Viewpoint | Analysis of the validity of private entrusted financial contracts

Published:

2022-06-20

Overview of 1. Private Entrusted Financial Management Entrusted financial management is an economic activity in which the principal entrusts his funds, financial assets, etc. to the trustee, who invests the assets in futures, securities and other trading markets or manages them through other financial forms, and the proceeds are distributed by both parties as agreed or the trustee collects agency fees. According to the main characteristics of the trustee, entrusted financial management can be divided into financial institutions entrusted financial management and non-financial institutions entrusted financial management. Financial institutions engaged in entrusted financial management business mainly include commercial banks, securities companies, trust companies, insurance companies and fund management companies. Non-financial institutions as trustees mainly include asset management companies, investment consulting companies and natural persons with certain professional knowledge. In recent years, due to the lack of specific supervision of the corresponding financial institutions, various forms and the lack of standardized guidance on rights and obligations, disputes have occurred frequently. In judicial practice, there are still differences in the validity of the private entrusted financial management contract, and this paper mainly combines the typical cases in judicial practice to analyze the effectiveness of the private entrusted financial management contract. The influence of the qualification of the 2. trustee on the effectiveness of the private entrusted financial contract. If the trustee is a legal person of a non-financial institution, the (I) shall review the content of its entrusted financial management and its business qualifications, subject qualifications, business scope, etc. If the content of the trustee's entrusted financial management exceeds its business scope, if the excess is prohibited, Restricted operation and franchise operation, the entrusted financial management contract is generally deemed invalid. Except for the trustee who accepts the entrustment of an unspecified object to engage in fiduciary wealth management business, in general, a contract entered into by a non-financial institution who accepts the entrustment of a specific object to engage in private entrusted wealth management is not considered invalid. However, if the trustee exceeds the scope of business and the excess is prohibited, restricted or franchised, or if the trustee is a practitioner in the financial industry, the financial contract will be deemed invalid. Typical case: Shanghai No.1 Intermediate People's Court (2020) Hu 01 Min Zhong No. 1847 Judgment held that "First of all, this court believes that Chen Jiping is listed as the authorized representative of relevant subordinate funds, regardless of the three-party naming on the front page of the dispute subscription agreement or the agreement in the general provisions of Article 1 of the dispute subscription agreement, and has made an agreement on the rights and obligations different from Puying Company as an investment consultant. In the process of the implementation of the dispute subscription agreement, Chen Jiping also carried out the relevant collection and transfer of funds in his own name in accordance with the agreement, and signed relevant documents on behalf of Ma Wenwei. Although Chen Jiping argued that these acts were the performance of his duties, this claim was clearly inconsistent with the contractual agreement and actual performance. After examination, the court has so far failed to provide sufficient evidence to prove that before and after the signing of the dispute subscription agreement, Ma Wenwei to accept its entrusted financial management and has a settlement relationship with the other party of the contract subject is Puying Company, and Chen Qiping and Ma Wenwei there is no direct payment, settlement relationship is known and recognized. Therefore, it is difficult for the Court to accept Chen Kiping's independent subject of his non-litigation subscription agreement. The court of first instance said that Chen Qiping was only a channel for Puying Company to invest in the trust company and collect funds, so the reasons and basis for Chen Qiping's determination that he did not have to bear civil liability were insufficient, and it was difficult for the Court to agree. Secondly, the parties in this case have not raised any objection to the invalidity of the subscription agreement, and there is no evidence that Ma Wenwei was obviously at fault in signing the subscription agreement in this case. In contrast, Chen Jiping and Puying, as specialized securities investment practitioners, are obviously more professionally aware of the investment projects and legal consequences involved in the case, and the prohibitions on the securities industry should be clearer. Knowing that the dispute subscription agreement violated the spirit of the relevant documents of the financial regulatory authorities and violated the order of securities market supervision, he still signed the dispute subscription agreement with Ma Wenwei, which eventually led to the invalidity of the agreement. Chen Jiping and Puying Company have unshirkable responsibilities. As the fault party, they should jointly bear Ma Wenwei's capital loss in accordance with the law". (II) if the trustee is a natural person, he or she generally does not need to be approved for accepting financial management entrustment, but if the trustee is a financial industry practitioner, the trustee should be examined for any violation of the prohibition of employment. For example, securities companies, trust companies and other practitioners privately accept financial management entrustment in their own name. In such cases, violation of the mandatory provisions of legal effect will render the entrusted financial management contract invalid. Typical case: Beijing Haidian District People's Court (2021) Beijing 0108 Minchu No. 29015 Judgment held that "judging from the WeChat chat records of both parties and the facts stated by all parties, Li Shengli accepted Yan Chunsheng and Liu Huiting's entrustment to manage their respective stock accounts and carry out relevant trading operations according to their own will and experience, although there is no written contract between the parties, but between Yan Chunsheng and Li Shengli and between Liu Huiting and Li Shengli is the legal relationship between the entrusted financial contract. According to the facts stated by the parties, Li Shengli was a securities practitioner when he accepted the entrustment of the two persons to operate the stock account for financial management. According to the provisions of paragraph 1 of Article 40 and paragraph 2 of Article 136 of the the People's Republic of China Securities Law, employees of securities trading places, securities companies and securities registration and settlement institutions, staff of securities regulatory institutions and other personnel prohibited by laws and administrative regulations from participating in stock trading shall not hold, buy or sell stocks or other securities with equity nature directly or in the name of others during their term of office or within the statutory time limit, nor may they accept shares or other securities of an equity nature as gifts from others. The employees of a securities company shall not privately accept the client's entrustment to buy or sell securities. The above provisions are mandatory provisions of validity. Therefore, in this case, Li Shengli, as a securities practitioner, engaged in securities wealth management business, and his entrusted wealth management contract with Yan Chunsheng and Liu Huiting is invalid". 3. the validity of the bottom clause in the private entrusted financial management contract. There is no clear agreement in the current law on the validity of the guarantee clause of the private entrusted wealth management contract. At present, in judicial practice, most courts have found that the minimum guarantee clause violates the principle of fairness in civil law and the principle of responsibility in entrustment contracts, violates economic laws, and should be deemed invalid; a few courts have found that the minimum guarantee clause does not infringe on national interests, does not disturb the order of the financial market, damages the public interest, and does not violate public order and good customs, so it should be deemed valid. Cases identified as invalid: Shanghai No. 2 Intermediate People's Court (2022) Hu02 Minzong No. 729 Judgment determined that "the entrusted financial management contract is the true intention of Fang Peili and Zheng Chao, and it does not violate the mandatory provisions of laws and administrative regulations. It is legal and effective. Both parties should comply with the principle of good faith, but the guarantee clause agreed by both parties should be invalid. Article 5 of the Receipt states that" the third party's income commitment shall ensure that the income shall not be less than 28% from May 26, 2015 to December 31, 2015 ", that is, the trustee Zheng Chao and the principal Fang Peili agreed to guarantee the minimum return of principal and interest, which is a guaranteed clause. Although the guarantee clause is the result of the autonomy of both parties, it unreasonably transfers the risk burden category that belongs to the client to the trustee, resulting in unequal civil rights and obligations of both parties, violating the basic principle of the client's own risk in the entrustment contract, and also violating the principle of fairness and the basic laws of the financial market, which is not conducive to promoting the healthy development of the securities market and maintaining the stability of the securities market, therefore, the agreement of the guarantee clause should be found to be invalid". Cases found to be valid: Guangdong Guangzhou Intermediate People's Court (2021) Yue 01 Min Zhong No. 25284 found that "regarding the validity of the guarantee clause involved in this case, the court's analysis is as follows: first, Article 144 of the the People's Republic of China Securities Law stipulates:" Securities companies shall not make promises in any way to the profits of customers' securities trading or to compensate for the losses of securities trading." In this case, although Deng Zhongyi, as the trustee, made a promise to ensure that the principal of the entrusted assets for stock investment will not be lost, Deng Zhongyi does not belong to the securities companies and their employees that are not allowed to engage in financial management on behalf of clients and promise returns as stipulated in articles 144 and 145 of the the People's Republic of China Securities Law, while the restrictive provisions of the law on the behavior of special subjects cannot be directly applied to non-special subjects by analogy, therefore, there is no violation of the aforementioned provisions or other mandatory provisions of laws and regulations resulting in the invalidity of the contract. Secondly, the performance of the contract involved in this case is that Deng Zhongyi was entrusted to use his own funds in He Qianlan's account to invest in securities for him, which does not involve the national interest, nor does it endanger the stability of the financial market and the public interest of society, such as the use of capital allocation for highly leveraged transactions. Deng Zhongyi involved in accepting entrustment to carry out stock investment financial management disputes, in Guangzhou two-level court only case, Deng Zhongyi self-admitted that is only accept He Qianlan's entrustment to carry out entrusted financial management, the principal does not come from the society is not a specific object, Deng Zhongyi is not mainly entrusted financial management profit income as a source of income. Therefore, the minimum guarantee clause involved in the case did not infringe on national interests, did not reach the level of disrupting the order of the financial market and harming the public interest, and there was no violation of public order and good customs. Finally, the civil status of both parties in this case is equal, and neither of them is the subject of monopoly in the market. Both parties have sufficient choice when determining the subject of the transaction. Both parties have full freedom of expression and freedom of contract on whether to conclude the entrusted financial management contract and the specific terms of the contract. The terms reached should be considered as the result of independent consultation and prudent decision-making, it is the embodiment of the principle of voluntary and the principle of autonomy of the civil subject. Judging from the WeChat chat records of both parties, Deng Zhongyi had bought shares from He Qianlan recommend many times and made analysis before the two parties established a private entrusted financial management contract. It can be seen that Deng Zhongyi has certain professional investment and financial management experience and knowledge, and has the ability to predict investment risks. Deng Zhongyi in the conclusion of the contract in order to strive for 30% of the profit sharing, voluntarily bear the risk, in the premise of not bearing the obligation to contribute to the bottom as a condition, voluntarily accept He Qianlan entrusted to use his funds for stock investment. Even because the securities market is a high-risk investment place, Deng Zhongyi's stock trading began to suffer losses in October 2019. Since then, Deng Zhongyi has continued to pay a "guaranteed profit" of 3000 yuan every month from November 2019 to March 2020 without raising any objection to the validity of the guaranteed clause. Therefore, the guaranteed clause is not invalid because it violates the principle of fairness. Based on the above analysis, the guaranteed clause formed by Deng Zhongyi and He Qianlan through agreement does not violate the prohibitive provisions of laws and regulations. The two parties distribute the benefits and losses between the parties. The rights and obligations of the parties are essentially balanced. The guaranteed clause is valid. The court of first instance found that the guarantee clause involved in the case was invalid, and the court corrected it." After the 4. determines that the guarantee clause is invalid, the validity of the private entrustment contract and the principle of loss determination. In judicial practice, after determining that the guarantee clause is invalid, most courts have determined that the guarantee clause belongs to the purpose clause and core clause of the entrusted financial management contract and cannot become a relatively independent invalid part of the contract. Therefore, the ineffectiveness of the guarantee clause leads to the invalidity of the entrusted financial management contract as a whole, and both parties to the contract share the losses arising from the performance of the entrusted financial management contract according to their fault. Typical case: Beijing Financial Court (2022) Beijing 74 Minzong No. 126 Judgment held that "this court believes that the agreement in the Account Entrusted Investment Agreement that" if Party A's account suffers a loss of principal after the end of the entrustment, Party B shall compensate Party A "by ensuring that the investment principal will not be lost and Li Jisheng will be exempted from the investment risk, which is a guaranteed clause, in view of the fact that the" guaranteed clause "belongs to the purpose and core clause of the entrusted financial management contract in this case, the court of first instance ruled that this cannot be a relatively independent invalid part of the contract, resulting in the" Account Entrusted Investment Agreement "signed by Li Jisheng and Jin Zhichao to entrust the financial management contract as a whole invalid, and there is no obvious impropriety. After the entrusted financial management contract is confirmed to be invalid, the trustee shall return the principal amount of the entrusted assets to the principal, and the income from the entrusted financial management shall first offset the amount of principal that should be returned". 5. Conclusion With the increasing number of disputes over private entrusted financial contracts, how to identify the effectiveness of private entrusted financial management in practice is undoubtedly crucial. The author thinks that if the trustee does not take "entrusted financial management" as the main business, and does not violate the legal effect of prohibition, the private entrusted financial management contract including the guarantee clause has legal space. Here, we look forward to further attention and response to this issue at the judicial level. 6. legal basis Civil Code Article 6 When engaging in civil activities, a civil subject shall follow the principle of fairness and reasonably determine the rights and obligations of all parties. Article 999 A contract of entrustment is a contract in which the principal and the trustee agree that the trustee shall handle the affairs of the principal. Article 929 If a paid entrustment contract causes the principal's loss due to the trustee's fault, the principal may request compensation for the loss. For a gratuitous entrustment contract, if the trustee's intentional or gross negligence causes the principal's loss, the principal may request compensation for the loss. If the trustee exceeds his authority and causes losses to the principal, he shall compensate for the losses. Securities Act of the People's Republic of China Article 40 Employees of securities trading venues, securities companies and securities registration and settlement institutions, employees of securities regulatory bodies and other persons prohibited by laws and administrative regulations from participating in stock trading shall not hold, buy or sell stocks or other securities of an equity nature directly or under a pseudonym or in the name of another person during their term of office or within the statutory time limit, nor may they accept shares or other securities of an equity nature as gifts from others. Article 135 A securities company shall not make a commitment to the proceeds of the trading of securities by its clients or to compensate for the losses incurred in the trading of securities. Article 136 If a practitioner of a securities company executes the instructions of the securities company to which he belongs or violates the trading rules by taking advantage of his position in the course of securities trading activities, the securities company to which he belongs shall bear full responsibility. The employees of a securities company shall not privately accept the client's entrustment to buy or sell securities. the People's Republic of China Securities Investment Fund Law Article 20 The fund manager of a publicly offered fund and its directors, supervisors, senior managers and other practitioners shall not commit the following acts: (4) It is prohibited to promise gains or bear losses to fund share holders in violation of regulations. Interim Provisions on the Operation and Management of Private Asset Management Business of Securities and Futures Institutions Article 3 Securities and futures business institutions and relevant sales institutions shall not sell asset management plans in violation of regulations, and shall not improperly publicize, mislead and defraud investors, and promise investors that the principal will not be lost or the minimum return will be promised in any way, including but not limited to the following situations: (1) There are expressions in asset management contracts and sales materials that contain the connotation of capital preservation and return, such as zero risk, guaranteed return, worry-free principal, etc; the name of the (II) asset management plan contains the word "capital preservation"; the (III) and investors privately sign repurchase agreements or commitment letters and other documents, directly or indirectly promise to protect capital and income.

Key words:

Point of view, entrustment, financial management, contract, terms, guarantee, securities, invalid, trustee, determination.