Preface

In judicial practice, where affiliated enterprises exhibit “a high degree of人格混淆, the cost of distinguishing the assets of each affiliated enterprise member is excessively high, and it seriously harms the fair compensation interests of creditors,” the conditions for consolidated bankruptcy should be deemed satisfied. In such circumstances, the determination of a high degree of人格混淆 is highly likely to overturn the entity’s prior independence as a bond issuer. Addressing this practical issue, this article focuses on legal provisions concerning bond issuer independence review, information disclosure obligations, information disclosure obligors, etc., combined with the determination criteria for consolidated bankruptcy, to conduct a tentative practical analysis of the relationship between consolidated bankruptcy determination and bond issuer independence review principles, as well as the impact of consolidated bankruptcy on the determination of bond issuer independence.

I. The Issue of Bond Issuer Independence Review

(1) Legal Provisions Related to Bond Issuer Independence Review

The “Company Law of the People’s Republic of China” (hereinafter “Company Law”), the “Securities Law of the People’s Republic of China” (hereinafter “Securities Law”), the “Law of the People’s Republic of China on the People’s Bank of China” (hereinafter “PBoC Law”), the “Notice on Matters Concerning the Implementation of the Registration System for Public Issuance of Corporate Bonds,” the “Regulations on the Administration of Enterprise Bonds,” the “Measures for the Administration of Corporate Bond Issuance and Trading,” and the “Measures for the Administration of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market” are the main legal provisions related to bond issuance projects. However, none of these legal provisions contain specific stipulations regarding issuer independence.

(2) The Issue of Bond Issuer Independence Review Principles

In bond issuance practice, issuer independence review is generally conducted based on the principle of independence in “assets, finance, personnel, business, and organizational structure” (commonly referred to as the “Five Independence Principle”). That is, the issuer’s主体 is examined based on the Five Independence Principle to determine whether it has a business system and corresponding assets related to its operations, whether there is organizational confusion, and whether it can independently make financial decisions. The main legal basis for the Five Independence Principle can be understood as follows:

1. According to Article 3 of the Company Law, enterprise legal persons shall have independent legal person property and enjoy legal person property rights; the company shall bear liability for its debts with all its property. Based on this, independence of legal person personality should be a prerequisite for an enterprise to issue bonds.

2. According to Article 15 of the Securities Law[1], issuers should have健全 and well-functioning organizational structures. Based on this provision, issuers should be enterprise legal persons operating under normal conditions, avoiding harm to bondholders’ lawful rights/interests due to the issuer’s空壳化 or operational crisis.

3. According to the “Notice of the General Office of the State Council on Implementing the Revised Securities Law”: “Issuers applying for public issuance of corporate bonds shall, in addition to meeting the conditions stipulated in the Securities Law, have a reasonable asset-liability structure and normal cash flow.” Based on this, issuers should also have a stable business model with no significant abnormalities in business activities. Article 14 provides: “Public issuance of corporate bonds shall meet the following conditions: (1) having健全 and well-functioning organizational structures; (2) the average distributable profit over the past three years being sufficient to pay one year’s interest on the corporate bonds; (3) having a reasonable asset-liability structure and normal cash flow; (4) other conditions prescribed by the State Council. Public issuance of corporate bonds shall be accepted, reviewed, and verified by stock exchanges and reported to the China Securities Regulatory Commission for registration.”

4. For issuing corporate bonds[2], according to Article 11 of the “Guidelines for Due Diligence Investigation in Corporate Bond Underwriting (2020 Edition)”: “Underwriting institutions shall investigate the issuer’s independence from its controlling shareholder and actual controller in terms of business, assets, personnel, finance, and organizational structure; investigate the situation of the issuer’s funds being occupied by the controlling shareholder, actual controller, and their related parties during the reporting period, as well as the provision of guarantees for the controlling shareholder, actual controller, and their related parties. Underwriting institutions shall analyze the above circumstances and fully disclose their impact on solvency.” Combined with Article 1-5-6 of the “Corporate Bond Business Work Paper Directory (2020 Edition),” when preparing work papers for corporate bond underwriting and受托 management businesses, underwriting institutions and受托 managers should include “materials related to the independence of the issuer from its controlling shareholder and actual controller in business, assets, personnel, finance, and organizational structure.”

5. For issuing non-financial enterprise debt financing instruments[3], according to Article 8 of the “Guidelines for Due Diligence Investigation of Debt Financing Instruments of Non-Financial Enterprises (2023 Edition)”: “Lead underwriters shall重点 conduct due diligence on matters including the enterprise’s controlling shareholder and actual controller, corporate governance, production and operation of major business segments, significant increases and decreases in major accounting items, credit status, major asset restructuring (if any), credit enhancement (if any), and other matters that the lead underwriter believes have a material impact on investors’ judgment of the enterprise’s solvency, and prepare a due diligence report.” See the “Lead Underwriter Due Diligence Work Paper Directory (2023 Edition)” for details.

II. The Issue of Bond Issuance Information Disclosure Obligations

(1) Provisions on Information Disclosure Obligations

According to the Company Law, Securities Law, and PBoC Law, to standardize information disclosure in the corporate credit bond market, Article 5 of the “Measures for the Administration of Information Disclosure of Corporate Credit Bonds[4]” (hereinafter “Information Disclosure Measures”) provides: “Information disclosure shall follow the principles of truthfulness, accuracy, completeness, timeliness, and fairness, and shall not contain false records, misleading statements, or material omissions.”[5] According to Article 13 of the Information Disclosure Measures: “Enterprises shall disclose their mutual independence from the controlling shareholder and actual controller in terms of assets, personnel, organizational structure, finance, and business operations.” Specifically, at the bond issuance stage, Article 30 of the “Measures for the Administration of Corporate Bond Issuance and Trading” provides that if registration application documents contain false records, misleading statements, or material omissions, the stock exchange or the China Securities Regulatory Commission shall terminate the relevant issuance and listing review process or registration process and explain the reasons to the issuer.

Since enterprises have information disclosure obligations during both the bond存续 and issuance periods, Article 18(1) of the Information Disclosure Measures provides: “During the bond存续 period, when a major event occurs that may affect solvency or investors’ rights and interests, the enterprise shall promptly disclose and explain the cause of the event, its current status, and possible impacts.” Combined with Article 18(2), “major events” include “the enterprise deciding to distribute dividends, make capital reduction, merger, division, dissolution, or apply for bankruptcy, or entering bankruptcy proceedings or being ordered to close.”

[6]

(2) Information Disclosure Obligors

According to Chapters 2 and 3 of the Information Disclosure Measures, information disclosure obligors mainly include the following two categories:

1. Enterprise Information Disclosure.

Pursuant to Article 7 of the Information Disclosure Measures, information disclosure obligors include the enterprise[7] and its directors, supervisors, senior management, controlling shareholders, and actual controllers[8]; Articles 24, 26, and 27 provide that in some cases, enterprise information disclosure obligors also include the lead underwriter,受托 manager, custodian group,接管 group, successor of debt settlement obligations, and institutions providing guarantees for bonds. Article 25 of the Information Disclosure Measures provides: “Where an enterprise enters bankruptcy proceedings, the enterprise’s information disclosure obligations shall be assumed by the bankruptcy administrator, except where the enterprise manages its own property or operates its own business.”[9]

2. Intermediary Information Disclosure.

Article 29 of the Information Disclosure Measures provides: “Professional institutions (including but not limited to bond underwriting institutions, credit rating agencies, accounting firms, law firms, asset appraisal institutions,受托 managers, etc.) and personnel providing intermediary services for bond issuance, trading, and存续 management shall be diligent and尽责, strictly comply with relevant laws, regulations, professional standards, and self-regulatory rules, perform obligations according to regulations and agreements, and be responsible for the professional reports, professional opinions, and other information they disclose.” At the same time, according to Article 30, “Lead underwriters and受托 managers shall perform information disclosure duties or obligations according to regulations and agreements and urge enterprises to perform information disclosure obligations in accordance with these Measures.”

III. The Issue of Determining Conditions for Consolidated Bankruptcy

According to the Bankruptcy Law and the “National Court Bankruptcy Work Symposium Minutes” (hereinafter “Symposium Minutes”), in bankruptcy cases of affiliated enterprises, where there is “a high degree of人格混淆, the cost of distinguishing the assets of each affiliated enterprise member is excessively high, and it seriously harms the fair compensation interests of creditors,” the conditions for consolidated bankruptcy should be deemed satisfied. In existing substantive consolidated bankruptcy cases of affiliated enterprises, the determination of bankruptcy can be divided into two categories: the first category is a single standard, with reasons including but not limited to “high degree of人格混淆,” “high degree of关联 between enterprises,” “loss of independent personality,” etc.[10]; the second category is a multiple standard, based on人格混淆 of legal persons as the fundamental standard, supplemented by auxiliary standards such as “assets difficult to separate,” “high economic cost of separation,” “failure to consolidate would harm creditors’ interests,” etc.[11] Some scholars believe that this multiple standard model, based on a high degree of人格混淆 as the fundamental (necessary) condition, conforms to the spirit of the Symposium Minutes regarding the谨慎 application of the substantive consolidated bankruptcy rule for affiliated enterprises.[12] Whether using a single standard or multiple standards, a high degree of人格混淆 is a necessary condition.

However, is there a difference between “high degree of人格混淆” and “人格混淆” or “lack of independent personality” occasionally appearing in cases? Based on the specific facts and reasoning in court documents, the extension of the aforementioned legal terms used by courts across regions is roughly the same—i.e., a high degree of人格混淆 of company legal persons due to financial confusion, asset confusion, personnel confusion, business operations confusion, etc. The above specific adjudicative standards can be understood as substantively identical to the basic fact that the issuer lacks independent “assets, finance, personnel, business, and organizational structure” and does not meet issuer independence in bond issuance projects. It is worth mentioning that the relationship between consolidated bankruptcy and bond issuer independence is linked through the legal person independence system. In existing consolidated bankruptcy cases of affiliated enterprises, “horizontal人格混淆” situations are in the majority—i.e., several companies controlled by the same parent company or actual controller become “confused” in terms of assets, business, personnel, etc.[13]

IV. The Issue of Bond Issuer Independence Review Responsibility

Given that intermediary institutions should conduct necessary verification and validation of the authenticity, accuracy, and completeness of the content of documents and materials provided by the enterprise. Moreover, if intermediary institutions believe that the materials provided by the enterprise contain false records, misleading statements, material omissions, or material violations of law, they should require the enterprise to supplement or correct them.[14] Assuming that the circumstance of “high degree of legal person人格混淆” leading to consolidated bankruptcy already existed when the consolidated bankrupt主体 issued bonds and continued until the ruling of consolidated bankruptcy, intermediary institutions cannot be excluded from being alleged to have failed to fulfill their prudent review obligations and may bear liability. The specific basis is as follows:

1. According to Article 163 of the Securities Law, if documents produced or issued by securities service institutions for securities issuance, listing, trading, and other securities business activities contain false records, misleading statements, or material omissions, causing losses to others, they shall bear joint and several compensation liability with the principal, unless they can prove they were not at fault. According to Article 40 of the Information Disclosure Measures, if documents produced or issued by securities service institutions for bond issuance, listing, trading, and other business activities contain false records, misleading statements, or material omissions, causing losses to others, they shall bear joint and several compensation liability with the principal according to law, unless they can prove they were not at fault.

2. According to Article 10 of the “Measures for the Administration of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market,” if documents produced or issued by professional institutions and personnel—including underwriting institutions, credit rating agencies, certified public accountants, and lawyers—providing services for debt financing instruments contain false records, misleading statements, and material omissions, they shall bear corresponding legal liability for the part for which they are responsible. Article 57 of the “Rules for Information Disclosure of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market (2021 Edition)” provides: “If information disclosed by enterprises, intermediary institutions, and other information disclosure obligors contains false records, misleading statements, or material omissions, they shall be given a warning, serious warning, or public reprimand, and may also be ordered to correct, apologize, suspend relevant business, or suspend membership rights.”

3. Articles 30 and 31 of the “Summary of the National Court Symposium on the Trial of Bond Dispute Cases” distinguish the rules for determining fault of bond underwriting institutions and bond service institutions. Article 31(2) provides: “The duty of care and scope of liability of accounting firms, law firms, credit rating agencies, asset appraisal institutions, and other bond service institutions shall be limited to their respective work scopes and professional fields. If the documents they produce or issue contain false records, misleading statements, or material omissions, whether they have fulfilled their diligence obligations shall be considered in accordance with the Securities Law and relevant judicial interpretations, distinguishing between intent and negligence and other different circumstances to determine the legal liability they should bear respectively.” Article 18(1)[16] of the “Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Civil Compensation Cases for False Statements in the Securities Market”[15] issued in 2022 provides: “If documents produced or issued by accounting firms, law firms, credit rating agencies, asset appraisal institutions, financial advisors, and other securities service institutions contain false statements, the people’s court shall determine whether they are at fault in accordance with laws, administrative regulations, rules and normative documents formulated by regulatory authorities, by reference to work scopes and procedural requirements stipulated in industry practice standards, and in combination with relevant evidence such as verification work papers.”

Notes (scroll for more):

[1] Article 15 of the Securities Law: Public issuance of corporate bonds shall meet the following conditions: (1) having健全 and well-functioning organizational structures; (2) the average distributable profit over the past three years being sufficient to pay one year’s interest on the corporate bonds; (3) other conditions prescribed by the State Council. Funds raised through public issuance of corporate bonds must be used in accordance with the purposes listed in the corporate bond fundraising prospectus; any change in fund use must be resolved by a bondholders’ meeting. Funds raised through public issuance of corporate bonds shall not be used to cover losses or for non-productive expenditures.

[2] Article 27 of the original “Guidelines for Due Diligence Investigation in Corporate Bond Underwriting (2015 Edition)” provided: “For non-public issuance of corporate bonds, the underwriting institution shall conduct corresponding due diligence investigation based on the content agreed in the offering documents. Due diligence investigation may refer to the provisions of this Guide.” The current “Guidelines for Due Diligence Investigation in Corporate Bond Underwriting (2020 Edition)” deletes the above content, increasing the mandatory obligations of lead underwriters.

[3] According to Article 30 of the “Guidelines for Due Diligence Investigation of Debt Financing Instruments of Non-Financial Enterprises (2023 Edition),” “Where there are other provisions or agreements for定向 issuance of debt financing instruments, the intermediary institution’s due diligence shall follow such provisions or agreements.”

[4] The term “corporate credit bonds” in these Measures includes enterprise bonds, corporate bonds, and non-financial enterprise debt financing instruments.

[5] Article 78 of the Securities Law, Article 4 of the “Notice of the General Office of the State Council on Implementing the Revised Securities Law,” and Article 4 of the “Rules for Information Disclosure of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market (2021 Edition)” also have relevant provisions.

[6] Article 4 of the “Measures for the Administration of Corporate Bond Issuance and Trading” and Article 21 of the “Rules for Information Disclosure of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market (2021 Edition)” also have relevant provisions.

[7] Combined with Articles 8 and 9 of these Measures, enterprises shall establish information disclosure事务 management systems and appoint and disclose information disclosure事务 responsible persons.

[8] Paragraph 2 of this article provides that the controlling shareholder and actual controller of an enterprise shall be honest, trustworthy, diligent, and尽责, and cooperate with the enterprise in performing information disclosure obligations.

[9] Article 38 of the “Rules for Information Disclosure of Debt Financing Instruments of Non-Financial Enterprises in the Interbank Bond Market (2021 Edition)” and Chapter 7, Section 1 of the “Shanghai Stock Exchange Bond自律 Regulatory Rules Application Guidance No. 1 - Continuous Information Disclosure of Corporate Bonds (2023 Revision)” have detailed provisions regarding specific disclosure matters for issuer bankruptcy.

[10] See Guiding Case No. 163 under the “Supreme People’s Court’s Release of the 29th Batch of Guiding Cases” (released on October 9, 2021), the case of Jiangsu Textile Industry (Group) Import and Export Co., Ltd. and its five subsidiaries’ substantive consolidated bankruptcy reorganization. The Nanjing Intermediate Court found that “the six companies involved had a high degree of人格混淆, mainly manifested in: highly交叉 personnel appointments, failure to form a complete and independent organizational structure; shared financial and approval personnel, lack of an independent financial accounting system; highly交叉 and confused business operations, forming a highly confused business entity, objectively making it difficult to properly distinguish the income of the six companies; numerous related debts and guarantees among the six companies, rendering the assets of each company unable to be completely independent of each other, making the清理 of claims and debts extremely difficult.”

[11] See Guiding Case No. 164, the case of Jiangsu Suchun Liquor Co., Ltd. and related companies’ substantive consolidated bankruptcy reorganization. The court found that “the three companies had a high degree of confusion in operations, finance, personnel, management, etc., and the cost of distinguishing the assets of each related enterprise member was excessively high.” In the (2020) Su 0481 Po No. 3 acceptance of substantive consolidation ruling, the court stated: “If substantive consolidated reorganization is not conducted, the fair compensation interests of other creditors will be harmed. Conducting substantive consolidated reorganization of the 12 companies is conducive to substantively and fairly protecting the overall compensation interests of creditors of the affiliated enterprises.” Also see (2021) Su 01 Po No. 31, the case of Nanjing Construction Engineering Group Co., Ltd. and 25 other companies’ substantive consolidated reorganization, and (2021) Su 03 Po No. 10, the case of Jiangsu Cluster Totem Big Data Technology Co., Ltd. and Jiangsu Cluster Soft Innovation Information Technology Co., Ltd. substantive consolidated reorganization.

[12] See Zhao Huimiao and Zuo Changwu, “Standards for Determining Substantive Consolidated Bankruptcy of Affiliated Enterprises in China,” published in Law Application, Issue 4, 2022.

[13] See Guiding Case No. 163 under the “Supreme People’s Court’s Release of the 29th Batch of Guiding Cases” and also (2020) Su 0481 Po No. 3, (2020) Jing 01 Po No. 30, and (2021) Su 03 Po No. 10.

[14] See Articles 10, 29, and 163 of the Securities Law and Articles 33 and 34 of the Information Disclosure Measures.

[15] It should be noted that the “Provisions of the Supreme People’s Court on Several Issues Concerning the Trial of Civil Compensation Cases for False Statements in the Securities Market” and the Securities Law have not been explicitly stated to apply to the interbank bond market.

[16] Paragraph 2 of this article provides: “The liability of securities service institutions shall be limited to their work scope and professional fields. If a securities service institution relies on the basic work or professional opinions of the sponsor institution or other securities service institutions, resulting in false statements in the professional opinions it issues, and it can prove that it has conducted careful verification and necessary investigation and review of the basic work or professional opinions on which it relied,排除 professional doubts, and formed reasonable reliance, the people’s court shall find that it is not at fault.”