Dispute over Sales Contract

· Source： Cases from the Supreme People’s Court Gazettes 

· Instrument Type： Judgment

· Source：SPC Gazette, Issue 11, (No. 253)

· Procedural status： Other

· Judgment date：01-17-2017

· Type of Dispute： Contract, Negotiorum Gestio, Unjust Enrichment 

Shanghai Delixi Group Co., Ltd. v. Jiangsu Bo'en Shitong High-Tech Co., Ltd., Feng Jun, and Shanghai Bo'en Shitong Photoelectricity Co., Ltd. (Case about disputes over a sales contract)
[Judgment Abstract]
1. In the capital reduction, a company should perform the obligation of notifying its known or knowable creditors and it cannot replace the notification obligation with the direct announcement on newspaper under the circumstance where it does not notify such known or knowable creditors in advance.
2. Where, in the capital reduction, a company fails to perform the obligation of notifying its known or knowable creditors and shareholders of the company fail to prove that their negligence to notify such creditors in the process of capital reduction is at no fault, when the company fails to pay off the debts formed before the capital reduction after the capital reduction, the shareholders of the company should assume the liability of supplementary compensation for such debts to the creditor.
Plaintiff: Shanghai Delixi Group Co., Ltd., domiciled in Beiqing Highway, Shanghai Municipality.
Legal Representative: Hu Chengguo, Chairman of the Board of Directors of the Company.
Defendant: Jiangsu Bo'en Shitong High-Tech Co., Ltd., domiciled in East District (Standardized Plants Phase II), Economic Development Zone, Siyang County, Jiangsu Province.
Defendant: Feng Jun, male, 30 years old, Chinese Han, domiciled in Suqian City, Jiangsu Province.
Defendant: Shanghai Bo'en Shitong Photoelectricity Co., Ltd., domiciled in Yuanming Road, Minhang District, Shanghai Municipality.
Plaintiff Shanghai Delixi Group Co., Ltd. (hereinafter referred to as “Delixi Company”) filed a lawsuit with the People's Court of Qingpu District, Shanghai Municipality against defendants Jiangsu Bo'en Shitong High-Tech Co., Ltd. (hereinafter referred to as “Jiangsu Bo'en Company”), Feng Jun, and Shanghai Bo'en Shitong Photoelectricity Co., Ltd. (hereinafter referred to as “Shanghai Bo'en Company”) for disputes over a sales contract.
Plaintiff Delixi Company alleged that: On March 29, 2011, the plaintiff and defendant Jiangsu Bo'en Company concluded a Sales Contract on Electronic and Electrotechnical Products. According to the Agreement, Jiangsu Bo'en Company purchased 20 high voltage switch cabinets, one AC panel, one DC panel, and other electronic equipment from Delixi Company and the total amount of the Contract was CNY1.11 million. After the Contract took effect, Delixi Company delivered all of the aforesaid equipment as stipulated in the Contract. Jiangsu Bo'en Company made a payment of CNY330,000 for goods to Delixi Company and it still owed Delixi Company CNY777,000. In September 2012, shareholders of Jiangsu Bo'en Company held a meeting of shareholders, on which the resolution on capital reduction was passed and it was decided to reduce Jiangsu Bo'en Company's capital of CNY190 million and its registered capital was reduced from CNY20 million to CNY10 million. Jiangsu Bo'en Company has handled the industrial and commercial registration of changes, but it did not pay off the aforesaid debts owed to Delixi Company before the capital reduction. Delixi Company held that before the registered capital reduction, Jiangsu Bo'en Company should pay off its debts; and if it failed to pay off the debts according to the law, its shareholders should assume the liability of supplementary compensation. Therefore, Delixi Company requested the Court to order that Jiangsu Bo'en Company should make the payment of CNY777,000 for goods to Delixi Company; defendants Shanghai Bo'en Company and Feng Jun should jointly assume the liability of supplementary compensation for the payment for goods Jiangsu Bo'en Company should make to Delixi Company within the capital reduction scope of CNY190 million.
Defendants Jiangsu Bo'en Company, Shanghai Bo'en Company, and Feng Jun did not reply.
Since the three defendants did not appear in court to respond to the lawsuit, the People's Court of Qingpu District, Shanghai Municipality confirmed the aforesaid facts as stated by plaintiff Delixi Company.
In the trial of first instance, the People's Court of Qingpu District, Shanghai Municipality held that:
The sales contract concluded by and between plaintiff Delixi Company and defendant Jiangsu Bo'en Company complied with the relevant legal provisions, was legal and valid, and should be protected by law. Both parties should fully perform the contractual obligations. Since Delixi Company has fulfilled its obligation of goods supply, Jiangsu Bo'en Company should waste no time in making the payment for goods as agreed. Jiangsu Bo'en Company's failure to make the payment for goods in arrears has constituted breach of contract and Jiangsu Bo'en Company should assume the liability of actual performance of monetary debts. Therefore, Delixi Company's claim for remaining payment of goods was not contrary to law and should be upheld. Since Jiangsu Bo'en Company failed to pay off or provide guarantee for its debts owed to Delixi Company in the capital reduction, its demand that its shareholder Feng Jun should assume the liability of supplementary compensation for Jiangsu Bo'en Company's debts within the capital reduction scope was not inappropriate and should be upheld. However, Delixi Company's claim that Shanghai Bo'en Company should assume the liability of supplementary compensation for defendant Jiangsu Bo'en Company's debts that have not been paid off within the capital reduction scope lacked factual and legal basis and should not be upheld. After being legally summoned by the People's Court of Qingpu District, Shanghai Municipality, the three defendants refused to appear in court without justified reasons, which was voluntary waiver of such litigation rights as reply and cross-examination, and they should bear the legal consequences caused thereby.
In conclusion, on November 4, 2016, in accordance with the provisions of Articles 8, 109, 130, 159, and 161 of the Contract Law of the People's Republic of China, paragraph 2 of Article 177 of the Company Law of the People's Republic of China, Article 144 of the Civil Procedure Law of the People's Republic of China, and paragraph 2 of Article 14 of the Provisions ( = 3 \* ROMAN III) of the Supreme People's Court on Several Issues concerning the Application of the Civil Procedure Law of the People's Republic of China, the People's Court of Qingpu District, Shanghai Municipality rendered a judgment that:
1. Defendant Jiangsu Bo'en Company should, within ten days after the judgment came into force, make a payment of CNY777,000 for goods to plaintiff Delixi Company.
2. Defendant Feng Jun should assume the liability of supplementary compensation for the aforesaid debts owed by defendant Jiangsu Bo'en Company to plaintiff Delixi Company within the capital reduction scope of CNY190 million.
3. Other claims of plaintiff Delixi Company should be dismissed.
Delixi Company refused to accept the judgment of first instance and appealed to the No. 2 Intermediate People's Court of Shanghai Municipality.
In the appeal, appellant Delixi Company alleged that: The capital reduction of appellee Jiangsu Bo'en Company was approved by all shareholders and appellee Shanghai Bo'en Company should know the provisions that Jiangsu Bo'en Company should pay off its debts before the capital reduction. However, for the purpose of safeguarding the interests of shareholders, even though it knew that Jiangsu Bo'en Company had debts that have not been paid off, Shanghai Bo'en Company agreed to the reduction of capital and defrauded the industrial and commercial registration of changes by issuing a statement contrary to facts to the industrial and commercial registration authority, resulting in Jiangsu Bo'en Company's completion of capital reduction and failure to pay off its debts. Shanghai Bo'en Company assisted in the capital reduction or capital withdrawal, which act also caused damage consequences. In accordance with the relevant laws and judicial interpretations, Shanghai Bo'en Company should assume the liability of supplementary compensation or joint and several liability. Therefore, Delixi Company requested the Court to revoke item (3) of the judgment of first instance rendered by the People's Court of Qingpu District, Shanghai Municipality and order that Shanghai Bo'en Company should assume the joint and several liability for Jiangsu Bo'en Company's payment for goods to Delixi Company within the capital reduction scope of CNY190 million.
Appellees Jiangsu Bo'en Company, Feng Jun, and Shanghai Bo'en Company did not reply.
After the trial of second instance, the No. 2 Intermediate People's Court of Shanghai Municipality confirmed facts found in the trial of first instance.
It also found that:
1. The Sales Contract on Electric and Electrotechnical Products concluded by and between appellant Delixi Company and appellee Jiangsu Bo'en Company also specified that the national standard should be the quality standard requirement, the condition for the seller's responsibility for quality should be the user's confirmation of drawings, and the time limit should be the warranty period of one year, starting from the date of debugging and acceptance debugging after equipment was charged with electricity; the time of delivery and sign-off (acceptance) of goods should be within three days upon arrival of such goods. If there was any objection, it should be raised within seven days; the term of equipment installation and debugging (acceptance) should be one month from the date of receipt of goods; for the term of payment for goods, the advance payment for goods that was 30% of the total amount of the contract should be made within seven days after the contract was concluded, the payment for debugging that was 50% of the total amount of the contract should be paid within ten workdays after the arrival of the goods, the payment for debugging that was 15% of the total amount of the contract should be made within ten workdays after the acceptance after equipment was charged with electricity was passed, and the other payment that was 5% of the total amount of the contract should be made within ten workdays after the expiration of the warranty period. Besides, the contract specified such information of Delixi Company as business address, legal representative, and contract means.
2. On August 10, 2012, Shanghai Bo'en Company, Feng Jun, and Chen Qinyan (shareholders of appellee Jiangsu Bo'en Company) held a shareholders' meeting, on which the following resolution was unanimously passed: (1) Zhang Yongli was entrusted with handling the relevant matters on registration of changes. (2) It was approved to reduce the registered capital of CNY190 million (with the subscribed amount of CNY27 million and the paid amount of CNY163 million). In particular, Feng Jun reduced capital of CNY190 million (with the subscribed amount of CNY27 million and the paid amount of CNY163 million). After the change of registered capital this time, the Company's accumulated registered capital was CNY10 million, in which Shanghai Bo'en Company contributed CNY7 million and Chen Qinyan contributed CNY3 million. (3) After the capital reduction this time, Feng Jun no longer had the shareholder's qualification. Shanghai Bo'en Company and Chen Qinyan separately affixed their signatures and seals on the resolution.
On September 27, 2012, Shanghai Bo'en Company and Chen Qinyan (shareholders of appellee Jiangsu Bo'en Company) held a shareholders' meeting, on which the following resolution was unanimously passed: (1) Zhang Yongli was entrusted with handling the relevant matters on registration of changes. (2) It was approved to modify Articles 6 and 7 of Chapter  = 4 \* ROMAN IV of the Company's articles of association. (3) The Company's registered capital reduction by CNY190 million was approved. In particular, Feng Jun reduced capital of CNY190 million (with the subscribed amount of CNY27 million and the paid amount of CNY163 million). On August 13, 2012, an announcement on capital reduction was issued in the Jiangsu Economic News and on August 31, 2012, a capital verification report was issued. After the change of registered capital this time, the Company's accumulated registered capital was CNY10 million, in which Shanghai Bo'en Company contributed CNY7 million and Chen Qinyan contributed CNY3 million. Shanghai Bo'en Company and Chen Qinyan separately affixed their signatures and seals on the resolution.
3. In the trial of first instance, appellant Delixi Company also provided the Information Release and Inquiry of the List of Dishonest Persons subject to Enforcement Published by Courts across the County excerpted from the website of the Supreme People's Court, according to which the Intermediate People's Court of Suqian City, Jiangsu Province separately placed on file and accepted enforcement cases where Jiangsu Bo'en Company was the person subject to enforcement on April 7, 2013, July 3, 2013, and February 26, 2015. The enforcement of judgments of such cases has not been closed.
The No. 2 Intermediate People's Court of Shanghai Municipality held that:
The sales contract concluded by and between appellant Delixi Company and appellee Jiangsu Bo'en Company was legal and valid and both parties should perform their respective contractual obligations as agreed. After Delixi Company performed the obligation of supplying goods as agreed, Jiangsu Bo'en Company failed to make the remaining payment for goods to Delixi Company, which act constituted breach of contract. Therefore, the Court should uphold the claim of Delixi Company that Jiangsu Bo'en Company should make the payment for goods amounting to CNY777,000.
The Court should also uphold the claim of appellant Delixi Company that appellees Feng Jun and Shanghai Bo'en Company should assume the liability of supplementary compensation for the aforesaid debts of Jiangsu Bo'en Company within the scope of CNY190 million on the following grounds: In nature, the capital reduction of a company was an internal act of the company and it should be decided by the company's shareholders according to the company's operating conditions, so as to promote the effective utilization of capital. However, in accordance with the provisions of item (2) of Article 177 of the Company Law, the company should directly notify and announce the creditors of the capital reduction, so as to avoid damages to creditors' rights of the company's creditors due to such capital reduction. According to the clauses of delivery, acceptance, and payment as agreed in the contract concluded by and between Delixi Company and appellee Jiangsu Bo'en Company as well as the actual performance thereof, the debts owed by Jiangsu Bo'en Company to Delixi Company have already been formed before the capital reduction. In the contract concluded, Delixi Company has left its address and contact means and in the existing evidence, there was no such circumstance that Jiangsu Bo'en Company failed to contact Delixi Company. Therefore, it should be presumed that Delixi Company was a known creditor that Jiangsu Bo'en Company could effectively contact. Although Jiangsu Bo'en Company has issued an announcement on capital reduction in the Jiangsu Economic News, it did not directly notify Delixi Company of matters on capital reduction. Therefore, such notification means did not comply with the statutory procedures for capital reduction, which made Delixi Company loss the right to claim for Jiangsu Bo'en Company's paying off of its debts or provide guarantee before the capital reduction.
In accordance with the provisions of the Company Law currently in effect, shareholders had the obligation of effectively performing full contribution of capital according to the articles of association of a company and the responsibility of maintaining adequacy of registered capital of the company. Although it was specified in the Company Law that the obligor of notification in the capital reduction was the company, whether the capital was reduced was the resolution of the shareholders' meeting and whether to reduce capital and how to conduct the capital reduction totally depended on the will of shareholders. Shareholders also knew the statutory procedures for and consequences of the company's capital reduction. At the same time, the company's handling of capital reduction formalities required cooperation of shareholders and shareholders should perform the duty of due care for the fulfillment of the company's obligation of notification. On August 10 and September 27, 2012, shareholders of appellee Jiangsu Bo'en Company separately formed resolutions of the shareholders' meetings on matters on capital reduction. By this time, the debts of appellant Delixi Company have already formed. As a shareholder of Jiangsu Bo'en Company, appellees Shanghai Bo'en Company and Feng Jun should know such debts. However, under such circumstances, Shanghai Bo'en Company and Feng Jun still approved Feng Jun's request for capital reduction through resolutions of the shareholders' meetings and they did not directly notify Delixi Company, which not only damaged Jiangsu Bo'en Company's solvency, but creditor's rights of Delixi Company. Shanghai Bo'en Company and Feng Jun should assume the corresponding legal liability for Jiangsu Bo'en Company's debts. When a company failed to notify the known creditor of its capital reduction, there was no difference between such circumstance and the essence of shareholders' illegal withdrawal of capital as well as the impairment of the creditor's interest. Therefore, although the Chinese laws did not specify liabilities of shareholders when a company failed to follow the statutory procedures for capital reduction and the benefits of creditors were infringed, such liabilities may be determined by reference to the relevant principles and provisions of the Company Law. Since there were flaws in the capital reduction of Jiangsu Bo'en Company, causing Jiangsu Bo'en Company's failure, after the capital reduction, to pay off the debts formed before the capital reduction, as shareholders of Jiangsu Bo'en Company, Shanghai Bo'en Company and Feng Jun should assume the liability of supplementary compensation for Jiangsu Bo'en Company's debts that have not been paid off within the scope of Jiangsu Bo'en Company's amount of capital reduction.
In conclusion, the claims and grounds of appellant Delixi Company in the appeal were tenable and should be upheld. The failure of appellees Jiangsu Bo'en Company, Feng Jun, and Shanghai Bo'en Company to participate in the litigation was their voluntary waiver of such litigation rights as reply and cross-examination and they should assume the corresponding legal consequences. The facts found in the trial of first instance were clear, but some parts of the judgment of first instance were inappropriate. Therefore, on January 17, 2017, in accordance with the provisions of Articles 8, 109, 159, and 161 of the Contract Law of the People's Republic of China, Article 177 of the Company Law of the People's Republic of China, Article 144, item (2) of paragraph 1 of Article 170, and Article 174 of the Civil Procedure Law of the People's Republic of China, and paragraph 2 of Article 14 of the Provisions ( = 3 \* ROMAN III) of the Supreme People's Court on Several Issues concerning the Application of the Civil Procedure Law of the People's Republic of China, the No. 2 Intermediate People's Court of Shanghai Municipality rendered a judgment that:
1. Items (1) and (2) of the civil judgment (No. 5823 [2016], First, Civil Division, Qingpu) rendered by the People's Court of Qingpu District, Shanghai Municipality on November 4, 2016 should be affirmed.
2. Item (3) of the civil judgment (No. 5823 [2016], First, Civil Division, Qingpu) rendered by the People's Court of Qingpu District, Shanghai Municipality on November 4, 2016 should be set aside.
3. Appellee Shanghai Bo'en Company should assume the liability of supplementary compensation for the aforesaid debts owed by appellee Jiangsu Bo'en Company to appellant Delixi Company within the capital reduction scope of CNY190 million.
4. Appellees Feng Jun and Shanghai Bo'en Company should no longer assume the liability of supplementary compensation they have actually assumed in other cases.
This judgment shall be final.