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
Foreign Banks Allowed to Operate in Myanmar
After more than 50 years of banning, the Central Bank of Myanmar has issued the first final licenses allowing four foreign banks to operate in Myanmar.
Tanzanian Draft National Energy Policy of 2015
Highlights on the ongoing and upcoming industry developments with focus on the transition of the energy sector since the introduction of the Big Results Now! campaign
Mineral Rights Available in Tanzania
Overview of the mineral rights available in Tanzania, with specific focus on the various categories of mineral rights
The Legal Framework of the Aviation Sector in Tanzania
As attention turns to Tanzania’s trade and energy opportunities, the spotlight has fallen upon the nation’s infrastructure. This update focuses on the capabilities and issues of the Tanzanian aviation sector.
Oil price volatility - Offshore oil storage
Are there any legal concerns with tankers being used for floating storage?
Oil price volatility - risks and opportunities in 2015
While many companies can weather the oil price slide and volatility, some industry players face a real risk of insolvency.
India: Union Budget 2015
A bullet-point overview of changes in Direct Tax, Indirect Tax and Goods and Service Tax in India in light of Finance Minister Arun Jaitley’s first full-year Budget…
Prohibition against transfer of personal data outside Hong Kong
Section 33 of the Personal Data (Privacy) Ordinance (PDPO) prohibits the transfer of personal data to places outside Hong Kong, except in circumstances specified in the PDPO.
Security of payment under FIDIC contracts: more secure, for now
The High Court of Singapore recently handed down an important judgment in relation to the enforceability of Dispute Adjudication Board (DAB) decisions under the FIDIC forms of contract.
Insurance Laws (Amendment) Bill passed as Ordinance in India
The long-awaited Insurance Laws (Amendment) Bill has become a provisional law in India. The Bill amends the Insurance Act (1938), the General Insurance Business (Naturalisation) Act (1972), and the Insurance Regulatory and Development Act (1999).
SICC: now open for business
On Monday 5 January 2015, the Singapore International Commercial Court ("SICC") was officially opened...
Myanmar insurance update
Clyde & Co partner Michael Horn recently visited Myanmar's commercial capital Yangon and reports on the current state of the insurance market...
Launch of the online mining cadastre transactional portal
Plus, a summary of the key mineral rights available in Tanzania; and, a look at the manner in which mineral rights can be transferred.
Restrictions imposed on holders of mineral rights
This briefing looks at some of the restrictions imposed on holders of mineral rights in Tanzania by the Mining Act 2010
Draft local content policy for the oil & gas industry in Tanzania
The first draft of the long-awaited local content policy for the oil & gas industry in Tanzania has now been published by the Ministry of Energy and Minerals ...
Tanzania: Revocation of mining licences
The Tanzanian government recently announced the cancellation of a total of 174 mining licences. This mining update examines the key continuing obligations imposed by the Mining Act upon mining licence holders.
Mining Development Agreements
In this month’s mining briefing we look at Mining Development Agreements (MDAs) and the role that they play in the mining sector in Tanzania.
The Tanzanian railway system: current legal framework
The railway system of mainland Tanzania has a total track length of 3,676 kilometers (km) with two separate networks, run by two separate organisations ...
Related Articles
Joko Widodo re-elected: How will it affect doing business in Indonesia?
In his election campaign, Jokowi declared nine missions ...
Africa: Guinea emerging from the shadows
Recent reports from three respected international organisations sketch a relatively upbeat picture of economic prospects in the west African state of Guinea ...
Philippines: The POGO problem – Harmonising immigration, gaming and gambling
It is highly illegal to gamble in China save for a few state-run lotteries. To avoid this prohibition, gambling companies operate offshore so that they may continue catering to Chinese nationals who play casino and e-games online ...
Related Articles by Jurisdiction
Latest legal developments in the upcoming China crude oil futures — Analysis from an offshore perspective
The medium sour crude oil contract, soon launching on the Shanghai International Energy Exchange, will be the first Chinese commodity futures contract accessible to foreign investors ...
Cyber Crime
Our cover story Being 'Verbal' with cyber crime and data protection details different jurisdictions' approaches to cyber crime, while Clyde & Co's Richard Bell writes about 'Electronic growing pains' and Deacons' Richard Hudson reports ...
Latest Articles
Joko Widodo re-elected: How will it affect doing business in Indonesia?
In his election campaign, Jokowi declared nine missions ...
Africa: Guinea emerging from the shadows
Recent reports from three respected international organisations sketch a relatively upbeat picture of economic prospects in the west African state of Guinea ...
Keeping track of sanctions
Governments around the world are increasingly using economic sanctions and embargoes as a foreign policy tool ...