To Confirm the Validity of the Subscription Agreement of Foreign-fund Companies in Accordance with Laws and Effectively Maintain the Order and Stability of Domestic Financial Market ——Liu v. H International Bond Company and Others on Guarantee Contract Disputes

Basic Facts

Liu and H International Bond Company signed a Bond Fund Subscription Agreement, and Liu bought a bond fund of 100,000 yuan from H bond company. Both parties agreed that the rate of return on investment would be settled once a month. After the contract expires, the subscriber may choose to repurchase from the issuer. Company D will provide guarantee for the project financing and issue the fund on behalf of the company. Liu has received the earnings during the fund’s holding period after paying 100,000 yuan worth of bonds, but after the expiration of two years, H bond company did not repurchase in accordance with the contract, and H company and D company did not pay back the principal and interest. Liu sued the bond company and the guarantee company to the Qianhai Court, requesting repayment of principal and interest.

Judgement

The court held that H Bond Company, a company incorporated in the Hong Kong Special Administrative Region, did not obtain the qualifications for issuing funds in China. H company’s own issuance of funds to an unspecified majority violates China’s mandatory legal provisions on the management of securities investment funds, and the fund subscription agreements signed by both parties are invalid. Both parties shall bear the obligation of returning funds to each other, and shall compensate for the corresponding loss according to their respective degree of fault. The main fault shall be borne by H company for illegally selling funds, D company for illegally selling funds and providing guarantee. There is also a certain fault of Liu, because Liu knew that D company sold the Hong Kong fund on behalf of the company, but still chose to purchase it in order to obtain a high rate of return. Therefore, the court does not support Liu’s request for payment of overdue principal compensation. The court ruled that the two companies will each return the investment amount of 100,000 yuan and compensate for the loss of the funds during their occupation.

 

Significance

This is a typical case of disputes over fund subscription contracts with a fixed rate of return, involving the order of the financial market and the country’s policies on the financial market. In this case, based on the strict application of self-examination criteria for private law and respect for the autonomy of Chinese and foreign commercial entities, the court fully considered the basic policies of the financial market, such as securities law, and comprehensively judged the effectiveness of fund subscription contracts. The Judgement in this case shows that the issuance of funds in China must not violate the basic provisions of the Securities Investment Fund Law of the People’s Republic of China. Otherwise, the fund subscription contract will be invalid, which effectively maintains the stability of the domestic financial market order. The case also reminds investors that the current foreign-related institutions have not yet obtained the qualifications of publicly-issued funds, and that publicly-raised funds generally require “double filing”, where both the fund manager and the fund products themselves need to be registered by a securities regulatory agency, and cannot blindly subscribe funds in order to obtain a high rate of return, otherwise they will each bear the corresponding investment losses.