Research On The Validity Of “Bottom Capital And Income” Clauses In Capital Management Contracts

The commercial arrangement of “bottom capital and income” in the asset management business has created a huge shadow banking system in the financial market which is indirect financing in the name of direct financing.Therefore the“rigid payment” has been negatively evaluated by the regulatory and judicial authorities.However,there exist innovative “bottom capital and income” clauses that circumvent “rigid exchange”,such as “credit enhancement measures”,where the current rules don’t define the definition and the legality clearly.The courts meet challenges when related disputes are brought to court.There is no solution to the difficult issues.Through an empirical analysis of judicial adjudication cases,this article attempts to address the following issues: how to determine whether the credit enhancement measures are rigid payment and the validity of the “bottom capital and income” clause and the whole contract.It also argues that in our legal system,the courts,as judges,need to consider both public law and private law interests in order to keep a good balance between freedom of contract and public order and morality.Chapter one examines the chaos and causes of “bottom capital and income”clauses in asset management contracts.Firstly,the New Regulation on Capital Management and the ninth National Courts’ Civil and Commercial Trial Work Conference minutes(hereinafter referred to as "the ninth summary")prohibit “rigid payment”.While capital managements have emerged with designed “credit enhancement measures” purposely.There are loopholes and ambiguities in the existing rules,and exists difficulties for judicial review: firstly,there is no clear definition of “rigid payment”,and the enumerated provisions are not comprehensive enough;secondly,the ninth summary is unclear between rigid payment and credit enhancement measures,which is crucial for the subsequent application of the rules.What are the points of judicial review of “bottom capital and income” arrangements and what the nature and effect of the different arrangements,need to be addressed.Chapter two is the judicial review of “bottom capital and income” clauses in capital management contracts and the difficult issues since the ninth summary.This part contains the points of the courts examined in determining rigid payments and credit enhancement measures,and then summarises the difficulties in the courts’ adjudication are lie on: the uncertainty of the scale of penetrating adjudication,the unclear relationship between credit enhancement documents and rigid payments,and the existence of different judgments in such cases.About the validity,some contracts containing rigid payment clauses are invalid and some become lending contracts,while in some case,the related bodies are liable for breach of contract.The contracts which don’ t constitute rigid payment are valid,and the related bodies are judged to bear the liability for breach of contract or tort liability.The problem with court trials is that there are different paths for determining the validity of the contract,the impact of partial invalidity on the overall validity,and the lack of clarity on how financial regulatory rules affect the validity of the contract.Chapter three solves the issue of how to distinguish the “bottom capital and income” clause,which should be defined into two parts,by clarifying the connotation of rigid payment,and then by giving the judicial recognition path considering the specific legal framework.Firstly,by analyzing the original intention of the regulation of rigid payment is to prevent financial systemic risks,and that financial justice should weigh the public law interests and private law interests to penetrate the subject.As a result,the connotation of rigid payment is to be paid by the issuer or manager of the asset management product itself or through third financial institutions or related parties to achieve the purpose of “bottom capital and income”.In this way,the judge can distinguish whether credit enhancement measures are rigid payment and keep a balance between protecting product innovation and preventing risks.Secondly,based on the legal relationships,this section analyzes whether various types of credit enhancement documents,such as difference compensation agreement,credit rating agreements,commitment letters and repurchase agreements,are rigid payments.Chapter four chapter analyzes the validity of capital management contracts containing “bottom capital and income” clauses,and provides judicial approaches.Combining contractual validity,regulation and judicial jurisprudence,it is concluded that the court’s logic for determining the invalidity of a clause by regulation is the public order and morality.Specifically,the rigid payment clause is directly invalid.While the validity of the credit enhancement measures are complex,a review of the substantive content is required to see whether they are invalid due to constitute a conspiracy to defraud or violate the regulations.And procedural review is also required,including whether the credit enhancement documents are signed following the internal resolution procedures and the information disclosure procedures.Finally,it is necessary to consider whether the contract is severable from the perspective of the parties to judge the validity: if not,the partial invalidity of the clause directly leads to the invalidity of the whole contract,and the parties are liable for contractual negligence.If so,and the “bottom capital and income” clause does not have a decisive impact on the contract,then the court need to review the remaining clauses.