——Sichuan Hongda Co., Ltd. vs. China Banking and Insurance Regulatory Commission and China Banking and Insurance Regulatory Commission Sichuan Office on Administrative Compulsory Measures and Administrative Reconsideration
[Principle of Adjudication]
Where a shareholder of a trust company misappropriates trust funds, fails to cooperate with financial regulatory authorities in risk disposal and causes the trust company to violate prudent operation rules, and refuses to make rectification, the financial regulatory authority shall have the power pursuant to law to take measures to restrict the rights of the trust company’s shareholder (including non-controlling shareholder) to participate in company operation and management. The aforesaid restrictive measures are temporary control aimed at preventing further risk expansion of the trust company. They are within the scope of administrative compulsory measures rather than administrative penalties, and therefore should be enforced in accordance with the procedures specified in the Administrative Compulsion Law.
[Implications]
This is the first case in which an administrative lawsuit was filed after a financial regulatory authority took compulsory measures to restrict the rights of a shareholder of a trust company. This case clarifies that where either a controlling or non-controlling shareholder of a trust company misappropriates the funds of the company and causes the trust company to violate prudent operation rules, and refuses to make rectification, the financial regulatory authority may take compulsory measures to restrict the rights of the shareholder. Meanwhile, it is made clear that such acts fall within the scope of administrative compulsory measures in nature, and the procedural provisions for administrative penalties shall not apply. This case is of great significance in supporting financial regulatory authorities to take measures to prevent financial risks and avoid systematic risks.
[Basic Facts]
On December 31, 2019, the China Banking and Insurance Regulatory Commission Sichuan Office (hereinafter referred to as the “CBIRC Sichuan Office”) issued a Financial Regulatory Opinion (Chuan Yin Bao Jian Guan [2019] No.14) to the Sichuan Trust Co., Ltd. (hereinafter referred to as the “Sichuan Trust”) to notify Sichuan Trust of main problems detected and regulatory opinions.
On July 8, 2020, the CBIRC Sichuan Office issued a Financial Regulatory Opinion (Chuan Yin Bao Jian Guan [2020] No.20) to Sichuan Trust to notify Sichuan Trust of the main problems detected and regulatory opinions.
On December 22, 2020, the CBIRC Sichuan Office issued a Decision on Regulatory Compulsory Measures (Chuan Yin Bao Jian Qiang Zi [2020] No.5) (hereinafter referred to as the “Decision against which the lawsuit is filed”) to Sichuan Hongda Co., Ltd. (hereinafter referred to as “Hongda”). The decision writes: “Since 2019, we’ve requested Sichuan Trust to practically assume its responsibilities in risk prevention and control, and to effectively prevent and resolve risks. We issued financial regulatory opinions and conducted regulatory interviews, raised the issue that the trust project funds of the Sichuan Trust were misappropriated by its shareholder Hongda and affiliates, and requested rectification within a specified time limit. However, Sichuan Trust and your company refused to make rectification, and failed to cooperate with our Office in risk disposal. The relevant acts of the Sichuan Trust have seriously violated prudent operation rules. In accordance with Item (11) of Article 66 of the Interim Measures for the Equity Management of Trust Companies and Item (4), Paragraph 1 of Article 37 of the Law of the People’s Republic of China on Banking Regulation and Supervision, it is hereby decided to take the following compulsory measures for prudential regulation: restricting your relevant rights in participating in the operation and management of Sichuan Trust, including the right to request the convening of a general shareholders’ meeting, right to vote, right to nominate, right to make a proposal, right of disposal, etc. This Decision shall come into effect as of the date of delivery... You shall submit a rectification report to our Office after the rectification has been made. We will, based on the results of the acceptance inspection, decide whether to lift the compulsory measures for prudential regulation or take further regulatory measures. This Decision remains effective until the Decision on Lifting Regulatory Compulsory Measures issued by our Office is received.” Hongda disagreed with the Decision against which the lawsuit is filed and applied to the China Banking and Insurance Regulatory Commission (hereinafter referred to as the “CBIRC”) for reconsideration. On April 1, 2021, the CBIRC issued the Decision on Administrative Reconsideration (Yin Bao Jian Xing Fu Jue Zi [2021] No.117) (hereinafter referred to as the “Reconsideration Decision against which the lawsuit is filed”) to uphold the sued Decision made by the CBIRC Sichuan Office.
Hongda refused to accept the Decision and Reconsideration Decision against which the lawsuit is filed, and filed an administrative lawsuit with the Primary People’s Court of Xicheng District of Beijing Municipality, requesting to revoke the Decision and Reconsideration Decision against which the lawsuit is filed. The Primary People’s Court of Xicheng District of Beijing Municipality made the first-instance judgment on October 22, 2021, rejecting the litigation claims of Hongda. Hongda refused to accept the first-instance judgment and appealed to the Beijing Financial Court. The Beijing Financial Court made the second-instance judgment on March 17, 2022, dismissing the appeal and affirming the first-instance judgment.
[Judge Comments]
The Beijing Financial Court is responsible for hearing two types of cases that shall be under the jurisdiction of Beijing’s intermediate people’s courts: first, first-instance financial cases filed against administrative actions taken by the People’s Bank of China, the China Banking and Insurance Regulatory Commission, the China Securities Regulatory Commission and the State Administration of Foreign Exchange and other state financial administrative authorities, other departments of the State Council and organizations authorized by laws, regulations and rules due to the exercise of their financial regulatory functions; second, appeals against the judgments or rulings on financial administrative cases rendered by the primary people’s courts of Beijing Municipality. In hearing such cases, on the one hand, administrative acts of financial regulatory authorities shall be supervised in accordance with the law; on the other hand, financial regulatory authorities shall be supported in their efforts to prevent and resolve financial risks. In this case, I determined, in accordance with the Administrative Compulsion Law, the Law on Banking Regulation and Supervision and other laws, that if a shareholder of a trust company misappropriates the trust fund, fails to cooperate with risk disposal and causes the trust company to violate prudent operation rules, the banking regulatory authority under the State Council or its dispatched institution can take administrative compulsory measures to restrict relevant rights of the shareholder of the trust company in participating operation and management of the trust company. The appeal filed by the shareholder of the trust company was dismissed, and financial regulatory authorities were supported in taking risk prevention and control measures in accordance with the law, so as to ensure the healthy and stable development of the financial market.
[Expert Comments]
Expert: Wang Jingbo, Professor, University of International Business and Economics
Sichuan Hongda Co., Ltd. vs. China Banking and Insurance Regulatory Commission Sichuan Office and China Banking and Insurance Regulatory Commission on administrative compulsory measures and administrative reconsideration, tried by the Beijing Financial Court, is the first administrative case arising from restricting shareholders’ rights in the trust sector in China. Whether acts of restricting shareholders’ rights in this case fall within the scope of administrative penalties or administrative compulsory measures is an academic question worth studying. In this case, considering the aim, temporariness and immediacy of the acts to restrict the shareholder’s rights, the judge determined such acts to be administrative compulsory measures after a comprehensive analysis based on the provisions of the Law on Banking Regulation and Supervision and the Administrative Compulsion Law, as well as theories of administrative law. Such a conclusion accords with legal principles and laws. This judgment represents a useful exploration for further clarifying the legal attribute and basis of financial regulatory acts.