinions also state the need to regulate lending channels for state-owned enterprises to prevent state-owned enterprises that do not have financial qualifications from engaging in financial business through high interest rate lending based on loans taken from financial institutions.
3. Bankruptcy and liquidation cases
Article 3 of the Opinions states that there needs to be a full use of the institutional functions in bankruptcy law for dealing with “zombie enterprises”, causing these zombie enterprises that no longer possess market competitiveness or operational values to enter into bankruptcy and liquidation as soon as possible for an orderly market exit and avoiding ineffective provision of supplies. On such basis, more attention should be paid to business consolidation and asset consolidation in the course of reorganization. The right of the forced approval for reorganization plans should be prudently exercised strictly in accordance with law, and active preventive measures should be taken to prevent bankruptcy cases from triggering financial risks in order to maintain social stability. Therefore, it is necessary to further improve the design of the bankruptcy system for specific entities such as listed companies and financial institutions, and there must be a strict investigation of malicious use of bankruptcy procedure for evasion of bad debts. To wit, the court will track down and recover a debtor’s assets to the extent possible through measures such the bankruptcy of affiliated enterprises or exercise of bankruptcy revocation rights and recall rights.
4. Financial cases involving criminal offenses
Pursuant to the relevant provisions of Articles 2 and 3 of the Opinions, the court still holds a very stringent attitude on financial cases involving criminal offenses.
With respect to private lending involving high interest rate refinancing or transfer of benefits via collusion with clerks of financial banks or illegal lending by workers of financial institutions, as well as the use of misrepresentations and falsifications of fact by a company or enterprise in its loan application to the extent that constitutes a criminal offense, the criminal liabilities of the actors will be pursued in accordance with law. There will also be continued strong efforts in suppression of illegal fundraising, and securities-related offenses will also be strictly penalized.
5. Investment cases
With respect to domestic investment cases, Article 3 of the Opinions stipulates the need to protect the lawful rights and interests of investors through trying civil matters involving misrepresentations, insider trading and market manipulation in securities markets.
From the perspective of the litigation system, the Opinions supports litigation institutions for investors’ protection offering legal consultant services for investors and initiating litigation on their behalf of so as to expand avenues for protecting investor rights. The Opinions also support an exploration into the establishment of a system for lawyer investigation orders in securities-related tort litigation to assist in evidence gathering by investors, as well as the use of expert witnesses and expert jury members to raise the quality level of trials.
From a compliance perspective, the Opinions indicate that financial product providers and service providers should be guided to perform their obligations to conduct due diligence of investors, to disclose information and the maximum amount of losses to prevent harming the rights and interests of investors.
With respect to investment cases involving foreign parties, the Opinions indicate the need for more research on financial security and financial risk issues involving cross-border investment under the One Belt One Road strategy to accurately determine the legal effects of cross-border investment conduct that evades the state’s foreign exchange control polices, and to provide legal protection for investments involving foreign parties.
6. Administrative cases
With respect to financial cases involving administrative entities, the Opinions also provide corresponding guidance for court trials.
For matters involving disputes over the local government debt, the Opinions note in order to regulate state conduct, there is a need to define in accordance with the law the legal liabilities of a government entity that has illegally provided guarantees. In matters involving the nature, validity and liabilities of administrative acts or administrative agreements undertaken by local government in substantially engaging in issuing bonds through the use of platform company financing, public-private partnership (PPP), investment funds and purchase of services, there must be clear rules to delineate the boundaries of responsibilities and effectively prevent the concentration of debt risks of local governments.
Regarding cases handled by financial supervisory agencies, the Opinions support the agencies’ performance of supervisor tasks. However, it is also noted that there should be an effective introduction of external resources, and there is a need to explore and improve the multidimensional dispute resolution mechanisms for financial cases, such as the promotion of successful experiences in the securities and futures industry and the insurance industry with the use of a connection mechanism between litigation and mediation, collaboration with financial supervisory agencies, trade associations and investor protection institutions to capitalize on the advantage of professional resources and prevent and resolve financial disputes.
In general, the Opinions primarily follow the spirit of the 5th National Financial Work Conference and closely track the three objectives of serving the physical economy, preventing and controlling financial risks and deepening financial reform, thereby giving directional guidance on adjudicating financial cases. Enterprises may also reference the above general assessment on operating risks in conducting their specific business.