In the Chinese mainland, the slowed economy has profoundly
influenced banking and financing investments and the resolution of
relevant disputes. On one hand, the speed of economic development
decelerated from near 10 percent to 7 percent and the structure of
the economy continues to undergo major government reforms.
Accordingly, the driving factors of economic development were
turning from resources, materials and investments to efficiency,
green initiatives and innovation. On the other hand, through either
trillions in stimulus packages, suspension of initial public
offering (IPO) projects or other macro-control mechanisms, the
government still plays a critical role in this new normal.
Considering these and other factors, banking and financing
disputes reveal four fresh trends: complexity, expansion,
quantification and crowded disputes.
The classic examples of banking and financing investment –
equity investment, debt investment and mezzanine investment –
are becoming more professional, complicated and innovative.
Undoubtedly, the involvement of parties from diverse backgrounds in
transactions highlights the sophistication of the underlying
subject matter of disputes. Financial institutions are so obsessed
with complex transactional structures, TOT/FOF for example, in the
hope that such design can help them to operate business either that
conforms to those supervisory requirements or takes a smooth detour
around them. The truth is that complicated transactional structures
can no longer be treated as effective tools to reduce risks;
instead, they serve as catalysts and consequently result in a
significant amount of disputes.
The range of banking and financing disputes has expanded
greatly. Real estate investment trusts, New Third Board issuance,
securitization, private equity investment and online financing have
all sprung up and struggled to free themselves from those
restrictions imposed by the traditional regulatory measures.
Subsequently, these new developments have produced many
unprecedented challenges to the regulatory status quo.
Macro-control over investment policy, underdeveloped regulatory
frameworks and insufficient risk pre-control are factors that
contribute to financing parties' defaults and further lead to
the swell of disputes.
The quantity as well as the amount involved in the banking and
financing disputes has increased tremendously. A conservative
source has recorded that up to the end of 2012, the issuance of
real estate trusts reached RMB 7.2 billion. Though the government
is dedicated to implementing measures to control the market, such
actions do not seem to effectively relieve the pain from small and
mid-sized real-estate developers when they struggle with the term
of redemption due to the insufficient cash flow. The ails of the
economy have carried over to the banking and financing sectors,
resulting in an eruption of defaults. It's now common for the
disputed amounts to exceed hundreds of millions in real estate
cases, wreaking havoc on financial institutions.
Numerous investors are involved in banking and financing
disputes, i.e. trust companies' collective trust schemes,
securities traders' asset management programs, fund management
companies' and their subsidiaries' asset management
programs, private equity funds in the form of LLPs or contractual
investment funds. Upon calling compulsory repayment to a halt,
financial institutions will be released from the role as
"gap-filler", but will then be dragged into class actions
initiated by investors who failed to profit and even lost their
Banking and financing disputes can be creatively resolved during
the slowing economy, but it will require the foresight of the
regulatory authorities, precautionary measures adopted by financial
institutions, support from the judicial system and the arbitration
institutions, as well as intelligence, courage and professionalism
of legal practitioners.
The article was originally published on the website of AmCham China.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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