China (PRC)

Wilson Wei HuoBy Wilson Wei Huo, Partner, Zhong Lun Law Firm
E: huowei@zhonglun.com

I INTRODUCTION

Banking dispute is defined in a broad sense in this article, referring to dispute where one of the parties is a banking or financial institution, such as a bank, a securities company or a fund management company. This article focuses on the recent developments of banking dispute resolution in China (in this article, China refers to mainland China). It is known that the laws of China belong to the civil law system, in which statutes form the sources of law.

II SOURCES OF BANKING DISPUTE RESOLUTION

i Common sources of banking dispute resolution

In China, common banking disputes mainly relate to, among other things, lending and loans, guarantees, bankcards, financial leasing, securities, futures business, commercial instruments, trust and letter of credit. These disputes not only happen between financial institutions and financiers, but also among financial institutions or between financial institutions and investors.

ii Sources of banking dispute resolution after the recent development of China’s economy under the “new normal”

Under the new normal, new types of banking disputes have arisen as a result of continuing economic slowdown, structural economy problems, supply-side structural reform, innovation of the internet and other factors.

Bond default disputes

The bond market in China has witnessed a large amount of bond defaults in recent years, including but not limited to defaults of corporate bonds, enterprise bonds, medium-term notes, short-term financing bonds, small and medium enterprises’ collection notes, and other types of bonds that are traded in the inter-bank market and the exchange market.

Private equity investment disputes

As stated in the 2017 Work Report of the SPC, along with the fast development of private equity investment (PE) in China, new types of PE disputes have arisen, such as private-equity partnership disputes, valuation adjustment mechanism disputes, equity repurchase disputes and corporate control disputes.

Internet financing disputes

Despite the combined positive effects on the economy, the existence of mobile internet, e-business and internet finance, such as peer-to-peer lending and mass and accumulative fundraising, and third-party payment platforms have caused complex and diverse disputes.

Generally, the inapplicability of the traditional principle to determine jurisdiction, the normalisation of class actions with small disputed amounts, and the wide usage of electronic evidence are the common features in internet financing disputes.

Other banking disputes

In addition, the number of disputes in connection with derivatives and trade financing has increased dramatically in China in recent years.

III SIGNIFICANT RECENT CASES

China adopted the guiding cases system on 26 November 2010. The SPC is in charge of selecting and releasing guiding cases. In addition to guiding cases, the SPC regularly releases typical and influential cases in its gazette (the SPC Gazette). Outlined below are some significant recent cases released by the SPC or represented by Zhong Lun relating to complicated issues such as pledge of rights, pledge of funds, guarantee obligation and entrusted loans.

In Fuzhou Wuyi Sub-branch of Fujian Haixia Bank Co, Ltd v. Changle Yaxin Sewage Treatment Co, Ltd and Fuzhou Municipal Engineering Co, Ltd (guiding case No. 53 concerning a dispute over a loan contract), the court ruled that the right to receive proceeds from franchises may be pledged and registered as a pledge of account receivable. Where the pledgee claims for priority right for compensation therein but it is inappropriate to liquidate, auction or sell off the aforesaid pledged right, the court may order the pledger to make a priority payment to the pledgee from the proceeds of the account receivable.

In Anhui Branch of Agricultural Development Bank of China v. Zhang Dabiao and Anhui Changjiang Financing Guarantee Group Co, Ltd (guiding case No. 54 concerning a dispute over an objection to enforcement), the court ruled that the fact that the account balance in the special bank account occasionally floats shall not affect the validity of the pledgee’s right over the pledged funds deposited in the special bank account as long as three requirements have been met. First, the pledger has opened the bank account and deposited such funds for the purpose of providing collateral to the pledgee. Secondly, the pledgee lawfully possesses and controls the bank account. Thirdly, the pledged property has been specified and the possession has been transferred from the pledger to the pledgee.

In Ningbo Branch of Wenzhou Bank Co, Ltd v. Zhejiang Chuangling Electric Appliance Co, Ltd (guiding case No. 57 concerning a dispute over a financial loan contract), the court held that when a creditor has entered into several maximum guarantee contracts with guarantors but failed to specify some of those guarantee contracts under the master loan contract, those guarantors though not expressly stated under the master loan contract shall still be liable for the indebtedness, so long as the debts have been incurred during the time limit of the guaranty liability provided under the maximum guarantee contracts and the creditor does not expressly waive its right against the guarantors.

In Beijing Changfu Investment Fund v. Wuhan Zhongsenhua Century Real Estate Development Co, Ltd et al (a case of a dispute over an entrusted loan contract),1 the court held that when the entrusted bank lent the loan to the borrower under the instruction of the lender without assuming any legal risks or liabilities under the loan contract entered into between the lender, the entrusted bank and the borrower, such loan shall be deemed as ‘private lending’ rather than lending by a financial institution. Laws, regulations and judicial interpretations concerning ‘private lending’ are applicable to the validity of the entrusted loan contract as well as its main provisions (i.e., interests, default interests and damages).

In Dalian Donggang Sub-Branch of China Merchants Bank Co, Ltd v. Dalian Zebon Fluorocarbon Paint Stock Co, Ltd and Dalian Zebon Group Co, Ltd (a case of a dispute over a loan contract),2 the defendant, as the guarantor, argued that its legal representative acted beyond his authority to enter into the guarantee contract and the shareholders’ meeting resolution to provide a guarantee to its shareholder was falsified. The court ruled that pursuant to Article 16 of the Company Law, if a company intends to provide a guarantee to its shareholder or its actual controller, the shareholders’ meeting or the shareholders’ assembly shall pass a resolution for such decision. However, this provision was designed for the company’s internal management and should not be used to determine the validity of the guarantee contract. If the company, as the guarantor, later argues that its legal representative acted beyond his or her authority to enter into the guarantee contract, the court shall rule in favour of the creditor’s claim as long as the creditor proves that the relevant shareholders’ meeting resolution meets the formality requirements and the act of the legal representative constitutes an ‘apparent’ representation of the company.

In A Fund Company v. A Real Estate Development Company (a case of a dispute over an entrusted loan contract represented by Wilson’s team), the lender entrusted a bank (the entrusted bank) to lend money to the borrower. The borrower provided its land-use right as collateral and registered such security interest under the name of the entrusted bank. In precedent cases, courts held that the lender was not entitled to sue the borrower directly because of the doctrine of the privity of contract. However, in this case, the court made an important breakthrough and ruled that the lender could initiate the lawsuit directly against the borrower and seek enforcement of its security interests as the actual creditor.

In T Securities Company v. A Bank (a case of a dispute over transferring property that had been frozen by the court and another case represented by Wilson’s team), the debtor has pledged a listed company’s stocks as collateral to the creditor, a securities company (the T Securities Company). After obtaining an arbitral award confirming its creditor’s right against the debtor, T Securities Company applied for enforcement before court A. However, the debtor’s other creditor, a bank, initiated a lawsuit against the debtor before court B, claiming that the debtor is not the lawful owner of the stocks pledged to T Securities Company. Court B then froze the stocks upon the bank’s application for property preservation. T Securities Company’s attorney, a member of Zhong Lun, applied with court A to realise T Securities Company’s creditor’s security interest. In the meantime, Zhong Lun applied to court B, the court that had frozen the property, to transfer the pledged stocks to court A for enforcement as court B has failed to enter into any auction or sales procedures in respect of the frozen property after 60 days of the start of the property preservation procedures. Eventually, the courts sustained Zhong Lun’s applications and requests.

IV LOOKING AHEAD

In China, the slowdown of the economy has profoundly influenced banking and financing investments and the resolution of relevant disputes. As a result, banking disputes have revealed four new trends, namely complexity, expansion, quantification and crowded disputes. Complexity refers to the fact that professional, complicated and innovative banking and financing investments have given rise to sophisticated disputes. Notably, the range of banking disputes has expanded dramatically along with the recent development of new methods of financing, in which the parties involved are becoming increasingly diverse, which has imposed unprecedented challenges on the regulatory framework. In addition, the number of banking disputes, as well as the amounts involved in such disputes, has grown. Newly emerged economic problems under the new normal have resulted in a lot of defaults and the disputed amounts often exceed hundreds of millions. Numerous individual investors are also involved in banking disputes, which means that financial institutions are being dragged into class actions initiated by those who failed to profit and even lost their principal investment.

The above-mentioned trends in banking disputes call for creative resolution under the new normal, which requires the foresight of the regulatory authorities, precautionary measures adopted by financial institutions, support from the judicial system and the arbitration institutions, as well as intelligence, courage, and professionalism of legal practitioners.

 

Endnotes:

1Issue No. 11, 2016, the SPC Gazette.

2Issue No. 2, 2015, the SPC Gazette.

Tags: Banking, China, Dispute Resolution
Related Articles by Firm
Recent developments in banking dispute resolution in China
New methods of financing and challenging economic conditions have fuelled new types of disputes ...
Third-party funding in Asia
Cheng-Yee Khong and Tom Glasgow of IMF Bentham examine the new regulatory environment for third-party funding in Singapore and Hong Kong. ...
The Validity of Asymmetrical Arbitration Clauses
In the recent case of Wilson Taylor Asia Pacific Pte Ltd v Dyna-Jet Pte Ltd [2017] 2 SLR 362; [2017] SGCA 32 (“Wilson”), the Court of Appeal was invited to consider the validity of an arbitration agreement that only provided for one party to commence ...
The “Good Faith” Principle
Hong Kong Court of Appeal holds that the “Good Faith” Principle is Complementary to the “Choice of Remedies” Principle, Aligning Hong Kong Law with Singapore Law ...
What’s new with Cybersecurity in Singapore?
With the increasing frequency of cyber-attacks, the new Cybersecurity Bill could not have come at a more pertinent time ...
China: New Law Outlines Dos and Don’ts of Foreign NGOs
A newly ratified law, which takes effect on January 1, 2017, outlines how foreign NGOs should conduct their activities in China.
China's New Family Planning Law Changes Employees’ Benefits
China passed a new law, effective 1 January 2016, which encourages families to have two children and removed the right to extended leaves for those who get married or have children late.
Vietnam Client Alert - November 2015
Vietnam's National Assembly recently passed new laws which affect investments, real estate, employment, use of internet resources and sanctions on administrative violations.
China amends educational laws to enable private educational institutions profitable
China removes "profit" restriction and allows Sino-foreign cooperation in educational institutions effective 1 June 2016.
Vietnam Client Alert
This edition discusses new laws on overtime rules, corporate seals and use of IPRs in company names to the resolution of domain name disputes. Moreover, it presents an overview of how the new Trans Pacific Partnership will affect Vietnam.
Myanmar Opened its Broadcasting and TV Market
The Broadcasting Law 2015 opens commercial licenses for TV or radio for bidding under an independent supervisory authority. This offers wide opportunities to investors from broadcasting infrastructures to broadcasting services.
China Streamlines Commercial Registration System
Effective 1 October 2015, government authorities will no longer issue organization code certificate or tax registration certificate but consolidate their functions into new version of business license.
China Increases Standards of Reward for Transformation of Scientific and Technological Achievements
The newly revised Law on Promoting the Transformation of Scientific and Technological Achievements of PRC respects any reward agreement and provides default reward standards in the event of no prior mutually agreed reward standards.
Statutory Registration of Standard Terms and Conditions in Tanzania
All companies doing business in Tanzania should know the salient points of the Standard Form (Consumer Contracts) Regulations 2014 which takes effect on 29 December 2015.
Flurry of New Energy Legislation Proposed in Tanzania
The Tanzanian Government is in the process of a radical overhaul of regulations governing the energy and extractive sector.
Tanzania Bill Establishing the Petroleum Act 2015
Tanzania's proposed Petroleum Act 2015 introduces key changes to the Petroleum Exploration and Production Act 1980 and the Petroleum Act 2008.
Draft Implementation Rule Addresses Vague Issues in the Labor Contract Law
The recent draft Implementation Rule reveals Chinese labor authorities’ efforts to clarify vagueness in the implementation of the Labor Contract Law for the past years.
Cyber Security Law to Tighten Network Operators and Users Supervision
The draft Cyber Security Law aims to strengthen supervision over cyber security. The proposed measures will influence not only network operators directly but also users and all public sectors.
Shanghai's New Immigration Policy to Attract Foreign Talents
The Shanghai Public Security Bureau released the Implementation Rules on Series of Immigration Policies of Shanghai Sci-tech Innovation Center. The article describes the standards for foreigners to be identified as “overseas talents”, the conditions to apply for permanent residence and ...
Draft Law Outlines Dos and Don’ts of Foreign NGOs for the First Time
The second draft of the Law on Administration of Foreign Nongovernmental Organizations was published recently. The Draft Law defines foreign NGOs which refer to non-profitable and nongovernmental social organizations established overseas.
Tanzanian Energy Developments
Summary of the latest industry developments, as well as the country’s political developments, with a special focus on the Ministry of Energy and Minerals (MEM)
India: Latest Legal Updates for May 2015
Insights into the proposed New Land Bill, recent Supreme Court judgment on the principle of the arbitration agreement, proposed enhancement of the pecuniary jurisdiction of the District Courts of Delhi and other legal updates
SAFE New Regulation Promotes Discretionary Settlement of FIEs’ Capital Nationwide
The State Administration of Foreign Exchange (SAFE) released a circular on Reforming the Administration of the Settlement of Foreign Exchange Capital of Foreign-invested Enterprises which further promotes discretionary settlement of foreign investment enterprises’ foreign exchange capital nationwide. The circular take ...
Singapore: a snapshot of employment changes in 2014
The Singapore Parliament has rolled out a number of employment-related legislative changes.
Statutory paternity leave legislation in Hong Kong
From 27 February 2015, male employees in the private sector are entitled to three days’ paternity leave.
Preparation for annual individual income tax declaration for 2014 in PRC
Indivdual taxpayers with an annual income of RMB120,000 or more shall file an annual individual income tax return with the within three months of the beginning of the next year.
Shanghai clarifies labour dispatch rules
The Shanghai Municipal Human Resources and Social Insurance Bureau and Shanghai Superior People’s Court jointly issued the Meeting Minutes on Application of Law on Labour Dispatch on 31 December 2014.
China requires work visa for certain short-term work tasks
As of 1 January 2015, China has further tightened immigration requirements for foreigners coming to China for short term work tasks.
Ship arrest in China - Increased clarity from the Supreme People's Court
The Supreme People's Court of the PRC published the Regulations for Certain Issues Concerning the Application of Law Relating to Arrest and Auction of Ships which took effect on March 1, 2015.
Cabotage and its impact in Indonesia
Indonesia's shipping and offshore marine industry underwent major changes since the introduction of the Maritime Law No. 17 of 2008.
Oil price volatility - global employment issues
Amidst the oil & gas layoffs, the industry has to ensure that it has the manpower skills in place to respond to demand when oil prices recover.
Shanghai Court rules on SHIAC jurisdiction following CIETAC breakaway
Shanghai Court recently ruled SHIAC has jurisdiction on disputes arising from a clause referring the disputes to "CIETAC Shanghai Sub-Commission".
Oil price volatility - risks and opportunities in 2015
The sharp fall in oil prices amid deteriorating sentiment over the global economy has made investors weary of investing in other commodities.
Oil price volatility - legal issues in the E&P sector
With oil prices at their lowest for over five years, E&P companies and the governments of the countries where they conduct their exploration and production activities are now assessing their options.
The Singapore approach to scrutiny of arbitral awards
International arbitration must, out of necessity, rely on the courts to uphold and enforce arbitral awards and to support the arbitral process...
The new CIETAC Arbitration Rules 2015
The New Rules adopt both best practices and the latest developments in international commercial arbitration and accommodate the increasing needs of the parties arbitrating at CIETAC.
China’s Supreme People’s Court issues judicial opinion on work-related injuries
The Regulations define the general framework of work-related injury matters, including the scope of work-related injuries, verification of the injury, and obligations and liabilities of employers, amongst other aspects.
China’s plans to accelerate growth of insurance market
State Council's vision on bringing China's insurance industry into the modern age
China’s Supreme People’s Court issues judicial opinion on work-related injuries
As of 1 September 2014, the new judicial opinion of the China's Supreme People’s Court concerning work-related injuries (the “Opinion”) came into force
A watershed in the availability of corporate information in China?
In March 2014, the State Administration for Industry and Commerce launched the National Company Credit Information System (the NCCIS)...
APAC Employment Update
Employment updates from China, India, Japan, Thailand and Mongolia ...
Tanzania: energy market developments
Including: the impact of the August's US-Africa leaders summit; plus, an overview of the power utility giant, TANESCO,and its future in the Tanzanian market
Road infrastructure in Tanzania
The ability of Tanzania to upgrade and improve its road infrastructure will be one of the key factors in whether it can continue the impressive rates of economic growth ...
Tanzania: Impact of foreign exchange regulation amendments
The latest amendments to the foreign exchange regulations have relaxed and in some cases removed restrictions on inward foreign investment in the Dar es Salam Stock Exchange ...
India Update, inc. 'Building India through PPP'
This edition brings a featured article on Public Private Partnerships, as well as key judgements passed by the Hon’ble Supreme Court of India, changes in corporate and commercial matters and case laws in indirect taxation.
Enforceable obligation to be friendly: a new principle of law
A recent judgment from the Commercial Court in London established a new principle of law, in one of the cases brought by Clyde & Co’s dispute resolution team in Dubai ...
Employment law developments across the GCC
a summary of the key employment law developments across the GCC ...
An overview of medical malpractice in the UAE
With an increasing focus on regulation and reforms by local health authorities,there is evidence of a more litigious approach developing in the area of medical malpractice ...
Export Processing and Special Economic Zones in Tanzania
We examine the features and requirements of the EPZ and SEZ frameworks, set-out the differences and comparative advantages of each ...
Draft National Petroleum Policy of Tanzania
A look at the second draft National Petroleum Policy of Tanzania and ongoing energy market developments
Iran – plans for privatisation and reform in power sector
A look at the historical background to Iran’s power industry and how the latest developments will be transforming the way Iran manages this significant sector.
“Good Samaritan” principles in the UAE: legal liabilities when administering first aid
This article discusses whether a Good Samaritan principle is applied in the UAE, both from the perspective of rescuers and safety officers.
UAE Trade Marks Office puts an end to examination reports
On 19 May 2014, the UAE Trade Marks Office announced that it will no longer issue examination reports or grant extensions of time during the trade mark application process ...
Iran’s new Integrated Petroleum Contracts
Iran hosted an “Oil Show” earlier this month in Tehran. According to reports, over 600 foreign companies from 32 countries and over 1,200 Iranian companies attended ...
FDI laws in Libya
A stark reminder of the fluidity of the legal and practical landscape ...
The legal framework of the port sector in Tanzania
The port sector in Tanzania is one of the largest of East and Central Africa, serving Tanzania as well as the neighbouring landlocked countries of Malawi, Zambia, Democratic Republic of Congo, Burundi, Rwanda and Uganda ...
Registration of private sector foreign loans with the Bank of Tanzania
The Bank of Tanzania requires that all foreign loans from the private sector in Tanzania are registered with them. We look at what this registration means in practice.
What investors should know about Mexico’s new Energy Law
A significant step toward permitting private capital to support Mexican oil and gas production ...
Investigating procurement fraud in South and Southeast Asia
Markets in Asia can pose unexpected challenges for companies that rely on fraud mitigation and investigation practices applicable to developed markets. Quite simply, these practices do not work in Asia ...
Tanzania: Prospecting for and mining of radioactive minerals
New uranium mining projects have recently been announced in Tanzania. This briefing looks at the legislative framework surrounding radioactive minerals in Tanzania.
Public private partnerships in Tanzania
PPP's: an update following the Finance Act 2014
2013/14 Global Fraud Report
Kroll’s 2013/14 Global Fraud Report, prepared in conjunction with the Economist Intelligence Unit, surveyed 901 senior executives from around the world. This document includes an overview of the results and a thought piece on what the results mean for businesses globally. (...
The Tanzania Mortgage Refinance Company
This update looks at the development of TMRC to date and the products offered to Tanzanian banks.
The Chinese currency in the international financial markets
The rise of Chinese trade in Africa generally and Tanzania specifically is well known. China – Tanzania trade reached USD 2.5 billion in 2012 ...
Tanzania’s 4th Offshore Licensing Round: Key Terms
The 4th Tanzania Deep Offshore and North Lake Tanganyika Licensing Round was launched in Dar es Salaam on 25 October by President Jakaya Kikwete ...
Tanzania Security Fact Sheet
This month’s Tanzania update is a fact sheet recapping on the types of security available for different asset classes when taking security over corporate borrowers, with a more detailed focus on debentures and mortgages.
Related Articles
Creating an effective fintech IP strategy
Revised guidelines could provide opportunities to protect technology in this rapidly developing sector.
Significant precedents from the DIFC courts
Afridi & Angell successfully defended an anti-suit injunction, an application to exclude evidence and obtained a document production order.
Law as a process
How process design defines value, delivers efficiency and drives business strategy.
Related Articles by Jurisdiction
China’s reform of arbitration in Shenzhen SEZ
The history of China’s opening-up policy and the internationalisation process of arbitration in Shenzhen, as well as the future of the merged arbitration institutions ...
Finance Special Report 2008
Off the back of an extraordinary year of growth, modest economic expectations in the year to come are the current trend. Asian-Counsel provides a regional overview in addition to special features on Islamic finance in Japan, recent developments in Malaysian ...
Latest Articles
Print Edition Subscription Form – Asian-mena Counsel
Asian-mena Counsel Print Edition Subscription Form
Creating an effective fintech IP strategy
Revised guidelines could provide opportunities to protect technology in this rapidly developing sector.
Significant precedents from the DIFC courts
Afridi & Angell successfully defended an anti-suit injunction, an application to exclude evidence and obtained a document production order.