Supreme Court Upholds Dissolution of Private Bad Asset Manager

Jilin Financial Assets Management Co. Ltd. will be dissolved, after China’s Supreme Court rejected an appeal by the bad asset manager whose controlling shareholder illegally borrowed 965 million yuan ($136.3 million) from the firm.

The Supreme People’s Court said it decided last month to uphold an earlier ruling by the Jilin Province High People's Court, according to a written verdict (link in Chinese) posted on its website last Wednesday.

The case spotlights the chaotic management at many of China’s privately-owned asset management companies (AMCs) that were meant to specialize in recovering bad loans at the regional level. But some of those expanded into more-lucrative businesses outside that core area, such as lending to property developers. 

China’s bad asset management industry is still dominated by four major state-owned firms. But in an effort to foster bad-asset cleanup at the regional level, the sector was opened to provincial-government-backed and some privately owned AMCs.

The Supreme Court’s decision will make Jilin Financial Assets the first of over 60 AMCs in China to be dissolved after a years-long dispute between its two shareholders. 

Hongyun Group Co. Ltd., a privately-owned port conglomerate, held 80% of Jilin Financial Assets when it was set up in 2015 with 1 billion yuan in registered capital. State-owned Jilin Financial Holding Group Co. Ltd. held the other 20%.

A few months after its establishment, Hongyun lent 965 million yuan of the AMC’s funds to several of its affiliates without approval from the AMC’s shareholders or board. Hongyun also used its shares in the AMC as collateral for 800 million yuan in fund-raising.

In October 2017, Jilin Financial Holding Group sued the AMC and Hongyun for poor management. The state-owned minority shareholder said the AMC “suffered from operational difficulties and an inflated compliance structure under the Hongyun’s control.”

In January 2018, the Changchun Intermediate People’s Court ruled the AMC should be dissolved after the two shareholders failed to settle their dispute despite several attempts at an equity transfer and boosting the company’s registered capital. In January 2019, the Jilin Province High People's Court upheld the decision after the AMC and the shareholder filed an appeal against the original ruling.

In its final ruling, the Supreme Court said that Hongyun had not recovered the 965 million yuan loan before the end of 2015 as the AMC had previously guaranteed.

That meant the AMC’s “main business of acquiring and disposing of non-performing assets could not be carried out normally,” the Supreme Court said. “The purpose of the establishment of the company was also frustrated. Serious difficulties have occurred in the operation of the company.”

The court added that allowing the company to continue operating would only lead to Hongyun’s future making of unilateral decisions due to its dominant position, which would harm the interests of the minority shareholder.

Contact reporter Tang Ziyi (ziyitang@caixin.com) and editor Doug Young (dougyoung@caixin.com)

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