Question raising

In 2020, Ms. Wang, Mr. Liu, and dozens of other investors signed a partnership agreement with a certain partnership enterprise for private fund investment and wealth management. The agreement stipulated that the partnership enterprise would pay dividends to investors at a fixed rate of return every six months. When the investment was due, the partnership enterprise would repay the principal and pay the final dividend. Due to the failure of the partnership enterprise to pay the payable dividends and principal upon maturity, investors intend to file a lawsuit to resolve the dispute, but do not know how to characterize fixed rate financial management and determine the cause of the lawsuit.

Lawyer Interpretation

Article 15 of the Interim Measures for the Supervision and Administration of Private Investment Funds clearly stipulates that "Private fund managers and private fund sales institutions shall not promise investors that the investment principal will not be lost or that the minimum return will be guaranteed." Therefore, the fixed rate investment of the aforementioned investors cannot be classified as partnership private equity funds. The partnership agreement stipulates a fixed interest and principal guarantee, which violates the prohibitive provisions of Article 15 of the Interim Measures for the Supervision and Administration of Private Investment Funds, and may result in the entire agreement being deemed invalid.

There is controversy in judicial practice regarding whether fixed rate of return wealth management can be recognized as private entrusted wealth management. Some judicial institutions recognize private entrusted wealth management agreements with guaranteed principal and fixed interest, while others believe that such agreements are essentially private loans. Some judicial institutions believe that private entrusted wealth management agreements with guaranteed principal and fixed interest are invalid for the entire agreement.

For example, in the (2019) Liaominshen 3576 case, the High Court of Liaoning Province believes that in private entrusted financial activities, although the trustee's commitment to guaranteed returns changes the basic characteristics of the entrusted contract where the principal bears risks, the Contract Law has arbitrary provisions on the principal's risk-taking. The guaranteed returns clause is an incentive and constraint mechanism established by the party's autonomy on the entrusted behavior, and does not violate mandatory legal provisions, Therefore, all provisions on guaranteed returns in private entrusted wealth management contracts should not be considered invalid. The entrusted financial management type of the agreement signed between the parties in this case is the type of guaranteed fixed return on principal and interest, and the contract should be recognized as valid.

In the case No. (2021) Yue 03 Min Zhong 11023, the Shenzhen Intermediate People's Court believes that the appellant's claim that both parties belong to an entrusted financial management relationship does not match the agreement that the appellant only charges fixed interest and does not participate in profit distribution. The legal relationship between the two parties conforms to the legal nature of private lending and should be recognized as a lending relationship. In the case No. (2022) Jing 74 Min Zhong 475, the Beijing Financial Court held that the entrusted wealth management agreement had a minimum yield clause, which should be deemed invalid.

In practice, for many financial and wealth management products, they cannot be simply characterized by the name of the agreement. The legal issues involved are diverse and complex. For example, in the above cases, different opinions may arise in judicial practice. Therefore, there are significant risks to the safety of funds in private investment and wealth management. Investors should consult relevant professionals before signing investment and wealth management agreements and paying investment funds.