Recently, Lawyers Jiang Lu and Sun Lijun of Shanghai Ronly & Tenwen Partners Law Firm own the lawsuit in representing the case of Shanghai Bao Investment Company v. Moumou Industry Group Company and Others over contract disputes. After the acting lawyers’ efforts in in-depth analysis and planning, drafting of documents, and appearing in court to respond to the lawsuit, the 245 million yuan in bond principal and 15.4% overdue interest of more than 100 investors were supported by the court; the relevant representative litigation, assignment guarantee, and equity pledge and other agency opinions were adopted by the court.

Basic Information of the Case

    In 2020, Shanghai Baomou Investment Company signed the Cooperation Framework Agreement on Moumouye** Series Non-public Targeted Bond Financing Instruments with the listed company Shanghai Moumouye Group Company and its 7 subsidiaries or related companies. Under this agreement, it was agreed that the core project company, Mingmou Company of the 7 companies issue targeted Bond Financing instruments in a non-public manner, so as to raise funds of not more than 500 million yuan; Shanghai Baomou Investment Company was entrusted as the manager and underwriters of Bond Financing instruments; At the same time, Shanghai Baomou investment company signed the Entrusted Management Agreement on Moumouye** Series Non-public Targeted Bond Financing Instruments with the product issuer, product filing institutions, and the Shanghai Gold Exchange, and obtained a series of credit enhancement safeguards to ensure the redemption of this non-public targeted Bond Financing instrument; subsequently, Mingmou Company issued 24 issues of products, raising funds of 298 million yuan, and about 100 investors participated in the subscription and fulfilled their payment obligations; after the expiration date of the product, the issuer did not return most of the money, and as of the date of the lawsuit, the total bond principal was about 245 million yuan.

      In early 2022, the two lawyers accepted the commission to act as agents of an Shanghao Baomou Investment Company to file a lawsuit against seven subsidiaries and related companies of the listed company, demanding that they shall bear repayment obligations, liabilities for breach of contract and corresponding guarantee responsibilities.

The Process

      During the preliminary preparation, due to the inconsistent opinions of the more than 100 bondholders, the acting lawyer reviewed all the signed materials and dozens of non-litigation texts of the Bond Financing instrument, interpreted and referenced each other based on the correlation between the texts, accurately determined the rights and obligations of the parties, and formulated a litigation plan. Furthermore, Shanghai Baomou Investment Company was recommended to convene a meeting of holders as soon as possible, so that representative litigation could be initiated based on the voting results. After completion of the necessary preparation, the acting lawyer made submissions to the court and communicated for the preservation. Finally, more than 100 properties under the defendant’s name were sealed for the first time, which provided a guarantee for subsequent performance and enforcement.

    In representing the case, the acting lawyer spent hundreds of hours arguing the textual agreement, evidence basis and legal basis of the case, and produced a nearly 30-page outline of the trial, and accurately predicted every possible focus of dispute. And in the outline of the trial, the evidence materials were accurately matched one by one. At the same time, the acting lawyer also prepared a formula table based on the capital contribution time of each bond holders, and calculated interest, overdue interest, liquidated damages, etc. one by one. During this period, the acting lawyer and the entrusted management team also participated in the defendant’s negotiation, settlement, and mediation many times. After multiple rounds of negotiations, they repeatedly revised and produced a number of package settlement agreements. In the end, because other creditors failed to reach a settlement simultaneously, the package settlement agreement could not take effect.

   Since this is a new type of case, the two lawyers led the team to compile laws, regulations, judicial interpretations, and industry normative documents, and conducted a unified compilation of dozens of legal documents for precise reference and validity evaluation. Furthermore, during the litigation, the team continued to pay attention to the issuance of multiple industry operating guidelines, and updated the compilation.

   After more than a year of litigation, the court supported all claims and the lawsuit was won.
 

Some legal issues or focuses of disputes in the case

1.Jurisdiction

     The underlying products were a non-financial corporate Bond Financing instrument filed and issued by relevant institutions. They were a new thing in the inter-bank bond market. The default litigation of this financing instrument was also a new type of case in the Shanghai court system. Should this case be a financial case under the jurisdiction of the Shanghai Financial Court of First instance, or should it be a commercial case under the jurisdiction of the Shanghai First Intermediate People’s Court of first instance? Since the Regulations of the Supreme People’s Court on the Jurisdiction of the Shanghai Financial Court does not clearly stipulate the jurisdiction of such business, and the Implementation Rules of Shanghai Higher People’s Court on the Jurisdiction of the Shanghai Financial Court also does not clearly classify the type of this case within the jurisdiction of the Shanghai Financial Court, there was a big dispute when the case was filed.

  After fully listening to the opinions of the Filing Division of the Shanghai Financial Court, the acting lawyer promptly submitted the litigation materials to the Shanghai No.1 Intermediate People’s Court. Since it is rare for the Shanghai No. 1 Intermediate People’s Court to accept such commercial cases, this case was finally accepted after a meeting and discussion.

2. Status of the trustee and representative litigation

Since this case involved more than 100 investors, and each investor had signed a Subscription Agreement on Non-public Targeted Bond Financing Instruments (hereinafter referred to as “Subscription Agreement”) with the issuer separately, after the default event occurs, they had different thoughts on whether to initiate a lawsuit. Therefore, there is a question of whether to sue separately or by the trustee.

1) Trustee system

    The Business Guidelines for Trustees of Bond Financing Instruments of Non-financial Enterprises in the Interbank Bond Market (Trial Implementation) and the supporting systems issued by the National Association of Financial Market Institutional Investors in 2019 provided the basis for the establishment of the entrusted management system. The documents were issued to protect the legitimate rights and interests of holders of bond financing instruments of non-financial enterprises in the interbank market, while regulating the business of trustees of bond financing instruments.

    The issuer of a bond financing instruments shall hire a trustee for the holders, and sign a management agreement on bond financing instruments which meets the requirements of these Guidelines with successful issuance as the only effective condition before the registration and issuance. The issuer shall also disclose the basic situation of the trustee and the main contents of the entrusted agreement in the issuance documents such as the prospectus of the bond financing instruments and the targeted issuance agreement, and prompt investors in a prominent position that the subscription for or holding of the current bond financing instrument is deemed to have agreed to the entrusted agreement.

    The trustee is generally the lead underwriters of bond financing instruments, a financial asset management company with financial licenses, a trust company that have obtained the business qualifications of bond financing instrument underwriter, a law firms with experience in bond financing instrument business, and other professional institutions. The main responsibilities of the trustee include, but are not limited to, managing and disposing of collateral, participating in debt restructuring on behalf of the holder, applying for property preservation on behalf of the holders, initiating litigation or arbitration, participating in bankruptcy proceedings on behalf of the holders, and other duties agreed in the entrusted agreement.

    The revised Securities Law 2019 officially introduced the “bond trustee” system, which was born in the same year as the trustee system for non-financial corporate bond financing instruments in the inter-bank bond market. The trustee system was formally established at the legal level for the first time and attracted widespread attention. In 2020, the Supreme People’s Court issued the Minutes of the National Court Symposium on Hearing Bond Dispute Cases to consolidate the implementation of requirements of the trustee system, clarifying the basic principles of case handling, the acceptance of cases for the determination of the qualifications of litigation subjects, management and litigation methods, special provisions on the protection of the rights of bondholders, the civil liabilities of the issuer, the responsibilities of other responsible entities, the responsibilities of the issuer’s bankruptcy administrator, etc.

     However, further improvement are still needs for some conflicts of interest in the trustee system. For example, if the trustee is also an underwriting company, whether it can make full disclosure and be diligent and responsible to investors. What’s more, related preventive mechanisms need to be standardized, and the connection, authorization, and restraint of meetings between the trustee and bondholders need to be further regulated in detail.

    Due to the rapid development of China’s capital market and the continuous emergence of various innovative products, there is a certain lag in legal regulations and cases. The lawyers are expected to jointly promote the improvement of supporting mechanisms, the introduction and application of laws, etc.

2) Litigation on behalf of the trustee

      Without the consent votes of all holders, whether the trustee can sue on behalf of more than 100 investors has become one of the focuses of controversy in both the filing court and the trial court of this case.

    Litigation on behalf of the trustee is also stipulated and advocated by legal documents. According to the relevant provisions of the “Minutes of the National Court Symposium on Hearing Bond Dispute Cases: “The meeting believes that the interests of holders of bonds issued during the same period are highly homogenized and often involve a large number of people. The use of joint litigation can effectively reduce the bondholders’ costs in safeguarding their rights, and maximize the rights and interests of bondholders; and is also conducive to improving the handling efficiency, saving judicial resources, and realizing the litigation economy. During the trial of a case, the people’s court shall, in accordance with the agreement of the parties or the resolution of the bondholders’ meeting, recognize the legal status of the bond trustee or the representative selected by the bondholders’ meeting, and fully guarantee that the trustee and litigation representative perform the functions of uniformly exercising the right of litigation. For cases of disputes of bond contract default, the principle of centralized prosecution by the bond trustee or the representative selected by the bondholder meeting shall be used in principle, supplemented by individual prosecutions by bondholders” Therefore, in order to save judicial resources and properly safeguard the interests of bondholders, centralized litigation on behalf of the holders is advocated by the law.

    Moreover, the Part II of the “Minutes of the Symposium of National Courts in Hearing Bond Dispute Cases” also makes it clear: “When the bond issuer is unable to repay the principal and interest as promised or if there is a default as agreed in the bond raising documents, the trustee shall, in accordance with the bond raising documents, the bond entrustment agreement, or the authorization of the bond holders’ meeting, file or participate in civil litigation on behalf of the bond holders, or apply for the issuer’s bankruptcy reorganization or bankruptcy liquidation, and the people’s court shall accept it in accordance with the law.” Therefore, the trustee still needs to combine with the bond raising documents, the agreement of the bond entrustment agreement, or the authorization of the bond holders’ meeting in filing a lawsuit. The trustee does not have such right naturally, but is subject to the dual statutory and contractual constraints.

    In this case, both the subscription agreement and the Trustee Agreement agreed that the trustee will take legal remedies to recover the outstanding principal and interest of the products in accordance with the resolution of the holders’ meeting. Therefore, in the end, according to the resolution of the holders’ meeting, a representative lawsuit was initiated.

3. Assignment guarantee

  In addition, part of the underlying equity was guaranteed by transfer. However, the text did not specify how to deal with it once there was defaults. The court held that there was uncertainty in the agreement, and it was necessary for the party claiming the security right to provide evidence or explain that the claimant had the right to receive compensation first.

      The acting lawyer believed that even if there was no agreed treatment method for the assignment guarantee, the priority to compensation should be given after auction or sale by reference to mortgage guarantee.

     Assignment guarantee is one of the typical guarantees. Even if the handling method is not agreed, in fact, both parties to the contract know the meaning behind it and the consequences that will be brought about. Furthermore, according to Argumentum a fortiori, the guarantee of the both mortgage and pledge involves priority auction compensation, not to mention the transfer of property rights. The guarantee method is more conducive to the interests of the guarantor.

Moreover, according to the interpretation of the key provisions regarding non-typical guarantees and its supplementary provisions in the Judicial Interpretation, Understanding and Application of the Guarantee System of the Civil Code of the Supreme People’s Court: V. Regarding the assignment guarantee, although the Civil Code does not clearly provide for assignment guarantee, the amendments to the pledge and fluidity clauses in Articles 401 and 428 are sufficient to produce the institutional effect of assignment guarantee. In China’s judicial practice, the form of guarantee should not be simply deemed invalid, especially the guarantee contract should not be deemed invalid in accordance with the prohibitions on transfer or fluidity. Even if the contract does not specify a specific liquidation method when the debt cannot be paid off, the court may also determine the creditor’s priority right to compensation for the corresponding subject matter based on the provisions of Articles 401 and 428 of the Civil Code.”

   Therefore, the agreement on the assignment guarantee and the actual registration of rights mean that the parties know or should know the meaning and legal responsibility behind it, and the guarantee method is more conducive to the interests of the guarantor.

 

Significance of the Case

This case involved debt financing instrument system of non-financial enterprises and the newly established debt financing instrument since the standardization of the trustee system. It is cutting-edge and innovative, and encounters a dilemma of failed redemption after expiration. Finally, it entered the litigation jurisdiction of the Shanghai court system as a new type of case. This case is representative and typical from the preparation of the pre-litigation meeting to the filing of the case, consultation, application of the law and liability. The full amount of assets was sealed without delay in this case, and the lawyer participated in the negotiations with debtors. The subsequent asset disposal is still in the process. The full victory of the case, the full support of interest, and the effective undertaking of the guarantee provide a strong guarantee for further enforcement