Since January 2020, the novel coronavirus pneumonia epidemic has spread throughout the country. With the development of the epidemic, local people's governments at all levels have launched primary and secondary response measures for public health incidents, although these measures have effectively controlled the epidemic, but the epidemic has also brought serious negative impacts on the production and operation of enterprises and the development of China's economy. In addition to enterprises that ensure epidemic prevention and control, basic people's livelihood and urban operation, the business of many domestic enterprises has been shut down, among which the service industry (such as catering, hotels, tourism, offline consumption, offline commerce, etc.) and labor-intensive industries have been greatly impacted. This situation will inevitably result in defaults on future maturing bond products.

Taking real estate development enterprises as an example, the beginning of the year is often the peak period for housing enterprises to issue bonds, and the sudden epidemic has caused real estate sales to suffer a cold snap, coupled with the peak period of debt repayment this year, the willingness of housing enterprises to issue bonds has become particularly strong. According to Moody's monitoring data, by the end of 2019, 12 of the 58 housing companies that issued high-yield foreign bonds had weakened liquidity; Affected by the epidemic, the liquidity of housing enterprises will further weaken in the first quarter of this year. While sales are blocked, housing companies are facing huge debt repayment pressure and financial costs this year. Relevant analysis reports show that the bonds of 95 real estate enterprises will mature this year will exceed 500 billion yuan, an increase of 45% over 2019. From the perspective of interest expenses, according to the average financing cost and total interest-bearing liabilities of 70 housing enterprises in the first half of 2019, the total monthly interest expenses of these 70 housing enterprises will exceed 35 billion yuan. At the same time, on February 3, 2020, China's bond market thundered again - Kangmei Pharmaceutical announced that the company's liquidity funds were relatively tight, and the principal and interest of the "15 Kangmei Bonds" were not repaid on schedule, and the differentiated payment scheme was being further improved. TThe bond default involved RMB2.4 billion, the largest debt ever matured by Kangmei Pharmaceutical. The impact of the epidemic on Chinese entities is enormous. It is foreseeable that the real economy may face the risk of widespread debt default in the future. In view of this, various departments from the central to the local government have successively issued a series of financial support measures to help enterprises tide over the current difficulties, in addition, when enterprises have difficulties in repaying bond principal and interest due to the impact of the epidemic, resulting in bond default disputes, they should also protect their rights through legal channels. Based on the impact of the current epidemic on existing bond products, the author intends to analyze whether issuers of bond products can invoke force majeure as a defense for default of bond products.

1. Bond defaults that may result from the epidemic

(i) "Technical default"

According to the Notice of the General Office of the State Council on Extending the 2020 Spring Festival Holiday, the Spring Festival holiday has been extended to February 2, 2020; However, some regions will extend on this basis, such as Shanghai, Suzhou and Hangzhou, which require enterprises to start construction no earlier than 24:00 on February 9, 2020, and many enterprises are forced to stop work, and the first impact on the capital market is that there may be technical default events.

The so-called "technical default" has not yet been clearly defined, but at present, the default that occurs due to failure to transfer the funds to the custodian institution in a timely manner due to errors in the collection of funds, system operation errors, and the closure of large-value payment systems is collectively referred to as technical defaults, and will generally be paid immediately within the next trading day or several trading days. According to the statutory holiday arrangement of the State Council this year, January 31 should be the trading day, but after the State Council adjusted the holiday arrangement, China Securities Depository and Clearing Corporation has adjusted January 31 to a non-trading and non-settlement day, and the securities market has been postponed to February 3. The settlement date of the funds related to the bond pledge repurchase was postponed to February 3;

However, it is worth noting that due to extended holidays or restricted movement in some regions, companies may cause technical defaults on bonds due to untimely pooling of funds between February 3 and 10. Once a bond issuer defaults technically, the difficulty and cost of subsequent financing will rise.

(2) Affected by epidemic prevention and control measures, resulting in difficulties in business operation and inability to repay the principal and interest of bonds on time

Affected by the spread of the epidemic, many enterprises have experienced a sharp decline in operating income in the short term, and lack sufficient funds to repay the principal and interest of mature bonds. In response to the development of the epidemic, relevant government departments have taken necessary administrative measures such as personnel isolation, traffic closure, and delayed resumption of work to prevent and control the spread of the epidemic, but from the perspective of enterprise development, it will inevitably affect the production, operation and sales of enterprises, and some enterprises also face a period of production and business closure, which aggravates the operational difficulties faced by enterprises. The above-mentioned objective reasons caused the bond issuer to fail to repay the principal and interest of the bond on time in accordance with the relevant documents of the offering memorandum, subscription agreement and other bonds, and the bond product defaulted.

(3) Epidemic prevention and control measures cause enterprises to delay the resumption of work, employees are not in place in a timely manner, and other non-monetary payment obligations agreed in the contract are not performed on time

In addition, in order to protect the interests of bond investors, bond transaction documents such as prospectus, bondholders' meeting rules, bond trustee management agreement and other bond transaction documents will also stipulate non-monetary payment obligations such as information disclosure and regular provision of financial statements. If the above obligations are not fulfilled in a timely manner, the bond issuer will also bear the corresponding liability for default. During the epidemic prevention and control period, due to administrative measures such as personnel isolation, traffic closure and delay in resuming work taken by government departments, the issuer may also constitute a bond default due to its inability to perform the above obligations on time.

The above are not all the types of defaults that the epidemic may cause, it is still impossible to judge how long the epidemic will last, if the epidemic is prolonged, then the impact on the real economy may be much more than that, more real economy industries will be more impacted, and deep defaults will be further stimulated.

2. Whether force majeure constitutes a defence for bond default

Article 117 of the Contract Law stipulates that if a person is unable to perform a contract due to force majeure, he shall be partially or completely exempted from liability according to the impact of force majeure, unless otherwise provided by law. If force majeure occurs after a party delays performance, it cannot be exempted from liability. "Force majeure" as used in this Law refers to objective circumstances that cannot be foreseen, avoided or overcome. Article 117 of the Contract Law stipulates that "force majeure" refers to objective circumstances such as natural disasters and wars that are unforeseeable and inevitable when the parties conclude the contract.

During the outbreak of SARS in 2003, the Supreme People's Court issued the Notice of the Supreme People's Court on Doing a Good Job in Relevant Trial and Enforcement Work of the People's Courts during the Prevention and Control of Infectious Atypical Pneumonia (Law [2003] 72). Article 3 (3) stipulates that "due to the SARS epidemic, contract dispute cases in which the performance of the original contract has a significant impact on the rights and interests of one party may be handled according to the specific circumstances and the principle of fairness may be applied." Disputes arising from the inability to perform the contract directly due to administrative measures taken by the government and relevant departments to prevent and control the SARS epidemic, or the inability of the parties to the contract to perform at all due to the impact of the SARS epidemic, shall be properly handled in accordance with the provisions of Articles 117 and 118 of the Contract Law of the People's Republic of China. Although the SPC notice has lapsed, its views are worth learning.

The author summarizes the offering memorandum of the bond business that it has undertaken, and for different bond products, under normal circumstances, the relevant provisions of force majeure stipulated in the offering memorandum, for example: the prospectus for corporate bonds on the stock exchange will stipulate that "(1) Force majeure events refer to natural and social events that cannot be foreseen, avoided and overcomeden by both parties when signing this Agreement." The party claiming that a force majeure event has occurred shall promptly notify the other party in writing and provide proof that the force majeure event occurred. TThe party claiming that a force majeure event has occurred must also make all reasonable efforts to mitigate the adverse effects of the force majeure event. (b) In the event of a Force Majeure Event, the Parties shall consult immediately to find an appropriate solution and shall make all reasonable efforts to minimize the losses caused by the Force Majeure Event. This Agreement shall be terminated prematurely if such force majeure event makes it impossible to achieve the objectives of this Agreement. FFor another example, the offering memorandum of medium-term notes of the Association of Financial Market Institutional Investors stipulates that "force majeure refers to the situation where, after the announcement of the medium-term note plan, the responsible person of the current medium-term note is unable to perform due to circumstances that the parties cannot foresee, avoid and overcome." (1) Force majeure includes but is not limited to the following circumstances: 1. Accidents caused by natural forces such as floods, fires, earthquakes, tsunamis, etc.; 2. The occurrence of international and domestic financial market risk accidents; 3. The trading system or trading venue cannot work normally; 4. Abnormal social accidents such as war, strikes, terrorist attacks, etc. (2) Response measures to force majeure events: 1. When force majeure occurs, the issuer or lead underwriter or joint lead underwriter shall promptly notify investors and relevant parties of medium-term notes, and do its best to protect the legitimate rights and interests of investors of medium-term notes. 2. The issuer or lead underwriter or joint lead underwriter shall convene a meeting of investors of medium-term notes to negotiate and decide whether to terminate the medium-term notes or exempt or delay the performance of relevant obligations based on the impact of force majeure events on medium-term notes. ”

There are slight differences in the description of force majeure clauses in the offering memorandum of the two bond products illustrated above, and the description of the offering memorandum for medium-term notes is more detailed. If force majeure is to be used as a reason for exemption, it is necessary to establish that the new crown pneumonia epidemic is an unforeseeable, inevitable and insurmountable objective circumstance that makes it impossible to perform the contract.

In the bond default situation mentioned above during the epidemic, force majeure cannot be applied as a default defense for the situation where the bond issuer is unable to repay the principal and interest of the bond. From the perspective of legal provisions, there is no problem of the inability to perform monetary debts, so the provisions of force majeure cannot be applied. Article 109 of the Contract Law stipulates that "if one of the parties fails to pay the price or remuneration, the other party may require it to pay the price or remuneration", while Article 110 stipulates the liability for breach of contract of non-monetary obligations: "If one of the parties fails to perform non-monetary obligations or performs non-monetary obligations inconsistently with the agreement, the other party may require performance, except in any of the following circumstances: (1) it is legally or de facto impossible to perform". It can be deduced from the above provisions that the legislator believes that only non-monetary obligations have the problem of inability to perform, and there is no inability to perform monetary obligations.

Therefore, the force majeure exemption provisions cannot be applied to bond issuers that encounter operational difficulties and insufficient funds due to the impact of the epidemic, and thus fail to repay the principal and interest on time. Even under the current situation of the epidemic, the court will not consider that the epidemic has caused an obstacle to the performance of the enterprise's repayment of principal and interest.

If an enterprise fails to perform non-monetary payment obligations such as information disclosure in a timely manner due to the administrative measures taken by epidemic prevention and control, it may invoke force majeure to exempt it from liability for breach of contract. According to the relevant provisions of the Contract Law, when applying force majeure, it should be noted that the bond issuer as the defaulting party and the bondholder as the non-breaching party also have certain obligations to perform.

Under the Contract Law, as the defaulting party, the bond issuer has the obligation to notify and prove. On the one hand, if an issuer is unable to perform its obligations on time due to the epidemic and its administrative measures, it should send a written notice to the trustee and each bondholder in a timely manner to fully fulfill its notification obligation. On the other hand, issuers should also provide evidence to prove the existence of force majeure events, although the occurrence of the epidemic is well known, but the severity of the epidemic varies from place to place, and the administrative control measures adopted are also different, and how the epidemic and its administrative measures hinder the performance of contractual obligations is still an issue that courts will focus on in individual trials. Therefore, the issuer should keep specific documents issued by government authorities to prove that force majeure circumstances do exist and hinder the performance of contractual obligations.

As a non-breaching party, bondholders have an obligation to prevent the expansion of losses, that is, when the issuer defaults on its bonds, the holders should take appropriate measures to prevent the expansion of losses, such as convening a meeting of bondholders, and if they fail to take appropriate measures to cause the loss to increase, they shall not claim compensation for the increased losses.

III. Conclusion

The epidemic will inevitably bring pain to China's macroeconomic and micro market players, but the impact of the epidemic on China's economy and capital market is generally short-term, and the impact on the value of most enterprises is also short-term and indirect, and does not have much impact on economic operation in the medium and long term. Regardless of whether the epidemic has produced a wave of bond product defaults, enterprises should calmly review the shortcomings of their own development and improve their ability to resist risks.

(This article is translated by software translator for reference only.)