Viewpoint | Analysis of the legal nature of over-the-counter funding contracts

In judicial practice, some courts tend to identify civil and commercial disputes arising from over-the-counter funding contracts as private lending disputes. In the appeal case of "Mao Huafeng v. Du Ping Private Lending Dispute", the "Loan Agreement" signed by the two parties agreed that one party as the lender and one party as the borrower, and agreed on the principal of the loan, the term of the loan, the calculation of interest and other matters, the court considered that it was fully in line with the basic characteristics of the loan contract. In the case of "Zhu Xian Sample v. Li Qi Title Private Lending Dispute", the court held that the key to distinguish between the nature of the entrusted financial management contract and the private lending contract depends on whether the two parties share or bear the benefits or risks arising from the use of funds, although the case is nominally an investment financial advisory agreement, however, in fact, the fund-raising party only charges a certain occupancy fee for the assets and does not bear any responsibility for the benefits and risks in the use of the assets, which should still be private lending in nature.

Before the large-scale outbreak of over-the-counter funding contract disputes in the second half of 2015, the identification of over-the-counter funding contracts as entrusted financial contracts was a common way of dealing with the court system, and there were many judgments to support it. In the case of "Hailin and CICC CIC International Investment Management (Beijing) Co., Ltd. Entrusted Wealth Management Contract Dispute", although the transaction behavior between the financier and the investor reflects the same characteristics as the behavior characteristics in the over-the-counter capital allocation business, the court defined the "Management Contract" signed by the two as an entrusted wealth management contract. Also in the "Zhang Changyou, Zhang Yueming entrusted financial contract dispute" appeal case, the court held the same position.

In recent years, some courts have identified disputes arising from over-the-counter funding contracts as over-the-counter stock funding contract disputes. For example, Article 1 of the guidelines of Shenzhen Intermediate people's Court of Guangdong Province on hearing disputes over over over-the-counter stock financing contracts defines over-the-counter stock financing contracts, which include but are not limited to stock allocation contracts, loan-to-stock speculation contracts, entrusted financial management contracts, cooperative operation contracts, trust contracts, etc., mainly considering the nature of over-the-counter capital allocation contracts from the essence of the contracts.

In practice, there are also many judgments to support. In the appeal case of "contract dispute between Zeng Lianghong, Yu Wei and Hunan Tengyu Investment Management Company, and Jishou Branch of Hunan Tengyu Investment Management Company", the court held that although the "loan contract" signed by both parties has certain characteristics of private lending form, it restricts the borrower to trade only in the designated futures account in terms of fund use and usage method, at the same time, the contract also provides for risk control provisions, and the borrower does not actually have the right to control the loan, the use of the loan to buy stock index futures also do not enjoy ownership, so the "loan contract" does not conform to the legal characteristics of private lending, the actual stock allocation contract.

Regardless of the funding model adopted by the financier and the funding provider, the core of the OTC funding business transaction model can be summarized as follows: the funding and funding parties have agreed on the funding costs, funding ratios and risk allocation by signing a cooperation agreement. The financier pays a certain amount of deposit, and the fundor advances it in proportion. The financier uses the allocated funds to buy and sell stocks. The stock account is provided and controlled by the fund allocation company and operated by the financier alone. At the same time, the fundor monitors the risk of the account through the design of compulsory closing line and closing warning line to ensure the safety of its own funds and receive a fixed return. In the course of the transaction, there are three main legal relationships between the lender and the financier: the lending legal relationship, the guarantee legal relationship and the borrowing legal relationship.

At the time of the rise of over-the-counter funding, mainly in the acquaintance society, the main body of the over-the-counter funding contract is the funding party, one side is the financing party. The funder lends its own funds to the financier and provides a securities account, and after the closing of the transaction, the financier is obliged to return the borrowed funds and the interest agreed upon by both parties to the funder. There is a transfer of money between the financier and the funder, resulting in a legal relationship of borrowing and lending based on money.

With the development of economy and society, the demand for investment by financiers increases, coupled with the information asymmetry between the funder and the financier, the traditional "one-to-one" model cannot meet the needs of both parties, so the third-party platform arises at the historic moment. The third-party platform acts as an intermediary, on the one hand, the financing party's borrowing demand can be published on its platform, on the other hand, the allocation of funds can be based on the demand issued by the financing party independent loans, choose the loan object. Under this model of funding with the help of a third-party platform, although the transaction structure and source of funds are different from the "one-to-one" model, because the funding platform only assumes the role of a "bridge", it does not affect the financing, The legal relationship between the two parties.

Based on the above-mentioned legal relationship of lending, the lender will require the financier to provide a certain form of margin as security for the loan when lending funds, and has the right to guarantee the realization of the lender's claim in the event of a loss in the transaction. The specific performance is:(1) margin. The financier is required to deposit a deposit with the bank or third-party payment platform as security for the claim at the request of the lender. (2) Securities purchased and yields. In the off-site capital allocation, in addition to the margin, the securities and fruits purchased by the financier must also be deposited in the stock account provided by the capital allocation party, which becomes the collateral for the capital allocation party. When the funds in the account of the financier reach the closing line, the capital allocation party can implement the guarantee measures agreed in the contract, forcibly close the assets in the stock account or transfer the funds in the investor's account into its own account. In such a case, the financier is obliged to add funds in a timely manner as the corresponding security, and the two thus form a legal relationship of security.

The borrowing legal relationship is mainly reflected in the financing direction of the fund-raising party to borrow the stock account necessary for over-the-counter funding business. Under the traditional capital allocation mode, the capital allocation company lends its stock account opened in the securities company to the financier for use. However, with the emergence of asset information systems with warehouse allocation function, such as HOMES system of Hang Seng Company and FPRC system of Mingchuang Company, the capital allocation company only needs to open a stock account in the securities company, and can use the asset management system to split the single account opened in the securities company into several virtual sub-accounts. Each investor has only the right to use the sub-account, whether the ownership of the sub-account or the actual account still belongs to the fund-raising party, and when the investor no longer trades, the fund-raising party will withdraw the stock account. The two thus form a borrowing legal relationship.

Article 667 of the Civil Code states: "A loan contract is a contract in which a borrower borrows money from a lender, returns the loan at maturity and pays interest." The main characteristics of the private lending contract are: the currency is the subject of the loan contract, the ownership of the currency is transferred from the lender to the borrower after the establishment and entry into force of the loan contract, and the borrower has independent and comprehensive control over the loan currency without interference from the lender during the period of performance of the contract.

In fact, private lending contracts do not meet the trading purpose of OTC funding contracts, and OTC funding contracts cannot be recognized as private lending contracts for the following main reasons:

First, the legal relationship of the essence of the private lending contract is the legal relationship of lending, according to the previous analysis, in the off-site funding contract, the legal relationship of lending is only the basis, in addition to the legal relationship of lending, but also includes the legal relationship of guarantee and borrowing. The real purpose of the fund-raising party to lend funds to the financing party is to make it participate in the stock trading, over-the-counter fund-raising contract includes not only "borrowing", but also "stock trading" and "guarantee" two contents, these three contents are inseparable and complementary. Or "borrowing" is just one of the ways to achieve the ultimate goal of "stock trading. "Lending" is not the real purpose of the transaction between the financier and the fundor, it is only as a means of capital financing, and the "stock transaction" that cannot be reflected in the general private lending contract is precisely the real purpose of the financier and the fundor signing an over-the-counter fund allocation contract.

Second, in the private lending contract, the borrower has absolute control over the funds, but in the off-the-spot funding, the stock account used by the financier is subject to the risk monitoring of the fundor, and the financier only has the right to operate the stock account, but has no control over the account and the funds in the account but only the right to use it, and the fundor's forced liquidation reflects its right to dispose of the collateral.

Third, in the financial field, any kind of transaction or investment is directly or indirectly derived from money and credit, and has the economic function and characteristics of borrowing. If the court ignores the special transaction mode reached by the autonomy of the parties when determining the nature of the contract, and directly determines that the contract is a private loan contract, it will undoubtedly be treated as a "dimension reduction", which will make the legal norms that should be applicable to over-the-counter capital distribution contracts not be applied, and thus lead to deviations in the determination of the validity of the contract and the distribution of civil liability.

The court that considers the over-the-counter funding contract as a entrusted financial management contract is mainly considered from the subject status of both parties to the contract. From a formal point of view, the transaction status of the fund-raising party and the financing party is similar to the status of the principal and the trustee in the entrusted financial management contract, that is, the fund-raising party, as the principal, entrusts its funds and accounts to the financing party as the trustee, and manages and invests in the securities market within a certain period of time, and pays a certain proportion of the income to the fund-raising party on schedule. In terms of the trading model and the trading position of both parties, there are some similarities between OTC funding contracts and entrusted wealth management contracts.

Even though the OTC distribution contract and the entrusted financial management contract have some similarities in form, this paper holds that from the essence of the contract content, the OTC distribution contract does not conform to the basic characteristics of the entrusted financial management contract, so the OTC distribution contract cannot be recognized as the entrusted financial management contract. OTC funding contracts do not conform to the "risk-sharing" characteristics of entrusted wealth management contracts. In an off-site funding contract, the two parties usually agree that the funding party will enjoy fixed income and not bear the investment profit or loss, regardless of the change in the share price, the financing party will enjoy the income and bear the risk, rather than the financing and funding parties share the risk. Based on this, the principal will not entrust the assets to the subject who does not have the corresponding business ability for disposal without choice. Therefore, whether from the basic characteristics of the entrusted financial management contract, or from the meaning of both sides, there is a fundamental difference between the over-the-counter funding contract and the entrusted financial management contract.

Atypical contracts are relative to typical contracts and are classified according to whether the law gives the contract a special name and rules. China's Civil Code sub-rules provide for nineteen typical contracts, and the object of this paper is not one of them, so it is an atypical contract.

Considering the logic and concept of the over-the-counter fund allocation model, if the legal relationship involved in the contract is viewed mechanically and only from the form, it is easy to identify it as the fund allocation party lending and the account for the use of the financing party, which form the legal relationship of borrowing and borrowing, but considering that the real purpose of borrowing is to carry out stock trading, the purpose of the lending account is also a necessary measure for risk control by the fund-raising party in order to ensure the safety of funds and stock transactions, so the OTC fund-raising contract should be a new form of contract.

In addition, Article 2 of the "Guidelines of the Shenzhen Intermediate People's Court of Guangdong Province on the Trial of Over-the-counter Stock Financing Contract Disputes" stipulates: "The cause of the case involving over-the-counter stock financing contract disputes can be determined as over-the-counter stock financing contract disputes. Other contract disputes are included in the statistics", which further supports the view that over-the-counter capital allocation contract is identified as an atypical contract.

This paper holds that over-the-counter funding contracts belong to the category of financing contracts. A financing contract is an agreement between the investment and financing parties to establish, change or terminate the fund-raising relationship. In the off-site funding contract, depending on the transaction structure and the subject, can be divided into direct financing and indirect financing. It is important to note that even OTC funding with the participation of third-party platforms, such as the P2P funding model, may appear to be indirect financing, but in essence it is in the category of direct financing. In the P2P allocation mode, the P2P network allocation platform acts as an intermediary and connects investors and lenders at the same time. Investors put forward application requirements for allocation on the borrowing platform and provide relevant information such as ID card, loan amount, repayment time, leverage ratio, etc. After the platform is approved, the information can be published on the platform, while the lender selects investment projects according to the loan list of investors published on the platform. Under this allocation mode, although the allocation party and the financier do not directly conduct transactions but through a third-party allocation platform, in fact, the allocation platform only acts as a "link" and "bridge" to assist the allocation party and the financier to realize information exchange, does not participate in the circulation of funds, and does not directly intervene in the transaction structure. Therefore, its essence still belongs to the category of direct financing.