ZY Bank Accused of Using “Yin-Yang Documents” to Conceal Bad Debt

A leading regional bank in China stands accused of concealing non-performing assets by means of “yin-yang documents” in the wake of a lawsuit over meagre dividends payments.

Zhonghui Shiye Group Co., Ltd. (中汇实业集团有限公司) has sued Henan province’s ZY Bank (中原银行) at the Zhengzhou People’s Intermediate Court over the inadequacy of its dividend payments.

The case has its origins in Zhonghui Shiye’s acquisition of 55 million stocks in Zhoukou Bank Share Co., Ltd. (周口银行股份有限公司) for a consideration of 99 million in 2012, two years prior to the founding of ZY Bank.

Following its establishment in December 2014 ZY Bank acquired Zhoukou Bank to serve as its Zhoukou branch, as well as one of the 13 municipal commercial lenders comprising the ZY Bank brand.

Zhonghui Shiye consequently became a shareholder in ZY Bank, before deciding in February 2015 to transfer its equity stake in ZY Bank to Yu’nan Gaosu Investment Co., Ltd. (豫南高速投资有限公司).

Because no dividends or corresponding rights of Zhoukou Bank had been distributed for a significant period of time prior to or subsequent to its merger with ZY Bank, the two parties stipulated that all dividends and other rights from prior to 31 December 2014 would belong to Zhonghui Shiye.

Zhonghui Shiye was subsequently perturbed by the extremely meagre volume of the dividends distributed by ZY Bank.

“The equity from our 99 million yuan investment has only produced two dividends of extremely small amounts,” the company’s representatives told Securities Daily.

“In February 2016 we received a dividend of 534,300 yuan from ZY Bank, far less than our capital costs and the returns we should have obtained – this was extremely unreasonable.

“We believe that our lawful rights and interests were very likely harmed, and for this reason we issued a letter to ZY Bank demanding compensation for the dividends we should have obtained, as well as other related returns and exercise of a shareholder’s right to information.

“ZY Bank has ignored us since receiving the letter and refused to cooperate. For this reason we have sued ZY Bank at the Intermediate People’s Court of Zhengzhou municipality.”

The civil lawsuit has since brought to light irregularities in the financial data provided by ZY Bank, with the Intermediate Court determining that the “2014 Profit Distribution Plan” outlined net profits of 2.522 billion yuan that year.

The prospectus for ZY Bank’s Hong Kong listing in 2017 claims that the figure was 2.668 billion yuan, however, for a disparity of 147 million yuan.

Allegations have also arisen that ZY Bank has sought to conceal its non-performing assets in 2016, as part of efforts to expedite its listing on the Hong Kong bourse.

Page 34 of its prospectus states that that in order to dispose of legacy assets and improve its asset quality, ZY Bank sold several loans in 2015 and 2016 for 214 million yuan and 8.624 billion yuan respectively.

A copy of the “Creditor’s Rights Transfer Agreement” executed by ZY Bank’s Zhoukou branch with ZY Asset Management Co., Ltd. (中原资产管理有限公司) in December 2016 that Zhonghui Shiye obtained indicates that ZY Asset Management took over creditor’s rights for 39 loans worth a total of 379.6 million yuan from ZY Bank’s Zhoukou branch for 318 million yuan.

The creditor’s rights list includes a 29 million yuan loan taken out by Angu Construction Materials Sales Co., Ltd. (安固建材销售有限公司) in December 2015 at an annual rate of 10.56% for a term of one year, with Zhonghui Shiye serving as one of 13 guarantors.

In 2018 ZY Bank’s Zhoukou branch subsequently filed a lawsuit against both Angu Construction and its 13 guarantors at the Zhoukou Intermediate Court following failure to make payment, which is inconsistent with the timing of the agreement executed with ZY Asset Management at the end of 2016.

Sources say that ZY Bank’s Zhoukou branch did not perform actual transfer of creditor’s rights, and that the agreement executed with ZY Asset Management served as part of a set of “yin-yang” documents used for different filing purposes.

He Tao (何涛), a senior executive from ZY Bank, has denied the validity of the document produced by Zhonghui Shiye.

“At present the decisions of the intermediate and superior courts indicate that there is no evidence attesting to a transfer of assets,” he said, while also calling claims of a transfer agreement with ZY Asset Management “definitely false.”

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