Five-Ocean Debt Demand Deadlock: Will Intermediaries Be Responsible?

 Five-Ocean Debt Demand Deadlock: Will Intermediaries Be Responsible?

In late August, according to people familiar with the situation, investors may hope to let intermediaries assume joint and several liabilities in the absence of debt repayment capacity in the current construction of Wuyang.

Several lawyers in related fields believe that in the case of false issuance of Wuyang Bonds, there are corresponding preconditions for intermediaries to assume responsibility, and the determination of responsibility boundary is worth discussing.

A bond underwriter from a large securities firm in East China told reporters that the industry was very concerned about the handling of the Wuyang case. If the principal underwriter ultimately assumes the responsibility of just acceptance, it will reduce the risk tolerance of private enterprise bond financing in the industry.

Intermediary institutions for joint and several hearings at court sessions

All this entanglement originated in August 2015.

Two years later, on August 14, 2017, the 15th Five-Ocean Debt formally defaulted, which led to the cross-default of 15th Five-Ocean 02. Wuyang Construction Group Co., Ltd. (hereinafter referred to as Wuyang Construction) is a private enterprise mainly engaged in construction in Shangyu District, Shaoxing City, Zhejiang Province. It was established in 1999 with registered capital of 376.6 million yuan. It has the special qualification of general contracting for construction of housing construction projects, and has a number of first and second-level qualifications. It was still in the beginning of bond issuance. There is a rating of 2A. It is understood that Wuyang Construction is quite famous in Shangyu Construction Industry, and many important projects are contracted by it.

Chen Zhizhang, chairman of Wuyang Construction, once said in media reports that issuing bonds does not require any collateral or guarantee, but can obtain financing only on the basis of corporate credit. It directly improves the debt structure of the company and provides financial support for the expansion of the companys business.

At this time two years later, Wuyang Construction is in the position of a red card for default and the unsecured side of the bond.

According to the Wechat Public Number of Hangzhou Intermediate Peoples Court, on the afternoon of May 14, 2019, the Hangzhou Intermediate Court heard 16 cases of bondholders suing Wuyang Construction and other defendants for securities false statement liability disputes.

It is understood that the trial involved the first 16 plaintiffs, involving more than 22 million yuan.

The plaintiffs claim for compensation for principal, interest and overdue interest was filed by Song Yixin, a lawyer of Shanghai Hanlian Law Firm, on behalf of investors. The claim was that Wuyang Construction, Chen Zhizhang and Debang Securities should compensate the principal, interest and overdue interest of the bonds purchased by the plaintiff. According to the plaintiff, according to the Tort Liability Law, the subject of prosecution is fully qualified. Chen Zhizhang, the legal representative of Wuyang Construction and Wuyang Construction, should bear all joint and several liabilities for breach of contract and fraudulent issuance of bonds. The fraudulent issuance of Wuyang Construction is manifested in the offset of accounts receivable and accounts payable for construction projects, and the reduction of enterprisesaccounts receivable and accounts payable, resulting in less provision for bad debts and the fraud of CSRCs corporate bond issuance approval with false declaration materials.

At the same time, the plaintiff sued that the issuance of 155-Ocean Bonds and 155-Ocean 02 by Wuyang Company constituted a breach of contract because it could not pay the principal and interest of the repossessed part on time. According to the decision of administrative penalty issued by the SFC, Wuyang Company defrauded the approval of the bonds issued by the public company by false declaration documents, so it requested Wuyang Company to pay the principal and interest of the bonds, and requested Chen Zhizhang, the legal representative, Debang Securities Co., Ltd., the underwriter, Daxin Accounting Firm, Shanghai Jintiancheng Lawyer. Firms and Dagong International Credit Assessment Co., Ltd. are jointly and severally liable.

The defendant, Wuyang Construction, believes that whether civil compensation should be misrepresented shall be examined and determined by the court. The defendants agent, Chen Zhizhang, made a sincere apology to all bondholders on behalf of Chen Zhizhang in court, and believed that it did not constitute joint infringement.

The defendant, Debang Securities, argued that Debang Securities had no basis for participating in fraudulent issuance of Wuyang Construction. Debang Securities made a due diligence investigation, fulfilled its duty of care, did not constitute joint infringement and did not assume joint and several liability. There is no causal relationship between the underwriting behavior of Debon Securities and the loss of the plaintiff. The defendant Daxin, Jintiancheng and Dagong International agreed that they did not constitute joint infringement and also demanded that the plaintiffs claim be rejected.

It is understood that the Hangzhou Intermediate Court has not handed down a verdict on this case as of the date of publication.

An investor told reporters that Wuyang bond is the first public offering bond issued by the CSRC by qualitative fraud. Debon Securities, Daxin Accounting Firm and Dagong Rating are invited to prove their innocence.

In fact, for Wuyang Construction and Chen Zhizhang, the SFC has carried out many investigations and punishments before, and has also taken regulatory measures and investigated relevant intermediaries such as Debang Securities, among which Daxin Accounting Firm has been subject to regulatory penalties.

Up to now, Debon Securities has not been regulated qualitatively and has been subjected to administrative penalties for the false issuance of Five-Ocean Bonds.

On August 11, 2017, Wuyang Construction Bulletin received the notice of investigation from the SFC, and on July 10, 2018, it received the Decision on Administrative Penalty. The Securities Regulatory Commission has identified the following problems in the construction of Wuyang: to defraud the approval of public issuance of corporate bonds by compiling false financial statements and other declaration documents for the period 2012-2014; to issue bonds with false financial documents for the period 2013-2014, resulting in false records in the documents disclosed by private issuance of corporate bonds; and to fail to disclose the annual report for 2016 as required. Change intermediary information. Through financial means of whitewashing statements, Wuyang Construction packaged the company into good assets, made false declaration materials to defraud the issuance of public bonds, and there were illegal acts such as disclosing false information to investors and not disclosing information according to regulations in the process of issuing private bonds. The amount involved in the case was huge and the means were bad, which resulted in the issuance of bonds. Serious consequences of non-payment of vouchers.

In this regard, the SFC has imposed a total fine of 41.4 million yuan on those responsible for Wuyang Construction and its chairman, Chen Zhizhang, and imposed fines on Chen Zhizhang and measures to ban him from entering the securities market for life, so that he may not serve as a supervisor of listed and non-listed public companies for life.

In addition, on January 22, 2019, the SFC made an administrative penalty decision on Daxin. It is recognized that Wuyang Construction has issued an audit report for the annual financial statements of 2012-2014 for the public issuance of corporate bonds, and Daxin has approved Wuyang Constructions accounting treatment of accounts receivable and accounts payable without sufficient and appropriate audit evidence to verify it. In August 2018, the China Association of Interbank Traders issued a message giving Dagong International serious warning and punishment, ordering it to rectify within a time limit, and suspending related business in the debt financing instrument market for one year. Beijing Securities Regulatory Bureau ordered Dagong International to take a one-year corrective action simultaneously.

As the principal underwriter of Wuyang Bonds, Debang Securities issued the Notice of Receiving the Notice of Investigation from Zhejiang Supervisory Bureau of China Securities Regulatory Commission on September 7, 2018.

Definition of UnderwritersLiability

Han Peng, a lawyer from Beijing Realizer Law Firm, told reporters that the final determination of the Wuyang case should be based on the findings of the SFC. The court also needs to combine the evidence in the case with the findings of the SFC to make the final decision.

Hangzhou heard the case in September last year and held a court session in May this year. However, the time limit for the investigation and determination of administrative penalties in the Securities Regulatory Commission is not clearly limited.

However, judging from the plaintiffs appeal of Hangzhou Intermediate Court, investors will focus on intermediaries after no way to claim debt. The court is required to decide that underwriter Debang Securities Co., Ltd., intermediary Daxin Accounting Firm, Shanghai Jintiancheng Law Firm and Dagong International Credit Assessment Co., Ltd. shall bear joint and several liabilities.

Lawyers in many related fields have told reporters that there are two ways to assume liability for tort: one is joint liability, which is similar to the liability of joint and several guarantee, and the other is to assume full compensation and liability according to the degree and proportion of fault, which is limited liability. The plaintiff (investor) evidences his loss. As far as the lawsuit itself is concerned, it is also possible to reach a settlement.

According to Article 69 of the Securities Law of China, The prospectus of the issuer and the announcement of the listed company, the method of raising corporate bonds, financial and accounting reports, listing report documents, annual reports, interim reports, interim reports and other information disclosure materials have false records, misleading statements or major legacies. Where an investor suffers losses in securities trading due to omission, the issuer and the listed company shall bear the liability for compensation; the issuer, the directors, supervisors, senior managers and other persons directly responsible for the loss, as well as the sponsors and underwriters of the securities company, shall bear joint and several liability with the issuer and the listed company. But except for those who can prove that they are not at fault.

However, a lawyer who did not want to be named told reporters, To be recognized as joint and several liability, according to the precondition of the securities law, that is, the subject of the act is identified as having the intention or presumptive intention to implement fraudulent issuance, and has carried out fraudulent issuance. In addition, he said that the original legislative basis of the securities law was more to restrict the sponsors and listed companies of stock issuance, rather than the issuers and underwriters.

Another lawyer in related fields told reporters that the current Securities Law stipulates in Article 69 that joint and several liability is more stringent for the intermediary structure. From a theoretical point of view, it may be more reasonable, fair and fair to assume supplementary liability.

In the view of the above lawyers, there is a division of joint responsibility and supplementary responsibility in jurisprudence. When the issuers liability as the first party is insufficient, the intermediary institution shall bear supplementary liability for the remaining amount of liability. From this point of view, intermediaries should assume supplementary liability unless there is evidence of malicious collusion.

With regard to the obligations and responsibilities of underwriters, Article 31 of the Securities Law stipulates that: When a securities company underwrites securities, it shall verify the authenticity, accuracy and completeness of the public offering documents; if it finds that there are false records, misleading statements or major omissions, it shall not engage in sales activities; if it has already sold securities, Sales activities must be stopped immediately and corrective measures must be taken.

At present, our countrys regulations on sponsorsdiligence obligation mainly consist of Securities Law and Measures for the Management of Sponsorship Business in Securities Issuance and Listing (hereinafter referred to as Measures for Sponsorship Management) promulgated by the Securities Regulatory Commission and Guidelines for Sponsors Due diligence Investigation (hereinafter referred to as Guidelines for Sponsorship and Adjustment).

Among them, the general requirement for the sponsors duty of diligence and due diligence is Article 11, paragraph 2 of the Securities Law, which stipulates that the sponsor should abide by the business rules and industry norms, be honest and trustworthy, be diligent and conscientious, prudently check the application documents and information disclosure information of the issuer, and supervise the issuers normal operation. And Article 4 of the Measures for the Administration of Sponsorship: Sponsorship institutions and their sponsor representatives shall abide by laws, administrative regulations and the relevant provisions of the CSRC, abide by business rules and industry norms, be honest and trustworthy, diligent and responsible, recommend issuers to issue and list securities in due diligence, and continuously supervise issuers to perform their normal operations and abide by them. Commitment, information disclosure and other obligations. Specific guidelines for the sponsors duty of diligence and due diligence are the Guidelines for the Sponsors Duty.

And the underwriters diligent duty of due diligence is specifically guided by the Guidelines for Due Adjustment of Underwriting.

The general requirement for underwritersdiligence and due diligence is Article 31 of the Securities Law: When a securities company underwrites securities, it shall check the authenticity, accuracy and completeness of the public offering documents.

In addition, Article 34 of the Measures for the Administration of the Issuance and Transaction of Corporate Bonds stipulates that: The underwriter shall, in accordance with these Measures and the relevant provisions of the CSRC and the China Securities Association on due diligence, risk control and internal control, formulate a strict risk management system and internal control system. To strengthen the management of pricing and distribution process.

A person from the bond underwriting department of a small and medium-sized securities firm said that in fact, it is not in line with the most basic business logic to let the underwriter who only charges a limited fee bear the full responsibility from the matching of income and risk. One of the most obvious examples is that the guarantor company charges a much higher premium than the intermediary fee in bond underwriting. Underwriters include general verification of the three characteristics of public offering documents, so as not to sell or stop selling after finding problems, and not to use improper means in the process of selling. Generally, it is based on the audit reports provided by rating agencies and accounting firms to verify.

Private Debt Issuance Difficulty

Sun Binbin, an analyst of Tianfeng Securities, believes that since the wave of default in 2018, the overall decline in credit quality of private enterprises has become a recognized fact. At present, the market risk preference is relatively tight, and there is a one-size-fits-all phenomenon for private enterprises.

According to Wind data statistics, since 2015, the number and amount of private enterprise bonds issued by exchanges have declined significantly.

In 2015, 99 private enterprises issued bonds, amounting to 175.315 billion yuan, accounting for 15.4% and 19.1% of the total issue of the exchange. By January-June 2019, the ratio had increased to 13.5% and 10.9%. In addition, from the perspective of the whole market, the proportion of private enterprisesdebt issuance in the total amount is lower. From January to June 2019, the proportion of private enterprises development in the whole market is 6.4%.

According to Wind statistics, there are 95 public bonds with a total size of 89.565 billion yuan and 123 private bonds with a total size of 68.677 billion yuan. From the data of past years, it can be seen that default bonds are mostly private-equity bonds before 2016; since 2017, default of public-equity bonds has increased significantly. Accordingly, various issues such as the progress of bond default disposal, investor rights protection and litigation disputes have gradually attracted market attention.

At present, the disposal methods of bond default are mainly bankruptcy reorganization, self-financing and debt reorganization of issuers, and the overall disposal period is longer.

It is understood that there are not many small public offerings similar to the situation of five foreign debts in the market at present, and there are some similarities between 16 Zhongan Xiao which has not yet been paid. 16 Zhonganxiao (code: 136821) was issued by Zhonganke Co., Ltd. (hereinafter referred to as Zhonganke) on the Shanghai Stock Exchange in November 2016, with a principal of 1.1 billion yuan and a period of three years. The issuers option to raise the par interest rate and the investors option to sell back at the end of the second year is a small public offering bond for qualified investors. As a result of the three-year non-public issuance of Zhongan Section bonds in December 2015, 15 Zhongan cancellation (code: 125620, issuance amount: 500 million yuan) in May 2018, a substantial default occurred, triggering the 16 Zhongan cancellation cross-default.

In September 2018, the issuer Zhongan Section has completed the principal and interest payment of 15 Zhongan Elimination by raising funds from various sources.

Up to now, there has been no significant progress in the disposal of 16 Zhongan Xiao. From July 22 to 31, 61 investors have sued the issuer Zhongan Ke and some intermediaries (including Tianfeng Securities, the trustee of 16 Zhongan Xiao).

There are also some exchanges that raise bonds, and there are different types of bond defaults, so the disposal process has attracted the attention of the market.

14 Rich Birds is a 2014 corporate bond issued by Rich Birds Co., Ltd. in April 2015, with an amount of 800 million yuan, and a substantial default occurred in April 2018. In addition, another private bond 16 Rich Birds 01 (the amount issued is 1.3 billion yuan) also constituted a substantial default in May 2018.

At present, the default principal and interest of 14 Rich Birds have not been repaid, and Guotai Junan is still promoting the bankruptcy and reorganization of Rich Birds.

Sun Binbin believes that at a time when risk preferences are tight, the market remains cautious about private enterprises. At present, the credit spreads of AAA-level private enterprises have begun to fall, while the credit spreads of AA+and AA-level private enterprises are still in a slow and broad stage, and the situation of differentiation among different levels of private enterprises is maintained.