ZHH wins judgements of first, second and retrial instance for CCB Nanping Sub-branch in a dispute over loan contract with Huabiao, Wuji and NVC

Date:2019/07/02 Views:4464

On March 7, 2014, Nanping Sub-branch, Chongqing, China Construction Bank Co., Ltd. (“CCB Nanping Sub-branch”) and Chongqing Huabiao Lamps Manufacturing Co., Ltd. (“Huabiao”) signed the Working Capital Loan Contract whereby Huabiao would borrow RMB 80 million from CCB Nanping Sub-branch for daily production and operation turnover.


On the same day, in order to guarantee for loan repayment by Huabiao as scheduled, Chongqing Wuji Real Estate Development Co., Ltd. (“Wuji”) signed the Mortgage Contract with CCB Nanping Sub-branch, whereby to provide mortgage guarantee at free will with the right to use its land at Danzishi, Nan’an District, Chongqing and apply for mortgage registration.


On the same day, NVC Lighting (China) Co., Ltd. (“NVC”) signed the Guarantee Contract with CCB Nanping Sub-branch, whereby to provide joint and several guarantee at free will for Huabiao's debt under the Loan Contract.


After the said contracts were signed, CCB Nanping Sub-branch granted a loan of RMB 80 million to Huabiao on March 7, 2014 as agreed under the Loan Contract. In October 2014, CCB Nanping Sub-branch learned that Huabiao and NVC were found in material legal disputes and serious difficulty in production and operation due to shareholder disputes, to the extent to greatly jeopardize the claim of CCB Nanping Sub-branch. Therefore, it declared the loan to be due immediately, requiring Huabiao to immediately repay all the principal and its interests, Wuji to have the value of its collateral used for repayment in priority and NVC to be jointly and severally liable for repayment.


ZHH, as the agent ad litem of CCB Nanping Sub-branch, made considerable preparations for trial. In the first instance of this case, Chongqing No. 5 Intermediate People's Court decided to support CCB Nanping Sub-branch's claims. NVC appealed to Chongqing Higher People's Court, considering the Guarantee Contract to be invalid on the grounds that the Guarantee Contract was not stamped with cross-page seal, nor signed by the legal representative subject to authorization, nor adopted by NVC's directors. Regarding the validity of the Guarantee Contract, the court of second instance held that although Article 16 of the Company Law of the People's Republic of China intends to prevent the actual controller or the senior management of a company from harming the interests of the company, minority shareholders or other creditors, whether the company called a shareholders' meeting and a resolution made by the shareholders' meeting were the company's internal procedures, not binding on a third party that traded with the company. As this provision is not mandatory, the Guarantee Contract could not be claimed invalidated accordingly. Also, as the company is a civil and commercial subject, its legal representative's behavior represented the company's behavior; even if the legal representative acted beyond authority, NVC might only defend its rights through internal accountability procedures other than claiming the guarantee to be invalid. The court of second instance therefore maintained the first instance judgment. NVC applied for retrial, and the 5th Circuit Court of the Supreme People's Court ruled against its application on the same grounds.


It was clarified in this case after the second instance by Chongqing Higher People's Court and the review of retrial by the Supreme People's Court that Article 16 of the Company Law of the People's Republic of China provides for the company's internal procedures, not mandatory nor binding on any third person that traded with the company. ZHH's team won the client's high recognition and positive evaluation based on its solid legal foundation, serious and responsible working attitude, high-quality legal services, and world-class legal professionalism and competence.


This project was led by Partner KE Haibin and handled by Chief Attorney CHEN Mingjie.