From 2015 to August 2020, more than 5,000 online lending institutions either exited with good faith or ran away, or lost contact, or were subject to criminally investigation, which resulted in huge debts and non-performing assets. How to preserve or increase the value of non-performing assets, or create premium? Whether the disposal methods can be customized on a case-by-case basis? Whether the disposal methods can be diversified to maximize the protection of the economic interests of online loan institutions, fund-raising participants, victims and other lenders? The lawyer team of Ronly & Tenwen Partners made an exploration.

I. Supervision and asset status of online lending institutions

Since 2015, online lending institutions have frequently gone into “crisis”, and often run away, lose contact, or close down. Subsequently, the state introduced a series of regulatory policies for special and centralized remediation, and the situation was fundamentally improved. On July 13, 2020, Guo Shuqing, secretary of the Party Committee of the People’s Bank of China and Chairman of the China Banking and Insurance Regulatory Commission, said in response to CCTV News that the supervision of online loan platforms had gone through a very painful stage, and now it had reached a fundamental turning point. At most, there were 5,000 or 6,000 online loan institutions. By the end of June 2020, only 29 were in operation, and the special remediation may basically end by the end of the year, after which there will be conventional supervision. At the same time, he said that there were still more than 800 billion of the lender’s funds that had not been recovered. As long as there was a glimmer of hope, he would cooperate with the public security and other departments to track down and clear the collection, and repay the capital contribution to the greatest extent possible.

As of June 2020, more than 5,000 online loan institutions have exited from the market. How to deal with the huge debts and non-performing assets of online lending institutions to maximize the protection of the interests of lenders? Currently, there is currently no model, channel and plan for reference. This year marks the end of the safe and orderly liquidation of online loan institutions. The Leading Group of the People’s Bank of China for the Remediation of Mutual Funds, the Leading Group of the China Banking and Insurance Regulatory Commission for the Remediation of P2P Online Loans, and the Supreme People’s Court have all issued guidance, clarifying that all walks of life should explore allocation of resources, multiple measures, broadening of channels, preservation and increase of value, maximization of the value of disposed assets, and protection of the interests of lenders under the principles of marketization and legalization.

At present, in disposing of the debts and non-performing assets of online lending institutions, many difficult problems have been encountered, and active exploration has been carried out. These difficult problems arise not only from the limitations of the design level of the legal system, but also from the single disposal measures and channels in judicial practice; and involve not only the conflicts between the different demands of lenders, but also the widespread practical obstacles such as unclear ownership of assets, complex asset forms, and serious debt evasion and debt cancellation.

II. Commercial procedures are an option for disposing of non-performing assets after the criminal judgment takes effect

In December 2018, the Leading Group on the Remediation of Mutual Funds of the People’s Bank of China and the Leading Group on the Remediation of Online Loans of the China Banking and Insurance Regulatory Commission jointly issued the Opinions on the Classified Disposal of Online Loan Institutions and Risk Prevention (ZZBH [2018] No. 175), under which it was determined that the main direction was to adhere to the exit of institutions. Except for some operating institutions that are strictly in compliance, the remaining online loan institutions should exit as far as they can, or close as soon as possible, so as to increase the intensity and speed of the remediation. The No. 175 Opinion gave a classification based on the risk status. The institutions in crisis were divided into two categories according to whether the public security department has filed a case; the institutions without crisis were divided into three categories based on existing business scale; the larger institutions were divided into high-risk institutions and normal institutions based on the risk status. The No. 175 Opinion formulated different disposal guidelines based on different risk classifications of online lending institutions.

According to No. 175 Circular, the online loan institutions were classified. Some online loan institutions were subject to criminal investigation, and forced to exit the market; some exited the market or transformed business with good faith, or were not subject to criminal investigation after a crisis. The disposal methods of debts and non-performing assets also varied among the online loan institutions with different risks. There are two kinds of legal procedures in judicial practice: one is the enforcement in criminal procedures, and the other is the disposal procedures such as commercial pre-reorganization, bankruptcy reorganization, and bankruptcy liquidation.

First, the enforcement of disposal of criminal proceedings in criminal procedures.

The Criminal Law stipulates that all articles of property illegally obtained by the criminal element shall be recovered or he shall be ordered to make restitution or pay compensation for them; the legitimate property of the victims shall be promptly returned; contraband and articles of the criminal’s own property used for committing the crime shall be confiscated; articles of confiscated property and fines shall be handed over to the national treasury and shall not be diverted or otherwise disposed of. The Criminal Procedure Law stipulates that a public security organ shall properly keep the foregoing property for future verification, and shall prepare a list of the property and the accrued fruits, and transfer the same with the cases; no entity or individual may misappropriate or dispose of the property or accrued fruit by itself; the judgment rendered by a people’s court shall include the disposal of the property and the accrued fruits that have been sealed up, seized or frozen; after the judgment rendered by a people’s court takes effect, the relevant organ shall dispose of the property and the accrued fruits in accordance with the judgment; all such property and accrued fruits shall be turned over the State treasury, except for those returned to the victim in accordance with the law.

In October 2014, the Supreme People’s Court issued the Several Provisions on the Enforcement of the Property Involved in Criminal Judgments, which clarified that the judicial tribunal of the People’s Court shall, in accordance with its authority, transfer the case to the people’s court responsible for the enforcement after the criminal judgment takes effect; the property involved in the criminal judgment shall be enforced by the People’s Court of first instance; the People’s Court of first instance may entrust a people’s court at the same level where the property is located for the enforcement; the criminal trial department shall promptly transfer the property involved in the criminal judgment to the filing department for review and filing; the scope of the property involved in the criminal judgment includes fines, confiscation of property, and ordered restitution, and dispose of the stolen money or goods transferred with the case, and confiscation of personal property which is use in the crime and transferred with the case, etc.

In February 2019, the Supreme People’s Court, the Supreme People’s Procuratorate, and the Ministry of Public Security issued the Opinions on Several Issues in Handling Criminal Cases of Illegal Fund-raising, clarifying that after the people’s Court makes a judgment on the property involved in the case in accordance with the law, the relevant local departments shall, under the overall coordination and coordination of the functional departments for handling illegal fund-raising, effectively fulfill their cooperative obligations and adopt comprehensive means in the work of clearance of the property involved in the case, the realization of the property, the collection of funds, and the return of funds to minimize the actual losses; according to relevant regulations, the property involved that is sealed, seized, or frozen should be generally returned to the participants in the fund-raising after the litigation is over; the property is insufficient for returning of all the fund raised, the return should be made in proportion to the amount of funds by each participant; the losses of the participants in the fund-raising shall be generally recovered preferentially over other civil debts and the enforcement of fines and confiscation of property.

   In the Criminal Law, the Criminal Procedure Law, and the judicial interpretation and guidance documents of the Supreme People’s Court, different legal terms such as “all articles of property illegally obtained”, “the property involved in the criminal judgment”, “stolen money or goods”, and “property involved in the case” were used, and their meanings are also slightly different. The scope of “property involved in criminal judgments” is broader, including fines, confiscated property, ordered restitution, and disposed stolen money and stolen goods transferred with the case and their proceeds. Among them, “income” includes the natural fruits and legal fruits of stolen money or goods, as well as material benefits such as rent and stock dividends obtained from the purchase and investment of stolen money or goods.

In accordance with the provisions of criminal litigation procedures, after an online lending institution or individual is subject to a criminal sentence by a court, the “property involved in the criminal judgment” is mainly enforced by the court of first instance which assumes the responsibilities of asset clearance, realization, collection and liquidation. On January 8, 2020, the Beijing Municipal No. 1 Intermediate People’s Court issued the “Announcement on Return of Funds in the case of fund-raising fraud, illegal absorption of public deposits, smuggling of precious metals, illegal crossing of border, and illegal possession of firearms of Anhui Yucheng Holding Group, Yucheng International Holding Group Co., Ltd., Ding Ning, Ding Dian, Zhang Min and 23 others”, under which funds were returned to harmed fund-raising participants on the “E-rental Treasure” online platform who had had their information verified and registered. On July 7, 2020, the Shanghai No. 1 Intermediate People’s Court issued an announcement on the “Kuailu System” case, and the “(2019) H 01 Z No. 1042 Case” entered the enforcement stage. The victims were requested to check and confirm the information as soon as possible for the return of their investment. The above two cases fall in the circumstance where the court of first instance is responsible for the enforcement of the judgment after it takes effect.

Secondly, the commercial disposition procedures.

If an online lending institution is ordered to exit or existed without good faith such as running away or receipt of criminal penalties, it will inevitably produce huge debts and non-performing assets. There are objective basic conditions for the settlement through commercial disposition procedures. Even if it is an online loan institution that has been sentenced to criminal penalties by the court, due to the huge number of cases, insufficient court manpower, shortage of judicial resources, the settlement through commercial procedures in criminal cases, the participation of social professional institutions in resolving the debts and non-performing assets of online loan institutions will definitely become an option. The disposal of non-performing assets of online loan institutions is completely similar to a special commercial reorganization and bankruptcy procedure, including self-reorganization, pre-reorganization, reorganization, and bankruptcy liquidation, etc. The disposal of the debts and non-performing assets of online loan institutions through commercial procedures, the use of commercial rules, and the integration of market resources is in line with not only the top-level design of the Leading Group of the People's Bank of China for the Remediation of Mutual Funds and the Leading Group of the the China Banking and Insurance Regulatory Commission for the Remediation of P2P Online Loans, but also the judicial guidance opinions of the Supreme People’s Court; it is not only in line with market business rules, but also protects the interests of lenders to the maximum extent possible. Therefore, the commercial disposal of asset in illegal fund-raising is an inevitable trend.

After the illegal absorption of public deposits by Wuhan Ssangyong Real Estate Development Company was filed for criminal investigation, the Wuhan Municipal Government took the initiative to intervene, innovated methods, allocated market resources through market-oriented means, and hired social professional institutions to participate in the restructuring and provide professional support. Finally, a group in Shanghai was introduced as an investor to carry out pre-court restructuring of the assets of online lending institutions and paid 100% of the principal of the platform lender. This was a successful case of commercial restructuring, and all parties achieved a win-win situation.

III. Maximization of the value of assets is the principle and goal in disposing of non-performing assets

On December 25, 2017, the Supreme People’s Court issued the Minutes of the National Court’s Work Meeting on Bankruptcy Trial, clarifying that the disposal of bankruptcy property should balance the maximization of the value and the efficiency of disposal. The people’s courts should actively explore more effective ways and channels for disposing of bankruptcy property, so as to maximize the price of bankruptcy property.

In April 2020, the Leading Group of the People’s Bank of China for the Remediation of Mutual Funds and the Leading Group of China Banking and Insurance Regulatory Commission for the Remediation of P2P Online Loans jointly held a teleconference on the special remediation of Internet finance and online lending risks. The meeting made it clear that 2020 marked the end of the tough battle to prevent and resolve financial risks, but stock risk management would be the core work for a long period of time in the future. It is necessary to adhere to the principles of marketization and legalization, adapt to local conditions, and take multiple measures at the same time to maximize the protection of investors’ legitimate rights and interests.

On July 30, 2020, in order to fully stabilize the Six Fronts and guarantee the Six Priorities, the National Inter-ministerial Joint Conference on the Dealing with Illegal Fund-raising organized the 2020 Mid-year Symposium on the Prevention of and Dealing with Illegal Fund-raising. The meeting made it clear that it is necessary to make all efforts to pay off the losses, emphasized the recovery of spoils and losses as the core of risk handling, and made all attempts to broaden the sources of refundable funds in accordance with the law; increased the punishment of online loan platform borrowers for malicious debt evasion and cancellation, effectively improved the efficiency of asset disposal, and maximized the recovery of mass’s losses.

“Maximization of the value of disposed assets”, “exploration of more effective ways and channels for disposing of bankruptcy property, and maximization of the price of bankruptcy property”; “Making all possible efforts to broaden the sources of refundable funds in accordance with the law and compliance, and effective improvement of the efficiency of asset disposal.” Whether it is for the Supreme People’s Court or for the central financial authority, making breakthroughs in the disposal methods and channels under the existing system, and improving the realization rate of bankrupt property and the efficiency of asset disposal are the common goals of government departments, judicial organs, industry associations, managers, law firms, accounting firms and other sectors of society.

IV. Diversification of the disposal methods and means of non-performing assets is an effective way to maximize asset value

At present, whether it is a criminal disposition procedure in a trial court or a commercial disposition procedure, the greatest restriction lies in the single method of disposition of assets, a single channel for disposition of assets, and the unique form of assets. The so-called single disposal method mainly refers to the return of funds, which are refunded or returned proportionally; the so-called single disposal channel mainly refers to the auction and sale of assets; the so-called unique asset form mainly refers to the form of cash.

We do not deny the convenience and operability of returning funds through auctions and asset sales, nor do we deny the significance, role and fairness of cash settlement and return plans. However, we believe that the forms of non-performing assets of online lending institutions are complex and the needs of lenders are not the same. There should be an allocation plan that matches the internal needs of lenders with the asset form, and an allocation plan that matches the external market needs of the society and different asset forms. It should be possible to explore other options other than auctions, sales and disposal of assets, and the collection and return of funds. For non-performing assets of some online lending institutions, the disposition plan can be tailored to local conditions, such as asset restructuring, debt-to-equity, equity replacement, debt repayment, restructuring, and bankruptcy liquidation, etc.

The key to disposing of non-performing assets of online lending institutions lies in the word “flexibility”, that is, there should be activation of assets, flexible solutions, innovative methods, and breakthrough of restrictions. The contrary solutions are “dead”, that is, there is rigid assets, single solutions, unique channels, and narrow ideas. In the case of non-performing assets of Shanghai LC online loan institution, we are dealing with it in line with the principle of “flexibility”. We worked with the accounting firm to carefully check the forms and values of non-performing assets such as loan claims, equity investment, real estate, movable property, and intellectual property formed by LC online lending institutions. We gained a detailed understanding of the life experience, work, investment experience and industry background of fund-raising participants, and extensively consulted more than two-thirds of them regarding their needs of redemption and repayment. Then, we designed the plans such as cash return, conversion of debt to equity, holding of real estate, and repayment of debts with property to maximize asset preservation and appreciation, the allocation of market resources, the realization of the market value of assets, and ultimately realized the preservation and value increase of assets and maximized the allocation of market resources and the market value of assets, eventually laying the foundation for reduction and recovery of fund-raising participants’ losses.

The adaption to local conditions and specific cases, the adoption of multiple measures, innovation, breakthroughs and participation in the disposal of non-performing assets of online loan institutions by social professional institutions are an effective way to realize the principles of marketization and legalization proposed by the Leading Group of the People’s Bank of China for the Rectification of Mutual Funds and the Leading Group of the China Banking and Insurance Regulatory Commission for the Remediation of P2P Online Loans for the Rectification of P2P Online Loans, as well as an important plan to achieve improved assets disposition efficiency and full recovery of losses as decided by the national Inter-ministerial Joint Meeting on the Dealing with Illegal Fund-raising

“Flexibility” brings about success. There is a long way to go in disposing of the non-performing assets of online lending institutions.

In view of the many difficulties and restrictions faced by online loan institutions in the disposal of non-performing assets, it is necessary for all parties in the society to explore and study together. We just introduce this question, and expect to explore together with blocks and march together. We look forward to exploring with colleagues from all walks of life and moving forward each other to resolve stock financial risks and protect the interests of fund-raising participants, victims and other lenders.