China Issues Authoritative Guidance on Handling Bond Disputes

Source: Regulation Asia Editors, Regulation Asia 2020-07-17

In disputes involving breach of contract, fraud or false statements – the issuer, its controlling shareholders, directors, and senior management will be held liable for bondholder losses.

China’s Supreme People’s Court has issued a new document setting out the legal mechanisms that can be used to handle bond disputes such as those arising from defaults, bankruptcies or fraud.

The document, aimed at providing a path for ensuring the protection of bondholder rights and interests, comprises the minutes from a December forum between officials from the court, the PBOC (People’s Bank of China), the CSRC (China Securities Regulatory Commission), the NDRC (National Development and Reform Commission) and other government agencies.

The document emphasises the responsibility of bond issuers and underwriters to ensure that relevant rules are followed and the law is not broken. Fiduciary managers such as credit rating agencies, accounting firms, law firms and intermediaries also have duty of care obligations.

In bond disputes, particularly in cases involving a large number of investors or complex issuance and transaction methods, bondholders’ meeting should serve as the discussion platform to allow the trustee and other bond representatives to participate in litigation, debt restructuring, bankruptcy reorganisation, reconciliation, liquidation and other matters.

Bondholder meeting resolutions are considered lawful and binding on all bondholders. However, issuers and their related parties, as well as bondholders with conflicts of interest, should avoid voting in such resolutions.

Where litigation is necessary to force reorganisation or bankruptcy liquidation, the document says bondholders are protected to the “greatest extent” if they file their cases jointly. This also improves the efficiency of case handling and conserves judicial resources, it says. However, bondholders can also participate in civil litigation separately.

Generally, litigation should take place in a court that has jurisdiction where the issuer resides, unless otherwise stipulated in bond issuance documents or fiduciary management agreements.

In cases involving breach of contract, fraud or false statements – the issuer, its controlling shareholders, directors, senior management, as well as the trustee, will be held liable for losses to bondholders.

Underwriting institutions or other service agencies may also be held liable if they are found to have facilitated fraud or false statements or disclosure, whether intentionally or due to failures in due diligence.

The document from the Supreme People’s Court is available here.

Responding to the document, the CSRC said it will actively cooperate with the Supreme People’s Court in implementation by issuing supporting rules and promoting the construction of market-based bond default settlement mechanisms.

This month the CSRC, PBOC and NDRC issued rules establishing mechanisms for handling corporate bond defaults, covered here.

Bond Disputes

China Issues Authoritative Guidance on Handling Bond Disputes

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