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"Yingda Law Firm successfully handled the first asset securitization (ABS) fund collection supervision account fund bankruptcy isolation execution objection case.
In this case, senior partner Jin Lu represented Shanxi Securities Co., Ltd. (“Shanxi Securities”) as an outsider in a loan contract dispute between creditor Guotong Trust Co., Ltd. (“Guotong Trust”) and Rongxin Leasing Co., Ltd. (“Rongxin Leasing”). Guotong Trust filed a property preservation measure against the ABS fund collection supervision account opened by the debtor, and raised an objection in Wuhan Intermediate People’s Court. After hearing, Wuhan Intermediate People’s Court issued an execution ruling on October 30, 2019 (2019) E01 Zhi Yi 786, ruling that Shanxi Securities has sufficient rights to exclude compulsory execution of funds in the account involved and suspending the execution of the subject matter according to law.
It is believed that this case is the first judicial confirmation of the separation of funds in the debtor’s name in the asset securitization product’s fund collection account from the debtor’s assets in an execution objection case in China. The handling lawyer’s grasp of the facts of the case and unique insights into relevant laws on asset securitization greatly protected the legitimate rights and interests of clients during case handling. At the same time, this case has significant significance in judicial practice in this field and has a significant impact on the development of ABS market.
In handling this case, lawyer Jin Lu wrote an article entitled “Brief Analysis and Summary of Handling an Execution Objection Case for People’s Court Execution Behavior on Frozen Fund Collection Accounts,” which is as follows:
Securities companies and subsidiaries of fund management companies carry out asset securitization business by setting up special plans, that is, using cash flows generated by basic assets as repayment sources, and issuing asset-backed securities through credit enhancement through structured methods.
The reason why it is required that the trading basis should be true, the transaction price should be fair, and the cash flow should be continuous and stable is to provide a basis for the true and effective transfer of basic assets and ultimately realize targeted compensation for new transferees based on cash flows from basic assets.
In 2019, due to a loan contract dispute involving Rongxin Leasing, all bank accounts under its name were frozen by court order at creditor’s request. This caused disputes over ownership of funds in accounts related to asset support special plans and legal risks for investors.
Therefore, the fund collection account opened under the name of the original equity holder for the purpose of asset securitization and with the purpose of collecting funds may be frozen by the court in accordance with the law. Can the administrator prove that it is the true beneficiary of the funds in the fund collection account that has been frozen by the court and thus exclude compulsory execution by the court? Does the administrator’s rights to the funds in the collection account suffice to exclude compulsory execution by the court and thus achieve recognition of the risk isolation effect of fund collection accounts to a certain extent in judicial review? These questions urgently need guidance from relevant judicial practice cases. Fourth, views of the agent and people’s court After learning about the account freezing risk disclosed by regulatory banks, the plan administrator immediately entrusted lawyer Jin Lu to file an execution objection application with the executing court. After careful study of the case, the agent concentrated on the nature of funds in fund collection accounts and rights of administrators to exclude compulsory execution and submitted the following agency opinions to the people’s court: According to the “Asset Purchase Agreement for Asset Support Special Plans” signed between plan administrators and original equity holders, rent receivables as basic assets have been legally transferred to securities companies. Therefore, plan administrators (representing asset support special plans) should be considered as rights holders for funds generated by basic assets. Although basic asset transfers are not legally binding on debtors because they do not notify all payers (debtors), they do not affect effectiveness of basic asset transfer behavior or legal binding force on original equity holders and plan administrators.
The content of basic asset transfer has been registered in China’s credit system. Although this registration procedure is not a statutory procedure for debt transfer, it has effectiveness for external publicity and effectiveness for publicity to third-party companies.
In hearing an execution objection application case, people’s courts should not narrowly interpret provisions on “formal examination” in “Provisions of the Supreme People’s Court on Several Issues Concerning People’s Courts Hearing Execution Objection and Review Cases”. They should not unilaterally determine rights holders for funds in accounts based solely on bank account names. According to provisions in Article 25(5) of Paragraph 1 of “Provisions of the Supreme People’s Court on Several Issues Concerning People’s Courts Hearing Execution Objection and Review Cases”, if rights holders (rent receivables) can be formally determined, rights holders for funds generated by rights can also be formally determined accordingly instead of being limited to determining rights holders for funds based solely on account names.
According to “Supervision Agreement” signed between plan administrators, original equity holders and regulatory banks, although original equity holders are nominal account holders for fund collection accounts, they do not have rights to control funds in fund collection accounts. Funds in fund collection accounts are actually owned and controlled by plan administrators. Plan administrators are actual rights holders for account funds. After hearing and deliberation by a collegial panel, people’s courts ultimately adopted lawyer Jin Lu’s agency opinions and confirmed that plan administrators are rights holders for funds in fund collection accounts and have rights to exclude compulsory execution of account funds according to law. People’s courts issued an execution ruling suspending execution against fund collection accounts according to law. Plan administrators may apply for lifting frozen measures against fund collection accounts according to law. Fifth, significance of this case and enlightenment for special asset management plans for asset-backed securities This case is the first judicial practice that confirms that plan administrators are rights holders for funds in fund collection accounts in asset support special plans during judicial review practice. It solves legal disputes over risk isolation of fund collection accounts in asset securitization business to a certain extent in specific cases. It is one of few practical references in judicial practice in this field and has significant significance for asset securitization business. It also provides some legal guidance for future development of asset securitization and design of transaction structures. At the same time, through this case trial process, especially creditor defense opinions, we should also see that legal texts such as notice system for basic asset (debt) transfers, “Asset Purchase Agreement for Asset Support Special Plans,” and “Supervision Agreement” require further exploration and improvement.
