On March 2, the Shanghai Financial Court held a press conference to release the Report on Preventing Legal Risks of Bond Disputes (“Report”). Following the Report on Preventing Legal Risks of Private Equity Fund Disputes released in 2022, this Report is another industrial legal risk prevention report released as part of the implementation of the Annual Release Mechanism of Legal Risk Prevention Reports on Financial Disputes established by the Court.
The released Report focuses on the bond industry. In recent years, China’s bond market has seen constant expansion of its scale, gradual promotion of its unification, and continuous improvement in its level of opening up and its rule of law system; at the same time, the bond market has also seen frequent bond default events, rapid increase of default scale, and occurrence of illegal events such as fraudulent issuance and false statements, along with which the number of bond dispute cases has soared, imposing great potential risks. Given that the orderly release and smooth elimination of bond market risks are important parts of preventing and eliminating financial risks, it is necessary to sort out and analyze the legal risks of this industry from the source so as to promote the healthy development of the bond market.
The Report is divided into four parts: the current situation and risk analysis of the bond industry, the bond disputes, the dispute types and the risk reflected from the disputes, and the advice on legal risk prevention. The Report offers a comprehensive summarization of risk factors in the bond market, the potential risks in the bond issuance, trading and repayment process, and the analysis and revelation of the causes of risks before putting forward measures and advice on legal risk prevention.
The Report analyzes and summarizes the risk factors in the bond market, including the continuous release of default risks of the bond market, the occurrence of illegal acts in information disclosure and the like, the relatively prominent risks of private placement bonds and private corporate bonds, market risks caused by structured issuance, and the correlation between domestic and foreign bond market risks, influenced by not only the changes in the macroeconomic and financial environment in recent years, but also the micro-factors of the issuers themselves.
In the Report, a statistical analysis of bond dispute cases accepted by Shanghai courts from 2018 to 2022 reveals the following features of these cases: the number of cases dropped after reaching a peak, and there was an obvious correlation between the disputes. The number of cases reached its peak in 2019 and then showed an overall downward trend in the recent two years, indicating an orderly release of bond default risks. Bond disputes often occurred in conjunction with other financing cases, as bond rating downgrades, valuation adjustments and the like triggered a series of disputes related to asset management products. The plaintiffs were mainly institutional investors, while the types of defendants were diversified. In 96.17% of the cases, the plaintiffs were institutional investors, and 95.04% of default dispute cases were filed by bondholders themselves. Defendants included bond issuers, guarantors, intermediaries and bond investors, in which intermediaries were involved in 7.6% of the cases. Disputes derives from the whole bond cycle, with bond defaults as the main part. The disputes rose from different stages, includingthe bond issuance, trading and repayment stages, in which corporate bond trading disputes accounted for 90.76%, and the main type of the cases was bond default, as bond default cases tried by Shanghai courts in the past five years involved a total of 51 issuers and 112 bonds. Types of defaulted bonds were diversified, and most of the defaults were maturity defaults. Defaulted bonds included general corporate bonds and exchangeable corporate bonds listed on the Shanghai and Shenzhen Stock Exchanges, medium-term notes, short-term financing bonds and ultra-short-term financing bonds listed on the interbank market, as well as bond financing plans, private placement bonds and targeted debt financing instruments listed on local exchanges. Most of the defaults were substantial defaults upon maturity of principal and interest and put amount. Lots of the cases involved procedural issues, among which the substantive legal disputes were more typical. Disputes over the jurisdiction of cases were relatively prominent, yet after the determination of the unified jurisdiction rules in the Minutes of Symposium on the Trial of Bond Dispute Cases by Courts Nationwide, the proportion of cases involving objection to jurisdiction dropped from 47.93% to 20.83%. Defendants usually had no objection to the bond principal and interest payable, and the focus of disputes in the cases was relatively similar. Cases were handled in diversified ways, with compulsory execution applied in 60% of cases. The ways of closing cases included mediation, withdrawal, judgment and change of jurisdiction. Among the cases closed by mediation or judgment, the proportion of applying for compulsory execution reached 64.67%.
In the Report, types of bond disputes are classified based on bond issuance, trading process and bond types, including fraudulent issuance disputes and disputes related to structured issuance that involve bond issuance; disputes arising from the establishment and validity of bond trading contracts and the performance of bond forward trading contracts that involve bond trading; disputes over the liability for false statements, disputes arising from the failure of the lead underwriter or the trustee to fulfill subsequent management obligations and disputes arising from conflicts of interest caused by the multiple identities of the trustee that involve the existing period of bonds; procedural disputes and substantive disputes that involve bond defaults; perpetual bond disputes and convertible bond disputes that involve special types of bonds; and disputes that involve cross-border bonds which arise from the exercise of domestic holders’ right to sue, the jurisdiction and application of law, the recognition and enforcement of foreign judgment, sand the cross-border bond regulation. In the Report, legal risks in the above types of disputes are sorted out and revealed.
The Report provides participants, regulators and legislative departments of the bond market with suggestions and advice respectively : investors are advised to pay full attention to the legal risks of bond investment, conduct bond trading in a standardized way, and make reasonable use of mechanisms for protecting the creditor's rights of investors. Issuers are advised to improve internal control and governance, standardize the recording of contents of bond documents, fully and faithfully fulfill the obligation of information disclosure, and properly arrange the disposal of defaulted bonds. Underwriters, trustees and bond service institutions are advised to be diligent, effectively identify and evaluate the risk of conflicts of interest, pay continuous attention to the solvency of issuers and guarantors, and strictly perform statutory duties such as verification and professional checks. Regulators are advised to intensify efforts to crack down on illegal activities in the bond market, strengthen cooperation and coordination in the regulation, give full play to the advantages of self-disciplined administration and strengthen cross-border regulation cooperation. Legislative departments are advised to improve the bond trustee system, the bondholders’ meeting mechanism and the information disclosure requirement.
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