——China Minsheng Banking Corporation Limited vs. Chen et al. on Dispute over Contract
[Principle of Adjudication]
Where a party beyond the trust contract provides third-party shortfall covering as a credit enhancement measure, full respect shall be given to the parties’ autonomy of will provided that such covering does not violate the mandatory provisions on effectiveness in laws and regulations. If the contents thereof are not in compliance with the law provisions on guarantee, the corresponding relationship of rights and obligations shall be determined based on the specific contents of the commitment document. In the determination of the liability for shortfall covering, if the trust plan stipulates a line to close the position forcibly, and consent from the shortfall covering obligator is not obtained for not closing the position forcibly immediately when the requirements for closing the position forcibly have been met, then the shortfall covering obligator shall not bear the liability for shortfall covering as to the additional loss arising from failure to close the position forcibly. However, if the actual share selling time for closing the position forcibly cannot be determined, which leads to the impossibility of estimating the capital loss amount under the assumption that the position is actually closed forcibly, the court may refer to the calculation method of shortfall covering amount as agreed in the “Shortfall Payment Contract” based on contract participation of the shortfall covering obligator, and shall comprehensively consider principal loss when reaching the line of forcible closure, possible loss in the event of failing to successfully close the position after reaching the line of forcible closure, taxes, trust remuneration, custodial fees, subscription shares, trust income during the duration of the trust plan, as well as the contractual breach caused by the failure to make timely payment of shortfall covering and other factors, so as to decide shortfall covering liability amount at its discretion.
[Implications]
In practice, the line for closing the position forcibly is set up in many trust contracts. In the actual execution of a contract, after the forcible position closure clauses are triggered in the trust plan, if the trustor and the administrator otherwise reach a consensus by means of provision of other credit enhancement measures, so that the administrator does not implement forcible position closure for the trust plan, the shortfall covering obligator shall not be liable for any loss arising from failure to implement forcible position closure if consent from the shortfall covering obligator is not obtained for not closing the position forcibly immediately. This case trial has a quite strong demonstrative value in determining the boundaries of rights and obligations fairly reasonably and is more conducive to building a predictable financial market environment.
[Basic Facts]
In June 2017, China Minsheng Banking Corporation Limited (hereinafter referred to as “Minsheng Bank”), as a Type A trustor, Xinzhiying Asset Management (Beijing) Co., Ltd. as a Type B1 trustor and Zheng as a Type B2 trustor, signed trust contracts with National Trust Co., Ltd. as the trustee respectively. They jointly established a collective fund trust plan with a 1-year term. Such a trust plan is a self-beneficial trust and the beneficiaries are the trustors. Among them, Minsheng Bank contributed RMB 100 million, Xinzhiying Asset Management (Beijing) Co., Ltd. contributed RMB 20 million, and Zheng contributed RMB 30 million. The trust funds are RMB 150 million in total. The position closure line under this trust plan is RMB 0.90, and if the Type B beneficiaries fail to sufficiently add or enhance trust funds no later than 10: 00 AM on P+1 day as agreed in the trust documents, or the estimated net value of trust unit on P day cannot be restored to more than RMB 0.94 even after such addition or enhancement, then the trustee will only accept investment advice from investment advisors regarding securities sale, and from 10: 00 AM on P+1 day, it will implement irreversible and forcible position closure on the trust plan until all trust plan assets are cashed out. During the course of closing position and cashing out, if one or several securities is suspended for trading, cannot be sold timely and accordingly cannot be cashed out, the trustee shall sell the securities in time at the opening of the morning of the first trading day after the resumption of trading of the securities, and shall clear the position within three working days after the resumption of trading of the securities (time for cashing out will be extended accordingly if cashing out fully cannot be achieved due to market causes and other reasons). In June 2018, Minsheng Bank (Party A) and Chen (Party B) entered into the “Shortfall Payment Contract”, and Huang, as Party B’s spouse, signed and affixed their fingerprint on it. The Contract provides: Party A is a Type A trustor of the Jinhui No.4 collective fund trust plan, and Zheng is a Type B2 trustor of the Jinhui No.4 collective fund trust plan. Chen and his/her spouse irrevocably and unconditionally agree to assume the obligation to pay the shortfall to Party A in accordance with the Contract. Scope of commitment payment: Party B irrevocably undertakes that it shall perform its obligation to pay the shortfall as follows: on the trust plan termination date (including the date of early termination, same below), if the cash assets of the trust plan are insufficient to pay Party A trust funds and trust income acquired by Party A at the expected annualized rate of return of 6.09% per year, Party A is entitled to request Party B to bear the shortfall payment obligation. Party B shall make up in cash Party A’s trust funds and distribute the difference between the total amount of trust interests to Party A at the expected annualized rate of return of 6.09% per year and the trust interests actually distributed to Party A under the trust plan. In July 2018, when the trust plan was about to expire, the trust plan fell below the closure line. Chen also stated that Minsheng Bank agreed with him to temporally suspend closing the position forcibly. Later on, Minsheng Bank entered into a supplementary agreement of the Shortfall Payment Contract with Chen particularly regarding the extension. In July 2018, Minsheng Bank (Party A) and Chen (Party B) entered into the “Supplementary Agreement of the Shortfall Payment Contract”, and Huang, even listed as Party B’s spouse, did not sign and affix fingerprint on the same. On December 30, 2019, National Trust Co., Ltd. issued the liquidation report, specifying that the collective fund trust plan ended on December 23, 2019, and the net trust income as of the liquidation distribution date of this trust was - RMB 80,582,227.28.
After hearing the case, the Beijing Financial Court held that Chen and Huang, as the shortfall covering obligators, shall assume obligations to pay the shortfall in accordance with the Shortfall Payment Contract, but in fact, “forcible position closure on the trust plan until all trust plan assets are cashed out” were not implemented after the trust plan fell below the closure line, and Huang did not sign the Supplementary Agreement of the Shortfall Payment Contract, therefore Huang shall not bear shortfall covering liability for the additional loss arising from failure to close the position forcibly after the expiration of the Shortfall Payment Contract. Therefore, the court ruled that Chen shall assume payment liability within the full shortfall covering obligation scope, and Huang and Chen shall jointly assume the liability for payment of shortfall covering amount and liquidated damages to Minsheng Bank within the scope of RMB 15,000, 000 of shortfall covering amount. After the judgment was rendered, the parties did not appeal.
[Judge Comments]
Adjudication of financial cases is not simple addition and subtraction, and we need to fully study and judge the contents of contracts entered into by the parties concerned, financial policies and financial laws and regulations, and the final judgment shall comply with the rules of commercial adjudication, follow the laws of financial development, and accord with the orientation of fairness and justice. In this case, the scope of liability of different obligors was differentiated based on whether the shortfall covering obligor agreed to temporally suspend closing the position forcibly, which is in line with the principle of fairness and the spirit of the Minutes of the Ninth National Conference of People’s Courts on Trials of Civil and Commercial Matters. On the one hand, the ruling can clarify the standards for liability assumption of different parties, and on the other hand, it can guide financial market players to conduct more standardized financial market behaviors and help create a favorable legal and business environment for the finance sector.
[Expert Comments]
Expert: Xing Huiqiang, Professor, Law School, Central University of Finance and Economics
As a legal saying goes, “Contract is the law between the parties.” That is to say, a contract established in accordance with the law shall be legally binding on the parties. If a third party to the trust contract provides a third-party guarantee of shortfall covering for the trust contract, it shall assume obligations under the contract for such guarantee, provided that it does not violate the mandatory provisions on effectiveness in laws and regulations. However, if the shortfall covering obligor has no knowledge of the suspension of forcible position closure, his liability shall be reduced or even exempted accordingly. Based on relevant laws, the contract and the facts of the case, the judgment fairly and reasonably defines the boundaries of each party’s obligations, which is conducive to fostering an honest, trustworthy, standardized and orderly financial market environment and has a quite strong exemplary value.