Case of Dispute over Financing and Lease of Ship filed by Guangdong Guangfa Industry and Investment Company against the Defendant Dongguan Dongxin Small Craft Company and Dongguan Xinyi Industry Corporation

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??Case of Dispute over Financing and Lease of Ship filed by Guangdong Guangfa Industry and Investment Company against the Defendant Dongguan Dongxin Small Craft Company and Dongguan Xinyi Industry Corporation ??





Guangzhou Maritime Court of the People??s Republic of China



Civil Judgment



(2003)GHFCZ No. 287



Plaintiff:		Guangdong Guangfa Industry and Investment Company

Domicile:		34F, No.713 Dong Feng Dong Road, Guangzhou, Guangdong Province

Legal representative:		Liu Hang, General Manager

Agents ad litem:		Du Chenghua, Zhang Yitao, employees of Guangdong Guangfa Industry and Investment Company

		

Defendant:		Dongguan Dongxin Small Craft Company

Domicile:		No.15, Botou Road, Humen Town, Dongguang, Guangdong Province

Legal representative:		Liu Zhiqiang, General Manager

Agent ad litem: 		Zhang Qingxiang, lawyer of Guangdong Ren Ren Law Firm

		

Defendant:		Dongguan Xinyi Industry Corporation

Domicile:		Yunhe Road North, Humen Town, Dongguan, Guangdong Province

Legal representative:		Liu Zhiqiang, General Manager

Agent ad litem: 		Zhang Qingxiang, lawyer of Guangdong Ren Ren Law Firm



On 27 May 2003, this court accepted the case about a dispute over financing and lease of ship filed by the Plaintiff Guangdong Guangfa Industry and Investment Company against the Defendant Dongguan Dongxin Small Craft Company (hereinafter referred to as ?°Small Craft Co.?±) and the Defendant Dongguan Xinyi Industry Corporation (hereinafter referred to as ?°Xinyi Co.?±) and constituted a collegial bench in accordance with law. On 15 July, the parties were convened for exchange of evidences before the court.  On 15 July and 22 August, open court hearings were held for trials of this case. Du Chenghua, the agent ad litem of the Plaintiff, and Zhang Qingxiang, the agent ad litem for both Defendants, the Small Craft Co. and Xinyi Co., attended the court hearings. This case has now been concluded.



The Plaintiff Guangdong Guangfa Industry and Investment Company complained that: On 21 November 1994, the Plaintiff and the Defendant Small Craft Co. entered into a Charter Party, whereby it was agreed that the Plaintiff would provide a fund of RMB10,000,000 to purchase three Russian hydrofoils for chartering out to Small Craft Co.; Small Craft Co. would pay the hire in an aggregate amount of RMB14,800,000 to the Plaintiff by 24 installments from 22 November 1994 to 22 November 1996; after paying off the above hire, Small Craft Co. may purchase the three hydrofoils at a nominal price of RMB1,000.  The Defendant Xinyi Co. guaranteed Small Craft Co.??s performance of the charterparty.  The Plaintiff then purchased the said three hydrofoils and leased them out to Small Craft Co., but Small Craft Co. has up to date effected only RMB1,000,000 to the Plaintiff. The Plaintiff requested the court to order Small Craft Co. to refund the remaining hire in the sum of RMB13,800,000 and Xinyi Co. to be severally and jointly liable for the above debts.



The Plaintiff furnished the following evidences within the period for adducing evidence: 1. Charter Party; 2. the bank slips evidencing the remittances made by the Plaintiff and the receipts of payments; 3. confirmations of payments effected by Small Craft Co.; 4. the application reports, the application for reducing/exemption of bank loan interest, the proposal of setting off debts against share right, etc., issued by the two defendants; and 5. the notice urging for payment of principal and proceeds of investment due/overdue.



The Defendant Small Craft Co. responded that the Charterparty between it and the Plaintiff was lawful and effective and that the facts stated in the Statement of Complaint of the Plaintiff were true, but during the period when it chartered in the three hydrofoils from the Plaintiff the volume of carriage was plunged and great losses in operations were resulted, so Small Craft Co. could not pay the hire as per the charterparty.  Therefore, Small Craft Co.??s failing to perform its obligations under the charterparty was caused by force majeure.  The three hydrofoils chartered in and managed by Small Craft Co. has since 1997 been detained by the People??s Court of Dongguan and other courts.  The Plaintiff should have asserted its rights with the relevant courts. 



The Defendant Xinyi Co. had no objections to the facts stated in the Statement of Complaint of the Plaintiff and confirmed that it did guarantee for Small Craft Co., but argued that as per the charterparty Xinyi Co. was liable for paying the hire for Small Craft Co. only when Small Craft Co. failed to pay the hire as scheduled and under the circumstance that the objects of lease was not lost or sustained no damages.  Now, however, the objects of lease in question, the hydrofoils, has been arrested since 1997 by the People??s Court of Dongguan and other courts.  Therefore, the Plaintiff should have claimed its ownership of the hydrofoils against the People??s Court of Dongguan, etc.. Xinyi Co. should not bear the guaranty liabilities beyond the scope of the charterparty.  Therefore, Xinyi Co. requested the court to dismiss the Plaintiff??s claims against it.



The two Defendants jointly produced the following proofs within the period for evidence adducing: 1. the Civil Ruling issued by the People??s Court of Dongguan; 2. the list of properties seized/detained; 3. the ship registration certificates of m/v ?°Dong An?± and ?°Dong Xin?±; 4. sales contracts related to m/v ?°Xi Chang?± and ?°Dong An?±.



At the application of Small Craft Co. and Xinyi Co., this court obtained some of the documents related to this case from the People??s Court of Dongguan and the Intermediate People??s Court of Guangzhou, and the two defendants paid the fees for collection of evidence in amount of RMB500 to this court. 



After examination and cross examination at the court hearing, the Plaintiff, Small Craft Co. and Xinyi Co. had no objections to the following evidences and facts, and the collegial bench ascertained and accepted the following:



On 21 November 1994, the Plaintiff and Small Craft Co. concluded a Charter Party, which stipulates that the Plaintiff was to provide a fund of RMB10,000,000 to purchase three Russian ?°Bolixiye?± hydrofoils for leasing out to Small Craft Co.; the boats were to be chosen by Small Craft Co. in accordance with its needs; the Plaintiff provided the necessary approvals or certificates of consent and entrusted Small Craft Co. to purchase the boats; the period of lease started from 22 November 1994 to 22 November 1996 with the total hire being RMB14,800,000; the Small Craft Co. was to pay the hire to the Plaintiff on 22nd of each month by 24 installments; during the period of lease, the ownership of the boats belonged to the Plaintiff and Small Craft  Co. obtained the right to use the boats only; without the consent of the Plaintiff, Small Craft Co. was not allowed to sell, transfer, sub-charter, mortgage the boats or take any other actions that would prejudice the ownership of the boats; Small Craft Co. was to be responsible for inspection and outfitting the boats, trial running, maintenance, as well as the insurance matters during the period of lease for the boats and bear all costs and expenses so incurred; if due to reasons on the part of Small Craft Co., the boats were lost or sustained damages, Small Craft Co. was to bear liabilities for compensation and to continue to pay the hire to the Plaintiff as per the agreed schedule till the period of lease expired; upon the expiration of the period of lease and after Small Craft Co. paying off all the hire as well as the nominal price of RMB1,000 to the Plaintiff, the ownership of the objects of lease should automatically be transferred to Small Craft Co.. It is also agreed under the charterparty that Xinyi Co., as the guarantor, should guarantee and be responsible for the actual performance of the charterparty; should Small Craft Co. fail to pay the hire to the Plaintiff as per the schedule, Xinyi Co. should, within 3 days upon receipt of the written notice from the Plaintiff, pay to the Plaintiff the outstanding hire inclusive of the delay penalty without any objection.  In the event that Small Craft Co. breaches the contract or causes the loss of or damages to the boats due to its fault and is incapable of compensation, Xinyi Co. should, as per the charterparty, be responsible for sorting out and liquidating all debts of Small Craft Co.. The Plaintiff, Small Craft Co. and Xinyi Co. all signed and affixed their respective chops on the charterparty.  The appendix to the charterparty, the Agency Agreement for Custody stipulates that the original invoices of the boats belong to the Plaintiff; Small Craft Co., under the entrustment of the Plaintiff, shall keep the original invoices of the boats for the Plaintiff during the leasehold. 



After the conclusion of the charterparty, the Plaintiff, paid the investment sums to Small Craft Co. in amount of RMB3,000,000 on 21 & 28 November 1994 respectively. Out of the sum effected on 28 November 1994 RMB200,000 was the interest accrued on other sums payable to the Plaintiff by Small Craft Co. but the Plaintiff added it to the investment fund provided to the latter. Plus the sums of RMB3,000,000 and RMB1,000,000 paid by the Plaintiff on August 15 and November 7 respectively before the signing of the charterparty, the Plaintiff had altogether paid RMB10,000,000 to Small Craft Co.. Upon receipt of the above sum, Small Craft Co. signed sales contracts with Helongjiang Channel Economic and Trading Co. from the end of 1994 to the first half of 1995, purchasing three Russian ?°Bolixiye?± hydrofoils.  Thereafter, Small Craft Co. went through registration formalities for the three boats in its own name. The three boats were named ?°Dong Xin?±, ?°Dong An?± and ?°Xi Chang?±, with Small Craft Co. being the owners of all of the three boats. 



During the period when the ?°Dong Xin?±, ?°Dong An?± and ?°Xi Chang?± were chartered to Small Craft Co., the company mortgaged the three boats separately to others for loans. During 28 January 1997 to 4 December 2000, the three boats were respectively seized by Guangzhou Intermediate People??s Court and the People??s Court of Dongguan and were finally sold by auction or at a discount to liquidate the debts of Small Craft Co.. So far Small Craft Co. has not paid any hire except the RMB1,000,000 effected on 9 June 1995. 



On 18 April 1997, Small Craft Co. and Xinyi Co. sent a letter to the Plaintiff, stating that in 1994 the Plaintiff invested RMB13,500,000 into Small Craft Co. for purchasing boats to engage in high speed passenger liner and transport along the Pearl River, but due to the recession of the water passenger transportation business, Small Craft Co. fails to refund the principal and proceeds of the investment to the Plaintiff as per the charterparty.  The two defendants requested the Plaintiff to suspend the accounts of the principal in amount of RMB13,500,000 as well as to stop the outstanding and part of proceeds accrued from the investment proceeds from accruing any more from Jan. 1, 1997 to Dec. 12, 1997 after checking and confirming by both sides. Besides, the above debts were to be refunded with the properties of Small Craft Co.. As Xinyi Co. was the party guaranteeing the performance of the contract by Small Craft Co. with the proceeds from its new investment so as to ensure the realization of its promise, and hope the Plaintiff could continue to support them with funds.



On 5 April 1999, Small Craft Co. and Xinyi Co. sent another letter to the Plaintiff, saying that with respect to the contracts between the Plaintiff and Small Craft Co. dated 21 November 1994 and 2 June 1997 respectively, the outstanding sums payable by Small Craft Co. to the Plaintiff included the principals of RMB9,000,000 and RMB850,000 and the corresponding proceeds from the investment; except the corresponding pawns for the two contracts, and that Xinyi Co. guaranteed the performance of both contracts by Small Craft Co.; whereas Small Craft Co. had stopped operations and Xinyi Co. could not materialize its promise with cash, it was suggested that part of the shares of Xinyi Co. in Xishuangbanna Tai Nationality Garden Co. Ltd. be used to offset part of the debts of Small Craft Co. owed to the Plaintiff.  On April 6, the Planitiff sent a notice to Small Craft Co. and Xinyi Co. urging for payment of principal and proceeds of investment due/overdue, demanding the two defendants to refund the principal of investment in the sum of RMB9,000,000.  On 25 March 2002, Small Craft Co. and Xinyi Co. addressed a letter to the Plaintiff, petitioning the Plaintiff to release them from the interest of the loan in amount of RMB300,000 on account of their financial difficulty.  The Plaintiff did not reply.



Furthermore, it has been astertained that the Plaintiff is a holding enterprise.  Its business license before 28 November 2002 stated that the scope of business covered investment, development, running industry enterprises introduced from abroad or of domestic joint co-operating nature, real estate, tourism, leasing and selling of factory premises and equipment related to investment, etc.. However, its business license after 28 November 2002 shows that its scope of business is for purposes of liquidating the creditor??s rights and debts of this enterprise only.  The Plaintiff admitted that it had no permit to run financial business or to engage in financing and leasing business in its scope of business and qualification. 



The collegial bench unanimously hold that the charterparty stipulates that the Plaintiff, based on Small Craft Co.??s specific requirements about the boats, provides the funds and entrusted Small Craft Co. to purchase the boats and then chartering them out to Small Craft Co. while Small Craft Co. pay the hire to the Plaintiff as agreed under the charterparty and upon the expiration of the charterparty obtain the ownership of the boats in the way agreed. The charterparty is in conformity with the main legal characteristics of a financing and leasing contract.  Therefore, the dispute between the Plaintiff and the Defendant arising out of the said contract should be categorized as dispute over financing and leasing contract.  Since the conclusion of this charterparty and the agreed period of performance were all prior to the promulgation of the Contract Law of the People??s Republic of China, in accordance with Article 1 of the Interpretations of the Supreme People??s Court on Some Issues concerning the Application of the Contract Law of the People??s Republic of China (I), the present dispute over financing and leasing contract between the Plaintiff and Small Craft Co. shall be regulated by the laws, regulations and judicial interpretations effective at the time when the charterparty was concluded. 



In the light of the provisions of Article 4 & 6 of the Regulations of the People??s Bank of China on Administration of Financial Organizations, financing and leasing should be categorized as financial business which could only be run by financial organizations holding the Permit for Corporate Financial Organization or the Business License for Financial Organization. Any person or company without the permit or license is not allowed to run financial business. The Plaintiff did not obtain the Permit for Corporate Financial Organization or the Business License for Financial Organization and was thus not qualified to engage in financing and leasing business.  The Plaintiff??s doing financing and leasing business without qualification by entering into the charterparty with Small Craft Co. had breached the relevant provisions of the laws and regulations of the PRC concerning management of financing.  In pursuance of paragraph 1 of Article 7 of the Law of the PRC on Economic Contracts and Article 6 of the Provisions of the Supreme People??s Court on Some Issues Regarding Trials of Disputes over Financing and Leasing Contracts, the charter party between the Plaintiff and Small Craft Co. is null and void and has no legal binding force.  The Plaintiff should be held at fault and liable for the nullity of the charterparty resulting from its engaging in financial business illegally; Small Craft Co. should have known or been aware of the Plaintiff??s lack of permission and qualification in running financing and leasing business at the time when the charterparty was concluded, therefore Small Craft Co. should also be held at fault for the nullity of the charterparty.



Article 16 of the Law of the PRC on Economic Contracts prescribes that after an economic contract is confirmed null, the party that obtained properties from the other as per the contract should return such properties to the owner; if both parties are at fault, each should bear his respective liability.  In the present case, the Plaintiff invested RMB10,000,000 as agreed under the charterparty and entrusted Small Craft Co. to purchase three hydrofoils as the objects of lease to be used by Small Craft Co.. Small Craft Co. should have returned the three hydrofoils to the Plaintiff pursuant to the said legal provisions.  But as the three boats were registered by Small Craft Co. in its own name and then mortgaged to others for purpose of loans, in consequence of which the boats were auctioned by the relevant courts to liquidate the debts of Small Craft Co., it is impossible for Small Craft Co. to return the three boats.  Moreover, Small Craft Co. has failed to prove the current market prices of the three boats, therefore Small Craft Co. should return to the Plaintiff the investment for purchasing the three boats. The hire in amount of RMB1,000,000 already paid by Small Craft Co. to the Plaintiff should be returned to the former and be deducted from the investment to be returned by Small Craft Co. to the Plaintiff. That is to say, the investment payable by Small Craft Co. to the Plaintiff are RMB9,000,000. As regards the claims of the Plaintiff against Small Craft Co. in the amount of RMB13,800,000, RMB3,800,000 out of which is investment proceeds payable to the Plaintiff as per the charterparty.  Now that the charterparty has been ascertained to be null and void, for which the Plaintiff is responsible, the Plaintiff??s claim for investment proceeds is baseless and should not be supported.



The Plaintiff and Xinyi Co. have reached an agreement on the guaranty matters as specified under the charterparty.  After Xinyi Co., as the guarantor, signed and affixed its stamp on the charterparty, the guaranty contract between the Plaintiff and Xinyi Co. was established. As the guaranty of Xinyi Co. was provided on 21 November 1994 when the Guaranty Law of the PRC had not been put into force, pursuant to paragraph 1 of Article 133 of the Interpretations of the Supreme People??s Court on Some Issues concerning the Application of the Guaranty Law of the People??s Republic of Chian, the guaranty agreement between the Plaintiff and Xinyi Co. shall apply the relevant laws, regulatiosn and judicial interpretations in force at the time when the guaranty was provided. 



The Plaintiff and Xinyi Co. agreed in the charterparty that if Small Craft Co. failed to pay the hire as scheduled, Xinyi Co. should perform the obligation of payment of hire instead. According to Article 5 of the Provisions of the Supreme People??s Court on Some Issues concerning Ascertainment of Guaranty in Cases of Disputes over Economic Contracts, the form of guaranty agreed between the Plaintiff and Xinyi Co. is a general guaranty.  Because the main contract, the charterparty, is null and void, the guaranty contract between the Plaintiff and Xinyi Co. is also invalid and has no legal binding effect.  But when entering into the guaranty contract with the Plaintiff, Xinyi Co. should have known that a license is indispensable in China for any enterprise to engage in financing and leasing business, but the Plaintiff did not have such license, so the charterparty between the Plaintiff and Small Craft Co. was invalid by law because the Plaintiff was engaging in financing and leasing business without permission.  However, the Plaintiff still provided guaranty for Small Craft Co. for its performance of the charterparty.  In compliance with Article 20 of the Provisions of the Supreme People??s Court on Some Issues concerning Ascertainment of Guaranty in Cases of Disputes over Economic Contracts, when the charterparty becomes null and void, Xinyi Co. should bear joint and several liabilities together with Small Craft Co..



To sum up the above, in accordance with Articles 7 & 16 of the Law of the People??s Republic of China on Economic Contracts, Article 6 of the Provisions of the Supreme People??s Court on Some Issues Regarding Trials of Disputes over Financing Leasing Contracts and Article 20 of the Provisions of the Supreme People??s Court on Some Issues concerning Ascertainment of Guaranty in Cases of Disputes over Economic Contracts, the judgment is hereby given, as follows:



1.	The Defendant Small Craft Co. to return RMB9,000,000 to the Plaintiff;

2.	The Defendant Xinyi Co. to bear joint and several liabilities with Small Craft Co. for the above debts;

3.	Other claims of the Plaintiff are to be dismissed.



Of the case acceptance fees in amount of RMB79,010, the Plaintiff shall bear RMB27,482 and the Defendants Small Craft Co. and Xinyi Co. shall jointly and severally bear the remaining RMB51,528. The investigation and evidence collection fees in the sum of RMB500 are jointly born by Small Craft Co. and Xinyi Co.. The case acceptance fees have been paid in advance by the Plaintiff.  This court shall not return the same and Small Craft Co. and Xinyi Co. shall pay their respective shares of the fees to the Plaintiff directly.



The above payment obligations should be accomplished within 10 days as of the day when this Judgment takes effect.



Should there be any objection to this Judgment, a statement of appeal with copy/copies in the number of the opponent party/parties may be submitted to this Court within 15 days upon the service of this Judgment, for appealing before the appellate court Guangdong Higher People??s Court. 





                                          Presiding Judge: Zhan Simin



                                          Judge: Xu Yuanping



                                          Judge: Deng Yufeng



                                          Secretary: Lai Yukang



                                          October 13, 2003