[Abstract] “Explicit equity and real creditor’s rights” is the product of the innovation of the investment model, and its nature has not been concluded judicially, which is a practical difficulty. After the investigation of judicial cases, it can be seen that the court mainly examines the true purpose of the parties to an agreement by checking whether they require fixed income return, whether they participate in actual operation, and whether the transfer price and interest rate is reasonable through comprehensive judgment of their background of contracting, the purpose of contracting, the arrangement of contractual rights and obligations, and the actual performance process. Commercial supervision policies will affect the rigor of judicial judgment to a certain extent, but in the context of “integration of equity and creditor’s rights”, in order to respect the autonomy of the parties, certain explorations have been made in the identification of investment and financing such as “explicit equity and real creditor’s rights” in judicial practice.

[Keywords] explicit equity and real creditor’s rights; Judicial determination; commercial supervision

[Author] Sun Lijun, senior partner of Shanghai Ronly & Tenwen Partners

Wang Chenxi, assistant lawyer of Shanghai Ronly & Tenwen Partners

Chinese law establishes two concepts of equity and creditor’s rights. They are subject to different legal rules under the Civil Code and the Company Law, and also have different legal status and obvious distinctions and clear legal boundaries. The division of equity and creditor’s rights constitutes the basis of a company’s financing and governance structure, and fundamentally affects the value system structure and specific rule design of the capital market legal system. However, with the continuous development of commercial practice in China, equity and creditor’s rights are often mixed in the economic reality of corporate financing, and are often mixed in use. Market entities have gradually formed various new trading models in complex investment and financing activities, such as mezzanine financing, class stocks, graded funds, structured asset plans, asset income rights products, etc. [1]. These new financing models have blurred the boundaries between equity and creditor’s rights, which puts forward new requirements for judicial decisions and commercial supervision.

I. “Explicit equity and real creditor’s rights”: Exploring a new investment model

 “Explicit equity and real creditor’s rights” is not a legislative legal term, but a summary of a new type of investment model in social and commercial activities in judicial practice. In practice, this investment model is for investors to invest in the form of equity, where the requirements of obtainment of fixed income, safe recovery of the forward principal and achievement of investment income are agreed; for financiers, it can solve some financing problems and further expand their equity principal to meet the demand for operating funds, etc. without occupation of the credit line or optimization of the statements. At the same time, it will also increase the hidden liabilities off the balance sheet and face risks such as default and “bankruptcy crisis”.

 The usual operation mode of “explicit equity and real creditor’s rights” is that the investor invests funds in the target company in the form of equity, including increase (payment) of capital contribution and equity transfer, etc., and signs an equity investment Agreement. The investor obtains the identity of a shareholder or an anonymous shareholder based on the relevant equity investment agreement. The parties specifically agreed on three aspects in the investment agreement: first, the investor does not bear equity risks or receive dividends in proportion to the shares, but only obtains fixed, capital-and interest-guaranteed investment income which has nothing to do with the operating result of the target company; second, the investor is only a nominal shareholder during the investment period, and does not act as a shareholder to exercise his rights or participate in the daily operation and resolutions of the enterprise, or even if he participates, he only participates in major affairs and decision-making matters; third, the investor is repurchased by the target company, the original shareholders and their related parties when the agreed period expires or specific conditions are met, or after exit from the target company through specific shareholders’ priority dividends and the performance of the gambling agreement, and obtains fixed investment income. Therefore, there are also views that “explicit equity and real creditor’s rights” is essentially a capital preservation agreement with rigid redemption.

 In the context of the state’s macro-regulation and control of the real estate industry, the “explicit equity and real creditor’s rights” financing model through trust channels has been “favored” by the real estate industry. However, in recent years, market supervision has been strengthened, and “explicit equity and real creditor’s rights” have gradually darkened under strong regulatory pressure. In December 2019, the “Notice for the Filing of Private Equity Investment Funds” issued by the Asset Management Association of China emphasized: “Through the establishment of unconditional rigid repurchases and disguised borrowing (deposit) lending activities, the fund’s income is not linked to the operating performance or income of the invested target.” It does not fall into the scope of the filing of private equity investment funds. Although “explicit equity and real creditor’s rights” is not directly mentioned, the situation described is consistent with the “explicit equity and real creditor’s rights”, which is undoubtedly a ban on “explicit equity and real creditor’s rights”. [2] Previously, the relevant regulatory departments have also issued the Notice on Strengthening the Supervision of the Real Estate and Securities Business of Trust Companies. It is strictly prohibited to indirectly issue real estate loans by means of additional repurchase commitments for investment, or issue liquidity loans in disguise by means of additional repurchase commitments for the purchase of assets of real estate development enterprises. In response to trust companies, the regulatory department issued the Notice on Regulating Banking and Credit Business, which refers to behaviors such as circumvention of supervision and idling of funds. In the context of risk prevention, relevant regulatory requirements may be further increased in the future.

 Under the layers of resistance from financial supervision, “explicit equity and real creditor’s rights” also faces multiple dilemmas in judicial decisions. In judicial practice, there are different perceptions of its legality, nature and effectiveness of the contract, without clear judgment standards. There have been judgments which recognized it as “equity”, as well as judgments which recognized it as “creditor’s rights”. Further discussion is needed on the criteria for determining whether “explicit equity and real creditor’s rights” belongs to “equity” or “creditor’s rights”, and the choice of judgment methods such as penetrating exploration of the true intentions of the parties, or the protection of commercial appearance doctrine. It is necessary to carry out further research and discussion of correction understanding and risk avoidance in both academia and practice in the practice of investment and financing.

II. “Explicit equity and real creditor’s rights”: an investigation of judicial practice

 After examination of many judicial cases, the focus of “explicit equity and real creditor’s rights” mainly lies in the identification of the nature of the investment relationship. In judicial practice, the considerations of the nature of “equity” and “creditors’ rights” includes the external and internal nature of the case, the authenticity and rationality of the meaning of the agreement, the actual performance of the agreement, the reciprocity of rights and obligations, and so on. In addition, some courts have not determined the nature of the investment relationship, and only deal with it in accordance with the rights and obligations agreed by the parties. On the basis of current judicial cases, the author explores the rules for the determination of “equity” and “creditor’s right” in the judicial decision of “explicit equity and real creditor’s rights”.

(I) External interests are superior to internal agreements

 Although “explicit equity and real creditor’s rights” under normal circumstances is a legal dispute between the investor and the financier, when the court hears an investment and financing case of “explicit equity and real creditor’s rights”, it will first examine whether the disputed contract between the two parties involves external legal relations such as the legitimate rights and interests of an external third party. This kind of externality often occurs in bankruptcy. Because the “Explicit equity and real creditor’s rights” model is usually an internal agreement of the relevant parties, the creditors are not aware of it. Based on the principle of protection of reliance interest and maintenance of legal and reasonable external interests, the contract involved in the case is often identified as equity investment.

 For example, in a dispute between a trust company (hereinafter referred to as “the trust company”) and a Huzhou real estate company. in Huzhou (hereinafter referred to as “the real estate company”) over the confirmation of bankruptcy claims [3], the court pointed out that “the agreement on the actual debt of the named shares cannot be used against a third party in the external relationship. It is not a bankruptcy claim. On the issue of the actual shareholders, it is necessary to distinguish between internal and external relations. Disputes over equity rights and interests arising from internal relations can be subject to the agreement between the parties, or the named shareholders, or the explicit equity and real creditor’s rights; but the internal agreement does not apply to external relations. After shareholders contribute the capital and obtain shareholder qualifications, they should no longer enjoy the bankruptcy claims of the bankrupt enterprise.” The court adhered to the commercial appearance doctrine and believed that the case involved bankruptcy proceedings and should tend to protect the interests of third parties. Therefore, it determined that the investment of the real estate company was an equity transfer payment, which was inferior to the general creditor’s right to be compensated.

(II) Factual identification elements of investment with equity or creditor’s rights

 If “explicit equity and real creditor’s rights” does not involve external interests but only internal interests between the parties, the court will investigate it in combination with a variety of factors. The determination of equity investment mainly considers whether they receive fixed income returns were received, whether they participate in the actual operation of the company, whether the equity transfer price is reasonable, whether they complete the registration of equity changes, and the terms of equity repurchase. The determination of the creditor’s right relationship is more complicated. The court will explore the hidden creditor’s right and debt agreement of the parties through various aspects of analysis, including whether the agreement is in the form of equity transaction or the structure of the creditor’s right, the confirmation of the nature of the investment payment, whether there is a guarantee measure, the negotiation process of the contract and other basic legal relationships, and comprehensively interpret the information in the financing transaction contract to prevent generalization only through partial interpretation, and apply overall thinking to investigate transaction motives and contract arrangements.

 In short, the determination of legal relations is based on true meaning of the parties, and they are distinguished based on the background, purpose, transaction model and performance of the agreement.

 What are the considerations for determining investment with equity or creditor’s rights? The author expounds the following main points of view.

1.Whether fixed income return is obtained

 The basic attribute of equity investment is the sharing of interests and risk sharing between the two parties in investment and financing. This is also the main principle of the court’s determination of “explicit equity and real creditor’s rights”. To meet this principle, the two parties can agree on certain investment and financing methods through autonomy of meaning, as long as it does not violate the principle of sharing the risk and liabilities of equity investment. Furthermore, there is no meaning of creditor’s rights, and the court’s characterization of such investment relationships in the event of disputes is also relatively clear. In practice, there are many ways to obtain equity, including investment in shares, capital increase in shares, equity transfer, equity holding, etc. The exit mechanism also includes third-party repurchase, target company repurchase, shareholder repurchase, equity transfer, capital reduction and exit. However, these methods have little effect on investment, and the court also recognized various capital increase and repurchase methods of equity investment. For example, the court once stated in the case that “investing in the target company by increasing capital into shares, exit year by year, and repurchasing mechanisms is a common trading model for financial investors, which is in line with business practices, and is not a unique model of real creditor’s right. They participated in the company’s operations to a certain extent, but the fixed income is much lower than the general borrowing interest.” [4]

 Because equity investment is risky and cannot guarantee fixed income, courts often consider whether there is agreement on terms for repurchase of fixed income, or signing of other terms to protect fixed income. If the court finds that the purpose of the investment is not to obtain fixed income, but to distribute the income conditionally in accordance with operating performance or other agreements, it tends to recognize it as a general equity investment. As in the practical case, the court once stated that “the equity repurchase of explicit equity and real creditor’s rights is not linked to performance. The compulsory repurchase clause is not unconditionally applied in this case. Therefore, it does not meet the constituent elements of explicit equity and real creditor’s rights.” [5] As another example, an investor has signed an agreement to agree on performance indicators, compensation for failure to meet performance indicators, and performance rewards. The court held that such performance clauses are not obviously unreasonable; the rights and responsibilities are equal; whether the repurchase obligation should be fulfilled is also contingent; and that fixed income is not always available regardless of the performance of the invested party. Since it does not meet the characteristics of borrowing, it should not be considered to be a “explicit equity and real creditor’s rights” [6]

 In addition, whether to go through the procedures for the transfer of equity is also an important related factor in determining the rights of shareholders. If an equity transfer agreement is signed but the equity transfer procedures have not been carried out, there will be increased possibility of being recognized as an actual debt investment. As in the practical case, although the two parties signed the Investment Agreement and agreed to invest in shares, they do not go through the procedures for changing the equity after the investment or participate in daily production and operation. Therefore, it was determined that the purpose of the plaintiff’s investment is not to obtain equity but to collect a fixed income every year according to the amount of the investment, that is, the “capital occupation fee”. Although the name of the income obtained is “capital occupation fee”, it is actually “interest” in nature. Therefore, the plaintiff’s investment behavior is nominally shares. He/she has not gone through the procedures for changing of the equity but collect fixed income every year, which does not violate the mandatory regulations of private lending. In fact, it is a debt investment.[7]

2. Whether there is participation in the company’s operation

 In the legal relationship of equity investment, investors who intend to obtain equity in the company often agree on their right to operate and manage the company in relevant contracts. After the registration as shareholders, they often actually participate in the company’s operation and management, such as retaining the right to vote on major matters at the shareholders’ meeting and the board of directors, dispatching directors and financial personnel to the company, and controlling the project company’s official seal or financial seal. When the court hears the case, it will consider whether the investing shareholders exercise the right to operate and manage in the true sense from the facts, so as to judge the true purpose of the investor’s capital contribution and the conclusion of the contract. If the court comprehensively determines that the investor acquires the equity of the company and participates in the operation and management based on the investor’s investment purpose, actual rights and obligations of the parties and other factors, it shall be recognized as an equity investment.

 From the perspective of the details of the case, take a case Shanghai Financial Court for example, in determining whether the parties participate in the company’s decision-making, according to the parties’ Share Transfer Agreement, the investing shareholders shall be consistent with the invested company when exercising shareholders’ voting rights on major matters related to the company’s mergers and acquisitions, restructuring, business development, etc., and shall obtain the consent of the invested company before submitting proposals to the shareholders’ meeting and the board of directors on major matters related to the company’s mergers and acquisitions, restructuring, and business development. However, in this case, the investor did not fulfill the obligations as a shareholder as agreed. It can be seen that he did not actually participate in the company’s business decision-making. It can also be confirmed that the two entered into a “Share Transfer Agreement”, and its true intention is not to actually transfer the equity of the target company.” [8] Of course, whether the parties participate in the actual operation of the company is not enough for the court to determine the character of the case. In this case, the court also combined multiple considerations such as the transfer amount and the registration of changes. It can be said that whether the parties participate in the operation is often used as corroborative evidence, not a decisive factor.

 However, it should also be noted that for ensuring the realization of the repurchase clause and the safety of the investment, the investor will also attach an agreement on the control of the company in addition to the investment contract, including voting right on certain major matters, and the right to supervise, etc., However, such an agreement is not enough to be recognized by the court as a powerful element of equity investment. The actual operation and management also need to be considered in combination with the type of investors, investment tendency, investment ratio, and the corresponding degree of involvement in the company’s operation and management. For example, in judicial practice, there are cases where, although a certain form of shareholder decision-making power is agreed but the parties transfer the equity, without clarifying the total investment, proportion of capital contribution, rights and obligations. In actual operation, they do not participate in operation and management, and the income received was not linked to the project’s profit and loss. Then, the court can combine the above elements in order to have sufficient and conclusive reasons to recognize it as an investment with creditor’s right. [9]

3. How to agree on the conditions for equity repurchase

 Equity repurchase is also an important element for the realization of the investment with “explicit equity and real creditor’s rights. In defining the nature of “explicit equity and real creditor’s rights”, the court explored the intent of equity transactions by examining the arrangements of equity repurchase terms in different transaction contexts. Common repurchase methods include equity repurchase, target company repurchase, third-party repurchase, etc. Generally speaking, the single factor of the repurchase method is not enough to affect the definition of the nature. The special circumstance is the repurchase clause in the context of investment gambling. The repurchase of gambling agreements is often triggered by the investor’s operating performance or uncertain major events. Like other compensation mechanisms in gambling agreements, it is only a means of passive protection of investors’ own interests, not the pursuit of goals. It is uncertain as to whether and when it will be triggered, which carries greater risks. Under such a transaction arrangement, the true intention of the investor to sign the agreement is actually to obtain the equity of the target company whose performance is up to standard. Therefore, in judicial practice, the relevant agreements in the case of “explicit equity and real creditor’s rights” with gambling clauses as a condition for repurchase will generally be identified by the court as equity investment.

 In addition to the above-mentioned gambling agreements, there are also agreements involving year-by-year withdrawals and repurchases, which are not easily recognized as “explicit equity and real creditor’s rights.”

 For example, in the A Fund Company Limited v. B Capital Management Company Limite and a District People’s Government in Hanzhong City over the equity transfer dispute [10], the repurchase terms agreed by the parties are: ...; Party A’s investment income cannot be recovered in full on time for two consecutive quarters or three consecutive quarters (Remarks by the author: The term of investment is ten years); other situations that may have a significant adverse impact on Party A’s rights and interests. The court held: “The repurchase clause is an internal agreement between shareholders and between shareholders and the target company on the sharing of investment income and risk, and it does not affect the purpose of the transaction and the investment model.”

 The main points of the judgment of this case as the 21st Reference Case of the Sixth Circuit Court of the Supreme People’s Court 2019” are: “The determination of the nature of a company’s financing contract should be combined with the transaction background, purpose, model, contract terms and performance. The investment of funds into the target company through capital increase, year-by-year exit and repurchase mechanism is its general trading model of financial investor and is in line with business practices. he relevant clause in this case is an internal agreement between shareholders on investment risks and benefits. n determining the validity of the contract, the autonomy of the parties concerned should be respected; and industry supervision regulations should be correctly identified; the reasons for the invalidity of the contract should be strictly grasped; and the validity of the contract should not be easily denied.”

4. Other expressions of meaning regarding the handling of the creditor’s rights and debts

 In hearing cases involving “explicit equity and real creditor’s rights”, the court will strictly hear the transfer price of equity, the amount of investment funds, the term of use, and the agreed interest rate, etc., and often explore the meaning of the effect pursued by the parties through the relevant price terms, thereby finally determining the nature of the of the legal relationship.

For example, in the case of A Fund Company Limited (hereinafter referred to as “Company A”) v. B Capital Management Company Limited (hereinafter referred to as “Company B”) and a District People’s Government in Hanzhong City over the equity transfer dispute [11], the agreement stipulates that Company A will increase its capital in cash with an investment period of 10 years and an annual return on investment of 1.2%. The court heard that: “Since the fixed income agreed in the agreement is only 1.2% per year, which is much lower than the general borrowing interest, the purpose is obviously not to obtain interest through lending.” 

 For another example, in the case of Yancheng C Real Estate Company Limited v. Beijing D Capital Holdings Company Limited over equity transfer dispute [12], the agreement stipulates that the calculation method of the purchase price is: the purchase price =130 million yuan× {1+11.8%× (paid-in days/365)}; the paid-in days are calculated from the date of the capital contribution by the investor until the date when the purchaser actually pays the purchase price. The transferor of the Equity Transfer Agreement, is obliged to repurchase the subject matter of the agreement at a fixed price after a certain period of time has passed in the repurchase transaction, but the company has not choice as to whether to repurchase it. What’s more, repurchase price will not take into account the operating status of the target company, but is fixed at an annual return of 11.8%. Therefore, judging from the meaning of the effect pursued by the parties, Henan E Building Materials Company Limited was pursuing to obtain financing funds, while Beijing F Fund Management Company Limited was pursuing o obtain a fixed return on principal and interest, which is in line with the characteristics of the loan relationship.

 The transfer price of equity is also one of the basis for the court to judge the nature of the investment. For example, in the case of G Trust Company Limited (hereinafter referred to as “Company G”) v. Zhucheng H Real Estate Development Company Limited (hereinafter referred to as “Company H”) over the financial borrowing contract dispute [13], the court found that the substance of the Cooperation Agreement and the Income Right Transfer Contract signed between Company G and Company H were both loan contracts. One of the reasons is that the Cooperation Agreement stipulates that Company G “transfers 90% of the equity held by the original shareholders of Company H with 1 yuan”, which is obviously inconsistent with the actual market value of the equity and is also inconsistent with common sense. In addition, the two parties agreed to repay all the principal of the repurchase of income rights of Xinhua Trust Company of 109 million yuan and the repurchase premium at the standard of 24%/year on the day of the expiration of 12-month period. Therefore, the two parties were actually in a loan contract relationship, and the “repurchase of income rights” agreed in the contract between the two parties was actually the principal of the loan; the agreement to “pay the repurchase premium at the standard of 24%/year” was actually the calculation standard for interest during the agreed loan period. Therefore, after judging the borrowing and interest rates of the equity transfer price, repurchase etc. agreed in the agreement, the judge in this case determined that contract was essentially a loan contract under the meaning of the creditor’s rights of both parties despite the repurchase clauses.

(III) Handling as per the agreement without recognition of the nature of the equity or creditor’s rights

 In trial practice, some courts have also blurred the nature of the equity or creditor’s rights, and do not define the nature of equity financing or creditor’s rights financing between the parties. Instead, they proceed directly from definition of the legality of the underlying contract. If the contract does not violate the mandatory provisions of laws and administrative regulations, and the signing of the contract by both parties is a true expression of meaning, it is determined that the contract is established legally and effectively, binding on both parties, and the repurchase obligor in the contract shall also repurchase the equity in accordance with the agreement.

 For example, in the appeal case of Beijing I Real Estate Development Company Limited (hereinafter referred to as “Company I”) v. J Trust Company Limited (hereinafter referred to as “Company J”) over contract dispute [14], a trust was used to increase the share capital, and the expected annualized rate of return on the exit date was agreed. The financier or its designated third party shall pay the price for the transfer of trust beneficiary right as per a specific calculation method, which is a more typical “explicit equity and real creditor’s rights” financing. The court did not determine the nature of the agreement, but stated: “The Cooperation Agreement and other related agreements signed between the parties in this case have a true meaning and the content does not violate the prohibitive provisions of laws and regulations. The original trial found that it was a valid contract and the applicable law was correct.” After that, Company J fulfilled its contractual obligations such as investment and transfer of equity in accordance with the contract. However, after the expiration of the contract, the financier failed to repurchase the equity and return the financing funds and proceeds in accordance with the agreement. The court found that it constituted a breach of contract and ruled it to make up the price in accordance with the contractual agreement.

 This approach abandons the theoretical limitations of the division of equity and creditor’s rights, and there are mixed reviews in the academic community. Some scholars believe that in terms of current legal practice, such judge’s proactive abandonment of discretion on the complex transaction patterns, legal relationships, and interest entanglements is suspected of slack” [15]. However, some scholars believe that this handling is flexible and pragmatic. If there is no circumstances of invalidity or involvement of the interests of a third party, it can be handled directly in accordance with the contract agreement without focusing on the nature of the contract. [16] The author believes that under the influence of financial innovation, it is increasingly difficult to distinguish equity and creditor’s rights, and the trend of integration of equity and creditor’s rights is also more obvious. With the reform of Company Law and the progress of judicial trials in the future, courts can gradually explore new trial ideas in a timely manner, and integrate the equity and creditor’s right to adapt to the development and change of investment and financing, thereby promoting the enterprises’ financing innovation ability. 

III. “Explicit equity and real creditor’s rights”: the impact of regulatory trend on judicial trials

(I) “Penetrating” trials during the period of strict supervision

 Through the observation of the judicial practice and regulatory policies of “Explicit equity and real creditor’s rights”, it is found that there is a certain “dynamic balance” between them in different periods. During the period of strict supervision, financial supervision policies have been tightened. As the judicial trials in the financial field was affected by policy orientation, the review of financial legal relations is stricter to ensure the realization of the goals of financial supervision rules. This kind of rigor is reflected in the court’s trial process. It will “see through the appearance to perceive the essence”. When there is a dispute over the legal characterization of “explicit equity and real creditor’s rights”, it breaks through the apparent legal relationship. The focus of the court’s review is to “penetrate” into the true purpose of the parties in signing the investment agreement.

 At the Ninth National Work Conference on Civil and Commercial Trial held in July 2019, it was proposed that in order to ensure the unity of the judgment scale, a unified judgment scale and correct judgment thinking should be established. The true transaction purpose of the parties should be explored on the basis of accurate revealment of the transaction model, and the nature and effectiveness of the transaction should be determined based on the true relationship between rights and obligations. This reflects the penetrating thinking in judicial trials. [17] In November 2019, in the “Minutes of the 5th Meeting of Judges of the Second Civil Trial Division of the Supreme People’s Court”, it was pointed out that there was no unified transaction model for “explicit equity and real creditor’s rights”. In practice, its nature is comprehensively determined based on the investment purpose of the parties, the actual rights and obligations relationship and other elements. [18] This point is also often cited by courts as the basis for the trial of cases. It was also right during this period that the court began to characterize equity financing cases with the nature of creditor’s right financing as “explicit equity and real creditor’s rights”, that is, the “financing where equity is actually the creditor’s rights.”

 It can be seen that the current judicial thinking of “explicit equity and real creditor’s rights” is still dominated by “penetrating trials”, even with a stricter trend. Although there are cases that explore non-distinguishment between equity and creditor’s rights and respect the autonomy and their contractual arrangements when the contract is valid, they have not become an agreed practice reached by the courts, and it has even been questioned in the academic community. [19] In the context of the tightening of the financial sector and strong supervision, the courts cannot ignore the interaction between justice and policy. They cannot be too cautious in striking a delicate balance between judicial independence and modesty.

(II) Judicial exploration in the period of weak supervision

 In the period of weak supervision and the context of loose financial supervision policies, the courts also have a higher degree of independence and autonomy in financial trials. They pay attention to the protection of legal autonomy and commercial appearance, and judge the nature of legal relations through the content and appearance of registration and publicity. At present, the academic community has mostly called for the protection of autonomy of meaning. For the financing such as “explicit equity and real creditor’s rights”, the investigation of factors such as the expression of the meaning of the contract, the performance behavior, and the overall structure and purpose of the transaction should be abandoned. There are also viewpoints that with the diversity of corporate financing transactions, courts should fully recognize the flexibility and diversity of commercial transactions in hearing disputes over corporate financing contracts, respect the financing arrangements and interest choices of commercial entities, and explore the true meaning of the parties to conclude the financing contract on the basis of ascertainment of objective transaction facts. “We should avoid the preconceived mindset of “explicit...real...” on financing contracts” [20], but uphold an attitude toward the principle of substance over form and follow the contract itself to explain the agreement of the parties. At the same time, it is necessary to comprehensively interpret the information of the contract in the financing transaction, and use overall thinking to investigate the transaction motivation and contractual arrangements, so as to prevent overgeneralization due to mere partial explanations.

 The academic community calls for a clear boundary between justice and supervision. They perform their respective duties. Judicial decisions in public policy services must be fully and rigorously demonstrated.  Based on respect for the principles of freedom of contract and autonomy of will in the civil law, it is necessary to maintain legal stability and predictability of judicial decisions. Judicial trials should not always follow in the footsteps of regulatory policies, or be used without restrictions on various financial regulatory policies. In particular, highly short-term, mandatory and mobile financial supervision and law enforcement policies are available today [21], together with a large number of industry association norms, exchange rules, regulatory agency window guidance and other policies that have emerged and operated in the form of non-national formal legal norms. At the time of the rise of innovative financial transactions, the court should respect them and give them the status of legal autonomy, provided they do not harm the interests of third parties and the public interests of the country.

V. Conclusion

In the context of the current tightening of regulatory policies and unclear legal status, various hybrid investments between equity investment and creditor’s right investment carry certain risks. When an investment agreement cannot be realized and is brought to the court, there will be various uncertain risks such as difficulty in claiming principal and interest, failure to obtain expected returns, as well as repurchase subject risks, product risks, and credit risks within the industry, regardless of whether equity or creditor’s rights are recognized. Therefore, in making such investments, in order to prevent risks, attention should be paid to the following: first, one should carefully select projects and transaction objects, carry out full due diligence in advance, and examine the sustainability of own operations and the strength of available external support from the economic value and social value etc. of the project; second, in the negotiation stage, it is necessary to clarify as much as possible the various ways to realize future debt claims, improve the comprehensiveness and rigor of debtor-creditor relationship or income realization methods, and agree in advance on the terms of rights and interests claims and their realization under the litigation or arbitration path. All in all, all entities should effectively fulfill their obligations, and choose investment methods carefully to avoid unfavorable situations such as the inability to realize repurchases due to the illegality of contractual agreements.

[1] Li Anan: The Integration of Stocks and Bonds: An Explanatory Framework for the Comprehensive Reform of Corporate Law, Global Law Review, Issue 4, 2019.

[2] Asset Management Association of China, Instructions for the Filing of Private Equity Investment Funds (December 23, 2019).

[3] The People’s Court of Wuxing District, Huzhou, Zhejiang (2016) Z 0502 MC No. 1671 Civil Judgment.

[4] No. 355 Civil Judgment of the Supreme People’s Court (2019).

[5] Jiangxi Provincial Higher People’s Court (2019) GMZ No. 677 Final Civil Judgment

[6] The People’s Court of Chaoyang District, Beijing (2018) J 0105 MC No. 45527 Civil Judgment

[7] The Intermediate People’s Court of Hengshui, Hebei (2019) J 11 MC No. 60 Civil Judgment.

[8] Shanghai Financial Court (2021) H 74 No. 133 Civil Judgment.

[9] The People’s Court of Chengdu High-tech Industrial Development Zone, Sichuan (2019) C 0191 MC No. 8104 Civil Judgment.

[10] The Supreme People’s Court (2019) No. 355 Civil Judgment.

[11] The Supreme People’s Court (2019) No. 355 Civil Judgment.

[12] The Beijing Higher People’s Court (2021) JMZ No. 499 Civil Judgment.

[13] Chongqing Higher People’s Court (2014) YGFMCZ No. 00010 Civil Judgment.

[14] The Supreme People’s Court (2014) MEZZ No. 261 Civil Judgment

[15] Huang Weiping, Cheng Zhuo Ling. Judicial Review of Explicit Shares and Real Debts: Reflection on Standard Selection and Logic of Judgment, Securities Law Review, Issue 32, Pp. 288-312.

[16] Chen Ming. Equity Financing or Explicit Shares and Real Debts: Determination of the Nature of a Company’s Financing Contract—A Case Study of Agricultural Development Corporation v. Tonglian Corporation Equity Transfer Dispute, Journal of Law Application, Issue 16, 2020.

[17] The Minutes of the National Court’s Work Meeting on Civil and Commercial Trial issued in November 2019: The meeting pointed out that in the civil and commercial trial, it is necessary to establish correct trial concept, pay attention to establishing the basic thinking of the right of claim, the thinking of consistent logic and value, and the thinking of the same case with the same judgment, and unify the judgment scale through search of similar cases, reference and guidance cases, etc., so as to effectively prevent the abuse of discretion; it is also necessary to pay attention to the relationship between civil and commercial trials and administrative supervision, and find out the true meaning of the parties and explore the true legal relationship through penetrating trial thinking.

[18] He Xiaorong. Minutes of the Meeting of Judges of the Second Civil Trial Division of the Supreme People’s Court—Pursuing the Jurisprudence behind the Judgment, People’s Court Press, 2018 Edition, p. 61.

[19] Huang Weiping, Cheng Zhuo Ling. Judicial Review of Explicit Shares and Real Debts: Reflection of the Standard Selection and the Logic of Judgment, Securities Law Review. Issue 32, Pp. 288-312.

[20] Li Haochen. On Penetrating Justice in Financial Trials-An Observation Based on Distinguishing “Stocks” and “Bonds” Cases, Law and Economy, 2020 (02).

[21] Chen Qi, Tang Shiya. Research on the Transformation of Mobile Supervision to Information-based Supervision—Review and Outlook based on Special Remedial Actions for Internet Financial Risks, Securities Law Journal, 2017 (22).

 

References

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