Analysis of the Litigation Subject Qualification of the Manager after the Registration Cancellation in the Context of Contractual Private Equity Funds
Introduction
Contract-based private equity funds are an important legal tool in China's asset management sector. However, in terms of legal positioning, they are essentially just a contract and do not possess the qualifications of a civil entity. Under this structure, the fund manager, as the executor of external legal actions, has the right to sign contracts on behalf of the fund product and participate in litigation. However, in some extreme scenarios, the fund manager is deregistered before the fund product has been liquidated. At this point, whether the fund manager still has the right to exercise litigation rights on behalf of the fund product becomes a controversial issue in some cases. This article systematically analyzes the issue of determining the litigation subject in the context of contract-based private equity funds from three dimensions: civil legal relationship, administrative regulatory norms, and judicial judgment stance. It combines theory and practice to systematically analyze the problem and proposes suggestions for risk prevention in practice.
01
The formulation of the problem
Contract-based private equity funds enjoy advantages such as flexible establishment, simple operation, and lower regulatory costs, and thus occupy a significant position in China's private equity fund market. However, contract-based funds are not civil rights subjects and lack independent legal personality. The realization of their rights and obligations is highly dependent on the fund manager. When the fund manager has its management registration cancelled by the China Securities Investment Fund Association (hereinafter referred to as "the Fund Association"), there is some controversy in certain cases regarding whether it still has the right to file lawsuits on behalf of the fund in its own name.
Some people hold the view that once the registration of a manager is revoked, it no longer possesses the legal qualifications to manage funds and cannot exercise rights externally, including litigation rights. Another viewpoint suggests that the revocation of the manager's registration only affects subsequent fundraising, establishment of new funds, etc., and does not impact its management responsibilities for existing funds, including representing the fund in litigation. This article intends to clarify this issue through a systematic review of legal norms, regulatory provisions, and judicial precedents, in order to provide reference for the adjudication of similar cases and practical operations.
02
An Exploration of the Litigation Subject Qualification of Fund Managers from the Perspective of Civil Legal Relations
(1)
The legal nature of contractual funds
Contract-based private equity funds are not civil rights subjects under China's civil legal regulatory system and do not possess the litigation subject qualifications stipulated in the Civil Procedure Law. Their essence is a trust relationship or entrustment relationship established between the fund manager and the investors through the fund contract. According to Article 88 of the "Minutes of the National Court Civil and Commercial Trial Work Conference" (Judicial Document No. 254 of 2019, hereinafter referred to as "The Nine-Minute Conference Minutes"), currently, in judicial practice, it is generally believed that under the fund contract, a broad trust legal relationship exists between the manager and the investors. In the context of contract-based private equity funds, after the investors deliver their property to the manager, the manager should dispose of the property in its own name and establish civil legal relationships externally.
Under this structure, since the contractual private equity fund products themselves do not possess the independent capacity for expression, the legal subject of their external actions can only be the fund manager, and the nominal party responsible for the legal relationship can only also be the fund manager.
(II)
The theoretical basis for the fund manager to act as the litigation party
According to Article 11 of the "Regulations on the Supervision and Administration of Private Investment Funds": "Private fund managers shall perform the following duties... For the establishment of investment funds through non-public means, private fund managers shall also, in their own name, exercise litigation rights or carry out other legal actions on behalf of the property interests of the private fund."
Meanwhile, the "Guidelines for Private Equity Investment Funds No. 1 (Provisions on the Content and Format of Contract-type Private Equity Investment Fund Contracts)" issued by the Fund Industry Association stipulates in Article 20: "According to the 'Private Fund Measures' and other relevant regulations, specify the rights of the private fund manager, including but not limited to: ... (6) In the name of the private fund manager, represent the private fund to sign relevant agreement documents related to fund investment with other third parties, exercise litigation rights or carry out other legal actions."
Based on the aforementioned regulations, in practice, under the investment transactions of contractual funds, all investment contracts (such as investment agreements, transfer agreements of income rights, etc.) are signed by the fund manager in its own name and stamped with the management company's seal. At the same time, it is indicated that the contract is signed on behalf of a certain private equity fund product. At this time, it is the fund manager that truly serves as the contract entity and enjoys civil rights and assumes civil obligations.
Based on the principle of contract relativity, the benefits under the relevant contract cannot be directly attributed to the investors. Therefore, once disputes arise subsequently, the entity that has the right to file a lawsuit regarding the relevant contract can only be the fund manager. During internal distribution, the terms agreed upon by the manager and the investors in the fund contract belong to another level of contractual relationship. Generally speaking, investors cannot directly assert their underlying investment rights by breaking through the principle of contract relativity.
In certain special circumstances, when the fund products are liquidated in the form of original distribution, it is also necessary for the investors and the fund managers to sign a debt transfer agreement, changing the debt entity under the underlying investment agreement from the fund manager to the investors. At this point, for the investors to file lawsuits and assert rights against the underlying debtors in their own names, it is only reasonable under civil legal relations.
(III)
The registration of the fund manager has been cancelled.
Does not affect civil legal relationships and the qualification of litigation subjects
The 76th and 77th articles of the "Regulations on the Registration and Filing of Private Investment Funds" (issued by the China Fund Association [2023] No. 5) stipulate the circumstances under which the registration of a private fund manager is revoked. The revocation action is essentially a disciplinary measure implemented by the China Fund Association in accordance with industry self-regulation. This single action is not sufficient to cause changes at the civil legal relationship level.
Based on the aforementioned analysis, since the fund manager is already the contracting party of the underlying investment agreement and the investor has not undergone the legal and agreed procedures to change the fund manager, there has been no change at the civil legal relationship level on the outside. The entity that has the right to file lawsuits on behalf of the fund product remains the fund manager. Therefore, the cancellation of the fund manager's registration should not affect its litigation subject qualification.
03
The legal consequences of the cancellation of the registration of administrators from an administrative supervision perspective
(1)
The legal consequences of the cancellation action
As mentioned earlier, the cancellation of the registration of a private fund manager is a disciplinary measure implemented by industry self-regulatory organizations, rather than an administrative penalty or criminal sanction.
According to Article 78 of the "Regulations on the Registration and Filing of Private Investment Funds" (issued by the China Fund Association [2023] No. 5):
After a private fund manager has its registration cancelled or revoked, it shall meet the following requirements:
(1) No new investors or fund size can be added, and no new investments can be made.
(2) It is prohibited to continue using the terms "fund" and "fund management" or similar names for private fund business activities, except in cases related to the disposal of existing private funds.
(3) Take appropriate measures to properly handle the fund assets in accordance with the regulations and contractual agreements, and safeguard the legitimate rights and interests of investors;
(4) Once the fund's assets have been disposed of, it shall promptly go through the procedures for changing the name, business scope, or cancellation of the business registration with the market entity registration authority.
The trusteeship management responsibilities and relevant liabilities that a private fund manager who has been deregistered or whose registration has been revoked should bear for the unliquidated private funds shall not be waived merely because the private fund manager has been deregistered or its registration revoked; it is not allowed to evade such responsibilities by means of deregistering the business entity, changing the registered location, etc.
Based on the above provisions, the cancellation action is aimed at regulating the market access and behavior order of fund managers, preventing them from continuing to engage in activities such as fund raising, but it does not negate their management responsibilities for existing funds. On the contrary, the regulatory authorities have clearly required them to continue to fulfill their obligations of managing fund assets and safeguarding the legitimate rights and interests of investors.
Therefore, from the perspective of administrative supervision, the cancellation of the management person registration and the fulfillment of the existing fund management duties can coexist. After the cancellation of the management person registration, new fund establishment and fundraising are prohibited, but activities related to the handling of the existing fund can continue to be carried out under the names of "fund" and "fund management". This means that actions such as filing lawsuits on behalf of the fund, recovering investments, and conducting liquidation and distribution all fall within the scope of "handling matters related to the existing fund", and are the legal and contractual obligations that the management person must fulfill.
(II)
The logical motivation for protecting investors
The regulatory norms clearly recognize that after the registration of the manager is revoked, the manager can continue to exercise rights on behalf of the fund and file lawsuits. The underlying logic behind this is to protect the interests of investors.
Firstly, when it comes to the four stages of fund management - fundraising, investment, management, and withdrawal - the stage with the strictest regulation is always the fundraising stage. Under the legal framework of our country, conducting fundraising activities requires corresponding financial qualifications; otherwise, it may involve charges such as the crime of illegally absorbing public deposits or the crime of fraudulently raising funds.
The strict supervision and rigorous review during the fundraising stage precisely establish strict entry thresholds for the fundraising entities, thereby ensuring the safety of investors' funds. Regarding the subsequent management actions, including litigation, they are mostly exercised based on the contractual agreements. From the regulatory perspective, there are no strict qualification restrictions. Therefore, emphasizing that after the registration of the fund manager is revoked, "new investors and fund size cannot be added, and no new investments can be made" is an inherent requirement of administrative supervision and also aligns with the logical motivation for protecting investors.
Secondly, if the litigation subject qualification of the management entity after its cancellation is denied, it will result in the inability of the existing funds to recover their assets through litigation, the inability to advance the fund liquidation process, and the failure to realize the interests at the fund level. Ultimately, it will harm the rights of investors. Clearly, this is contrary to the regulatory purpose. Therefore, the administrative regulatory norms also explicitly support that the management entity should continue to perform its management duties, including litigation, after cancellation.
04
Judicial stance in judicial practice
In recent years, courts in various regions have reached a relatively unified judicial opinion when handling cases involving the loss of litigation subject status for contractual fund managers after their registration was cancelled. They generally hold that the cancellation of the manager's registration does not affect their right to represent the fund in litigation.
(1)
Case Analysis Related to This Topic
Case No. 60699 of the People's Court of Pudong New District, Shanghai (2022)
In this case, the defendant argued that the plaintiff had been disqualified as a private equity fund manager and should no longer represent the fund in litigation. The court held that the act of canceling the registration of a private equity fund manager falls under the disciplinary measures implemented by industry self-regulatory organizations. After the cancellation, the manager is no longer allowed to conduct the filing procedures for the establishment of new products or the extension of existing products. However, based on the provisions of the fund contract, the manager still needs to fulfill corresponding diligence obligations and responsibilities, and handle tasks such as investment management and final liquidation of existing products. The fund contract stipulates that the obligations of the manager include exercising litigation rights on behalf of the investors in the name of the manager. Therefore, the manager has the right to file this lawsuit.
This case clearly distinguished between the "eligibility for fundraising" and the "management responsibilities" at two different levels, emphasizing that the cancellation does not affect the latter.
2. Case No. 2024-02-执异1112 of the Second Intermediate People's Court of Beijing
This case is an action for execution objection. The objector claimed that "Company 1 was deregistered as a private fund manager on August 21, 2020, and no longer has the qualification for private fund management business. It does not meet the requirements for the applicant entity." The Beijing Second Intermediate People's Court, after trial, held that the objection reason lacked legal basis and was not supported. This case further confirmed that the manager can also exercise rights on behalf of the fund during the execution process, and the cancellation of qualification does not constitute a procedural obstacle.
3. Case No. 2021-74-1977 of the Beijing Financial Court
In this case, even though plaintiff Li submitted the "Public Notice of the Cancellation of Private Fund Management Institution", claiming that "Jiaxing Xinyi Company's management institution status has been cancelled, the asset management contract has terminated, it no longer has the status of a management institution, and has no right to represent other investors to raise an objection for execution. The objection should be raised by each investor", the Beijing Financial Court still held that "Jiaxing Xinyi Company exercising litigation rights or implementing other legal actions in the name of the management institution on behalf of the fund share holders is both the agreed rights in the fund contract and the duties it should fulfill as a management institution. That is to say, Jiaxing Xinyi Company raising the execution objection related to this case on behalf of the fund share holders is not only in line with the contract agreement but also does not violate relevant laws. It is an eligible party, and this court confirms it."
As a court specifically handling financial cases, the Beijing Financial Court's judgment opinions carry significant exemplary significance. This case once again confirms that the litigation rights of the administrator originate from contractual agreements and legal provisions, and are independent of the status of the qualification.
(II)
Summary of the Rules of the Judges
Based on the above cases, the following judicial rules can be summarized:
The cancellation of the manager's registration is a disciplinary action within the industry, which does not affect the manager's ability to fulfill their management duties in accordance with the fund contract and legal provisions.
2. The right of the manager to file a lawsuit on behalf of the fund stems from the stipulations in the fund contract and the authorization granted by relevant legal norms, and has no direct relation to the validity of the qualification.
3. After the account is closed, the manager shall still be responsible for the investment management of the existing funds, as well as the final liquidation. Litigation is a necessary means to achieve these tasks.
4. Denying the management entity's right to sue after its dissolution would prevent the recovery of the fund's assets through judicial means, thereby infringing upon the legitimate rights and interests of investors.
05
Common objections and analysis
(1)
Can investors directly file lawsuits on behalf of the fund?
There is a view that after the manager is revoked, the investors, as the ultimate rights holders of the fund, can directly represent the fund to file a lawsuit. However, this view is legally untenable.
Firstly, the investment contracts at the fund level are signed by the manager in its own name. Investors are not parties to the contract and do not possess the plaintiff status under the principle of contractual relativity. Secondly, according to Article 88 of the "Nine-Minute Rules", a trust relationship exists between the manager and the investors. After the investors deliver their assets to the manager, they lose the direct control over the assets and can only claim rights from the manager in accordance with the fund contract. Finally, if investors are allowed to file lawsuits directly, it will disrupt the rights and obligations structure stipulated in the fund contract, resulting in the virtualization of the manager's responsibilities and being inconsistent with the provisions of the "Civil Procedure Law" regarding the plaintiff's subject qualification.
(II)
Can the fund liquidation team represent the fund to file a lawsuit?
There is a view that after the registration of the fund manager is revoked, the fund liquidation team should represent the fund to exercise its rights. However, this view is also difficult to hold.
Firstly, whether the fund is liquidated and whether a liquidation team is established are internal management matters within the framework of the fund contract. They are decided by the manager and the investors themselves, and have nothing to do with the counterparties of the contract. Secondly, the liquidation team of the fund is not a legal civil entity and does not possess the litigation subject qualification stipulated in the "Civil Procedure Law". It cannot file lawsuits in its own name. Even if the liquidation team is established, its main responsibilities are limited to the internal distribution of assets, and it still needs to exercise its rights in the name of the manager or jointly in the name of the investors. Therefore, the liquidation team cannot replace the manager to become the litigation subject.
06
Legal advice and practical risk prevention
(1)
Suggestions for the manager
1. Improve the terms of the fund contract: Clearly stipulate in the fund contract that even after the registration of the manager is revoked, it still has the right to exercise various rights on behalf of the fund, including litigation, to avoid disputes arising from unclear contractual provisions.
2. Fulfill information disclosure obligations promptly: After the management entity is deregistered, it should promptly disclose relevant information to the investors and explain the subsequent management, liquidation and litigation arrangements to alleviate the investors' concerns.
3. Actively exercise litigation rights: The administrator should exercise litigation rights in accordance with the law and the agreement, promptly recover the fund assets through litigation, fulfill the duty of diligence, and prevent being held accountable by the investors for inaction.
(2)
Advice for Investors
Respect the litigation status of the manager: Investors should be aware that the manager is the sole legally authorized entity to file lawsuits externally and should not file lawsuits on their own or interfere in the litigation process.
2. Protecting rights through internal channels: If an investor is dissatisfied with the management's litigation actions, they can exercise their rights through the internal supervision mechanism stipulated in the fund contract, convene a meeting of holders, or otherwise claim liability for breach of contract from the management.
3. Pay attention to the progress of fund liquidation: Investors should closely monitor the liquidation process of the fund after the management company's dissolution. If necessary, they can legally apply to replace the management company.
07
Conclusion
The cancellation of the registration of a contractual private equity fund manager does not mean that the manager's qualification to exercise litigation rights on behalf of the fund is also eliminated. From the perspective of civil legal relations, the manager is a contractual party and enjoys external rights based on the principle of contractual relativity; from the administrative regulatory perspective, cancellation mainly restricts behaviors such as raising funds and establishing new funds, but does not exempt the manager from the management responsibilities for existing funds; from the judicial practice perspective, courts in multiple places have formed a consistent stance, recognizing that after cancellation, the manager still has the right to file lawsuits.
Therefore, whether from the perspective of the consistency of legal logic or the practical need to protect investors' interests, it is necessary to confirm that the contractual private equity fund manager, even after its dissolution, still has the qualification to represent the fund in filing lawsuits. In the future, as the regulatory system for private equity funds continues to improve, relevant legal norms and judicial rules should also be updated in tandem to provide more clear and unified basis for the resolution of this issue.
