Dispute Lawsuit Concerning the Establishment of Company by YU XXX, etc. in Beijing (2013)
Basic facts:
In 2004, YU XX agreed with LU X and LU XX to establish an enterprise in the form of limited liability and joint stock, with the registered capital of RMB XXX. YU XX has paid RMB YYYY to LU X and LU XX according to the agreement. Later, because LU XX worked abroad for a long period, the business is entirely operated by LU X and LU XX. In 2009, after LU XX returned to China, he required to verify account and distribute dividend, but failed to obtain response from the other two persons. In 2012, YU XX came to consult us on how to dissolve the company and to recover the investment. Our lawyer has recorded the basic situation described by him. After the preliminary investigation, the company mentioned by LU XX does not exist. LU X has registered an individual industrial and commercial household at the agreed business address in his own name. Thus, we suggested that he shall recover the investment through terminating the investment agreement. YU XX accepted our suggestion and entrusted us to initiate this case to Beijing Haidian District People’s Court, claiming to terminate the investment agreement among three parties, return investment and to pay interest.
LU X and LU XX argued that 1. As YU XX is a civil servant, he cannot become a shareholder, so the company cannot be established in the name of YU XX; 2. YU XX cannot unilaterally withdraw investment, or convert investment into loan. They don’t agree to terminate the investment agreement.
Lawyers’ statement:
1. The investment agreement signed by the three parties does not violate the mandatory provisions of law, thus it is true and valid. The identity of YU XX as a civil servant does not affect his becoming a shareholder of the company stipulated in the agreement. China’s current effective laws, the Civil Service Law and the Civil Service Regulations have not expressly provides that the civil servant cannot become the shareholder of a limited liability company. Even if the civil servant’s engagement in operation has violated the civil service law, he shall bear the responsibility under public law, but the effectiveness of civil conduct cannot be denied on this basis. The Civil Service Law is the administrative norm for civil servants, rather than the effectiveness norm for civil legal acts among equalities of civil law. Therefore, although the civil servant’s engagement in the operation of company is in violation of the Civil Service Law, it shall not necessarily result that the civil servant’s investment and share-holding behavior is invalid.
2. The purpose of entering into the agreement by YU XX is to realize the investment in the form of company. However, the legal liability and resulting consequences of company and individual industrial and commercial household are completely different. YU XX’s confidence in the operation ability of LU X and LU XX shall not be deemed as the recognition of the fundamental change in the organization form. The agreement was signed 8 years ago, but the company has not been established according to the agreement. Therefore, the investment purpose of YU XX has not been realized, thus he is entitled to the statutory right of termination.
3. According to the provisions in the Contract Law, after the agreement is terminated, the party may require to restore original state, take other remedial measures and have the right to claim damages. Based on the agreement and confidence in LU X and LU XX, YU XX has injected the investment in full to them. The agreement is terminated because the other parties' breach of agreement, thus LU X and LU XX shall return the investment paid by YU XX and the interest incurred during the occupation period of fund.
Judgment of court:
Court of First Instance has recognized the form of individual industrial and commercial household and dismissed all appeals raised by YU XX, because the Court believed that the agreement is effective and YU XX has not raised objection since the agreement was signed. Court of Second Instance has ultimately supported the opinion of our lawyers to change the judgment to terminate the investment agreement and return the investment to YU XX, but has not supported our claim for interest incurred from the investment.
Lawyers’ remarks:
During the process of litigation, the facts stated by the client and the evidences provided by the client shall be confirmed in writing. The entrusted lawyers shall verify, investigate and confirm the facts stated by the client, and issue specific legal advice and court attendance scheme on this basis. As the deviation in the understanding of laws and regulations, the judgment may be completely different. Any judgment shall be carefully studied by the principal. Several important legal points involved in this case:
1. Whether the identity of shareholder as a civil servant will affect the validity of the Investment Agreement;
2. During the development of business agreed in the investment agreement, whether the shareholder can require to terminate the investment agreement by reason that the organization form of the business developed is inconsistent with what is stipulated in the agreement; if the shareholder has the right to determinate the agreement, whether such right will be given up by the shareholder with the lapse of time;
3. After the agreement is terminated because of the breach of investment agreement, is it evitable to require for interest for restoring original state or is it a claim to require for interest for compensation for loss?
The court of second instance has confirmed the statutory right of termination enjoyed by YU XX; but unfortunately, the Court failed to determine the default behaviors of LU X and LU XX; in terms of the relief after the termination of the contract, the Court has not determined that the interest shall be restored to original state when it is determined to restore the investment to the original state, and has not determined that interest is included in the scope of compensation, just dismissing the request for interest by reason that establishing company is the obligation of all shareholders.
