Dispute over Loan Contract of Hong Run (Group) Co. Ltd.

2007-11-1

1. Information of Litigants

Appellant ( plaintiff of the original trail): Zhong Cheng Financial Co. Ltd.

Domicile: 23/F Jing Du Plaza, 499 Luke Road, Causeway Bay, Hong Kong

Appellee (defendant of the original trail): Hong Run (Group) Co. Ltd.

Domicile: Room D, 17/F, Hou'an Building, 107-109 Ousting Road, Kowloon, Hong Kong

Appellee (plaintiff of the original trail): Finance Bureau of Jiangmen, Guang Dong Province

Domicile: 21-23, Hua Yuan Zhong Ruad, Jiangmen, Guang Dong

2. Background of the Case

On 10th May 1995, Zhong Cheng Financial Co. Ltd.(hereinafter referred to as "ZCC") and Hong Run (Group) Co. Ltd.(hereinafter referred to as "HRG") signed a Loan Agreement, promising: that ZCC would loan HGR $10,000,000HK and the life of the loan is 180 days ending on 28th November 1995; that an amount of interest is $900,000HK, counted once per 90 days and $450,000HK per once; that a lump-sum service charges would be accepted counted on 1% of the amount of loan that is $100,000HK when granting the loan; that if the payment is deferred, an amount of fine, counted on 5бы of the amount of unpaid-money per day, would occur and the repaying day cannot be overdue more than 5 days; HRG would provide to ZCC a Company Check of $10,000,000HK, a 180-long-dated Company Check of $450,000HK and a 90-long-dated Company Check of $450,000HK, which all can be negotiated, to be a mortagage; and that ZCC accepted the Finance Bureau of Jiangmen, Guang Dong Province (hereinafter referred to as "FBJ") to be the guarantor commen by HRG, on the situation that as long as HRG cannot pay ZCC the capital and interests on time, FBJ would have to fulfill the guarantee liability to pay ZCC and bear all the economic loss and indemnity liability made by HRG. Zhang Cheng Bo, Board Chairman of HRG, guaranteed in his own name and issued a Private Check of $100,000,000HK to ZCC to be the mortagage and other shareholders issued written guarantees. The Guarantee issued by FBJ must be signed and testimonied by People's Government of Jianmen, Guangdong, otherwise, the context would not be effective. Representative of ZCC, representative of HRG and principal of FBJ signed on this Agreement and FBJ sealed on the place of Guarantee.

On 10th May 1995, FBJ issued an Irrevocable Guarantee to ZCC, promising that to provide guarantee to the capital, $10,000,000HK, loaned by HRC from ZCC, interest and fees; that in cases HRC cannot pay on time, FBJ has to take the place of HRC to clear up the loan capital and interest and the penalty and costs occurred by delaying within 10 days after receiving a Notice of Claiming Reimbursement from ZCC; that this Guarantee would continually be in effective even if ZCC agrees HRC to pay the loan postponed; that this Guarantee takes effective at the date of signing and automatically lost effective at the date the borrower clears up the loan capital and interest owned to ZCC; that this Guarantee is applied to Hong Kong law. The principal of FBJ signed on this Guarantee and put down the common seal of FBJ. Office of People's Government of Jiangmen sealed at the place of witness.

According to the direction of HRC, ZCC defrayed $9,900,000HK, after deducting $100,000HK handling charge, to HRC by a transfer on 1st June 1995. HRC and Zhang Cheng Bo issued to ZCC two Long-dated Checks of $450,000HK each as the interests and two Long-dated Checks of $10,000,000HK each as the pledge. After receiving the loan, HRC paid ZCC the interest, $450,000HK, of the first stage that is from July 1995 to August 1995. To 28th November 1995, the promissory repayment date is at the expiration, whereas, HRC cannot refund the $10,000,000HK capital and the $ 450,000HK interest of the second stage.

On 20th December 1995, ZCC sent a correspondent to HRC to supervise and urge HRC to refund and to make know that on the ground that HRC did not repay the capital on time, ZCC would account the interest exceeded the time limit on 25% interest rate of a year during the exceeding period to recuperate the loss. On 30th January 1996, ZCC sent a correspondent to FBJ as well, asking FBJ to perform the liability of the repayment guarantee that to converge the capital, the interest of the second stage and the interest of exceeding the time limit, totaly $ 10,888,356.16HK, owned by HRC to the account pointed by ACC. However, both HRC and FBJ have not repay.

On 4th July 1996, HRC sent a C ZCC, stating that due to the difficulty on turning over the financing, HRC cannot return the loan on time and ask to postpone the repaying date a year later. Moreover, the $450,000HK interest of the second stage and the interest exceeded the time limit would be tried the best to pay before 20th July 1996. Henceforth, HRC defrayed $1,000,000HK interest to ZCC on 16th July 1996.

On 28th September 1998, ZCC sent correspondents to HRC and FBJ, separately, to supervise and urge them repay. Thereinto the correspondent to HRC, it is, again, put down in written clearly that the interest of the expired repayment would be counted on the yearly rate of 25%. HRC replied on 17th October 1998 that: "The correspondent has been received. HRC will try the best to repay the $10,000,000HK loan owned to ZCC; and regarding the interest, please give a favor to reduce a little. Moreover, if the situation allowed, hope the debt can be recomposed."Yet, no common understanding was reached with ZCC.

On 14th June 1999, ZCC recovered HRC again. HRC sent a correspondent to ZCC on 5th July 1999, admitting that it defaulted the loan from ZCC and suggesting to transfer to ZCC a $4,000,000US capital loaned by others from HRC which is still owned. Yet, and again, the common understanding has not reached with ZCC. At the reasons that HRC did not pay the loan and FBJ refused to perform the obligation of payment as it guaranteed, ZCC brought an action to Intermediate People's Court of Jiangmen on 25th August 2000, asking to order: 1. HRC pays the loaning capital, $10,000,000HK, plus the interest from the maturity of the loan to the date the loan paid off (calculated on yearly rate of 25% according to the contract); 2. FBJ bears the joint and several liabilities of payment; and 3. HPC and FBJ pay the legal charge of this case together.

Furthermore, it also found that inc), which was provided by ZCC to the original court on 20th May 2001, holding: the Loan Agreement and the Irrevocable Guarantee include four elements-offer, acceptance, cost and will to state a legal relation-required by a complete contract and the context of the Loan Agreement and the Guarantee is not respect to the fulfillment of illegal liabilities and obligations, therefore, the Loan Agreement and the Irrevocable Guarantee are lawful and effective contracts; that based on Article 24 of Chapter 163, Loaner Statutes, of Hong Kong Law, stipulates: "Every and any person, who loans money or offers to loan money with actual profit exceeding 60% than the yearly rate, violates the law.", the interest rate under the item of the Loan Agreement does not exceeds this percentage, therefore, the interest stetted in Item 8 of the Loan Agreement is a lawful interest rate; Hong Kong Law does not make any limit on external guarantee made by the department of domestic government. There, the Guarantee issued by FBJ to ZCC is lawful and effective; FBJ has obligation to pay off the loaning capital of $10,000,000HK and the interest and fees occurred to ZCC, according to Item 2 of the Irrevocable Guarantee; based on Hong Kong Law, ZCC can find out the liability of FBJ under the items of the Guarantee, according to Item 4 of the Loan Agreement, and has no need to take any action to the loanee or any other guarantor or any hostage or any guaranty beforehand.

3. Findings and Judgment of the Court of the First Trail

Intermediate People's Court of Jiangmen holds that the Loan Agreement signed by ZCC and HRC is lawful and effective based on Hong Kong Law, then, ZCC granted the loan to HRC according to the Agreement; however, HRC only paid back the $900,000HK interest within the contract period and the $550,000HK interest exceeding the time limit, which has constituted the breach of contract. Thereby, it is justified and would be supported that ZCC asked HRC to pay back the loaning capital of $10,000,000HK and the interest exceeding the time limit counted on 25% yearly interest rate HRC still owned. The interest exceeding the time limit shall be counted from 29th November 1995 to 5th July 1999, on the ground that it cannot be found out, based on evidences now available, that after 5th July 1999 ZCC and HRC how to handle the interest of the arrearage, whether there are other agreements or not and whether HRC has confirmed on not; if therein existed in deed, ZCC can bring another action.

The Item "This Guarantee is applicable to Hong Kong Law"written in the Irrevocable Guarantee in this case shall be held to be invalid, based on Article 9 of LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON ECNOMIC CONTRACTS CONCERING FOREIGN INTERESTS, on the ground that this Item evades the compelling and forbidding stipulations of statue of our country. This case shall be applied to interior laws concerning adjusting the guarantee relationship between ZCC and HRC. Due to the specifically stipulations in interior laws, stipulations on laws and interpretations of judicature that government offices cannot be guarantees, this Guarantee shall be confirmed as invalid, which FBJ, ZCC and HRC all have fault and shall bear relevant fault liabilities respectively based on laws. FBJ shall bear one third of the indemnity liability on part of debt HRC cannot clear off to ZCC.

By the reason foregoing, the original court adjudges: 1). HRC shall pay back to ZCC the loaning capital of $10,000,000HK and relevant interest exceeding the time limit (from 29th November 1995 to 5th July 1999, counted on 25% yearly interest rate and shall be deducted the $550,000HK interest already paid by HRC from the amount of the interest exceeding the time limit), within 10 days after the present judgment takes effect. 2). FBJ bears one-third-indemnity liability at the time HRC has no ability to clear off the loaning capital and interest mentioned above to ZCC. The fees for the trail in this case are 113,680.35RMB and shall be paid by HRC.

4. Claims and Causes

ZCC, taking exception to the Judgment rendered by the original court, lodged an appeal to this court, claiming: 1). Withdraw the original judgment; 2). HRC pays back to ZCC the loaning capital of $10,000,000HK and relevant interest exceeding the time limit (from 29th November 1995 to the day of clearing off, counted on 25% yearly interest rate); 3). Order FBJ to bear the joint and several indemnity liabilities on the above-mentioned loan and interest; 4). Order HRC and FBJ to pay the fees of the two trails of this case. The causes are as follows: 1). There are no facts and legal basic for the original court does not support the interest after 5th July 1999. Although both parties did not negotiate on the problem of interest after 5th July 1995, ZCC did not give any written or oral notice to HRC to express that it gives up demanding the interest of this loan. Without agreement does not equal to giving up, thereby, under the condition of no agreement or the agreement out of clear, the interest shall be counted on 25% of the forward agreement. 2). It is wrong that the original court adjudged the item of applying Hong Kong Law is invalid on the ground that the guarantees violate the compelling and forbidding stipulations of statue of our country and breach common interest of our society. Due to the parties of the contract related foreign elements have right to choose the applicable law, the applying shall based on the rule of autonomy of the will of parties concerned. The guarantee is agreed by the Government of Jiangmen before FBJ signed the Guarantee. It is not the fault of debtee that FBJ's act of guarantee did not be approved by Department related to administration of foreign exchange. In addition, the procedure of examining and approving shall be the duty of FBJ.

5. Findings and Judgment of High People's Court of Guangdong Province

High People's Court of Guangdong Province holds that it has sufficient facts and legal basic and shall be supported that the original court confirmed this case is applied to Hong Kong Law based on the rule of proximate connection; and the relationship of loan contract between ZCC and HRC exists and binding force to both sides, based on the Paper of Legal Opinion issued by Koo and Partners Law Firm (Hong Kong). After signing the Loaning Agreement, ZCC granted the $10,000,000HK loan to HRC according to the agreement; however, HRC only pack back to ZCC the $1,450,000HK interest and the other loaning capital and interest does not be paid on time agreed by both sides in the agreement. Thus, the act of HRC has constituted to breach and HRC shall bear relevant liability for breach of contract. According to the 25% yearly interest rate confirmed in the contexts of the correspondences between both sides, which both sides did not bring objections, the original court holds that the calculating standard of the interest exceeding the time limit shall be confirmed. Henceforth, ZCC and HRC did not make a new agreement on deducting the interest, thus it shall be regarded that both sides still calculate the interest based on 25% yearly interest rate. Thereby, the claim of ZCC, regarding that the interest after 5th July 1999 shall be calculated on 25% yearly interest rate, has sufficient facts and legal basic and shall be supported. It is inappropriate and shall be corrected that the original court only support the interest to 5th July 1999 and does not handle the interest henceforth, on the ground that the last date HRC wrote to ZCC to confirm the owning day is 5th July 1999, after which the available evidences cannot find out that how ZCC and HRC handle the interest of the arrearage, whether there are other agreements or not and whether HRC has confirmed on not.

On the Item "This Guarantee is applicable to Hong Kong Law"agreed on the Irrevocable Guarantee by FBJ is a stipulation specifically evading the interior forbidding laws. Based on Article 194 of the Opinion by the Supreme People's Court on Several Questions in Relation to the GENERAL PRINCIPLES OF THE CIVIL LAW OF THE PEOPLE'S REPUBLIC OF CHINA on Implement (trail practice), the Item shall be confirmed as invalid and has no legal binding force to both sides. Thereby, the legal relationship of guarantee in this case shall be handled through applying the interior law. Both FBJ and ZCC have fault to make the Guarantee Agreement invalid and shall bear relevant fault liability, that is, FBJ shall bear one second indemnity liability on the debt in this case HRC has no ability to clear off. The order of the original court that FBJ shall bear one-third indemnity liability on the debt in this case HRC has no ability to clear off lacks foundation and shall be corrected.

Based on Article 153, Paragraph 1(3) of the CIVIL LITIGATION LAW OF THE PEOPLE'S REPUBLIC OF CHINA, High People's Court of Guangdong Province adjudges as follows: 1). Maintain the third item of the original judgment and the content concerning to the responsibility of sharing the court fees. 2). Change the first item of the original judgment as: HRC shall pay back to ZCC the loaning capital of $10,000,000HK and relevant interest exceeding the time limit (from 29th November 1995 to the day clearing off, counted on 25% yearly interest rate and shall be deducted the $550,000HK interest already paid by HRC from the amount of the interest exceeding the time limit), within 10 days after the present judgment takes effect. 3). Change the second item of the original judgment as: FBJ bears one-second-indemnity liability at the time HRC has no ability to clear off the loaning capital and interest mentioned above to ZCC. The fees for the second trail is 113,860.35RMB and ZCC shall pay 22,772.07RMB and HRC shall pay 91,088.28RMB.

6. Analysis

(1). It is right that the court of the first trail and the court of the second trail confirm the main agreement in this case shall be applied Hong Kong Law.

In this case, the loaner, ZCC, and the loanee, HRC, are legal persons of company registered in Hong Kong and the guarantee FBJ is a government office of People's Republic of China, thereby, this case is a dispute over commercial contract related to Hong Kong. Although each party did not agree on the law applied to when handling contract disputes at the time signing the Loan Agreement on 10th May 1995, Article 145 of GENERAL PRICIPLES OF THE CIVIL LAW OF THE PEOPLE'S REPUBLIC OF CHINA stipulates: "The parties to a contract involving foreign interests may choose the law applicable to settlement of their contractual disputes, expect as otherwise stipulated by law. If the parties to a contract involving foreign interests have not made a choice, the law of the country to which the contract is most closed connected shall be applied."Due to both the debtee and the main debtor of the loaning relation in this case are Hong Kong companies and the place of performance of the main contract is Hong Kong as well, the Loan Agreement is most closed connected to Hong Kong and shall be adjusted by applying Hong Kong Law.

(2). It is right that the court of the first trail and the court of the second trail hold that the Guarantee Agreement in this case shall be applied interior law.

The act of guarantee shall be applied to relevant laws and stipulations to the law at the time, on the ground that the act of guarantee in this case happened before the enforcement of the GUARANTEE LAW OF THE PEOPLE'S REPUBLIC OF CHINA. Article 3 of the INTERIM REGULATIONS ON FOREIGN EXCHANGE CONTROL OF THE PEOPLE'SREPUBLIC OF CHINA, released by State Department on 18th December 1980, stipulates specifically: "The People's Republic of China pursues the policy of centralized control and unified management of foreign exchange by the State. The administrative agency of the People's Republic of China in charge of foreign exchange control is the State Administration of Foreign Exchange Control (SAFEC) and its branch offices."Thereby, the Foreign Exchange Control System is a basic economic control system of our country and a basic national policy to ensure the payment of foreign exchange balance. Article 3 of the Measures for the Control of Issuing Foreign Exchange Guarantee Externally by Institutions within China, released by Administration Bureau. of Foreign Exchange of People's Republic of China , stipulates: "The State Administration of Exchange Control and its branch offices are the administrative organs in charge of foreign exchange guarantee, which are responsible for the examination and approval, administration and registration of the foreign exchange guarantee."Article 4, Paragraph 2 stipulates: "No governmental departments and institutions shall provide foreign exchange guarantee."Article 106, Paragraph 2 of the Opinion by the Supreme People's Court on Several Questions in Relation to the GENERAL PRINCIPLES OF THE CIVIL LAW OF THE PEOPLE'S REPUBLIC OF CHINA on Implement (trail practice), passed and enforced by the Supreme People's Court on 26th January 1988, stipulates: "Government offices cannot be the guarantor."Article 194 stipulates: "The act a party uses to evade the compelling or forbidding stipulations to law will not take effect of applying foreign law."Article 2, "Regarding Questions of Application of Law when Handling Disputes over Economic Contract related Foreign Elements", Paragraph 10 of the Answer by the Supreme People's Court on Several Questions in Relation to the LAW OF THE PEOPLE'S REPUBLIC OF CHINA ON ECONOMIC CONTRACTS INVOLVING FOREIGN INTEREST stipulates: "At the time the application law shall be the foreign law, shall not apply to this foreign law but relevant law of our country, as long as the application will violates basic legal principals of our country and common interest of the society of our country."

Item 8 of the Irrevocable Guarantee issued by FBJ on 10th May 1995, stipulates: "This Guarantee is applicable to Hong Kong Law. "The Hong Kong Special Administrative Region is a part of the People's Republic of China, however, due to history reason, the Hong Kong Legal System is completely different with the Interior Legal System of the People's Republic of China. Thereby, it is clearly that to stipulate, "This Guarantee is applicable to Hong Kong Law. "by FBJ in the Irrevocable Guarantee is to evade the forbidding stipulations to interior laws, which shall be regarded as invalid and has no binding force to both sides based on the relevant stipulations mentioned above. The guarantee relation in this case shall be handled by applying interior laws.

Source: CCMT.ORG.CN
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