Legal effect of provisions on independent validity of security contracts

With the gradual development and improvement of the investment and financing markets in China, trusts have become an important financing instrument in the infrastructure and real estate sectors. In trust financing projects, of greatest concern to the funding party, other than the provisions on returns and withdrawal, are the credit enhancement measures, usually realised in the form of a security contract, and the funding party will usually demand the clear stipulation in the contract of a provision on the independent validity of the security contract.

However, in judicial practice, does such a provision really function as a “protective talisman”? This remains the subject of debate. This column will provide a brief analysis by looking at a certain trust financing project.

Particulars of the project

Recently, the first author provided legal services in the RMB4 billion (US$655 million) property trust financing project of a certain group company. In the trust investment project, the financier entrusted property to a trust company to establish a trust plan, and a financial institution purchased the trust product, thus becoming the actual investor. The credit enhancement measure for the trust was an irrevocable joint and several guarantee provided by a shareholder of the group (a triple-A rated entity).