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Hongqiao Zhenghan, After Seven-Year Rights Defense, Obtains Supreme Court Support, Setting a Precedent for Enforcement Objection Litigation in Cases of “No Written Distribution Plan”

HongQiao ZhengHan represented Bank A in a seven-year rights protection campaign against the enforcement court’s unauthorized distribution of case funds without preparing a written distribution plan during the enforcement distribution procedure, which has recently yielded fruitful results. Through the retrial procedure of the Supreme People’s Court (the “SPC”), HongQiao ZhengHan successfully revoked the original second-instance ruling dismissing the lawsuit, and the SPC ordered the second-instance court to hear the case. The case has clarified the judicial criterion that procedural defects shall not deprive parties of their substantive remedy rights, opening up a solid path for rights protection for creditors encountering similar unfair enforcement distributions.

Keywords: SPC Retrial, HongQiao ZhengHan, Turning Defeat into Victory, Action Challenging Enforcement Distribution Plan, Procedural Justice, Remanding for Retrial, Protection of Priority Claims

I. Basic Facts of the Case

Bank A is the first-ranking mortgagee of the real estate involved in the case. During the enforcement distribution process, an intermediate people’s court in western China failed to prepare a written distribution plan in accordance with the law, ignored Bank A’s multiple objections, arbitrarily reduced the amount of Bank A’s priority claims, and distributed the substantial remaining auction proceeds to ordinary creditors. After representing Bank A in pursuing rights protection through various procedures including enforcement objection, reconsideration of enforcement objection, and procuratorial supervision, HongQiao ZhengHan finally filed an action challenging the distribution plan with the intermediate people’s court, but the case was procedurally dismissed by the high people’s court of the province (the second-instance court) on the ground that “the enforcement court did not issue a written plan, which does not meet the statutory conditions for case acceptance”.

II. Key Points and Difficulties

This case fell into a highly prevalent legal dilemma: the law stipulates that “a lawsuit may be filed if there is an objection to the distribution plan”, but if the enforcement court acts illegally by failing to issue a written distribution plan in the first place, does the creditor thus have no access to remedies? After the action challenging the distribution plan was accepted, the mechanical adjudication of the second-instance court trapped the creditor in a logical loop of “losing the right to sue due to the enforcement court’s prior illegal act”. The keys to resolving the deadlock in rights protection in this case were: how to get the court to accept the action challenging the distribution plan in the absence of a written distribution plan; and how to push the SPC to break through the formalistic constraints of the provisions and recognize the justiciability of the “de facto distribution plan”.

III. Highlights of Representation

Representing Bank A, HongQiao ZhengHan embarked on a seven-year journey of rights protection, exhausting all available paths for safeguarding rights, specifically including:

(1) Filing an enforcement objection with the intermediate people’s court, requesting the issuance of a distribution plan, which was dismissed by ruling.

(2) Dissatisfied with the dismissal ruling, applying for reconsideration of the enforcement objection to the high people’s court of the province, requesting the revocation of the dismissal ruling and ordering the intermediate people’s court to issue a distribution plan. The high people’s court of the province revoked the dismissal ruling but held that a distribution plan had been issued through the actual distribution act, and Bank A could file an action challenging the distribution.

(3) As the intermediate people’s court still refused to accept the action challenging the distribution, applying for enforcement supervision to the people’s procuratorate at the same level as the intermediate people’s court, which issued a procuratorial suggestion to correct the procedural illegality.

(4) Based on the procuratorial suggestion, the intermediate people’s court accepted Bank A’s action challenging the distribution plan, and the first-instance court upheld all of Bank A’s priority claims.

(5) The defendant appealed against the judgment, and the high people’s court of the province procedurally dismissed Bank A’s lawsuit on the ground that “the enforcement court did not issue a written plan, which does not meet the statutory conditions for case acceptance”.

(6) Dissatisfied with the second-instance dismissal ruling, HongQiao ZhengHan represented Bank A to file a retrial application with the SPC.

During the SPC retrial stage, HongQiao ZhengHan adopted a breakthrough strategy of “substantive rights protection”. In the desperate situation where the lawsuit was dismissed in the second instance and remedy measures were almost interrupted, it accurately refined the principle of “functional equivalence” and insisted that the enforcement court’s procedural illegality should not be borne by the law-abiding creditor. HongQiao ZhengHan argued from multiple dimensions that the enforcement court’s multiple enforcement acts had the substance of distribution, and Article 509 of the Interpretation of the Supreme People’s Court on the Application of the Civil Procedure Law of the People’s Republic of China did not limit the conditions for filing an action challenging the distribution plan to a “written distribution plan”, successfully persuading the collegial panel that procedural defects should not be a reason for depriving substantive rights. Ultimately, the SPC issued a reversed ruling, revoking the original ruling and ordering the high people’s court of the province to conduct a substantive hearing.

IV. Key Adjudication Points

The SPC adopted HongQiao ZhengHan’s representation opinions and clearly stated:

Substantive Functional Equivalence: Although the enforcement court did not prepare a formal plan, it clarified the distribution order and amount through documents such as replies and case closure notices, which functioned as a “de facto distribution plan”.

Priority in Protecting the Right to Sue: The enforcement court’s procedural illegality should not be an obstacle to the parties’ exercise of remedy rights, and the court should substantively resolve disputes.

Revocation of Ruling and Ordering Trial: The second-instance ruling constituted an error in application of law, and the second-instance court was ordered to conduct a substantive hearing to safeguard the creditor’s statutory remedy rights.

V. Case Implications

This case is of great reference significance for financial institutions and the general creditor community: when encountering unfair distribution caused by the enforcement court’s “arbitrary acts” or “inaction”, do not be deterred by “formal requirements”. Even without a nominal “plan”, as long as distribution facts exist, creditors can safeguard their rights through professional legal strategies. This ruling of the SPC has set a benchmark for enforcement distribution disputes across the country where “no access to sue” is encountered, ensuring that creditors’ priority right to repayment will no longer be frustrated due to defects in enforcement procedures.

Turning Defeat into Victory: HongQiao ZhengHan Breaks the “Rashomon” in an 8-Year Dispute Over a 100-Million-Yuan Villa

Recently, the “100-Million-Yuan Villa Sales Contract Case” represented by HongQiao ZhengHan Law Firm has come to a conclusion. The Supreme People’s Court ruled in a retrial to dismiss all the opposing party’s applications, uphold the final judgment of the Shanghai High People’s Court in favor of the appellant, and confirm the buyer company’s ownership of the villa in question. Spanning nearly 8 years, the case went through multiple procedures including dismissal of the lawsuit in the first instance, order for trial in the second instance, victory in the retrial first instance, affirmation on appeal, and victory in the retrial at the Supreme People’s Court, covering both civil and criminal fields. In the end, it recovered for the client (the buyer) a scarce property with historical protection value worth over 100 million yuan, demonstrating HongQiao ZhengHan lawyers’ outstanding capabilities in the field of major and complex civil and commercial dispute resolution.

Case Background: A “Rashomon”-Style Real Estate Battle

In 2017, the buyer company signed a house sales contract with Seller S, purchasing a garden villa with historical protection and collection value on Wukang Road in Shanghai for 100 million yuan. After the online signing of the contract, the buyer paid the full 100 million yuan purchase price to the seller’s bank account in a lump sum, but the seller refused to transfer the property title. The buyer had no choice but to file a lawsuit, yet the seller claimed never to have received the purchase price, alleging that the buyer “fabricated a house sale, which was actually a guarantee for private lending”.

The confusing facts plunged the case into a “Rashomon” situation, launching an 8-year journey to “reconstruct legal facts” and “break through the fog”.

Case Difficulties: An Intricate Legal Predicament

1. Extremely High Difficulty in Fact Restoration

After the 100 million yuan purchase price entered Seller S’s account, it was immediately transferred out and frantically circulated among multiple companies related to a third party J within just 1.5 hours, finally ending up in an account of an entity related to the buyer. Seller S claimed that it never actually controlled the funds, and the transaction was a “fraudulent fake house purchase, essentially a loan guarantee”.

2. Frustration in First Instance Due to Criminal Intervention

Seller S repeatedly intervened or delayed the civil trial through various means, including filing a criminal report with the public security organs, applying for procuratorial supervision with the procuratorate, reporting to the discipline inspection commission, and petitioning the court. After a “contract fraud case” was criminally filed, the civil lawsuit was dismissed in the first instance, the case was transferred to the public security organs, and the civil procedure was forced to suspend.

3. Fierce Disputes Over Legal Characterization

Core issues such as whether there was criminal fraud under the house sales contract; if no criminal fraud existed, whether it constituted civil fraud; whether the subject of civil fraud was the third party J or the buyer; whether the contract was revocable under fraud by the third party J; whether the buyer was a bona fide counterpart; and how to characterize the nature of the 100 million yuan funds had no precedents due to the special facts of the case, leading to great disputes over the application of law.

Case Highlights: Key Strategies for Breaking the Deadlock and Winning

1. Visualization Application Assisting the Court in Perceiving Every Detail

Faced with case materials occupying 6.86G of computer memory, including Seller S’s resume, the buyer’s transaction motives and background materials, historical transaction contracts related to the case, fund payment flow records, the intricate equity structure and affiliated relationships of several companies, criminal transcripts of about 10 parties on multiple occasions, WeChat chat records, and complex and messy loan amount and interest calculation details, the legal team sorted out the fund flow and character relationship diagram through “visual charts”, locked in key elements such as the appearance of the transaction during house viewing, the participating parties and environment at the time of signing, the receiving account at the time of payment, a comparison of the similarities and differences in the statements of all parties in the criminal transcripts, and the true expression of intent involved in the WeChat records, successfully restoring the case facts:

The buyer had paid the purchase price in accordance with the contract, and the seller had credulously entrusted its close friend, third party J, with long-term control of its bank card, U-shield, property ownership certificate, and keys, resulting in the loss of control over the purchase price.

During the second instance, the presiding judge even took the initiative to request HongQiao ZhengHan to provide an electronic version of the visualized PPT for the court’s research and discussion of the case.

The complex relationships between the parties in the case have been blurred for confidentiality purposes.

2. Civil-Criminal Linkage Breaking Procedural Barriers

When the seller exerted pressure through criminal means, the legal team assisted the client in responding to the public security investigation at the first time and submitted a special legal analysis report. Eventually, the public security organs closed the case on the ground of “no criminal facts”, putting the case back on the right track of civil trial. After the second instance ordered the continuation of the trial, the Shanghai No.1 Intermediate People’s Court ruled in favor of the buyer in the first instance, the Shanghai High People’s Court affirmed the judgment, and the Supreme People’s Court dismissed the application for retrial and upheld the favorable outcome. However, in each civil stage, the seller continued to initiate criminal public security investigations, procuratorial supervision, and discipline inspection commission investigations through various means and procedures. Criminal review ran through the entire civil trial, and the joint response through civil-criminal linkage helped the client achieve a favorable result.

3. Long-Term Layout and Comprehensive Defense Against Derivative Risks

After winning the second instance, the seller obstructed enforcement, triggering 3 derivative lawsuits (including a third-party enforcement objection lawsuit filed by the seller’s ex-husband, a separate ownership confirmation lawsuit in a different court, and a claim for house transfer taxes and fees). The legal team predicted the controversial focuses, solidified the foundation for victory in advance, and ensured the unobstructed realization of the client’s property rights.

Case Value: Adjudication Rules Confirmed by Victory

The case was upheld in the retrial by the Supreme People’s Court, and the legal document sets forth two major adjudication rules:

1. “Fraud by a Third Party” Does Not Constitute Grounds for Revocation

Even if fraud by a third party exists, the validity of the transaction is not affected if the counterparty to the contract is unaware and without fault.

2. Boundaries of the Application of the “Risk-Bearing” Principle

A seller who hands over its account and property right certificates to others and allows the free flow of funds shall be deemed to have disposed of its own rights and may not rely on this to oppose a bona fide buyer.

Handling Lawyers: 8 Years of Professionalism and Perseverance

Relying on HongQiao ZhengHan’s “corporatized” system, multiple partners and lawyers participated in the discussion, research, and formulation of litigation strategies for this major case throughout the 8 years, ensuring the case outcome. Under this system and working model, the lead legal team also grew rapidly: Lawyer Yao Huiyun, the case handler, has advanced from a junior lawyer to a senior partner; this case was the first one handled by Lawyer Lu Xiaocheng after graduation and joining the firm, and Lawyer Lu has now become an experienced dispute resolution lawyer. From the dismissal of the first instance to the affirmation of the retrial by the Supreme People’s Court, the nearly decade-long litigation marathon tested not only the lawyers’ professional competence but also their extreme commitment to the client’s interests. HongQiao ZhengHan’s operation model of “extreme professionalism and in-depth collaboration” seamlessly connected all links of evidence analysis, procedural offense and defense, and derivative risk disposal, ultimately paving a path to victory in the dilemma of “no precedents to follow”!

Dispute over the Transfer of Equity in a Commercial Bank Valued at Over 12 Billion Yuan | Supreme People’s Court: Transfer of More Than 5% of Equity in a Commercial Bank Without Prior Approval Is Ineffective, and Splitting to Avoid Approval Is Not Allowed

Recently, the Supreme People’s Court issued the Civil Ruling ((2024) Supreme Court Civil Application No. 2152), ruling to dismiss Zhongjing’s application for retrial. With this, the nearly four-year-long dispute over the equity transfer of Huishang Bank worth tens of billions of yuan between Shanshan, represented by HongQiao ZhengHan, and Zhongjing has finally come to an end after trials at three levels of courts—the Shanghai Financial Court, the Shanghai High People’s Court, and the Supreme People’s Court. All of Zhongjing’s sky-high claims of over 6 billion yuan against Shanshan were dismissed by the courts.

Case Review

In August 2019, Shanshan, representing all buyers, and Zhongjing, representing all sellers, jointly signed a Framework Agreement, stipulating that Shanshan would acquire approximately 14% of Huishang Bank’s equity held by Zhongjing at a price of about 12.1 billion yuan, including approximately 2% of domestic shares directly held by Zhongjing, approximately 2% of domestic shares held by Zhongjing’s affiliated entities, and approximately 10% of H-shares held by Zhongjing’s overseas entities.

Stipulations in the Framework Agreement

1) The buyer and seller shall separately sign share/equity transfer agreements for the aforementioned assets respectively, and the main terms shall be consistent with this Agreement; otherwise, this Agreement shall prevail;

2) The buyer shall pay the deposit before the specified deadline;

3) After receiving the deposit, the seller shall submit the materials required for approval to the buyer, who shall file an application for share transfer with Huishang Bank, and upon approval by Huishang Bank and the regulatory authorities, the parties shall go through the procedures for the transfer of domestic shares;

4) The buyer shall pay the remaining transaction price before the settlement date.

Performance Status

1) After the signing of the Framework Agreement, Zhongjing and Shanshan signed an Equity Transfer Agreement for one of the equity transfers and completed the industrial and commercial change registration;

2) Shanshan paid the deposit in full in accordance with the agreement;

3) After the parties submitted the transaction approval procedures to Huishang Bank, before Huishang Bank was scheduled to hold a board meeting to deliberate on the “Proposal on the Investment in Huishang Bank by Shanshan Holdings Co., Ltd. and Other 4 Enterprises”, Zhongjing called Huishang Bank, stating that Shanshan had clearly indicated to it that it could not pay the remaining price as agreed, and the equity transfer proposal was not suitable for submission to the meeting, so Huishang Bank withdrew the aforementioned proposal.

4) Before the settlement date, Shanshan did not pay the remaining transaction price to Zhongjing.

Litigation Status

Zhongjing filed a lawsuit on the ground that Shanshan’s failure to perform the payment obligation on time constituted a breach of contract, claiming that Shanshan should compensate it for various losses of over 6 billion yuan.

Judgment Result

The contract was rescinded and the status quo ante was restored, the parties mutually returned the equity and equity transfer payment, and the parties’ claims for compensation for losses were dismissed.

Core Adjudication Opinions

The subject matter of this case involved a huge amount and complex legal relationships. Before HongQiao ZhengHan was entrusted, the case had been heard multiple times, and Shanshan was in an unfavorable situation where it might be found in breach of contract and ordered to pay huge compensation. After accepting the agency, HongQiao ZhengHan put forward a subversive claim that “the contract was not approved and thus not effective, Shanshan had no obligation to pay the equity transfer payment and shall not be liable for breach of contract compensation”, which was finally supported by the court, avoiding huge compensation for Shanshan.

This case went through first instance at the Shanghai Financial Court, second instance at the Shanghai High People’s Court (affirmed), and retrial review at the Supreme People’s Court. Except for the finding that both parties were at fault in terms of fault liability, the agency opinions put forward by HongQiao ZhengHan on the following controversial issues were basically adopted by the court, fundamentally reversing Shanshan’s previous unfavorable situation. The details are as follows:

I. Is the Framework Agreement a preliminary contract or a formal contract?

Agency Opinion of HongQiao ZhengHan:

The content of a preliminary contract is generally brief and does not directly point to specific changes in rights and obligations, while the terms of a formal contract are relatively complete. The “Framework Agreement” in this case is a typical formal contract, not a preliminary contract.

Firstly, from the perspective of expression of intent, the “Framework Agreement” directly states the final rights and obligations of the transaction parties, including clear and specific stipulations on the subject assets, transaction price, payment, liability for breach of contract, etc., and explicitly provides that the rights and obligations of the ancillary agreements to be signed separately for each equity transfer shall be subject to the Framework Agreement, rather than signing a “new contract” separately to determine the rights and obligations between the parties.

Secondly, from the perspective of content, the content of the “Framework Agreement” directly points to specific changes in rights and obligations, and there is no expression such as “this Framework Agreement shall terminate upon the signing of a formal contract separately”.

Thirdly, from the perspective of performance standards, the completed transaction acts of the parties are all performances of the “Framework Agreement”. The paid equity transfer payments and the delivered equity are all performed in accordance with the “Framework Agreement”.

Finally, from the perspective of liability for breach of contract, the breach clause of the “Framework Agreement” directly targets the failure to perform the obligations under the “Framework Agreement”, rather than the liability for breach of contract to be borne when the ancillary equity transfer documents are not signed separately.

Adjudication Opinion of the Supreme People’s Court:

Firstly, from the specific content of the Framework Agreement, it clarifies the formation of an equity transfer relationship between Shanshan and its designated domestic and overseas entities and Zhongjing, and makes clear and specific stipulations on the subject assets, transaction method, transaction consideration, payment and equity transfer method, liability for breach of contract, etc., which include the main terms of a contract.

Secondly, the Framework Agreement stipulates that the share/equity transfer agreements and other ancillary agreements to be signed separately shall have main terms consistent with the Framework Agreement, and in case of inconsistency, the Framework Agreement shall prevail; for matters not stipulated in the share/equity transfer agreements and other ancillary agreements, the Framework Agreement shall prevail. The Equity Transfer Agreement for the first delivery stipulates that the equity transfer is an integral part of the transaction matters agreed in the Framework Agreement, and the Framework Agreement and the Equity Transfer Agreement have the same legal effect. It can be seen that the Framework Agreement, as the core document for equity transfer, the subsequent agreements signed and performance acts of the parties are all implemented around the specific stipulations of the Framework Agreement, and inconsistent terms and unstipulated matters shall be subject to the Framework Agreement.

In summary, combining the factors that the content stipulated in the Framework Agreement is specific and clear and includes the main terms of the contract, the stipulated liability for breach of contract is clear, the Framework Agreement is governing, and its relevance to other agreements involved in the case, it is found that the Framework Agreement and related contracts are indivisible, and the Framework Agreement is a formal contract.

II. Does the Framework Agreement need to be submitted for approval together, and is it effective?

Agency Opinion of HongQiao ZhengHan:

The Commercial Banking Law and the Nine-Minute Meeting Minutes stipulate that the purchase of more than 5% of the total shares of a commercial bank shall be subject to the prior approval of the CBIRC, and a contract without approval is not effective due to the lack of the special effective conditions stipulated by law. The disputed transaction is a package transfer of 14% of Huishang Bank’s shares, and the equity transfer contracts for the disputed transaction include the Framework Agreement and ancillary agreements. The Framework Agreement can only take effect after being submitted to the CBIRC for approval together with the ancillary agreements, and there is no possibility of independent effectiveness.

The Framework Agreement explicitly stipulates that the rights and obligations of the equity transfer in this case shall be subject to the Framework Agreement, and the ancillary agreements shall be consistent with the Framework Agreement; in case of inconsistency, the Framework Agreement shall prevail; for matters not stipulated in the ancillary agreements, the Framework Agreement shall prevail. Therefore, the Framework Agreement can more objectively reflect the actual situation of the equity transfer transaction than the ancillary agreements. If the Framework Agreement is not submitted for approval together, the regulatory authorities cannot judge the true intent of the parties, which does not meet the requirements of “penetrating” supervision.

Adjudication Opinion of the Supreme People’s Court:

Combining the factors that the content stipulated in the Framework Agreement is specific and clear and includes the main terms of the contract, the stipulated liability for breach of contract is clear, the Framework Agreement is governing, and its relevance to other agreements involved in the case, it is found that the Framework Agreement and related contracts are indivisible, and the Framework Agreement is a formal contract. As a contract agreed by both parties through consultation, the equity transfer share stipulated in the Framework Agreement has exceeded 5% of the total shares of Huishang Bank, which falls under the circumstance stipulated in Article 28 of the Commercial Banking Law that shall be subject to the prior approval of the banking regulatory authority of the State Council. At present, the Framework Agreement has not gone through the approval procedures, and the original court’s finding that the Framework Agreement is not effective is not improper.

III. Can the partial completion of equity delivery infer that the corresponding equity transfer agreement is effective?

Agency Opinion of HongQiao ZhengHan:

The disputed transaction of transferring 14% of Huishang Bank’s equity is integral and indivisible. Legally, the transfer of more than 5% of a commercial bank’s equity can only take effect after the equity transfer contract is approved by the regulatory authorities. In terms of regulatory requirements, the Framework Agreement and ancillary agreements can only take effect after being submitted to the regulator for approval together. Any phased delivery act that attempts to evade supervision or is based on a misunderstanding of the law is wrong and should be corrected, rather than presuming that the contract is effective without approval based on the wrong result (i.e., partial equity delivery).

Adjudication Opinion of the Shanghai High People’s Court:

When the transferring parties intend to transfer more than 5% of the total equity, even if the actual transfer acts are intentionally or unintentionally divided into multiple times, the approval obligation shall be performed before the first transfer. The practice and opinion of the parties in this case of adopting a batch transaction method, not submitting for approval when the previous transaction does not reach 5%, and preparing for approval only when the transaction amount is about to exceed 5% evade financial supervision and violate the legislative purpose of the Commercial Banking Law, constituting a circumvention act, which this Court does not recognize.

Although the subsequent equity contracts signed and performance acts of the relevant parties have a certain independence, their real purpose and expression of intent are all to perform the overall objectives and relevant terms agreed in the Framework Agreement. Evaluating these ancillary contracts and documents separately or determining the rights and obligations of the parties will violate the true expression of intent of the parties in signing the contracts. Therefore, in the case that the Framework Agreement is not effective, the relevant equity transfer agreements and contracts signed by the parties subsequently shall be found to be not effective.

Adjudication Opinion of the Supreme People’s Court:

In this case, both Zhongjing and Shanshan, while fully aware of the obligation to obtain prior approval, carried out the purchase and equity transfer acts without approval, which is obviously improper, and both parties are at fault. … This Court holds that Zhongjing, while fully aware that the equity transfer involved in the case has not been approved, still actually carried out the equity transfer and cooperated in going through the equity change registration, and objectively has improper performance acts and fault.

IV. Does Shanshan’s failure to pay the remaining equity transfer payment constitute a breach of contract?

Agency Opinion of HongQiao ZhengHan:

When the contract is not approved and effective, two types of obligations and corresponding liabilities for breach of contract in the contract have taken effect independently: first, the approval obligation to promote the effectiveness of the contract and its liability for breach of contract; second, the obligations that shall be performed first and their liability for breach of contract, which are explicitly agreed in the contract as a prerequisite for performing the approval obligation. In addition, other main rights and obligations of the contract, including Shanshan’s obligation to pay the remaining equity payment and Zhongjing’s obligation to deliver the equity, are not effective, and neither party may require the other party to perform before the transaction is approved. Therefore, when the contract is not effective, Shanshan has no payment obligation and cannot constitute a breach of contract.

Adjudication Opinion of the Supreme People’s Court:

In the case that the Framework Agreement is not effective, Zhongjing’s claim for liability for breach of contract against Shanshan for delayed payment cannot take effect independently. Therefore, its claim that the ineffectiveness of the Framework Agreement is caused by Shanshan’s fundamental act of failing to pay the price as agreed and that it is entitled to apply the deposit penalty cannot be established, and this Court does not support it.

V. Who is the subject of the approval obligation?

Agency Opinion of HongQiao ZhengHan:

From the perspective of the performing subject, in accordance with the principle of good faith, the approval (cooperation) obligation, as a “pre-contractual obligation” before the contract takes effect, is borne by both parties to the contract. From the perspective of the performance period of the obligation, the approval obligation of the parties to the contract runs through the entire process from the “signing of the contract” to the “effectiveness of the contract”.

Moreover, in accordance with the judicial interpretations on transactions that require approval to take effect, the approval obligation mainly lies with the transferor. For example, Article 8 of the “Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Mining Right Dispute Cases” and Article 5 of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Dispute Cases Involving Foreign-Invested Enterprises (I)” both explicitly stipulate that the transferor bears the approval obligation and shall be liable for compensation if it violates this obligation.

Therefore, for a contract that takes effect upon approval, in accordance with the contract stipulations, legal provisions, or the principle of good faith performance, both parties to the contract have the obligation to promote the effectiveness of the contract in good faith. As the transferor and major shareholder, Zhongjing obviously has the obligation to actively promote the completion of the approval, and in any case, it should not obstruct the board meeting that has been scheduled to be held, which necessarily constitutes a breach of the approval obligation.

Adjudication Opinion of the Shanghai Financial Court:

In accordance with the provisions of the second paragraph of Article 27 of the “Interim Measures for the Administration of Commercial Bank Equity”, the applicant for approval of the change of more than 5% of commercial bank equity is the commercial bank. The formal application for approval to the regulatory authorities shall be filed by Huishang Bank, and the Framework Agreement mainly stipulates the internal deliberation process of Huishang Bank. The “Share Transfer Contract” for the domestic share transaction of Huishang Bank signed by Zhongjing and Shanshan stipulates that: “After the signing of this Contract, both parties shall file an application for share transfer with Huishang Bank and the regulatory authorities in accordance with the provisions, and jointly go through the procedures for the transfer of the target shares to Shanshan at the registration and settlement institution.” The applicant subject stipulated in the above contract is inconsistent with the provisions of the second paragraph of Article 27 of the “Interim Measures for the Administration of Commercial Bank Equity”, and the parties did not explicitly stipulate the bearing of the legal consequences of the approval obligation in the contract, so both parties have the obligation to promote the approval in accordance with the principle of good faith.

VI. If the Framework Agreement is not effective, how to determine the fault liability?

Agency Opinion of HongQiao ZhengHan:

Before the contract is approved and effective, neither Shanshan’s payment obligation nor Zhongjing’s equity delivery obligation is effective, but the approval obligation has taken effect independently. Shanshan cannot be at fault for the payment obligation that has not yet arisen, and Zhongjing’s suspension of the board meeting to prevent approval is the only party at fault.

Adjudication Opinion of the Shanghai High People’s Court:

Regardless of the attribution of the approval liability subject, if the parties strictly abide by the provisions of this article of the Commercial Banking Law, and do not perform the ineffective Framework Agreement or actually carry out equity transfer before obtaining approval, there will be no equity changes and fund delivery, and no other secondary losses will be caused. All losses arising from the performance of the equity transfer agreement by the parties when the contract as a whole is not effective shall be borne by the parties who improperly perform the contract.

Adjudication Opinion of the Supreme People’s Court:

Both Zhongjing and Shanshan, while fully aware of the obligation to obtain prior approval, carried out the purchase and equity transfer acts without approval, which is obviously improper, and both parties are at fault. Therefore, both parties shall bear corresponding liabilities for the losses caused by the performance without approval.

Zhongjing is also at fault for the ineffectiveness of the Framework Agreement, and in the case that the Framework Agreement is not effective, the liability for breach of contract against Shanshan for delayed payment cannot take effect independently. Therefore, this Court does not support its claim that the ineffectiveness of the Framework Agreement is caused by Shanshan’s fundamental act of failing to pay the price as agreed.

In summary, the law stipulates that the purchase of more than 5% of the equity of financial institutions such as commercial banks and insurance companies shall be subject to the approval of the relevant competent authorities, and approval is a statutory effective condition of the contract. A contract without approval is not effective. Therefore, before the contract takes effect, the purchaser has no obligation to pay the equity payment and shall not be liable for breach of contract for failing to pay the equity payment.

In practice, many transaction parties have inertial cognition of the validity of the contract, and do not know that approval will affect the validity of the contract. After signing the contract and before completing the approval, they begin to perform the main rights and obligations of the contract such as paying the equity payment and delivering the equity, and even mistakenly believe that they should be liable for breach of contract for failing to pay as agreed. The courts hearing this case made a clear and accurate determination on the principle that a financial equity transfer contract for more than 5% equity is not effective without approval, and specially evaluated the parties’ practice of splitting transactions and attempting to evade the approval of the Framework Agreement content, explicitly pointing out that such practices and opinions evade financial supervision and violate the legislative purpose of relevant laws, constituting circumvention acts.

Against the background of increasing attention to financial security and financial order, many professional opinions of the courts hearing this case may provide useful guidance and reference for the transaction and dispute resolution of other financial equities.

For any professional exchanges and discussions, please feel free to contact us at any time.