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The Case of XX v. XX & XX Equity Joint Venture on Dispute over the Equity Transfer Contract
Jurisdiction: Arbitration CIETAC Shenzhen
1.Case Brief
The claimant and a Hong Kong company concluded an equity transfer contract concerning the equity transfer and other relevant issues of the equity joint venture with the two respondents. The equity transfer contract was notarized by the notary public office of XX City in XX Province on November 29, 1989. On March 31, 1990, the People's Government of XX City replied to approve the application for alteration of shareholders of the equity joint venture and approved the equity transfer contract.
According to the contract, the claimant should transfer 75% of the equity joint venture's equity he owned to the first respondent and the Hong Kong company should transfer 25% of the equity joint venture's equity it owned to the second respondent. After all the equity of the joint venture had been transferred, the transferee should replace the transferor to be the shareholder of the equity joint venture and continue to perform the original equity joint venture contract and articles of association of the equity joint venture.
All parties agreed in the contract that the Hong Kong company should give the claimant carte blanche to handle the transfer of equity of the equity joint venture and the second respondent of this case should give the first respondent carte blanche to handle the transfer of equity of the equity joint venture.
It was confirmed in the contract that the price of all the existing equity should be $290,000. In case it was necessary to pay RMB, the claimant should take charge of adjusting the exchanges in the course of liquidating the debts before the transfer of equity of the equity joint venture.
It was stipulated in the contract that because the creditor's rights and debts of the equity joint venture were not discharged, the payment of the transfer of $290,000 should be preserved in the account of the equity joint venture by being transferred by the transferee (namely the respondent) and be used to discharge the debts (the net debts after the creditor's rights balanced the debts) of the equity joint venture prior to the equity transfer. In case there were surplus after discharging the debts prior to the equity transfer, and no other debts happened before the transfer belonged to the equity joint venture within three months after the transfer became effective, the transferee should pay up the surplus (including the interest) to the transferor (namely the claimant) within seven days and transfer them to the bank account named by the transferor.
It was also prescribed in the contract that the respondents should transfer the $290,000 to the special account of the joint venture within one week after the equity transfer was approved by the Municipal People's Government and the assets relevant to the joint venture were counted and handed over. In case the payment was delayed, the respondents should pay $300 per day as demurrage. If delayed for thirty days, the transferee should bear the legal responsibility to the transferor besides the demurrage.
After the abovementioned contract had been concluded and approved, the respondent transferred the sum of $290,000 into the account of the equity joint venture to discharge the debts happened prior to the transfer. On August 10, 1990, the equity joint venture published a liquidation bulletin on Shenzhen Special Zone Daily proclaiming that any units or individuals which had creditor's right or debt with the joint venture should send personnel to the joint venture to go through the liquidation within three months after the publish of the liquidation bulletin.
After the three months of the bulletin term expired, the claimant once sent two letters on January 24, 1991 and August 17, 1992 to the respondent and negotiated with the respondent several times for requiring the respondent to make the payment of transfer as preserved in the equity joint venture's account. The efforts of the claimant were in vain.
On December 21, 1992, the claimant submitted the dispute to CIETAC Shenzhen for arbitration claiming that:
(1) The respondent should make the payment of transfer of RMB 670,000 and the demurrage for four months and two years up to October 31, 1992 of RMB 549,400;
(2) The respondent should assume the relevant arbitration fee.
The main issues of the disputes between the two parties were listed as follows:
(1) Whether the debt of equipment was established
The claimant deemed that as stipulated in the equity transfer contract, the payment of the assignment transferred to the joint venture's account was used to discharge the debts happened prior to the equity transfer, the surplus of which should be paid up to the claimant within seven days as of three months after the equity transfer formally became effective. On March 31, 1990, the contract became effective by approval of the Municipal People's Government. On August 10， 1990, the original shareholders of the equity joint venture published the liquidation bulletin on newspaper proclaiming that any units or individuals which had creditor's right or debt with the joint venture should go through the liquidation within three months after the publish of the liquidation bulletin. After the term of three months expired, nobody asked the joint venture to repay debts any more while the respondent did not repay the balance of the payment of transfer to the claimant until the present. The respondent had violated the provisions of the contract, which brought about severe economic loss to the claimant.
The respondent alleged that the purpose for the respondent forwarded the payment of transfer to the joint venture's account to preserve was discharging the debts happened before the equity transfer while the claimant concealed the debts before the equity transfer for the following reasons: the joint venture had concluded an agreement with a bolt factory in XX county concerning the bolt factory to import foreign equipment for self-tighten bolt production on December 15, 1987 prior to the equity transfer. These equipments (8 drive-head machines and 7 rolling machines, 15 machines in total) were actually imported by the equity joint venture which was entrusted by the bolt factory with its self-owned fund, with the value of RMB 460,000. The payment was transferred to the equity joint venture while the equipments remained stocked in the joint venture instead of being delivered to the bolt factory after import. According to this, the respondent considered that the joint venture failed to settle the debt to the bolt factory. The respondent also stated that the equipments imported by the joint venture prior to equity transfer in the name of self-usage were the bolt factory's equipments in fact and it did not go through the formalities of tax compensatory and write-off for the transfer and re-export. On legal meaning, the original equity joint venture had a debt to the country which should have been spontaneously fulfilled by the original equity joint venture. The respondent persisted that as there still was debt that the original equity joint venture did not repay, the payment condition stipulated in the contract was not mature. Therefore the respondent could not perform the obligation of payment.
The claimant admitted in the defense that he had signed an equity joint venture agreement to import equipment with a bolt factory of XX county in 1988. The bolt factory contributed the money, while the equipments were introduced in the name of self-use equipment of the joint venture and produced at the locality where the equity joint venture is situated. And the products were divided into two parts for each party. The two parties cooperated to produce for several months and then stopped, and the equipments were put in the equity joint venture up to now. The claimant considered that the respondent blamed it for concealing the condition of that equipment was unfounded for the following reasons: when transferring the equity, although the claimant did not list the equipment into the roll of transfer, it did hand over the equipment to the respondent to preserve and explained orally to the transferring representative. Moreover, the claimant handed over the duplicated copy of the agreement signed by the equity joint venture and bolt factory of XX County concerning equity joint introducing the equipment to the respondent when handing over the assets and documents. After the equity transfer, bolt factory of XX county had sent personnel to negotiate with the equity joint venture to take back the equipments for many times. Thus, the respondent was clear about the source of the equipments.
With respect to the liquidation of the debts happened before the equity transfer of the equity joint venture, the claimant insisted that the equity joint venture did not have the undischarged debt with the bolt factory of XX county as the respondent alleged for the following reasons: the full payment of the introduced equipments was made by the bolt factory of xx county. The equipments were imported through entrusting a machinery pattern company in the name of the equity joint venture to declare to the customs. Matters concerning purchase and sale of the equipments between the bolt factory of XX County and the machinery pattern company had clarified already. In addition, the bolt factory of XX County had signed the letter of assurance to promise that the expenses resulting from going through the re-export formalities for the equipments were irrelevant to the equity joint venture. The claimant considered it not debt that the joint venture took charge of dealing with the declaration and title transfer for the bolt factory of XX County.
(2) The formalities for customs transfer
The claimant declared that according to the agreement between the equity joint venture before the equity transfer and the bolt factory of XX county, the formalities for customs transfer of the equipments could be handled by the customs then the equipments could be taken away by the bolt factory of XX county. One agreement between the equity joint venture after the equity transfer and the bolt factory of XX county also admitted the handling of the formalities while the respondent refused to handle the declaration of the equipments for the excuse of the undischarged debts between the old shareholders and new shareholders of the equity joint venture and dealt with the equipments passively.
The respondent argued that the unsettled matters of the imported equipments were the debts of the equity joint venture before equity transfer and should be dealt by the shareholders of the equity joint venture before the equity transfer. As the equipments imported in the name of self-using of the equity joint venture, the customs transfer must be handled in the name of the equity joint venture. In order to handle the formalities, the equity joint venture after equity transfer had provided all materials necessary to assist the handling. Nobody was aware of why the formalities of customs transfer did not be handled up to now.
The respondent also proclaimed that the equity joint venture was a Sino-foreign enterprise and had independent status of a legal person. The respondent was a shareholder of the equity joint venture meanwhile it was an independent legal person. The respondent, as a legal person entity independent with the equity joint venture, should not take any obligation that should be performed by the equity joint venture.
2.Award
(1)
All the claims of the claimant shall be overruled; And
(2)
The arbitration fee and the handling fee shall be assumed by the claimant.
3.Comment
The main legal matters in relation to this case are as follows:
(1)
In accordance with the provisions of the equity transfer contract signed by both parties which became effective, the condition of the respondent repaying the balance of the payment of transfer preserved in the account of the equity joint venture to the claimant was that there were surplus after discharging the debts prior to the equity transfer, and no other debts happened before the transfer belonged to the equity joint venture within three months after the transfer became effective.
The debt refers to the civil law relationships to request to do or not do some specific conducts among some specific persons. The conception of debt in civil law was different from the conception in civil life, the former does not limit to the relationship of borrowing and lending.
The materials as presented by the two parties proved that the agreement to jointly introduce equipments was signed by the equity joint venture prior to the equity transfer and the bolt factory of XX County. The equipments were paid by the bolt factory of XX County and imported in the name of self-using production of the equity joint venture. In the term of equity transfer and after the equity transfer, the bolt factory of XX county sent personnel to Shenzhen in June and July of 1990 and November 1990 and 1991 claiming the title to the equipments and requested the equity joint venture to handle the relevant formalities in order to take back the equipments to the county and signed relevant agreement with the equity joint venture after the equity transfer. The equity joint venture before the equity transfer admitted the claims of the bolt factory of XX County concerning the title of the equipments and the request of taking back the equipments in the explanation of the matter of the bolt factory of XX County importing the equipments from Taiwan on October 20, 1989. Since the equipments were imported in the name of self-using production of the equity joint venture for tariff free by the joint venture before the equity transfer. In accordance with the law, the equipments could not be sold or leased out to other domestic enterprises. So the conduct of the equity joint venture above evaded law in fact and under which the bolt factory of XX County could not get the title of the equipments. It could be seen that the relationship between the equity joint venture and the bolt factory of XX County was creditor's right and debts which happened before the equity transfer and the debt was not discharged up to now.
Because the matters concerning the equipments were unsettled debts prior to the equity transfer, the condition of repaying the balance stipulated in the equity transfer contract by both parties was not satisfied.
(2)
To assume the liability for the liquidation of the debts
The abovementioned imported equipments were declared in the name of self-using by the equity joint venture. Now it would be changed to be declared by the bolt factory of XX County as the buyer who should handle the customs transfer also. Then the county factory shall deliver the equipments from the place the equity joint venture located to the county. As the handling of the formalities shall be coordinated including the assistance of the equity joint venture and the support of the respondent to the joint venture, since the respondent was the shareholder of the equity joint venture after the equity transfer. But the respondent was a legal person independent with the equity joint venture after all and could not undertake the civil obligation of the equity joint venture directly. While the evidence as presented by the claimant could not prove that the unsettlement of this debt was due to the respondent's counteracts which made the equity joint venture passively to handle the formalities of customs transfer. Therefore, it could not be established in law that respondent should bear the liability for unsettlement of that debt of the equity joint venture.
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