ABSTRACT
The unit-holders of a contractual fund, as both its settlors and beneficiaries of the trust, have the right to replace the trustee (i.e., the administrator) in accordance with the law and the terms and procedures specified in the fund agreement. The new administrator acquires administrator status when the unit-holders pass a resolution for change of administrator and the nominee accepts the position. Should a dispute over status arise between the former and the new administrators, the replacement may file a declaratory judgment action against the former administrator.
FACTS
In July 2016, Shanghai X Xin Asset Management Co., Ltd. (“SHXX Asset Management”) as fund administrator and X Xin Securities Co., Ltd. (“XX Securities”) as custodian signed Fund Agreements with investors. The resulting X Yu Internet Private Equity Fund (“XY Fund”) was established on July 25, 2016 and terminated on July 24, 2020. Liquidation of the fund commenced on April 21, 2021, carried out by Shanghai XX Asset Management and the custodian XX Securities, both of whom were registered with the Asset Management Association of China.
Between May 21 and 27, 2021, the investors concerned executed the Letter of Authorization for Appointing New Fund Administrator and the Resolution of All Unitholders, stating: (1) all unitholders unanimously agreed to replace the incumbent administrator Shanghai XX Asset Management with Shanghai X Xi Equity Investment Fund Co., Ltd. (“Shanghai X Xi”); (2) Shanghai XX Asset Management shall cease to act on behalf of the fund from the day when the resolution took effect; (3) all unitholders unanimously agreed to approve the Proposal for Work Handover by the Incumbent Administrator, requiring Shanghai XX Asset Management to cooperate in the change of administrator, including without limitation the execution of a new fund agreement within ten days from the effectiveness of the resolution; and (4) all unitholders unanimously agreed that Shanghai X Xi should take over the fund and form a liquidation team with the then custodian to oversee the liquidation of the fund. On May 28, 2021, Shanghai X Xi sent a written reply, in which it accepted the investors’ appointment.
On August 31, 2021, the custodian issued the Custodian Reply Regarding XY Fund’s Written Resolution on Replacement of Administrator, recognizing the above resolution and required actions and agreeing to provide cooperation. Subsequently, Shanghai X Xi as the new administrator and XX Securities as the custodian entered into a New Fund Agreement with each investor. Shanghai X Xi then issued an Effectiveness Letter to the custodian on September 21, 2023, acknowledging that day as when the new agreement took effect.
Because Shanghai XX Asset Management refused to recognize Shanghai X Xi as the new administrator and to complete the necessary procedures, Shanghai X Xi brought an action, seeking court’s confirmation of its status as XY Fund’s administrator effective from May 27, 2021.
Shanghai XX Asset Management argued that only investors had the power to change the administrator, and that Shanghai X Xi had no standing to sue it because no contractual relationship or legally prescribed right and obligation existed between them.
HOLDING
On January 31, 2024, the Primary People’s Court of Jiading District of Shanghai issued (2023) Hu 0114 Min Chu No. 769, declaring that Shanghai X Xi became the administrator of XY Fund as of September 21, 2023. Both Shanghai X Xi and Shanghai XX Asset Management filed an appeal.
On June 11, 2024, the Shanghai Financial Court issued civil judgment (2024) Hu 74 Min Zhong No. 459, which: (1) vacated the judgment of (2023) Hu 0114 Min Chu No. 769; and (2) affirmed Shanghai X Xi’s status as the administrator of XY Fund as of May 28, 2021.
REASONING
The Shanghai Financial Court (“Court”) opined that there were two issues in this case: (1) Whether Shanghai X Xi had standing to bring this action against Shanghai XX Asset Management; and (2) Whether and when Shanghai X Xi had legally become XY Fund’s administrator.
Regarding the first issue, the Court held as follows:
First, the administrator of a fund has the right to dispose of fund assets according to the provisions of law and the terms of the fund agreement. Fund assets are independent from the assets of the unitholders, the administrator, and the custodian, and are in general accountable for the debts incurred by the fund. The right to benefit from them is also separate from the right to manage them. The administrator manages and disposes of fund assets in its own name but in the interest of investors and for specific purposes, and engages in legal acts with third parties. It then allocates the proceeds to the fund assets and is obligated to distribute entitlements to unitholders in accordance with the law and the terms of the trust. For this reason, the administrator has the de facto right to manage and allocate the fund assets and investment returns as it sees fit.
Second, a declaratory judgment action is designed to confirm the existence or absence of facts or rights in a legal relationship rather than demand performance by a particular party. Such action requires the defendant to pose a real threat to the plaintiff’s claimed legal status or rights, necessitating a court decision to remove the threat. In this case, Shanghai X Xi asserted it became the administrator of XY Fund as of May 27, 2021, but because the former administrator Shanghai XX Asset Management refused to cede its position and thereby harmed investor interests, it filed the present action so that it could lawfully exercise its authority as the administrator.
Regarding the second issue, the Court held that during the existence of a fund, unitholders may replace the trustee in accordance with the provisions of law and the terms and procedures specified in the fund agreement. Although XY Fund was terminated on July 24, 2020, it remained in legal existence until the completion of liquidation. During this interim period, the lawful right of the unitholders to replace the trustee should not be unduly restricted. In general, unitholders’ unanimous decision to change the administrator is an exercise of their rights, in both revoking the status of the incumbent administrator and granting that status to the new administrator. In the present case, all investors agreed to change the administrator from Shanghai XX Asset Management to Shanghai X Xi. On May 28, 2021, Shanghai X Xi accepted the appointment, meaning the parties had reached an agreement regarding this change. This made Shanghai X Xi the new administrator on that date. Furthermore, by accepting the unanimous appointment, a trust relationship was established by a meeting of the minds and Shanghai X Xi in reality also succeeded to the rights and obligations of the original administrator, so the absence of a newly signed fund agreement does not itself imply an incomplete change of administrator.
SIGNIFICANCE
This case marks China’s first declaratory judgment action where the administrator of a private contractual fund sought legal confirmation of its status as the fund administrator, addressing the longstanding uncertainty over the ownership of trust property since the enactment of the Trust Law of the People’s Republic of China. As trustees, administrators of a fund perform vital functions such as the investment, management, liquidation, and distribution of fund assets. However, many disputes have arisen in recent years over the vacancies in, or competing claims to, the administrator role, impeding the investment and liquidation process and undermining investor interests. In this case, the Court, given consideration to both the tenets of the Trust Law for private contractual funds and the contractual agreements, establishes that a fund administrator, as the nominal owner of fund assets, has the standing to file a declaratory judgment action against the original administrator. This case effectively broke the management and liquidation deadlock resulting from a battle for the administrator position, thereby protecting the interest of the investors.Copyright (c) 2018 Shanghai Financial Court China Disclaimer
