Guidelines for characterizing repurchase commitments

A repurchase commitment is a transaction arrangement to ensure an investor’s safe exit, whereby a fund raiser transfers a specific asset or right to the investor and undertakes to buy back the asset or right from the investor when a pre-agreed event arises. In commercial deals, repurchase commitments are widely used as a type of atypical credit enhancement measure. Based on their different forms, repurchase commitments may be divided into unilateral commitments and repurchase agreements. Two main viewpoints have been expressed in judicial decisions as to the legal nature of repurchase commitments, i.e., repurchase commitments are independent transactions, or they are guarantees.

Judicial precedents have shown that the mainstream judicial view is that a repurchase commitment is independent. Whether it is a unilateral repurchase commitment or a repurchase agreement executed bilaterally, repurchase itself is an independent and transactional action that is different from guarantee. A repurchase commitment is independent because a repurchase transaction is independent of the underlying legal relationship and is not affected by the establishment, elimination and modification of the underlying creditor-debtor relationship. A repurchase commitment is also transactional in the sense that the commitment represents the transaction arrangements made between the parties on their rights and obligations, whereby the committed party takes over the investment risks of an investor, rather than paying off debts for the debtor.

In the case of contractual disputes between the Shenyang branch of Bank of Dalian Co Ltd and the Taiyuan branch of China Minsheng Bank Co Ltd, the High People’s Court of Liaoning province held that the repurchase commitment in the case reflected the transaction arrangements made by commercial transaction parties with regard to their own rights and obligations, and that the parties did not intend to use the repurchase commitment to pay off debts on behalf of the debtor. Therefore, the nature of the repurchase commitment in this case is not a guarantee contract, but a conditional asset transfer contract.

Yao Xiaomi is a partner and Li Yupeng is an associate at Lantai Partners

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