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The Case of XX v. XX on Dispute over Operating the Equity joint venture Shenzhen XX Boatyard Company Ltd
Jurisdiction: Arbitration; CIETAC Shenzhen
Date of Decision: July 15, 1999
1.Case Brief
The claimant and the respondent concluded "Contract of Operating the Equity joint venture Shenzhen XX Boatyard Company Ltd"(hereinafter referred to as "Equity joint venture Contract") in Shenzhen on December 30, 1992, of which the provisions relevant to the dispute for the case that both parties agreed on were as follows: the claimant (Party A) and the respondent (Party B) agreed to establish the equity joint venture company "Shenzhen XX Boatyard Company Ltd"(hereinafter referred to as "Equity joint venture Company").The total investment of the Equity joint venture Company should be RMB 150,000,000 and the registered capital should be RMB 60,000,000,among which Party A should contribute RMB 29,400,000 in cash accounting for 49% of the registered capital, and Party B should contribute RMB 30,600,000 in cash and part of equipment accounting for 51% of the registered capital. The exchange rate of foreign currency and RMB should accord to the price of Shenzhen Foreign Exchange Regulation Center on the day when they are input. The parties to the equity joint venture should pay the registered capital according to the proportion to their subscriptions in three installments respectively: In the first installment, Party A and Party B should contribute 20% of the required payment in proportion to their subscriptions within 30 days upon and after acquiring the business license for equity joint venture. In the second installment, Party A and Party B should contribute 40% of the required payment within 120 days upon and after acquiring the business license for equity joint venture. And in the third installment, Party A and Party B should contribute 40% of the required payment within 180 days upon and after acquiring the business license. Article 13 of Chapter Six of the Equity joint venture Contract "Responsibilities of the Parties to the Equity joint venture" stipulated that Item 2 of the responsibilities of Party A was providing gross maritime space, about 107,000 square meters, to the Equity joint venture Company which should be located in the water terminal of Mawan port in South Oil development zone, with the land-value of about RMB 280 per square meter, and transacting the process of obtaining the land use right with the department for land administration. Chapter VII of the Equity joint venture Contract stipulated that the Board of Directors of the Equity joint venture Company should be composed of six directors, of which 3 directors should be delegated by Party A and 3 by Party B. There should be one chairman and one vice-chairman, which would be assumed by turns. The term of the chairman, vice chairman should be four years, and they can continue working with the entrusting party's permission. Article 19 of the Equity joint venture Contract stipulated that there should be management and operating department, responsible to the daily operating and management work of the company in the Equity joint venture Company, which should has one general manager and one vice-general manager that recommended by both parties and employed by the Board of Directors. Article 32 of the Equity joint venture Contract stipulated that the term of the Equity joint venture Company should be 50 years.
The Equity joint venture Company acquired the corporate business license after the approved registration at Administration for Industry and Commerce on April 16,1993.Thereafter, disputes occurred during the performance of both parties of the Equity joint venture Contract, then the claimant applied for arbitration.
The arbitration requests of the claimant in its application were as follows:
(1) The respondent should unfurl the entire books of the Equity joint venture Company to the claimant, whose actual contribution's authenticity and validity should be examined by the Accounting Firm appointed by the arbitration tribunal.
(2) The respondent should bear the liability for breach of contract owing to its insufficient contribution and capital flight in its contribution to the Equity joint venture Company, which violated the law.
(3) The respondent should compensate the claimant for the total losses resulted from its unilateral control of the Equity joint venture Company, which violated the contract, articles of association and relevant laws and statutes.
(4) The respondent should bear the arbitration fee, court fee and the retaining fee, as well as other reasonable fees of the claimant for the case.
After Shenzhen XX Accounting Firm, appointed by the arbitration tribunal, issued No. SHEN HUA ZHUAN SHEN (1998) 040 audit report, the claimant altered its arbitration requests on January, 1999 into as follows:
(1)The legal representative of the respondent, He Xuefu, should surrender the entire seal and business license of the Equity joint venture Company to the claimant within 3 days as of the day the award takes effect.
(2)The arbitration tribunal should affirm that the respondent should bear the responsibility resulted from the long-term non-normal operating situation of the Equity joint venture Company.
(3)The arbitration tribunal should affirm that the respondent should bear and repay the debt and losses produced during the period when the respondent unilaterally controlled the Equity joint venture Company after the vice-general manager and other people appointed by the claimant were excluded by the respondent.
(4) The respondent should return the assets of the Equity joint venture Company that long-term occupied by the respondent immediately, such as cars, electronic equipment, of which the total value was RMB 1,237,387.58
(5) The respondent should pay the compensation RMB 2,432,505.01 to the Equity joint venture Company.
(6) The respondent should pay the compensation RMB 19,826,840 to the Equity joint venture Company.
(7) The respondent should pay its due registered capital RMB 15,758,555.74 to the Equity joint venture Company.
(8) The respondent should pay the damages RMB 4,727,566.72 to the claimant.
(9) The arbitration tribunal should affirm that the claimant has fulfilled its contribution obligation and the respondent should bear the responsibility of the non-complete legal formalities of transfer of land use right, then charge the respondent to cooperate with the claimant to complete relevant formalities.
(10) The respondent should bear the arbitration fee, audit fee, books custodial fees and the retaining fee for the case.
The claimant put forward in the letter to Shenzhen branch on February 3, 1999 that: in the light of the situation that the respondent's other property was unclear and difficult to enforce, it is requested respectfully that the arbitration tribunal should find that the respondent should offset its due compensation obligation and liability for breach of contract to the Equity joint venture Company and the claimant by its shares in the Equity joint venture Company. Provided that the shares were not enough, the insufficient part should be compensated by other fund or assets by the respondent so that the claimant's legitimate rights and interests could be actually protected.
The respondent held in its defense and supplementary documents that all requests of the claimant could not be tenable and should be overruled.
The main issues of both parties' disputes were as follows:
(1) In respect of the content of the contributive obligation of the claimant and actual performance
(a) As for the content of the contributive obligation of the claimant
The claimant held that although article 10 of the Equity joint venture Contract stipulated that the claimant should contribute RMB 29,400,000 in cash, at the First (Broaden) Board of Directors' Meeting on May 11, 1993, both shareholders agreed to alter the ways of investment contribution into: the claimant should make the contribution in the form of land use right of 106,990 square meters converted into money, and the respondent should make the contribution in cash. Such alteration has been approved by the original approval administration by foreign trade and Shenzhen equity joint venture Zheng Zi (1993) No. 0122 Approval Certificates for Investment in Enterprises by People from Hong Kong, Macao and Taiwan of People's Republic of China. Therefore, the contributive obligation of the claimant was to provide the land use right of 106,990 square meters of gross maritime space to the Equity joint venture Company.
The respondent argued that the aforesaid requests of the claimant were untenable. The reasons were as follows:
I. The alteration of ways of investment contribution came down to shareholder's obligation, while the Board of Directors was merely the highest authority of the Equity joint venture Company and had no right to determine the shareholder's obligation. Therefore, the alteration of the contract could not be substituted with resolution of Board of Directors' meeting.
II. What's more important was that even though Summary of the First (Broaden) Board of Directors' Meeting did mention that the claimant should become a shareholder by transferring land use right converted into money, it did not regulate on the details such as location, area, status and unit price, which was impracticability therefore.
III. "The land use right of 106,990 square meters should be converted into money of RMB 29,400,000" in (1993) No. 1022 Approval Certificate possessed no basis. In accordance with Laws of Chinese-Foreign Equity joint ventures and its Implementation Regulations, the governmental approval should base on the Equity joint venture Contract and Articles of Association rather than the Board Directors' Meeting. Besides, the resolution of the Board Directors' Meeting did not include such content in the approval certificate. Therefore, part of No. (1993)1022 Approval Certificate, related to ways of investment contribution, was erroneous and could not constitute the basis of the alteration of the claimant's ways of investment contribution.
The respondent fully noticed that Article 13 of Chapter VI of the disputed contract stipulated the obligation of the claimant to provide about 107,000 square meters of gross maritime space. The respondent deemed that such obligation could not be the contributive obligation of the claimant, which was stipulated clearly in Chapter V "Total Investment and Registered Capital". Therefore, Article 13 of the dispute contract could not replace or deny Article 10.
Being aware of the content of (1993) No.1022 Approval Certificate, the respondent repeatedly declared to the related government department that the contributive obligation of the claimant was RMB 29,400,000, and the related government department mailed the claimant, urging it to pay the contribution in cash on March 14, 1996, September 30, 1997 and April 30, 1998. These documents showed that: First, the respondent repeatedly notified to the related government department that the claimant failed to pay the contribution in cash according to the disputed contract and Articles of Association and requested the claimant to pay the contribution in cash. Second, the related government department still deemed that the claimant should contribute in cash and demand that it make the contribution as soon as possible.
In summary, the respondent held that the two documents that the claimant offered to support the alteration of its ways of investment contribution could not constitute the legal documents of the alteration of ways of investment contribution. The respondent never agreed the alteration of the claimant's ways of investment contribution while the government department still demanded that the claimant pay the contribution in cash. Therefore, the claimant should pay the contribution in cash according to the disputed contract.
(b) As for the claimant's actual performance of its contributive obligation
The claimant held that after the establishment of the Equity joint venture Company, the claimant submitted the land use right of 106,990 square meters to the Equity joint venture Company for utilization according to the agreement by both parties, and repeatedly requested the Equity joint venture Company to cooperate with it to transact the formalities of such transfer of land use right according to manners prescribed by local administrative authorities. However, such repeatedly requests were all refused by the general manager appointed by the respondent, who was in charge of the daily work of the Equity joint venture Company, resulting in that the transfer formalities of the land use right could not be handled till now. However, the Equity joint venture Company, controlled and operated by the respondent, carried through large-scale construction projects on the 106,990 square meters of land provided by the claimant that actually made use of such land. Therefore, the claimant fulfilled the contributive obligation completely according to the agreement.
The respondent argued that even if the claim of the claimant that its contributive obligation was providing land use right of 106,990 square meters of gross maritime space was tenable, the claimant still failed to fulfill its contributive obligation. The reasons were as follows:
I The precondition of fulfilling the contributive obligation of transferring land use right was the claimant owned such land use right of 106,990 square meters of gross maritime space. While the basis of the claimant to support its ownership of the 106,990 square meters of gross maritime space was Official Reply to the Approval Limits of Introduction Projects and Other Issues (Shen Government (1988) No. 189), issued on June 10, 1988, and Circular of the Approval and Transmission of Summary of Chief Shareholders' Meeting of South Deep (Shen Government (1992) No.140), issued on April 6, 1992. It was not difficult to discover after a careful study of these two documents that: First, the land in the area defined by the red line was not state-owned land yet. The documents repeatedly mentioned the issue of confiscation, which was the action that expropriates the collective ownership of land into state-owned land in accordance with Land Administration Law. Second, the documents stipulated clearly that South Oil "carry through complete and comprehensive development and construction" on the land defined by the red line. Third, the documents used concept "transfer" rather than "allocation". Analyze from the above contents, the land defined by the red line is not the land allocated. Allocation was a method to obtain land use right of state-owned land. However, the land defined by the red line had not been confiscated into state-owned land, thus was needless to consider allocation.
The respondent also noticed that Decisions concerning Further Strengthening the Land Planning and Administration, issued by the City Committee of Shenzhen and the People's Government of Shenzhen on October 23, 1998, stipulated that "withdraw the right of land planning and administration of South Oil group and other pieces of the development zones and implement unified administration by department of land planning and administration of the city", reflecting on another aspect that what the government originally granted the claimant was "the right of planning and administration of state-owned land" rather than land use right.
The above fully illustrated that the claimant did not hold the land use right of the land defined by the red line. Meantime, the red line map submitted by the claimant to the arbitration tribunal failed to indicate that 106,990 square meters of gross maritime space, where the Equity joint venture Company located now, was within the red line area.
What the respondent requested the arbitration tribunal to notice especially was that the Equity joint venture Company submitted Application Report concerning the Processing of Relevant Land Formalities to Bureau of Planning and Land of Shenzhen, requesting it to grant the land use right of 106,990 square meters to the Equity joint venture Company on June 29, 1995. Bureau of Planning and Land of Shenzhen granted the Equity joint venture Company Notification for the Payment of Transfer of Land Use Right (Contract Number:96-049)and demarcated the red line drawn map to remise the land use right to the Equity joint venture Company. Such facts reflected, from another aspect, that the claimant did not hold the land use right of 106,990 square meters of gross maritime space because there never existed two land use rights on the same land.
II Even if the claimant owned land use right of 106,990 square meters of gross maritime space (we don't think so), the claimant still failed to fulfill its contributive obligation completely, because:
First, the claimant alleged that it obtained land use right by means of allocation. Meanwhile, the claimant held that only delivering the land use right to the Equity joint venture Company in the form of transfer could be deemed as the fulfillment of contributive obligation. However, according to Article 5, 6 of Interim Measures for Administration of Allocation of Land Use Right, transferring the land use right obtained by allocation should be provided with the following qualifications at least(but not limited to):①transact the formalities of transfer of the land use right and deliver the fee for transfer of land use right;②get the certificate of land use right of state-owned land. Obviously, 106,990 square meters of gross maritime space did not possess these documents.
Second, according to Urgent Circular concerning Relevant Regulations on Assessment of Chinese Party's Assets Being Strictly Implemented when Initiating Equity Joint Venture, Contractual Joint Venture and Selling State-owned Assets to Foreign businessmen, issued on December 31, 1992, before establishing the equity joint venture with foreign party, the state-owned assets should be assessed first. While 106,990 square meters of gross maritime space was not evaluated.
Third, the claimant claimed in the hearing on January 22, 1999 that the fixed number of year of the land use rights it owned was 25 years, which would expire in 2009. While the operation term of the Equity joint venture Company, established in 1993, was 50 years. Then what to do after 2009? Accordingly, the respondent held that there seemed exist commercial fraud suspicious of the claimant.
III. The claimant held in the Reply to the Defense, submitted to the arbitration tribunal on March 3, 1998, that "When the claimant transfer the land defined by the red line, which was allocated by government of Shenzhen for free, the claimant will conclude Contract of Transfer of Land Use Right with the transferee entity, after which the claimant will pay the different premium for years and get the Real Estate Certificate of the transferred land based on such contract. " We noticed that such depiction went without any legal basis, and even directly contradict the legal provisions.
(c)In respect of Contract of Transfer of Overall Land Use Right of South Deep
The claimant alleged that owing to the refusal of the Equity joint venture Company to sign Contract of Transfer of Overall Land Use Right of South Deep, it failed to accomplish the legal formalities to transfer the land use right to the Equity joint venture Company. Withal, we hold different opinions:
First, 106,990 square meters of gross maritime space did not possess the precondition of transfer of land use right, which was analyzed above;
Second, there existed no legal basis of the claim that by signing Contract of Transfer of Overall Land Use Right of South Deep, the legal formalities of the transfer of land use right to the Equity joint venture Company could be accomplished.
Third, what is more important, the contents of Contract of Transfer of Overall Land Use Right of South Deep damaged the interest of the Equity joint venture Company severely. Article 13 of such contract stipulated that yearly difference in land-value and the transfer fee of land use right should all be bore by the Equity joint venture Company, while the respondent never agreed to additionally pay the yearly difference in land-value and the transfer fee of land use right. Meantime, according to the principles and spirit of law, shareholder's contribution should not bring burden to the company. Therefore, the respondent had complete right to refuse to sign such contract. What should be noticed was in the Reply to the Defense, the claimant claimed that it paid the yearly difference in land-value, which means the claimant itself did not agree, or gave up the content of Article 13 of such contract.
In summary, we deemed that the claimant failed to demonstrate that it owned the land use right of 106,990 square meters of gross maritime space. Even if it owned, owing to such land's not possessing transfer qualifications completely, it could not be deemed as contribution. The Equity joint venture Company had fully right to refuse signing Contract of Transfer of Overall Land Use Right of South Deep. The aftereffect of non-accomplished legal formalities of the transfer of land use right to the Equity joint venture Company should be bore by the claimant alone.
The claimant brought forward the following counter-defense against the above claims of the respondent:
The core issue of disputes for the case was: the 107,000 square meters of gross maritime space, in use of the Equity joint venture Company, belonged to the state-owned land administrated by Bureau of Land of Shenzhen, or belonged to the scope of land Shenzhen government allocated to the claimant as capital stock in 1984.
In order to demonstrate that 107,000 square meters of gross maritime space was the land Shenzhen government allocated to the claimant as capital stock in 1984, the claimant submitted the following evidences to the arbitration tribunal:
(1) Red Line Map of "Development of Space of South Oil Development Service Company in Shenzhen", issued by City Planning and Designing Administration Bureau in Shenzhen. Each coordinates of the borders of such red line map was stamped the print of "Planning Section of City Planning and Designing Administration Bureau in Shenzhen". The Fourth Development of Space of such map showed that" thereinto earth is 6,822,518.6 square meters and offing is 1,038,700 square meters". According to the map, the gross maritime space, which the claimant provided to the Equity joint venture Company according to the Equity joint venture Contract, was exactly located in the scope of such red line map.
(2) Shen Government (1998) No.189 Governmental Document of Shenzhen government stipulated clearly that "the land defined by the red line is transferred for free as the invested capital stock by Shenzhen".
(3)The three documents, i.e. Letter of Intent of Operating the Equity joint venture Shenzhen XX boatyard company Ltd on September 1, 1992, and Application for Use of Land of South Oil Development Zone, Report concerning the Application for the Transfer of Land Use Right, filled and submitted by the Equity joint venture Company on May 12, 1993, could demonstrate that: before and after the conclusion of the Equity joint venture Contract by the claimant and the respondent, the respondent, as well as the Equity joint venture Company controlled by it, regarded 107,000 square meters of gross maritime space as the land the claimant owned land use right.
(4) Nan Shen Chief (93) No.013A of Red Line Map of Land Use was made by the claimant according to its authority, which was taken away by the Equity joint venture Company for preservation and utilization on July 24,1993.
(5)The Equity joint venture Company, controlled by the respondent, reported to the claimant under the title of Report concerning Some Issues within the scope of Red Line Area of XX Company Boatyard on October 7, 1993, requesting cooperation on cross-site problem with Mawan Electricity Factory and other problems.
The claimant deemed that the above evidences and other documents submitted by it to the arbitration tribunal had fully demonstrated that the government, the claimant and the respondent all confirmed that the land used by the Equity joint venture Company now was part of the claimant's land transferred by the government of Shenzhen as capital stock in specific characters and figures forms.
After 1994, the respondent intended to imitate Mawan Electricity Factory's practice, expecting the government of Shenzhen to take 107,000 square meters of land back and transfer it to the respondent again, thus refused to sign Contract of Transfer of Land Use Right with the claimant and bruited the feint everywhere in its own wishful thinking that 107,000 square meters of land did not belong to the claimant, regardless of all the facts happened. The claimant did not think such the respondent's deed was wise because the respondent failed to submit any evidence to prove that 107,000 square meters of land was transferred directly from the government of Shenzhen to it for utilization till now. Although the respondent brought forth Notification for the Payment for Transfer of Land Use Right of Bureau of Planning and Land of Shenzhen without stamp to the arbitration tribunal to prove certain land was transferred directly to the Equity joint venture Company for utilization by Bureau of Land, the claimant held that even the respondent could submit such payment notification and 96-047 of Contract of Transfer of Land Use Right t mentioned in the notification, the respondent only proved that land use right of No.T106-220 was transferred to the Equity joint venture Company for utilization from the government of Shenzhen, rather than to the respondent, which was merely the shareholder of the Equity joint venture Company, the same status as the claimant. Moreover, the respondent still failed to submit the Contract of Transfer of Land Use Right of No.T106-020 and the red line map, so how can it demonstrate that the Equity joint venture Company had possessed land use right of T106-220 legally, and such land was exactly the 107,000 square meters of gross maritime space under the disputes between the claimant and the respondent, which was in use of the Equity joint venture Company?
The claimant held that since 1994, the respondent made illusion to deceive itself in its own wishful thinking and attempted to cheat other people regardless of the realities, damaging the interest of the claimant and the Equity joint venture Company seriously. Therefore, the respondent should bear corresponding responsibilities in accordance with China's existing laws and relevant provisions of the Equity joint venture Contract. There was no evidence to support the claim of the respondent that 107,000 square meters of gross maritime space was transferred directly from the government of Shenzhen to the Equity joint venture Company, which could not be substantiated. While the claim of the claimant that 107,000 square meters of gross maritime space was transferred from the government of Shenzhen to the claimant as part of capital stock had been proved by sufficient evidences. The arbitration tribunal should confirm it.
The claimant claimed that the imperfect legal formalities of land use right were resulted from historical reasons. In the hearing, the respondent repeatedly emphasized that the legal formalities of the claimant' 23 square km of land, transferred from the government of Shenzhen as capital stock, were imperfect, and the claimant also admitted that it was the fact. However, the claimant requested the arbitration tribunal to notice respectfully that the claimant was registered and established in 1984, at the same time the government of Shenzhen transferred such land to the claimant as its capital stock. The Constitution Law, stipulated that land use right should be separated from land ownership, as well as Land Administration Law were issued after June 1986. It was difficult to support the demand that related actions should accord with the forms and procedures stipulated in relevant laws and regulations before they were issued. Respecting history is the remarkable characteristic of Chinese judicature. When dealing with land use right of such land transferred from the government of Shenzhen as capital stock, the claimant had fully noticed and complied with the existing relevant statutes, as well as perfect the various legal formalities gradually, requesting the legal representative of the claimant to sign Contract of Transfer of Land Use Right in the name of the Equity joint venture Company was part of which. The entire civil liabilities caused by the delay of going through legal procedures of transfer of the gross maritime space in use of the Equity joint venture Company for long, resulting from the respondent's infringement on purpose, should be bore by the respondent, including but not limited to additional yearly difference in land-value and relevant fees that should paid to the Land Administration Department.
(2) In respect of the respondent's contribution
The claimant claimed in its application that it lacked knowledge of specific situation of the Equity joint venture Company's finance and operation. However, the claimant had sufficient reasons to suspect the authenticity of the respondent's actual contribution and the possibility of capital flight by analyzing the financial situation of the Equity joint venture Company. In order to maintain the interests of the claimant and creditors of the Equity joint venture Company, the claimant requested the arbitration tribunal to appoint an accounting firm to examine the authenticity and validity of the respondent's actual contribution.
The respondent argued in its defense that it had paid the contribution RMB 30,195,697.80 in cash and practicality on June 22, 1993, September 23, 1993 and March 31, 1994 respectively, which were verified and corresponding certifications were issued by She Jian (1993) No.108 Contribution Verification Report, issued by Shekou Accounting Firm in Shenzhen on June 22, 1993, and Cheng Yan (1994) No.D316 Contribution Verification Report, issued by Zhongcheng Accounting Firm in Shenzhen on April 8, 1994, respectively. Shen Hua Speical (1998) No.40 Audit Report, issued by Shenzhen Huapeng Accounting Firm appointed by the arbitration tribunal on October 20, 1998, indicated that the contribution devoted by the respondent was reduced to RMB 15,545,981.34, while Hong Kong party's capital stock of paicl-up capital in the balance sheet of the Equity joint venture Company on June 30, 1997 was RMB 14,841,444.26, and the Equity joint venture Company should pay the respondent RMB 25,323,561.49(including loan of $ 3000000). Concerning the Audit Report aforesaid, the respondent held in the documents, submitted on February 2, 1999, that the dredging project fees of HK 9,818,690.31, paid by the respondent in the name of the Equity joint venture Company, was neither calculated as account payable by the Equity joint venture Company to the respondent, nor the capital devoted by the respondent. Therefore, the respondent requested the arbitration tribunal to regard such payment of HK 9,818,690.31 as the capital that had been paid by the respondent, and regard part of account payable of $ 3,000,000, equivalent to the capital the respondent did not pay, as capital.
(3) In respect of the dispute that whether the respondent controlled the Equity joint venture Company unilaterally
The claimant held that on the basis of being familiar with the business and of the position of major shareholder, the respondent delegated its legal representative to be the board chairman and the general manager at the same time and controlled decision-making right and operation right from the very beginning. Ever since the establishment of the Equity joint venture Company, the claimant never enjoyed and exerted the rights a shareholder should have: the Equity joint venture Company never submit important reports, balance sheet, annual financial statements and so on to the claimant; major policy decisions were decided without discussing with the claimant; regular meetings of the Board of Directors were not on schedule, making the claimant unable to exercise its rights through the Board of Directors. Senior management staffs such as the vice board chairman and the vice general manager, who were appointed by the claimant according to the Equity joint venture Contract, were also excluded from management of the Equity joint venture Company by the respondent's various excuses. In order to maintain the claimant's interest as a shareholder, the claimant requested to exert its shareholder's rights according to the Articles of Association of the Equity joint venture Company to consult the books of the Equity joint venture Company and audit them, which were turned down completely by General Manager He Xuefu.
In view of the above situation, the claimant sent many letters to the respondent, asking to convene directorate meetings or shareholders' meetings to change the non-normal operation situation, which the respondent wholly turned its back upon. The claimant also reflected such situation to relevant departments (such as City Key Projects Office, Nanshan Branch of City Administration for Industry and Commerce), while problems have not ever changed. From August 18, 1995, when staffs appointed by the claimant to the Equity joint venture Company could not get the wage, the respondent controlled the operation right of the Equity joint venture Company comprehensively.
During the period when the respondent unilaterally controlled the Equity joint venture Company, the respondent made false reports, withdrew registered capital and refused to convoke directorate meetings, which violated the Equity joint venture Contract, Articles of Association and law and damaged the legitimate rights and interests of the Equity joint venture Company and the claimant, resulting in foreign liabilities of RMB 39,426,333 and bad debts of more than RMB 29,000,000(referred to Item 4 of Page 7 of the Audit Report), for which the Equity joint venture Company could not be operated normally. Therefore, the claimant respectfully requested the arbitration tribunal to confirm definitely in the award that the fault behavior of the respondent resulted in the breakdown of the operation of the Equity joint venture Company and made the finding that the respondent should bear complete civil liabilities for this.
The entire civil liabilities the respondent should bear should include, but not limited to, these two items:
(a) Amortization costs of RMB 2,432,505.01 and the subsequent interest according to Item 8 of Page 6 of the Audit Report. Owing to the respondent's arbitrarily lending large amount of funds to enterprises that had no connection with the Equity joint venture Company and failing to pay the due contribution to the Equity joint venture Company completely, the Equity joint venture Company lacked operating capital for long and was forced to loan RMB of 7,000,000 from Trust and Investment Corporation of Agriculture Bank of China in Shenzhen and RMB 2,905,000 from Shekou Branch of Development Bank of Shenzhen successively (referred to Item 8 of Page 6 of the Audit Report),which produced subsequent interest of RMB 2,432,505.01 till June 1997. The claimant held that such interest and the subsequent interest due to non-sufficient repayment of capital should be bore by the actual controller and operator of the Equity joint venture Company -- the respondent.
(b)The payment of RMB 19,826,840 lent to Shenzhen Yuanjiang Company and the corresponding interest in accordance with Item 1 of Page 4 of the Audit Report.
In the light of the Audit Report, there existed no operational reasons or causes that why the respondent lent such huge sum of money to Shenzhen Yuanjiang Industry Company, whose forms of receipts could not be found in the archives. According to the survey of the claimant, Shenzhen Yuanjiang Industry Company had been logged-out and the Equity joint venture Company lost its claim object to exercise its creditor's right. The respondent, as the actual controller and operator of the Equity joint venture Company when lent such sum of money, undoubtedly should bear the responsibility to compensate the losses resulted from its fault operation and should compensate the Equity joint venture Company RMB 19,826,840 and the corresponding bank interest.
The respondent argued that:
First, the respondent had never controlled the Equity joint venture Company unilaterally. The business activities of the Equity joint venture Company were truly mainly conducted by the respondent, while which was stipulated definitely in the Articles of Association, Article 32 of which showed that" in view of the professional and specificity of ship repair industry, both parties agreed on the operational mode that Party B (namely the respondent) should take the leading role and Party A (namely the claimant) should participate. "Concerning the decision that Mr. He Xuefu assumed the office of both the board chairman and the general manager, it was affirmed by both parties and passed at the first meeting of the Board of Directors of the Equity joint venture Company, rather than self-assertion of the respondent. Second, major decisions were discussed and determined by both parties. The major decisions of the Equity joint venture Company, no matter staff orientation, project feasibility studies, design and invite public bidding, determination of land reclamation project, as well as transfer of shares to German BTV Company, were all made on the participation of the claimant, which can be fully proved by summaries of the first and the second meetings of Board of Directors. Third, the senior management staffs, appointed by the claimant, were not excluded from the management of the Equity joint venture Company. The vice board chairman, appointed by the claimant, participated in all previous meetings of Board of Directors, and, as the vice board chairman appointed by the claimant, signed the Share Transfer Contract in German BTV Company in the name of the Equity joint venture Company. The vice general manager, appointed by the claimant, directly participated in the management of the company, having addressed a speech on a special subject in the first meeting of Board of Directors, until he was transferred away in 1994. The only accountant of the Equity joint venture Company was occupied by the person appointed by the claimant. What should be pointed out here was from the only evidence that the claimant submitted to show the respondent's excluding the staffs from the claimant -- No.5 Bulletin of the Equity joint venture Company in 1995, any person with a little knowledge of law would not draw the same conclusion as the claimant. Since the Articles of Association of the Equity joint venture Company did not stipulate that directors can get payment from the Equity joint venture Company (except those who assumed operational functions at the same time), nor the Board of Directors made such determination. Moreover, both shareholders' directors were stopped to get wage when the determination of the Equity joint venture Company to stop directors from getting wage was made. Such determination had nothing improper at all, so how could it be deemed as the exclusion of the claimant by the respondent? Fourth, the responsibility that Board of Directors' meetings were not convened on time mainly lied in the claimant. The Equity joint venture Company convoked the second meeting of the first session of Board of Directors on November 17, 1994, at which directors of both parties reached consensus on many issues. However, after directors of the respondent signed on the directorate summary finished by both parties' missionary after the meeting, the claimant suddenly overthrew the consensus reached at the Board of Directors' meeting and refused to sign, trying to impose its own opinion on the Board of Directors. Although the claimant repeatedly sent people to have interviews with relevant people of the claimant and had face-to-face discussions with the general manager of the claimant, the claimant insisted on its own opinion, directly resulting in the failure to convoke the Board of Directors' meetings on time.
The aforesaid RMB 2,432,505.01 by the claimant was the interest from the fund the Equity joint venture Company borrowed from Trust and Investment Corporation of Agriculture Bank of China in Shenzhen and Shekou Branch of Development Bank of Shenzhen according to the Audit Report. The debtor of these two loans was the Equity joint venture Company. The aforesaid two items of loans were used for the Equity joint Venture Company thus the corresponding interest should be born by the Equity joint venture Company undoubtedly. The Audit Report showed that the sum of money of RMB 19,826,840 was lent to Shenzhen Yuanjiang Industry Company by the Equity joint venture Company, which was decided by the board chairman, as well as the general manager, of the Equity joint venture Company, rather than the respondent, which received no interest either. Provided that such erroneous decision caused losses to the Equity joint venture Company, the responsibility of the board chairman and senior management staffs should be gone behind in accordance with Company Law.
In summary, the additional Item 5 and 6 of the requests of the claimant were untenable and should be overruled.
The additional Item 3 of the arbitration requests of the claimant was also untenable and should be overruled. The reasons were as follows:
The claimant alleged that the vice general manager of the Equity joint venture Company, appointed by the claimant, was excluded from the Equity joint venture Company, the only evidence of which was No.5 Bulletin of the Equity joint venture Company in 1995.We deemed that: first, the vice general manager was appointed to a position by the Directorate of the Equity joint venture Company, rather than delegated by the claimant. Second, the contents of the aforesaid No.5 Bulletin were stopping all directors' personal expenses in the Equity joint venture Company, which was applicable to all the directors rather than only to those delegated by the claimant. Moreover, such decision did not stop distributing wages to the managers. Third, the only vice general manager, recommended by the claimant, left the Equity joint venture Company in January 1995,while No.5 Bulletin was issued on May 18,1995.Apparently, the fact that the respondent excluded the staffs appointed by the claimant did not exist. While the respondent would propose the Board of Directors to run the responsibility of those directors and managers who were unauthorized absent.
(4) In respect of the first item of the claimant's requests
The respondent argued that:
The claim of the claimant that the entire seals and Business License of the Equity joint venture Company should be delivered to the claimant could not be tenable and should be overruled, because: first, neither law nor Articles of Association of the Equity joint venture Company stipulated that seals and Business License should be transferred to the shareholder of the Equity joint venture Company, namely the claimant. Second, under the circumstance that the Equity joint venture Company had ceased operation, it could not be more proper that the board chairman of the Equity joint venture Company, as well as the general manager, preserved the seals and Business License, and there were no other suitable candidates.
(5) In respect of the second item of the claimant's requests
The respondent argued that:
The claim of the claimant that the respondent should bear the responsibility of non-normal operation situation of the Equity joint venture Company could not be tenable and should be overruled. The reasons were as follows:
(a) The responsibility of the non-normal operation situation of the Equity joint venture Company lied in the claimant. During the process of inviting public bidding for hydraulic terminal project in May 1995, owing to the lack of certification of land use right of 1,069,000 square meters of gross maritime space, such project was ordered to suspension by the government. While in terms of Article 13 of the disputed contract, offering the land use right of 1,069,000 square meters of gross maritime space to the Equity joint venture Company was the claimant's obligation.
(b) The claimant did not make it clear that the Equity joint venture Company should bear what kind of responsibility, so the respondent could not advance specific defense.
(6) In respect of Item 4 of the requests of the claimant
The claimant alleged that the respondent should return the assets of the Equity joint venture Company that occupied by the respondent for a long term and pay royalties to the Equity joint venture Company. Item 2 of Propositions of Related Problems on Page 7 of the Audit Report recorded that "there are 4 motorcars worth RMB 1,149,133.06, wiring worth RMB 88,254.52, of which the total value were RMB 1,237,387.58 in the Dexing (Hong Kong) Guangzhou Office". Since the respondent occupied these Equity joint venture Company's assets without any legal and factual reasons, the respondent should return them to the Equity joint venture Company immediately and pay royalties for the utilization for these years.
The respondent argued that on account of that the Equity joint venture Company had ceased operation and had no working places, all the motorcars were preserved in Guangzhou and were not in use. While all the mobile phones were used by the managers of the Equity joint venture Company and there was no reason to return them. So such request could not be tenable either and should be overruled.
(7) In respect of Item 7 and 8 of the claimant's requests
The claimant held that:
Although the respondent claimed that it had made due contribution completely, according to Page 1 of the Audit Report "Second, Assets and Liabilities and the Interests and Rights of the Owner": the paicl-up capital in the original report forms was RMB 3,387,425.60,which was reduced by RMB 15,545,981.34 in the Audit Report. It meant that after the reduction the actual contribution of the respondent was merely RMB 14,841,444.26, 48.5% of its due contribution. The claimant respectfully requested the arbitration tribunal to find that the respondent should recover registered capital of RMB 15,758,555.74 immediately.
Article 38 of the Equity joint venture Contract stipulated that "Provided that any party of the equity joint venture fails to submit its due contribution on time, from the first month overdue, the defaulting party shall hand over penalty, 5% of the due contribution, to the complying party in every overdue month. Provided that the due contribution is not yet submitted after six months overdue, besides the penalty, 30% of the due contribution totally, the complying party is entitled to terminate the contract according to Article 41 of this contract and ask the defaulting party to compensate for the losses." In accordance with this provision, the respondent should pay penalty of RMB 4,727,566.72.
The respondent argued that:
The problem of the respondent's recovering the registered capital had been elaborated in the contribution part. The basis on which the claimant requested the respondent to pay penalty was Article 38 of the contract, according to which the right of asking the defaulting party to pay penalty was part of the rights of the complying party. Since the claimant did not fulfill contributive obligation itself, which violated the contract apparently, it undoubtedly did not have the right to ask the respondent to pay penalty.
(8) In respect of Item 9 of the claimant's requests
The claimant held that:
According to the resolution of the first meeting of Board of Directors of the Equity joint venture Company, the claimant handed over 106,990 square meters of gross maritime space, as the registered capital, to the Equity joint venture Company for its utilization, which started construction on such land since 1993. However, the respondent still failed to cooperate with the claimant to transfer the land use right to the Equity joint venture Company till now. In the first hearing, the claimant submitted enough evidences to prove that because the legal representative of the Equity joint venture Company of the time delayed signing land contract, the claimant failed to transfer the land use right of 106,990 square meters of gross maritime space to the Equity joint venture Company. To ensure the normal operation of the Equity joint venture Company, the claimant requested the arbitration tribunal to find that the respondent should cooperate with the claimant to perfect relevant procedures as soon as possible.
The respondent argued that the claimant should complete its contributive obligation itself, which should not bring dis-bennifit to the Equity joint venture Company. Therefore, such claim of the claimant could not be tenable and should be overruled.
2.Award
(1)
The respondent shall hand over its due while unpaid registered capital of RMB 15,758,555.74 to the Equity joint venture Company.
(2)
The respondent shall return the payment of RMB 19,826,840 that the Equity joint venture Company lent to Shenzhen Yuanjiang Industry Company.
3.Comment
The legal matters in relation to this case are mainly as follows.
(1)
Law application
This case involves the disputes arouse in the performance of the Equity joint venture Contract between both parties in Chinese territory. In accordance with Article 5 of Law of the People's Republic of China on Economic Contracts Involving Foreign Interest (Note: This law has been abolished by Contract Law of People's Republic of China and is no longer applicable since October 1,1999), the settlement of disputes of this case should be governed by Chinese law.
(2)
The contribution of the claimant
(a) As for the claimant's ways of investment contribution
The arbitration tribunal holds that the alteration of the claimant's ways of investment contribution in the Equity joint venture Contract between both parties is effective. The claimant should convert the land use right of 106,990 square meters of gross maritime space, located in Mawan port terminal in South Oil development zone, into money as its contribution.
(b) As for whether the claimant owns the land use right of such gross maritime space
The arbitration tribunal notices that the two documents, Official Reply to the Approval Limits of Introduction Projects and Other Issues (Shen Government (1988) No. 189) and Circular of the Approval and Transmission of Summary of Chief Shareholders' Meeting of South Deep (Shen Government (1992) No.140), issued by the People's Government of Shenzhen on June 10, 1988 and April 6, 1992 respectively, definitely transferred the land within the red line area, from Nantou byland to Xixiang," to the claimant for free as invested capital stock of Shenzhen", demonstrating that the claimant gained the land use right of the land within the red line area by allocation. The word "transfer", used in the document, has its own historical reasons that do not affect the quality of such land use right. Although the respondent alleged that the red line map, submitted by the claimant, did not show that 106,990 square meters of gross maritime space was exactly within the red line area in the aforesaid documents, the respondent failed to provide corresponding evidence to demonstrate. Therefore, the arbitration tribunal does not support such claim. Item 9 of Decisions Concerning Further Strengthening the Land Planning and Administration, issued by City Committee of Shenzhen and the People's Government of Shenzhen on October 23, 1998 just took back the right of planning and administration of land in successive development zone entrusted by the government department to the claimant originally, rather than the land use right allocated to the claimant former. Although the respondent submitted Application Report on the Processing of Legal Formalities of Transfer of Land Use Right, submitted by the Equity joint venture Company to Bureau of Planning and Land of Shenzhen on June 29, 1995, and Notification of Payment of Transfer of Land Use Right, issued by Bureau of Planning and Land of Shenzhen on May 15, 1996, the former is merely the application advanced by the Equity joint venture Company, the latter is not credible for it lacks the stamp of Bureau of Planning and Land of Shenzhen. Based on the above analysis, the arbitration tribunal deems that the claimant owns the land use right of 106,990 square meters of gross maritime space located in Mawan port terminal in South Oil development zone.
(c) As for the fact, reason and responsibility of whether the claimant fulfilled its contributive obligation
The Equity joint venture Company has actually utilized such gross maritime space. Only because the differences between the two shareholders of the equity joint venture, the claimant failed to transact the formalities of transferring the land use right to the Equity joint venture Company. The arbitration tribunal holds that the contributive obligation of the claimant is to provide land use right of 106,990 square meters of gross maritime space to the Equity joint venture Company. Although the claimant has provided such land to the Equity joint venture Company for utilization, the claimant did not finish the relevant procedures to transfer such land use right to the Equity joint venture Company, namely, the claimant did not fulfill its contributive obligation completely. Therefore, the arbitration tribunal does not support the claimant's claim to affirm that the claimant has fulfilled its contributive obligation.
Concerning the failure of accomplishment of transfer formalities of land use right, both the claimant and the respondent are responsible, while the claimant bear main responsibility. Therefore, the arbitration tribunal does not support the request submitted by the claimant that the responsibility of imperfect transfer formalities of land use right should be bore by the respondent. The claimant should accomplish the transfer formalities of land use right as soon as possible and the respondent should cooperate.
(3)
The respondent's contribution
Up to June 30, 1997, the respondent only made contribution of RMB 14,841,444.26 to the Equity joint venture Company, 48.5% of its due contribution. Therefore, the respondent did not fulfill its contributive obligation fully and violated the contract. The request advanced by the claimant that the respondent should hand over RMB 15,578,555.74 to the Equity joint venture Company is tenable and should be supported. However, in view of the claimant's failure to fulfill its contributive obligation completely, the claimant has no right to ask for penalty of the respondent as the complying party according to Article 38 of the Equity joint venture Contract. Therefore, the arbitration tribunal does not support the request of the claimant that the respondent should pay the penalty of RMB 4,727,566.72 to the claimant.
(4)
The disputes that whether the respondent unilaterally controlled the Equity joint venture Company
Concerning the issue that the Vice General Manager XXX, delegated by the claimant, left the Equity joint venture Company, the claimant alleged that he was excluded by the respondent while the respondent argued that XXX left the company in January 1995.However, neither advanced any evidence to prove the time and reason of XXX'S demission, and the arbitration tribunal could not cognizance it. The claimant claimed that the respondent fully controlled the operation right of the Equity joint venture Company since August 18, 1995, basing on No.5 Bulletin issued by the general manager of the Equity joint venture Company on August 18, 1995.However; the arbitration tribunal notices that such Bulletin just decided to "stop the personal expenses of directors and shareholders of the company to assure the normal expenditure of all the engaged personnel", which does not violate the Equity joint venture Contract, the Articles of Association and definite regulations of resolution of the Directorate, thus could not be regarded as the evidence that the respondent excluded the people appointed by the claimant like vice general manager and unilaterally controlled the Equity joint venture Company. Therefore, the arbitration tribunal does not support Item 3 of requests advanced by the claimant.
(5)
The responsibility of long-term non-normal situation of the Equity joint venture Company
The direct reason of the project suspension of the Equity joint venture Company is that the claimant did not accomplish the relevant formalities of transfer of land use right to the Equity joint venture Company, to which the claimant should bear main responsibility. However, when the claimant repeatedly proposed to convene meetings of shareholders to work on the solution of the problem, the respondent turned its back upon the goodwill of the claimant to settle the problem, resulting in long-term suspension situation of the Equity joint venture Company, and should bear corresponding responsibility. Therefore, the arbitration tribunal does not support the claim of the claimant that such responsibility should be bore by the respondent alone.
(6)
Item 5 of requests of the claimant
The claim of the claimant accords the reality that if the representative of the respondent He Xuefu did not lend the huge sum of money of the Equity joint venture Company to Shenzhen Yuanjiang Industry Company, the Equity joint venture Company should not have borrowed from the bank. Therefore, it is reasonable for the claimant to request the respondent to bear the interest of two bank loans and the arbitration tribunal will support it.
(7)
In respect of Item 6 of requests of the claimant
The representative of the respondent XXX, unauthorized, lent such huge sum of money to the underling company of the respondent by right of his status as board chairman as well as general manager of the Equity joint venture Company. Such action, serving the interest of the respondent while harm the interest of the Equity joint venture Company, should be deemed as action of the respondent, rather than the individual action of XXX or action of XXX as the board chairman and general manager. Therefore, the request of the claimant that the respondent should be responsible to return the sum of money of RMB 19,826,840 lent to Shenzhen Yuanjiang Industry Company to the Equity joint venture Company is justifiable and reasonable, which is supported by the arbitration tribunal. Concerning the interest, in view of the claimant's not putting forward specific amount of the request or the method to calculate the interest to the arbitration tribunal, and the respondent's bearing the bank loan interest, the arbitration tribunal finds that the interest of such loan could be exempt from payment.
(8)
Item 1 of the claimant's requests
The arbitration tribunal holds that the entire seals and Business License of the Equity joint venture Company should be preserved by a special person of the Equity joint venture Company in terms of the Articles of Association and regulations stipulated in the Board of Directors' resolution, while the alteration of the custodian should also be decided by the Board of Directors of the Equity joint venture Company. Under the circumstance that the Board of Directors of the Equity joint venture Company did not make a separate decision, the claim of the claimant that the entire seals and Business License of the Equity joint venture Company should be handed over to the claimant lacks basis and could not be tenable. The arbitration tribunal does not support such request.
(9)
Item 4 of the claimant's requests
Assets of the Equity joint venture Company should be preserved and used by the Equity joint venture Company. Without the determination of the Board of Directors, there is no legal basis for the respondent to occupy the Equity joint venture Company's assets, who should return the aforesaid assets to the Equity joint venture Company and pay reasonable use charge to the Equity joint venture Company for the utilization if there is any. Therefore, the arbitration tribunal supports such request of the claimant.
(10)
Item 10 of the claimant's requests
Based on the aforesaid views, the arbitration tribunal holds that the arbitration fee, audit fee and books custodial fees for the case should be bore by the claimant and the respondent according to the proportion of 40% to 60%. The claimant claimed that the respondent should bear the retaining fee of the claimant but failed to put forward the specific amount request. Therefore, the arbitration tribunal does not consider such request.
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