In this article, A is a foreign enterprise. B is a wholly Chinese-owned real estate project company. C and D are Chinese shareholders of company B. and E is a Chinese enterprise.
Chinese shareholder D and company E executed a cooperative development agreement, providing for the development by the parties of a plot of land owned by company E. Pursuant to the agreement, D was to pay part of the demolition and relocation compensation
to E.
Subsequently, the Chinese shareholders, C and D, executed a shareholder investment agreement and jointly established and invested in project company B. The parties provided that part of the demolition and relocation compensation paid by D to E would serve as part of the registered capital of B.
New agreement
Senior Associate
Dacheng Law Offices
Beijing
In the year of the establishment of project company B, Chinese shareholder D transferred all of its rights and obligations under the cooperative development agreement to B, and B and company E were jointly to develop the land. For this purpose, B and E executed a new cooperative development agreement (the New Agreement). In the New Agreement, the parties confirmed that the demolition and relocation compensation previously paid by Chinese shareholder D to company E under the cooperative development agreement would become the amount (the Claim Transfer Payment) paid to company E by project company B. B’s other shareholder, Chinese shareholder C, paid an amount of demolition and relocation compensation to company E on the behalf of project company B (the Compensation Payment), and company E issued project company B a receipt.
Subsequently, foreign enterprise A acquired part of the equity in project company B, and subscribed for a capital increase in project company B. Based on this, project company B was converted into a Sino-foreign equity joint venture.
As company E failed to perform the New Agreement, project company B instituted legal action against company E demanding performance. As they violated mandatory provisions of laws, the court determined that the two cooperative development agreements were invalid and rejected project company B’s claims. However, in its judgment the court determined that “company E actually received payment from project company B totaling xxx (equivalent to the total of the Claim Transfer Payment and the Compensation Payment).”
For this reason, project company B demanded that company E refund it the Compensation Payment plus interest. However, E asserted that Chinese shareholder D owed it an amount relating to another matter, it refused to refund the aforementioned amount. Accordingly, B instituted another legal action, demanding that E refund it the aforementioned amount.
Main points of the case
Company E asserted that, since the two cooperative development agreements were determined by the court to be invalid, the transfer of the claims by Chinese shareholder D to project company B was also invalid and the payment to it by Chinese shareholder C on the behalf of B was also invalid. Furthermore, a transfer of claims required the creditor to give advance written notice thereof to the debtor, which Chinese creditor D did not do. Accordingly, company E should refund the Compensation Payment to Chinese shareholder C and Chinese shareholder D, and it had the right directly to set off the amount owed by D against such compensation.
Project company B asserted that although the two cooperative development agreements were determined by the court to be invalid, Chinese shareholder D’s transfer of the claims to project company B and Chinese shareholder C’s payment of the Compensation Payment on the behalf of project company B were acts carried out in performance of the New Agreement, and were not part of the New Agreement itself. Furthermore, although the New Agreement was determined to be invalid, it nonetheless could serve as evidence that Chinese shareholder D had given advance written notice of the claim transfer to company E, otherwise E would not have confirmed in the New Agreement the conversion of the payment by D to E of the Compensation Payment previously made under the cooperative development agreement into the amount paid by project company B to company E under the New Agreement. Accordingly, E should refund the demolition and relocation compensation plus interest to B.
The court at first instance ordered company E to refund the demolition and relocation compensation plus interest to project company B. Neither party appealed the judgment.
Assessment and analysis
Although there was a movement of cash between Chinese shareholder C and company E, this did not establish any direct legal relationship between them. The only legal consequence of this movement of cash was the establishment of a legal relationship between project company B and Chinese shareholder C involving a payment by C on the behalf of B, without altering the relationship of claims and debts between B and E. Despite the invalidity of the two cooperative development agreements, E was still required to refund the paid amount to project B as a result of the relationship of claims and debts under the agreements, not to Chinese
shareholder C.
Although the court rejected project company B’s claims, it nevertheless determined in the judgment that “after investigation it has been verified that company E actually received payment from project company B totaling xxx (equivalent to the total of the Claim Transfer Payment and the Compensation Payment).” Accordingly, the judge in the case could not render a contrary determination, i.e. that there was a direct relationship of claims and debts between Chinese shareholders C and D and company E, and as the two cooperative agreements were invalid, company E should refund the amounts to them, not to project company B. From this it can be seen that the judgment, and more importantly the determination of the facts by the court, had a major impact on the subsequent course of the case.
The parties to a lawsuit should not only seek a favourable judgment, but should also seek favourable confirmation of the facts of the case, otherwise they may risk winning the first case but losing future cases.
Lucia Liang, a senior associate at Dacheng Law Offices, specializes in real estate and construction, litigation & arbitration and enforcement
12/F-15/F, Guohua Plaza
3 Dongzhimennan Avenue, Beijing
Postal code: 100007
Tel: +86 10 58137138 (Lucia Liang)
Fax: +86 10 58137788
E-mail: jun.liang@dachengnet.com
