A Litigation Case of the Zhongcheng Square Real Estate Project (2002)
Basic facts:
Zhongcheng Square was formerly a real estate project developed by Guangzhou Pengcheng Real Estate Co., Ltd. (GZPC), a Sino-Foreign joint venture formed by Guangzhou Urban Construction & Development Corporation Limited (GZUCD) and Gangpeng (Hong Kong) Development Co., Ltd. (GPHK). GZUCD subsequently quitted the joint venture and GZPC entered into independent operation thereafter. The total equity transfer fee payable to GZUCD was paid by GPHK with real properties of a corresponding area in Zhongcheng Square. Details in this regard were governed by 19 Real Estate Presale Contracts entered into by GZPC and GZUCD. The real estate project later became China’s largest incomplete real estate project due to GZPC’s insufficient financial strength, resulting in a delay of delivery for 8 years. GZUCD sued GZPC and requested it to continue performing the real estate presale contracts and compensate it for economic losses.
GZPC asserted that the Independent Operation Contract entered into between the two companies violated the Company Law which stipulated that shareholders must not withdraw their capital from a joint venture, and resulted in a reduction of company assets, damaging the lawful interest of GZPC and other creditors, and consequently the contract shall be voided. Accordingly, the 19 Real Estate Presale Contracts which are intended to cover the illegal purpose with legitimate act should also be voided.
GZUCD brought a suit to the Higher Court of Guangdong Province in 2002, and its claims were supported by the court of first instance. GZPC appealed to the Supreme Court, but the case encountered great difficulties and resistance due to the unfair intervention of HUANG Songyou, then Vice President of the Supreme Court. The Supreme Court remanded the case and the Higher Court ruled against GZUCD in retrial by rejecting all its claims. As a result, GZUCD appealed to the Supreme Court.
Lawyers’ statement:
1. The registered capital of GZPC was completely provided by GPHK as agreed in the relevant contract, and the conditions for cooperation (principally the land-use right for the real estate project) provided by GZUCD were not counted into the registered capital at the time of joint-venture registration. The arrangement made by GPHK that it pays the equity transfer price with real properties developed by GZPC, is consistent with the provision of the Law of the People’s Republic of China on Chinese-Foreign Contractual Joint Ventures which stipulates that a partner to joint venture is permitted to share the profit of cooperation by receiving distribution of products. GZUCD’s quitting of joint venture by equity transfer did not result in a reduction of company registered capital and therefore did not constitute a withdrawal of capital.
2. In December 1995, GZPC had total assets of RMB 345 million and net assets of RMB 111 million. If to look at the asset condition of GZPC in the year when the Independent Operation Contract was signed, the equity transfer by GZUCD did not affect GZPC’s solvency or incur payment crisis. The equity transfer did not conflict with other debts of the company nor damaged the interest of other creditors.
Judgment of court:
The Supreme Court eventually accepted most contents in our lawyers’ statement by ruling in support of most GZUCD’s claims. It was decided through a discussion by the Judicial Committee of the Supreme People’s Court, that, the 19 Real Property Presale Contracts shall be cancelled and GZPC shall return the principal of property purchase funds of more than RMB 490 million and pay a penalty of RMB 14.72 million.
Lawyers’ remarks:
The real estate project involved in this case is the then largest abandoned real estate project of China. The subject matter of the lawsuit involved approximately RMB 700 million. Our lawyers represented GZUCD in the trials of first and second instance, and the retrials of first and second instance spanning more than a decade and involving numerous setbacks which put our lawyers’ professionalism and firm belief in justice to the test. The favorable judgment was the best reward for their professionalism and conscientiousness.
