Private placement fund refers to an investment fund established in the People's Republic of China by raising funds from investors in a non-public manner.For investors,private equity funds have become an important financial investment method due to their greater flexibility and concealment,high risk but also high income opportunities.As long as there are risks involved in investment,according to relevant regulations,private equity institutions must not promise investors that the investment principal will not be lost or that they will promise a minimum return.However,there are still private equity institutions that,through related party guarantees,related party commitments to repurchase,and other methods,commit to maintaining capital and income in disguised form,and cheat investors through illegal propaganda,leading to investors not fully aware of the risks involved in blind investment,ultimately leading to investment losses.

The existing private equity funds in China are divided into three types according to different transaction structures:corporate type,partnership type,and contractual type.The partnership type private equity fund is generally composed of general partners and limited partners.The general partner is the private equity fund manager,who jointly establishes a private equity fund with no more than 49 limited partners.Investors who participate in investments as limited partners bear limited liability for the Fund to the extent of their subscribed capital contributions.The biggest difference between contractual private equity funds and limited partnership private equity funds is that contractual private equity funds do not have independent legal entities.The rights and obligations between investors and private fund managers are only governed by the fund contract,but the fund contract itself is not a single legal entity,so there are significant difficulties for investors to safeguard their rights.In order to attract investors,some contractual private equity funds violate a fixed expected rate of return,which prevents investors from correctly and comprehensively judging the risks inherent in the private equity fund.Once the fund manager fails to perform its duties,investors can choose the following litigation options:

(1)Advocate that the fund manager fulfill the liquidation responsibilities

There are two situations where a fund manager loses contact or fails to perform his duties.The first is that after the expiration of the fund contract,the principal income of the investor cannot be repaid,and the fund manager fails to perform its duties at this time,resulting in the inability of the investor to exit smoothly.Generally,a fund contract confers on the fund manager the obligation to form a liquidation team and return property after the termination of the fund contract.At the same time,the fund contract stipulates that the fund custodian and the fund manager jointly perform the liquidation responsibility.At this time,based on the agreement in the fund contract,if the fund manager and custodian fail to perform their duties of liquidation and return of property,they can be required to perform their duties of liquidation and return of property by filing a lawsuit.At the same time,the provisions of Article 81 of the Securities Investment Fund Law of the People's Republic of China can be referred to:When the fund contract is terminated,the fund manager shall organize a liquidation team to liquidate the fund assets.The liquidation group is composed of fund managers,fund custodians,and relevant intermediary service institutions.If the fund manager fails to perform its duties before the termination of the fund contract,investors may,based on the provisions of the fund contract,claim early termination of the fund and require the manager to perform liquidation duties.At the same time,the fund contract may be terminated under any of the following circumstances,with reference to the provisions of Article 80 of the Securities Investment Fund Law of the People's Republic of China:(2)The general meeting of fund unit holders decides to terminate the fund contract;(4)Other circumstances stipulated in the fund contract.The above scheme is the most common investor rights protection litigation scheme and is feasible.However,the problem is that if the fund manager loses contact,although the proposed lawsuit can obtain a successful judgment,it is difficult to actually perform.If an investor brings a lawsuit against the fund custodian and requires it to assume liquidation responsibilities,then the custodian's liquidation responsibility is only to liquidate the fund assets and return the book capital,which is only a distribution obligation.The fund contract and relevant legal provisions do not provide the fund custodian with the responsibility to recover the claims of the fund itself.At this time,the plan is not conducive to maximizing the recovery of property.

(2)Claim that the fund contract is invalid

There are two paths to choose from for a lawsuit against the invalidity of a fund contract.First,according to Article 52 of the Contract Law of the People's Republic of China,a contract is invalid under any of the following circumstances:(2)malicious collusion that harms the interests of the state,the collective,or a third party.If there is malicious collusion between the private fund manager and the underlying debtor to harm the interests of investors,investors can claim that the agreement signed by the fund manager and a third party is invalid according to this article,and then require the return of fund assets.If the transaction still has a guarantee,it can be claimed in accordance with Article 8 of the judicial interpretation of the"Guarantee Law"that the guarantor at fault should bear a certain amount of compensation liability(not exceeding one-third of the debtor's inability to repay).The problem with this scheme is that it is difficult to prove malicious collusion.If investors have conclusive evidence that there is malicious collusion between the private fund manager and the underlying debtor that has harmed the interests of investors,they can claim that the contract is invalid and require the underlying debtor to return the fund assets.Secondly,according to Article 52 of the Contract Law,a contract is invalid under any of the following circumstances:(5)Violation of mandatory provisions of laws and administrative regulations.A significant portion of private equity institutions promise investors that their investment principal will not be lost or that they will promise a minimum return.The trading arrangements vary,and some even sign supplementary agreements outside the fund contract,stating the expected rate of return.Some of them promise to maintain their principal and income in disguised form through related party guarantees,related party commitments to repurchase,and other methods.Article 20 of the Securities Investment Fund Law of the People's Republic of China stipulates that fund managers and their directors,supervisors,senior managers,and other practitioners who publicly offer funds shall not violate any promise of income or bear losses to fund unit holders.Article 15 of the Interim Measures for the Supervision and Administration of Private Equity Investment Funds stipulates that private equity fund managers and private equity fund sales institutions shall not promise investors that the investment principal will not be lost or that they will promise a minimum return.Similar clauses guarantee the minimum return on investment principal and interest,and also stipulate the excess income.They should belong to the"guaranteed minimum return on principal and interest clause",which is the minimum guarantee clause in the entrusted financial management contract.Similar minimum guarantee clauses exempt the principal from the investment risks that should be borne,resulting in an imbalance in the civil rights and obligations of the parties,which violates the legal relationship of entrusted financial management and the basic principles of"benefit sharing and risk sharing"of private equity funds,as well as the basic laws and trading principles of the financial market,and should be null and void.The minimum guarantee clause is the purpose clause and core clause of the entrusted financial management contract,and cannot become a relatively independent invalid part of the contract.Therefore,the invalidity of the minimum guarantee clause leads to the invalidity of the relevant entrusted financial management contract relationship.According to the law,after a contract is invalid or revoked,the property acquired as a result of the contract should be returned.If it cannot be returned or is not necessary,compensation should be made at a discount."The party at fault shall compensate the other party for the losses thus incurred.If both parties are at fault,each party shall bear corresponding responsibilities.".Although such a scheme is feasible,there are several problems.First of all,not all income protection measures are invalid minimum guarantee clauses.If a third party is willing to join the debt to bear the income guarantee liability,the court cannot easily determine that the agreement is invalid.Such clauses should be analyzed on a case by case basis and cannot be generalized.Secondly,after the fund contract becomes invalid,the investment income obtained by investors will involve the return of improper profits.However,this plan can partially solve the first layer of creditor's rights and debt relationship of investors based on Article 73 of the"Contract Law"subrogation lawsuit,which will be discussed in detail later.In fact,the litigation scheme for invalidation of investment contracts is a double-edged sword,and investors should take comprehensive consideration when applying it.

(3)Claim that the investor exercises the cancellation right

The investor exercises the cancellation right,If you choose to seek relief under Article 22 of the Trust Law"If the trustee disposes of the trust property in violation of the purpose of the trust or causes losses to the trust property due to violation of management duties or improper handling of trust affairs,the trustor has the right to apply to the people's court to revoke the disposition,and has the right to require the trustee to restore the trust property to its original state or provide compensation.This article stipulates the trustor's revocation right,but it is necessary to meet the requirements of the trustee's disposition of the trust property in violation of the purpose of the trust or violation of management duties There are two conditions:improper handling of trust affairs and causing losses to the trust property.The difficulty in practice lies in the proof of subjective malice.Moreover,there is no unified conclusion in judicial practice as to whether the legal relationship of contractual private equity funds is governed by the Trust Law.If investors sue through trust legal relationships,there is a risk of rejection.If relief is sought within the scope of the General Principles of Civil Law and the Contract Law,there will be issues of unauthorized agency and agency by estoppel.Moreover,the application of the civil law agency system to contractual private equity funds is somewhat farfetched,and there are few conclusive conclusions in judicial practice.

(4)Investor exercises subrogation rights

In the event that the fund manager loses contact or fails to perform his/her duties,if an investor chooses to file a subrogation lawsuit,there are three options,but they all lack a solid legal basis.First,based on Article 73 of the Contract Law,if the debtor delays in exercising its due creditor's rights,causing damage to the creditor,the creditor may request the people's court to subrogate the debtor's creditor's rights in its own name,unless the creditor's rights exclusively belong to the debtor itself.The obstacle to this scheme lies in the subrogation litigation requirement in Article 73 of the Contract Law,which requires that both the upper and lower levels be in a debt to debt relationship,while the investor and the private equity fund itself are in an investment relationship rather than a debt to debt relationship,and the fund shares enjoyed by the investor at this time belong to property rights.Investors cannot be identified as having a debt relationship with private equity funds without liquidation.Therefore,it is difficult to obtain court approval to file a subrogation lawsuit based on Article 73 of the Contract Law.Secondly,based on Article 68 of the Partnership Law,limited partners are not allowed to perform partnership affairs and represent limited partnerships externally.The following acts of a limited partner shall not be deemed to be the execution of partnership affairs:(7)When the executive partner is negligent in exercising his rights,he/she shall be urged to exercise his/her rights or bring a lawsuit in his/her own name for the benefit of the enterprise.This article determines the subrogation rights of limited partners.The nature of contractual private equity funds is similar to that of partnerships.The investors of contractual private equity funds are similar to limited partners in partnerships,and the responsibilities of fund managers are similar to those of general partners.However,contractual private equity funds do not belong to partnerships after all,and there is no independent legal entity.Forcibly referring to Article 68 of the Partnership Enterprise Law is somewhat farfetched.Therefore,there are significant risks in whether they can be applied by reference in practice.Thirdly,based on Article 65 of the Trust Law,the trust supervisor has the right to file a lawsuit or perform other legal acts in his own name in order to safeguard the interests of the beneficiary.The problem with this scheme is that the trust supervisor specified in Article 65 of the Trust Law is under Chapter VI of the Trust Law,and there is generally no trust supervisor for contractual private equity funds.Therefore,the subrogation rights based on the Trust Law are not of practical significance.

Unlike corporate private equity funds or partnership private equity funds,contractual private equity funds do not have independent legal entities,and investors cannot exercise the rights of investors at the partnership or corporate level.This characteristic determines the failure of managers of private equity funds to perform their duties,and it is more difficult for investors to maintain their rights than other types of private equity funds.Although investors can request fund custodians to hold fund unit holders'meetings,Replacing the fund manager,but at this time,when the fund investment may have lost money,few private fund managers are willing to accept the offer.The establishment of a liquidation group by fund unit holders on their own is not explicitly stipulated by law.Therefore,when investors encounter this type of problem,it is best to hire a professional lawyer to solve it.The lawyer selects appropriate litigation strategies based on different situations,helping investors successfully defend their rights and recover losses.

Zheng Fei

Bachelor of Law and Bachelor of Management,a full-time lawyer and member of the Financial Business Department of the Institute,specializing in litigation and non litigation legal services in civil and commercial dispute resolution,corporate investment and financing,and mergers and acquisitions.The financial and legal service team of Gaopeng Stock Exchange has raised more than 36 billion yuan for various enterprises over the past three years,and has participated in many non litigation and litigation businesses such as corporate bond issuance,private equity fund establishment and operation,asset securitization product issuance,overseas financing listing,listing on the New Third Board,PPP project implementation plan preparation and practice,mergers and acquisitions and restructuring.He has rich legal service experience in the fields of enterprise legal risk prevention and litigation business,investment and financing,etc.

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