The Judgment of the “Wuyang Bonds Case”: From the Perspective of Investors and Intermediaries

The Wuyang Bonds Case is the largest litigation amount in the history of civil compensation for securities fraud in China, the first time that the representative litigation system is applicable to the securities dispute field in China and may also be the first case in which intermediaries may be deemed to assume joint and several liability.

On December 31st, 2020, the Hangzhou Intermediate People’s Court rendered the judgment of first instance on false statements in bond issues brought by 487 investors against Wuyang Construction Group Co., Ltd.., Chen Zhizhang, Debang Securities Co., Ltd., PKF Daxin Certified Public Accountants LLP (Special General Partnership), Allbright Law Offices (Special General Partnership) and Dagong Global Credit Rating Co., Ltd. (“Wuyang Bonds Case”), stating that Chen Zhizhang, Debang Securities and PKF Daxin should assume joint and several liability for the subject matter of action of RMB 740 million (without interest accrued), while Dagong Global should assume joint and several liability for the compensation to the extent of 10% with Allbright assuming joint and several liability for the compensation to the extent of 5%.


Wuyang Construction (also known as the “Construction Aircraft Carrier” of Shaoxing) was established on August 27th, 1999 with Chen Zhizhang as its legal representative with the registered capital of RMB 376.6 million. In August 2015, Wuyang Construction issued corporate bonds “15 Wuyang Bonds” of RMB 800 million, with the term of 2+1 year and the investors’ put option attached at the end of the second year. One month later, Wuyang Construction issued second corporate bonds “15 Wuyang 02” of RMB 560 million with the term of 3+2 and the investors’ put option attached at the end of the third year, the underwriter in both instances was Debang Securities.

In July 2017 approaching the sell-back period, “15 Wuyang Bonds” was exposed to be difficult to complete the redemption. In August, China Securities Regulatory Commission began to investigate Wuyang Construction.

Since 2019, bond investors continually sued to Hangzhou Intermediate People’s Court.

In March 2020, Hangzhou Intermediate People’s Court notified qualified investors to participate in the registration of litigation.

Before the hearing, 496 qualified investors applied to participate in the representative litigation and jointly elected four investors as the litigation representatives.

On September 4th, 2020, Wuyang Debt Case was heard.

On December 31st, 2020, Hangzhou Intermediate People’s Court made a first-instance judgment on the case.

Perspective of Investors

Prior to the official implementation of the new Securities Law on March 1st, 2020, securities litigation in China was mainly based on traditional independent litigation and joint litigation. Although the Supreme People’s Court (“SPC”) issued the Several Provisions of the Supreme People’s Court on the Trial of Cases of Civil Compensation Arising from False Statement Securities Market in 2003, in which Article 14 explicitly regulates that the method of representative litigation may be adopted, and Article 54 of the Civil Procedure Law also provided similar provisions.

However, in practice, the application of representative litigation in securities litigation has been limited, which made it difficult for investors, especially small and medium-sized investors, to defend their rights in the face of securities fraud. Article 95 of the new Securities Law, for the first time, stipulates that investors may elect representatives to participate in the litigation in the field of securities litigation. On July 31st 2020, the Supreme People’s Court officially promulgated Provisions of the Supreme People’s Court on Several Issues concerning Representative Action for Securities Disputes, which further specified the applicable conditions, procedures and authority of the representative in the field of securities litigation, so as to formally implement “collective litigation” in China’s securities field.

For the Wuyang Bond Case, after Hangzhou Intermediate People’s Court notified qualified investors to participate in the registration, a total of 496 qualified investors engaged in online registration, with the four litigation representatives jointly elected all natural persons, among whom two represented small-scale creditors and two represented large-scale creditors. The implementation and practice of the representative system in securities litigation effectively showcases that small and medium investors can make their voices heard, with the cost of the protection of their rights greatly reduced.

Perspective of Intermediaries

With respect to the civil liability of Debang Securities and PKF Daxin, Hangzhou Intermediate People’s Court held that Debang Securities, as the underwriter of the bond issue, failed to refer to the industry rules for private placement bonds, failed to fully perform the verification procedures, and failed to write the facts that might affect Wuyang Construction’s ability to issue and repay debts into the verification opinion as major matters; PKF Daxin, as the auditor of the bond issue, recognized the accounting treatment of Wuyang Construction for the “offset” of receivables and payables, provided that adequate and appropriate audit evidence was not obtained, and issued an audit report with unqualified opinion for the annual financial statements of Wuyang Construction from 2012 to 2014. When learning that the audit report was used for the purpose of bond issue of Wuyang Construction, it was deemed as having issued an audit report with false records. Therefore, both Debang Securities and PKF Daxin failed to perform their due diligence, had serious faults, and shall assume joint and several liability for compensation.

With respect to the civil liabilities of Dagong Global and Allbright, Hangzhou Intermediate People’s Court held that Dagong Global, as the credit rating institution for the issuance of the bonds, failed to further verify and pay attention to the major matters that may affect the bond issuance conditions and capacity and to reasonably rate the credit; Allbright, as the law firm for the issuance of the bonds, failed to pay attention to the verification of major contracts and major changes in assets involved in the issuance of the legal opinions, failed to conduct proper due diligence on the ownership of real estate, and failed to find any legal risks that may affect Wuyang Construction’s solvency. Therefore, both Dagong Global and Allbright failed to perform due diligence and have faults, and shall respectively assume the joint and several liability within the scope of 10% and 5% based on the principle of combining the assumption of liability and the degree of fault.

The core provision of the court’s decision was Article 173 of the former Securities Law (Article 163 of the new Securities Law). PKF Daxin and Allbright, as securities service institutions, shall assume the joint and several liability for compensation together with the issuer if there are any false records, misleading statements or major omissions that cause losses to investors and cannot prove that they are not at fault.

Compared with the income of the intermediaries in the case, the maximum fine reached 1,200 times of that of the income of the intermediaries. As the maximum compensation judgment for intermediaries and the first judgment that intermediaries shall assume joint and several liability in the history of Chinese securities litigation, Wuyang Bond Case has undoubtedly sounded a wake-up call for all securities service intermediaries: they shall bear in mind the duty of due diligence and give objective and impartial opinions in order to avoid one loss causing “eternal regret” once a project “explodes”.


For the investors, especially the small and medium level investors, the promulgation of the new Securities Law, the relevant judicial interpretations and the judgment of the first instance of Wuyang Bond Case provide them with an important impetus. It is reasonable to expect that problems of small and medium level investors such as claim difficulties arising from claims & litigations, delay and high costs may be effectively alleviated after the new securities representative litigation system is put in place.

For the securities service intermediaries, at present, the intermediaries in the case have already appealed as they are not satisfied with the judgment at the first instance. There are also views that support intermediaries and question the results of the judgment: on the one hand, investors themselves should bear part of the risk, but the judgment is essentially a “disguised rigid redemption” by intermediaries, which is against the principle of fairness; one the other hand, the judgment will force intermediaries to refrain from engaging in financing projects of private enterprises, which will further aggravate the current situation of financing difficulties and high costs for private enterprises.

However, no matter the outcome of the appeal, the case causes “joint and several liability” as “the sword of Damocles” hanging over the head of intermediaries. As Hangzhou Intermediate People’s Court outlined in the first judgment: “Let the saboteur pay the price of damage, let the ‘doorman’ dare not pretend to sleep, which is the basic attitude of judicial justice towards the misrepresentation in the securities market.”