1970.01.01 Catherine MIAO、 Li, Yuming、Li, Yi_Yi、Wang, Wanjun
Introduction
With a view to strengthening strategies to dispose of non-performing assets by financial asset management companies, the Supreme People's Court of China successively promulgated several judicial interpretation documents which have gradually established and consolidated the special status of financial asset management companies in the special situation investment market. Among such judicial interpretation documents, the Provisions of the Supreme People's Court on Several Issues Concerning the Application of Law in the Trial of Cases Involving Assets Formed in the Acquisition, Management or Disposal of Non-performing Loans of State-owned Banks by Financial Asset Management Companies (in Chinese, 最高人民法院关于审理涉及金融资产管理公司收购、管理、处置国有银行不良贷款形成的资产的案件适用法律若干问题的规定) (Fa Shi [2001] No. 12) (the "12-Article Judicial Interpretation”) promulgated by the Supreme People’s Court, which came into effect on 23 April 2001, is particularly noteworthy. The 12-Article Judicial Interpretation has effectively dealt with some of the difficulties and challenges encountered by financial asset management companies during the early stages of their establishment and responded creatively to many controversial legal issues encountered by financial asset management companies in the disposal of non-performing assets. It has provided favorable legal protections for many investors in acquiring non-performing assets from financial asset management companies and it is regarded as a new cornerstone in the development of the industry.
In order to align with the Civil Code and other relevant judicial interpretations and ensure the unification and correct application of laws, the Supreme People’s Court promulgated the Decision of the Supreme People’s Court to Repeal Certain Judicial Interpretations and Relevant Regulatory Documents (Fa Shi [2020] No. 16) on 29 December 2020, repealing 116 judicial interpretations and other relevant regulatory documents including the 12-Article Judicial Interpretation as from 1 January 2021. The repeal of the 12-Article Judicial Interpretation has resulted in some strong reactions in the non-performing assets industry. Some financial asset management companies and investors of non-performing assets have begun to express concerns. Several legal issues remain uncertain due to the repeal of the previous regulations and this article aims to sort out the substantial impact on non-performing asset transactions caused by the repeal of the 12-Article Judicial Interpretation and to put forward some practical and feasible solutions to mitigate the relevant legal risks.
1 Main Legal Issues Addressed by the 12-Article Judicial Interpretation and Relevant Documents
In the process of implementing the 12-Article Judicial Interpretation and gradually standardizing non-performing asset transactions, the Supreme People’s Court has successively promulgated the Reply to the Letter on Issues Relating to Implementation of the 12-Article Judicial Interpretation of the Supreme People's Court (in Chinese, 对〈关于贯彻执行最高人民法院“十二条”司法解释有关问题的函〉的答复, the “Reply to 12-Article Interpretation”), the Supplementary Notice on Issues Relating to Acquisition and Disposal of Non-performing Assets of Banks by Financial Asset Management Companies (in Chinese, 关于金融资产管理公司收购、处置银行不良资产有关问题的补充通知, the “Supplementary Notice”) and the Minutes of the Symposium on Hearing Cases Concerning Transfer of Financial Non-performing Loans by the Supreme People’s Court (in Chinese, 关于审理涉及金融不良债权转让案件工作座谈会纪要, the “Hainan Minutes”) and other documents (collectively, the "12-Article Interpretation Relevant Documents"). Where the courts handle cases regarding non-performing asset transactions involving financial asset management companies, the 12-Article Judicial Interpretation and 12-Article Interpretation Relevant Documents provide important guidelines and a solid basis for the relevant legal issues.
According to the 12-Article Judicial Interpretations and the 12-Article Interpretation Relevant Documents, the major legal issues addressed, and the corresponding provisions are as follows:
a) Notification of claims transfers, preservation of statute of limitations and pursuit of claims by way of newspapers at the provincial level or above
Documents
Main Provisions
12-Article Judicial Interpretation
After the transfer of claims owned by a state-owned bank, the bank may perform the obligation of notifying the claims transfer by publishing an announcement or notice in respect to the transfer of claims in a newspaper which has national or provincial influence. If a pursuit of claims has been included under the announcement or notice, it shall achieve the effect of preserving the statute of limitation.
Reply to 12-Article Interpretation
In the event that a financial asset management company preserves the statute of limitation by way of publishing an announcement or notice in respect to the claims transfer and pursuit of claims in a newspaper which has national or provincial influence, the statute of limitation may recommence on the date of claims transfer.
A financial asset management company can preserve the statute of limitation of acquired claims by way of publishing an announcement or notice to pursue claims in a newspaper as mentioned above.
Hainan Minutes
Where a state-owned bank1 or financial asset management company publishes a notice or announcement in respect to a claims transfer and pursuit of claims in a newspaper which has national or provincial influence in accordance with the Reply to 12-Article Interpretation, the statute of limitation shall recommence on the date of the notice or announcement, and the aforesaid notice or announcement shall also achieve the same effect for the statute of limitation of guarantee contracts.
b) Automatic transfer of original guarantee and security
Documents
Main Provisions
12-Article Judicial Interpretation
A financial asset management company will obtain the relevant mortgages in accordance with the law after the acquisition of claims secured by mortgages, and the original registration of mortgages shall remain valid.
Supplementary Notice
If a state-owned commercial bank (including a state-controlled bank) transfers a non-performing loan to a financial asset management company, or a financial asset management company acquires or disposes of a non-performing loan, the guarantee and security shall be transferred at the same time without the consent of the guarantor or security provider, and the guarantor and security provider shall continue to undertake the liability within the original liability scope, and any provisions requiring consent from the guarantor or security provider for the transfer of the guarantee or security shall not be binding when creditors transfer claims.
c) Change of litigants and enforcement applicants in particular circumstances
Documents
Main Provisions
12-Article Judicial Interpretation
In ongoing cases whereby a state-owned bank has filed a lawsuit before the transfer of claims, the court may, on the application of the bank or the financial asset management company, change the litigant to the financial asset management company which is the transferee of the claims.
Supplementary Notice
When a financial asset management company transfers or disposes of any non-performing loan that has been involved in litigation, enforcement or bankruptcy, the court shall order to change the litigant or enforcement applicant in accordance with the claims transfer agreement and the application made by the transferor or transferee.
d) Jurisdiction of litigation and guarantee for property attachment
Documents
Main Provisions
12-Article Judicial Interpretation
Where a financial asset management company files a lawsuit against a debtor, the lawsuit shall be under the jurisdiction of the court at the location where the defendant is domiciled, unless otherwise agreed to by the original lender and the debtor.
Financial asset management companies are not required to provide guarantees or security for the property attachment.
2 Substantive Impact of the Repeal of the 12-Article Judicial Interpretation
The Supreme People’s Court did not specify the applicability of other relevant documents when it repealed the 12-Article Judicial Interpretation. We understand that even though the 12-Article Interpretation Relevant Documents remain valid, since the Reply to 12-Article Interpretation is a reply made by the Supreme People’s Court to the 12-Article Judicial Interpretation and the Supplementary Notice, and the Hainan Minutes aim to further regulate the non-performing asset transactions with a small number of provisions in the 12-Article Judicial Interpretation cited, in light of accepted legal wisdom, we tend to believe that with the repeal of the 12-Article Judicial Interpretation, the Reply to 12-Article Interpretation, Article 1 of the Supplementary Notice2 and Article 11 of the Hainan Minutes3 shall not be applicable, however other parts of the Supplementary Notice and the Hainan Minutes shall continue to be applicable.
Although the 12-Article Judicial Interpretation is repealed and part of the 12-Article Interpretation Relevant Documents is no longer applicable, this does not mean that all matters regulated will be proceeded without legal basis. This is because most of the provisions in the Supplementary Notice and the Hainan Minutes remain applicable, and the Civil Code, the Civil Procedure Law, the Provisions of the Supreme People’s Court on Several Issues Concerning the Handling of Cases of Property Preservation by the People’s Courts (in Chinese, 最高人民法院关于人民法院办理财产保全案件若干问题的规定) and some other regulations, to a certain extent, restate the regulations under the 12-Article Judicial Interpretation and 12-Article Interpretation Relevant Documents4 , thus most of the matters still have a relevant legal basis.
The 12-Article Judicial Interpretation, the Reply to 12-Article Interpretation and Article 11 of the Hainan Minutes explicitly provide that original lenders and financial asset management companies may perform the notification obligations regarding claim transfers and preserve the statute of limitation or pursue claims by way of publishing a joint announcement for claims transfer and debt collection (the “Joint Announcement”). However, since the aforesaid regulations became inapplicable, the actual effect of the Joint Announcement is uncertain. Therefore, it should be noted whether or not the original lenders and financial asset management companies may continue to perform the notification obligations regarding the claims transfer and preserve the statute of limitation or pursue claims by way of publishing a Joint Announcement.
3 Solutions to the Uncertainty of the Legal Effect of the Joint Announcement on Non-performing Asset Transactions
Whether or not the Joint Announcement will continue to help creditors perform their notification obligations regarding claim transfers and preserve the statute of limitation or pursue claims has become uncertain, non-performing asset transactions will continue to occur. Before any new regulations come into effect to specify the legal effect of the Joint Announcement, financial asset management companies and investors should take proactive measures to protect their interests.
As far as financial asset management companies are concerned, as they were established by the State and play an important role in mitigating the risks of non-performing assets, we suggest that financial asset management companies have thorough communications with the Supreme People’s Court in respect of the repeal of the 12-Article Judicial Interpretation, elaborate on the issues that may be caused by the repeal of the judicial interpretation, and provide proposals to resolve any issues and connect the new regulations with the repealed regulations. In the interim, it is advisable for financial asset management companies to take the following measures:
(1)When financial asset management companies acquire non-performing loans from state-owned commercial banks (including state-controlled banks), they should insert clauses in the relevant claims transfer agreement, requiring the original lenders to (i) publish an announcement or notice in respect of the claims transfer and claims pursuit in a newspaper which has national or provincial influence and (ii) send separate claims transfer notices and debt collection letters to all debtors in each connection by way of the notary service. Meanwhile, the original lenders should make representations and warranties that if any legislative institution, judicial institution or administrative institution promulgate new regulations in respect to claim transfers and/or debt collections in the future, the original lenders shall perform all obligations immediately pursuant to the relevant regulations. Further, financial asset management companies should communicate with the original lenders (or have clauses inserted in the relevant claims transfer agreements) that if any debtor makes a defense on the grounds of non-receipt of the claims transfer notice in judicial proceedings, the original lenders shall immediately notify the judicial institution and debtor of the claims transfer in writing.
(2)When financial asset management companies transfer non-performing assets, they should still publish an announcement or notice in respect of the claims transfer and claims pursuit in a newspaper with national or provincial influence, and send separate claims transfer notices and debt collection letters to all debtors in each connection by way of the notary service, with a view to ensure and achieve the legal effect of claim transfer and debt collection.
As far as the investors of non-performing assets are concerned, it is advisable to take the following measures:
(1)The investors should insert clauses in the relevant claims transfer agreement, requiring financial asset management companies to (i) publish an announcement or notice in respect of the claims transfer and claims pursuit in a newspaper which has national or provincial influence and (ii) send separate claims transfer notices and debt collection letters to all debtors in each connection by way of the notary service. Meanwhile, financial asset management companies should make representations and warranties that if any legislative institution, judicial institution or administrative institution promulgate new regulations in respect to claim transfers and/or debt collection in the future, financial asset management companies shall perform all obligations immediately pursuant to the relevant regulations.
(2)The investors should communicate with financial asset management companies (or have clauses inserted in the relevant claims transfer agreement) that if any debtor makes a defense on the ground of non-receipt of the claims transfer notice in judicial proceedings, financial asset management companies shall immediately notify the judicial institution and debtor of the claims transfer in writing.
4 Conclusion
Under the operation of the existing legal framework, the main impact of the repeal of the 12-Article Judicial Interpretation on non-performing asset transactions is whether state-owned banks (including state-controlled banks) and financial asset management companies can continue to perform the notification obligations regarding claim transfers and preserve the statute of limitation or pursue claims by way of publishing a Joint Announcement has become uncertain. We are not aware of any other material impact, thus financial asset management companies and non-performing asset investors do not need to be overly concerned.
Although (i) the original lenders and financial asset management companies can notify of the claims transfer, preserve the statute of limitation and pursue claims by way of separate notices, and in judicial practice, (ii) some courts endorse the notification of claim transfers by lawsuit filing and service of civil complaint, and (iii) the courts shall have the power to add the transferee of claims as a third party without an independent claim in court proceedings to protect the interests of creditors, this will significantly increase the burden of the original lenders and financial asset management companies.
As the acquisition, management and disposal of non-performing loans from state-owned banks are the core work of financial asset management companies, in order to balance the responsibilities and burdens of financial asset management companies, we expect new regulations to resolve the issues caused by the repeal of the 12-Article Judicial Interpretation, and we are happy to give advice on the implementation of the new regulations. We can also provide new ideas to maintain the stability of the transaction structures so as to improve efficiency in disposing of non-performing assets.
1.This shall include wholly state-owned commercial banks, state-controlled commercial banks and state-owned policy banks.
2.According to Article 1 of the Supplementary Notice, the 12-Article Judicial Interpretation, the Reply to 12-Article Interpretation, and the Notice of the Supreme People's Court on Payment of Litigation Fees for Cases Where State-owned Financial Asset Management Companies Dispose of Non-performing Assets from State-owned Commercial Banks (in Chinese, 最高人民法院关于国有金融资产管理公司处置国有商业银行不良资产案件交纳诉讼费用的通知, the “Litigation Fees Notice”) are applicable to cases where state-owned commercial banks (including state-controlled banks) transfer non-performing loans to financial asset management companies or financial asset management companies dispose of non-performing loans by loan transfer.
3.According to Article 11 of the Hainan Minutes, where a state-owned bank transfers a non-performing loan to a financial asset management company, or where a financial asset management company disposes of non-performing assets by loan transfer upon the acquisition of non-performing loans, the 12-Article Judicial Interpretation, Reply to 12-Article Interpretation, Supplementary Notice and Litigation Fees Notice shall be applicable. Where a transferee retransfers the non-performing loans, the aforesaid regulations shall not be applicable except where the transferee is a relevant government, institution or department that acts as a contributor on behalf of the corresponding government or a group company that holds the state-owned assets of the state-owned enterprise debtor; where a state-owned bank or financial asset management company publishes a notice or announcement in respect of the claims transfer and pursuit of claims in a newspaper which has national or provincial influence in accordance with the Reply to 12-Article Interpretation, the statute of limitation shall recommence on the date of the notice or announcement, and the aforesaid notice or announcement shall also achieve the same effect for the statute of limitation of guarantee contracts.
4.For example, according to Article 547 of the Civil Code, if a creditor transfers its claims, the transferee shall acquire any accessory right related to the claims, unless the accessory right exclusively belongs to the creditor, and the accessory right shall not be affected by the failure to complete transfer registrations or shift possession. In this regard, the rules under Article 9 of the 12-Article Judicial Interpretation have been restated. As another example, according to Article 9 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Handling of Cases of Property Preservation by the People's Courts (in Chinese, 最高人民法院关于人民法院办理财产保全案件若干问题的规定), where the applicant for property preservation is a commercial bank, an insurance company or another type of financial institution with independent debt repayment capabilities that is established upon approval by the relevant financial regulatory authority or a branch thereof, the court may not require the applicant to provide a guarantee or security, and in judicial practice, many courts believe that financial asset management companies shall belong to the aforesaid financial institutions and therefore waive the guarantee or security. In this regard, the rules under Article 5 of the 12-Article Judicial Interpretation have been restated to a certain extent.
