Theory On The Contact Law Relief Of Anticipatory Breach Of Bonds

The illusion of zero-default of bonds results in the ignorance on the covenants of default within the bond market of China.Covenants such as bond acceleration were not stipulated in the bond indenture,as a result,the bondholders are forced to seek contract law remedies such as anticipatory breach in civil litigation when credit risks arise before the due date of bond credit.This article analyzes the real needs and theory basis of such a contract law relief,which is common among the practice of civil disputes regarding bond anticipatory breach,and restate the judicial rules pursuant to empirical study on judicial cases.Further,this article discusses about the legal application of anticipatory breach in bonds,combining the legal interpretation and judicial mechanism into the proposals of improving the contract reliefs of anticipatory breach of bonds.Under the context of this bond market,the anticipatory breach of bonds in essence refers to the significant uncertainty in repayment of the principal.Considering the existence of distribution of corporate interest,the agent cost,the information asymmetry faced by creditors,the creditors are still susceptible to the credit risks of the company,including the risk of cash flow,the risk of opportunism,the risk of asset variation.These risks could cause the debtor to be unable to repay as expected.From the perspective of law,these risks,which could rise before the due date,and the bond creditors could be restricted by such a term,which makes it rather difficult to seek relief due to the lack of any contractual basis for acceleration.Therefore,the only measure is to seek additional relief from the contract law rules and principles.The theoretical basis of bond anticipatory breach is the contractual theory of bonds,which assist in filling up the defects of contract.The contract law provides the provisions of anticipatory breach and the defense of insecurity for such circumstances,according to which the bond holders could cause acceleration in litigation without acceleration clause by avoiding the restriction of term.In judicial practices,the substantive issues for which the court determines anticipatory breach is:(i)the issuer lost its solvency and does not provide any credit enhancement;(ii)the issuer defaults in its payment of interest or disclosure of information which cause the failure of contract purposes;(iii)other bond defaults of the issuers.This judicial relief is created in the intersection zone of Contract Law and Security Law,the publicity of the disputes makes it necessary to settle the dispute prudently.However,reviewing the current judicial cases,there are still problems such as: Firstly,from the perspective of judicial determination:(i)the failure of contract purposes is interpretated wrongly,and(ii)the omissions is presumed as the default of the issuer.Secondly,in application of laws,the provision of anticipatory breach and defense of insecurity are not clarified and differentiated properly,which causes defected application in laws.Finally,from the perspective of judicial results:(i)the object of contract cancellation is not clear;(ii)the same bond become due on different date as a result of individual cancellation(iii)the imbalance of interest between bond holders.The latest amendment by civil code provides new methods for interpretation of anticipatory breach and defense of insecurity,which could be defined as prospective non-performance and anticipatory refusal to perform and shall be settled with different relief mechanisms.The amendment also applies to bond disputes.Firstly.for the determination of insolvency of the issuers,the following factors could be taken into consideration,to decide whether the issuer has lost its solvency: the credit rate,the financial report,the asset freezing,the enforcement of judgment and other defaults.Secondly,the bondholders shall request the issuer to provide reasonable credit enhancement within reasonable period of time in a written resolution of bond holders’ meeting.Thirdly,if the issuer fails to provide such a credit enhancement or recover its solvency,the bondholders may delegate the trustee to file a lawsuit to cause acceleration of the bond.For anticipatory refusal to perform,which is an intentional act of damaging the creditor right,the bond holders could directly request the issuer to pay the bond before maturity.The bondholders may assert the right of revocation to recover the properties transferred by the debtor pursuant to Article 539 of the Civil Code under such circumstances as well.In judicial practices,to identify the purpose of a contract,a complete framework shall be established.(i)The mutual agreement of contractual object shall be emphasized;(ii)subjective interpretation of the actual meaning of both parties shall be adopted combining the provisions of the bond transaction documents;(iii)the type of bonds shall be taken into consideration to avoid over abstraction of contractual object.Finally,as bond contracts are commercial contracts,the application of civil law shall be properly adjusted with accordance of business practices and the ideologies of commercial adjudication.The purpose of such an adjustment is to revise some unsuitable arbitral provisions to bond transactions,and to avoid the spillover effects.As a result,it is suggested that:(i)the liability of default shall be applied preferably instead of cancellation;(ii)the business customs in bond acceleration should be adopted to interpret the “reasonable period”,“reasonable guarantee”,“contractual object”stipulated by laws,and(iii)the procedures and organizations shall be considered to enable proper cooperation of judicial proceeding and self-autonomous procedures.