Gard Maritime & Energy Ltd v China National Chartering Co. Ltd

Professor Dicks accepted that from the inception of the 1993 Company Law and the 1994 Regulations to the inception of the 2005 Company Law, a state enterprise could become a limited liability company by obtaining SAIC’s approval to an application for change of registration as to type of company under Part Five of the 1994 Regulations, notwithstanding the definition of “company” in Article 2 of the 1993 Companies Law. However, in his view, by reason of the repeal of Articles 1, 7 and 192 of the 1993 Companies Law and the wording of Articles 2 and 9 and Article 192 (which defines a “foreign company”) of the 2005 Company Law, the latter Law contemplates only three types of company: limited liability companies, joint stock limited liability companies and foreign companies. Thus, after the implementation of the 2005 Companies Law, a state enterprise could only become a limited liability company by ceasing to exist (by cancelling its registration) and establishing a new company under Article 6 to which a company business licence bearing the date of establishment of the new company would be issued under Article 7. It followed that CNC Ltd must be a new company established under Article 6 and CNC Corp will have ceased to exist since a legal person must have the necessary funds and ability independently to bear civil responsibility under Article 37 of the General Principles of the Civil Law 1986. Accordingly, CNC Ltd will not have vested in it the contractual rights that were vested in CNC Corp unless CNC Corp has assigned those rights to CNC Ltd which, on the evidence, it has not. It further followed that the date of establishment specified in CNC Ltd’s business licence was erroneous, since under Article 7, this date was the date CNC Ltd as a limited liability company came into existence.

Professor Dicks was of the opinion that Article 9 supported this conclusion because Article 9 was in terms limited to situations where a limited liability company became a joint stock limited liability company, or vice versa, which strongly suggested that state enterprises could not become limited liability companies by re-registering under Part Five of the 1994 Regulations.

In his first report, Professor Dicks said that the reasons for the repeal of the former Articles 7 and 21 could be deduced from the notes to a comparative table of the texts of the 1993 and 2005 versions of the Company Law provided in the Company Law Annotated 2008 Volume 2 where it is stated (p.1895) in respect of Article 7 that it was repealed because “the restructuring (gaijian) of state-owned enterprises is no longer at the legislative heart of this Law and for this reason [this provision] has been deleted”; and in respect of repealed Article 21, “Dealt with by other law (falü)” (p. 1907). In the case of the repeal of Article 229 of the 1993 Company Law 1993 the comment is: “Deleted because circumstances have changed with the passage of time.” (p. 2025)

In Professor Dicks’ opinion, even if CNC Corp could have restructured by registering a change of “type of company” under the 2005 Companies Act and the 1994 Regulations, the change from being a state enterprise to a limited liability was so profound that the limited liability company should be treated as a completely new entity that does not have vested in it CNC Corp’s contractual rights, unless those rights have been assigned to it by CNC Corp. In support of this view he pointed to the concluding words of Article 9 of the 2005 Companies Law contending that it was necessary to provide that rights and obligations were transferred where there was a change from a limited liability company to a joint stock limited liability company because otherwise there would be no such transfer by reason of the radical difference between the change of types of company contemplated by the Article. Using his own “very literal” translation, Professor Dicks quotes from the commentary on Article 9 in the Company Law Annotated 2008 (Volume 1 at p. 101):

After a limited liability company in accordance with law changes to become a joint stock limited company the original limited liability company is no longer in existence, but the rights and obligations of the original limited liability company should not automatically disappear simply because the original limited liability company no longer exists. For this reason, this Article provides that when a limited liability company in accordance with law is changed into a joint stock limited company the joint stock limited company succeeds to the rights and obligations of the original limited liability company after the change. That is to say, the joint stock limited company which results from the change enjoys the rights of the original limited liability company and the joint stock limited company which results from the change undertakes the obligations of the original limited liability company, so that the joint stock limited liability company which results from the change cannot take the non-existence of the original limited liability company as a reason not to accept liability for the obligations of the original limited liability company.

Professor Dicks and Daiichi’s counsel, Mr Goldstone QC accepted that CNC Corp’s obligations as distinct from its contractual rights were inherited by CNC Ltd. As I understood it, this was by reason of The Provisions of the Supreme People’s Court on Several Issues in Adjudication of Civil Dispute Cases Concerning Restructuring of Enterprises (“the Fa Shi 2003”) issued pursuant to the power of the Supreme People’s Court to issue interpretations on questions involving the specific application of laws and decrees in the adjudication work of the courts. I return to the Fa Shi 2003 below. Suffice it to say at this stage that it was Professor Dicks’ opinion that: (i) there was a vital distinction between the Fa Shi 2003 and the appended Explanatory Note; (ii) the Fa Shi itself dealt only with the transfer of obligations and was concerned with a public policy issue of fraud (iii) the Explanatory Note was contradictory and was not to be taken as propounding a general rule that the contractual rights of a state enterprise passed to the restructured limited liability company as well as its obligations.

Founding on the views of Dr Zhu, Mr Rainey QC for CNC Ltd submitted that it was plain that after the inception of the 1993 Companies Law a state enterprise could restructure by applying under Articles 9, 26 and 34 of the 1994 Regulations and upon being re-registered as a limited liability company and being issued with a new business licence, it continued to exist in this different corporate form and as such was possessed of its pre-re-registration rights and subject to its pre-re-registration obligations. This, argued Mr Rainey, was clearly demonstrated by the 1998 SAIC Regulations (Footnote: ¹) which are predicated on re-registration under the 1994 Regulations being the process for conversion from state enterprise to limited liability company.

Mr Rainey further submitted that it was equally plain that the state enterprise/limited company conversion process remained exactly the same after the implementation of 2005 Company Law notwithstanding the repeal of the former Articles 7, 21 and 229 and the insertion of the new Article 9. This was so because: (i) the 1994 Regulations and the 2005 SASAC Regulations continued to apply just as before; (ii) many state enterprises had not restructured by 1 January 2006 and there was no sensible reason for switching to the process posited by Professor Dicks; and (iii) as revealed by the evidence, state enterprises with the active participation of SAIC had continued to restructure by re-registering under the 1994 Regulations. The new Article 9 was an “avoidance of doubt” provision and did not denote that the rights and obligations of a state enterprise were not vested in the restructured company. And in any event, Professor Dicks had mistranslated the last part of the last sentence of the commentary on Article 9 contained in the Company Law Annotated 2008. In the words of Dr Zhu:

The last sentence …. is not “in a very literal translation” as claimed by Dicks Report (para 4.11). In original Chinese text … the sentence is expressed as including the words “itself no longer is” (ziji bu zaishi自己不再是). Correct literal translation should be:“…, the joint stock limited liability company after the change cannot take as a reason (the fact that) itself is no longer the former limited liability company, not to undertake the former limited liability company’s obligations.”

This original Chinese sentence shows that the author of the commentary takes the former limited liability company and the joint stock limited liability company as one and same entity except each with a different form. The word “itself” (ziji 自己) indicates the joint stock limited liability company is the former limited liability company, there never existed two different entities at the same time, and all that happened is a change of “clothes” of a different legal form. Indeed, in the whole Chinese passage of the commentary there is no single word indicating the change of “legal person” (faren法人) of the company. (Zhu, 2^nd report, paras 150-151)

On the question whether the state enterprise’s contractual rights passed to the restructured company, Mr Rainey submitted that the effect of re-registration was that the former entity continued to exist although in a different corporate form. The registration of a change of “type of company” was not intended to have any different consequence than that resulting from the registration of a change of any of the other items listed in Article 9 of the 1994 Regulations and no-one was suggesting that the registration of change of any of those other items led to the extinguishment of the applicant entity and the creation of a new company.

Mr Rainey relied on a passage in Issue 3 of 2003 of the Research Office of the People’s Judicature (Renmin Sifa,), an official bi-monthly magazine of the Supreme People’s Court, reporting the opinion of judge Liu Jiachen, Deputy President of the Supreme People’s Court. As Dr Zhu explained, the People’s Judicature is an important publication of the Supreme People’s Court which relays the opinion, interpretation, annotation, provision, or explanation of the Supreme People’s Court on certain issues or points of law and judicial practice. It is relied upon by lawyers, academics, government officials, companies and business people, as a source of judicial opinion, interpretation and court practice. The passage in question reads:

“…where the change of a company’s name has been re-registered with registration authority, if the company’s shareholder and business have not been changed, the company prior to the change and the post-change company are still the same legal entity. When the company’s name has been changed, the name prior to the change is no longer existed; the post-change company cannot possibly enter any agreement with the company prior to the name change on the rights and obligations of the company. Therefore, the rights and obligations prior to the change of the company’s name shall be entitled and undertaken by the post-change company in accordance with law, including of course those rights and obligation relating to litigation.”

Mr Rainey further relied on the Fa Shi 2003 and the Explanatory Note. The preamble to the Fa Shi recites the laws it addresses and amongst those laws is “the RPC Company Law”. Articles 4 and 5 read:

4.

Where a state-owned enterprise is restructured as a whole to a state-owned limited liability company with a sole investor in accordance with the Company Law, the liabilities of the former enterprise shall be borne by the post-restructure limited liability company.

5.

If an enterprise achieves third-party participation in the enterprise by means of capital and share increase or by partial assignment of equity, and is thereby completely restructured as a limited liability company or company limited by shares, the debts of the original enterprise shall be borne by the new company formed by the restructuring.

The Explanatory Note is by Judge YE Xiaoqing, senior judge of Civil Court Division Two of the Supreme People’s Court. It was Judge YE Xiaoqing who drafted the Fa Shi 2003. Dr Zhu’s translation of the relevant parts of the Explanatory Note reads:

1.

The issue of assumption of obligations after enterprises are restructured as a whole (整体zhengti) to companies in accordance with the Company Law

The restructuring of enterprises as a whole to companies in accordance with the Company Law refers to a readjustment of the original capital structure on the basis of the assets of the original legal person, in which the organization (or department) authorized by the state to make the investment puts into effect a control of shares of the enterprise as a sole investor and the original enterprise is restructured as a state-owned limited liability company with a sole investor, or, the enterprise achieves a participation of other persons as shareholders of the enterprise by means of capital and share increase or by partial assignment of equity and thereby the enterprise is restructured as a whole to a limited liability company or company limited by shares. In the restructuring of enterprises as companies, what is restructured is the original system of property rights of the enterprise, the changes of the original investment structure, capital structure and organizational form of the state-owned enterprise. Since the newly established company is established on the basis of the restructuring of the original enterprise, therefore, it ought to (应当yingdang) be said that the legal status of the state-owned enterprise as a subject in law (国有企业的法律主体地位guoyou qiye de falü zhuti diwei) has undergone no change in substance after the restructuring of state-owned enterprises as companies. Where state-owned enterprises are restructured as solely state-owned companies, the whole assets of the state-owned enterprise are put into the solely state-owned company, the qualification of legal person (法人资格faren zige) of the original state-owned enterprise terminates (终止zhongzhi), the post-restructure solely state-owned company shall (应当yingdang) be the continuation (延续yanxu) of the original state-owned enterprise, and the state-owned enterprise before the restructuring and the newly established company after the restructuring is in law really one legal person (在法律上实为一个法人zai falü shang shi wei yige faren). For this reason, Article 4 stipulates that the obligations of the enterprise restructured shall be borne by the post-restructuring newly established company. Where state-owned enterprises are restructured as a whole to limited liability companies or companies limited by shares, the result of the restructure of the enterprise as a whole is that the property and the rights and obligations of the original enterprise are taken over as a whole by the newly established company (原企业财产及债权，债务整体被新设公司接收yuan qiye caichan ji zhai quan, zhaiwu zhengti bei xinshe gongsi jieshou), the original enterprise legal person extinct (消灭xiaomie), and the newly established company and the original enterprise, in respect of the assets, rights and obligations, belongs to a kind of inheritance (承继chengji) relationship. Even though the restructuring as companies brings about an addition of new shareholders, however, when the new shareholders accepted stock ownership it was carried out on the basis of a valuation of the assets of the original enterprise, a sorting out of the creditor’s rights and debts, a compensation of debts with assets, and followed by a valued conversion to shares. The new shareholders at the time of participating in as shareholders, had a full knowledge of, and already accepted, the obligations of the restructuring enterprise. For this reason, Article 5 stipulates that the obligations of the enterprise restructured shall be borne by the post-restructuring newly established company.

Dr Zhu’s opinion that the Fa Shi 2003 applies to cases both before and after the 2005 Companies Law was not disputed by Daiichi and Mr Rainey submitted that the Explanatory Note is of very high persuasive authority for the proposition that a state enterprise’s contractual rights pass to the limited liability company on a re-structuring as well as its obligations.

On the question whether CNC Corp restructured under Part Five of the 1994 Regulations or must be taken to have established a new limited liability company under Article 6 of the 2005 Companies Law, I accept Mr Rainey’s submissions in preference to the views of Professor Dicks attractively advanced though they were by Mr Goldstone. It was common ground that in the period from the inception of the 1993 Companies Law to the inception of the 2005 Companies Law, a state enterprise desiring to restructure as a limited liability company did so by registering a change of “type of company” with SAIC under Part Five of the 1994 Regulations, and I am quite satisfied that it was intended that this restructure process should continue notwithstanding the amendments made to the 2003 Companies Law by the 2005 Companies Law. In this connection I regard it as highly significant that SAIC, the state entity responsible for administering the process of registration under the 1994 Regulations, has routinely dealt with state enterprise restructuring since 1 January 2006 under Part Five of the 1994 Regulations. This in my view is hardly surprising for it must have be manifest that come 1 January 2006 there would be many state enterprises that had still not become limited liability companies and there is no conceivable reason that makes any sense for requiring those enterprises to establish a new company under Article 6 rather than use the existing machinery contained in the 1994 Regulations.

I accept Dr Zhu’s translation of the commentary on Article 9 contained in the Company Law Annotated 2008 and agree with his conclusion that the author of the commentary regarded the former limited liability company and the joint stock limited liability company as one and the same entity save that each had a different form. I am also of the opinion that Article 9 functions as a “for the avoidance of doubt” provision and as such does not support the proposition that a limited liability company that is the result of a state enterprise restructuring is a completely new company that does not have vested in it the state enterprises’ contractual rights.

I also accept Mr Rainey’s submissions on the question whether CNC Ltd had vested in it at all material times CNC Corp’s contractual rights. In my judgement, the scheme for the registration of changes to the matters listed in Article 9 of the 1994 Regulations provided under Part Five is clearly intended to operate uniformly in all respects, including in relation to the outcome of re-registration in terms of corporate form. It follows that if the registration of a change of the company’s name or a change of the legal representative’s name would not result in the demise of the applicant and the creation of a completely new company --- which would obviously be the case --- this would also be the outcome of the registration of a change of “type of company”, whether the applicant is a limited liability company or a state enterprise.

I am also persuaded that a Chinese Court would reach the same conclusion on the authority of the Explanatory Note to the Fa Shi 2003. With respect to Professor Dicks, his facility with written Chinese is not as good as Dr Zhu’s, who is a native speaker, and for this reason I accept Dr Zhu’s translation of the Explanatory Note where it differs from that of Professor Dicks.

The key passage in the Note is:

Where state-owned enterprises are restructured as solely state-owned companies, the whole assets of the state-owned enterprise are put into the solely state-owned company, the qualification of legal person of the original state-owned enterprise terminates the post-restructure solely state-owned enterprise shall be the continuation of the original state-owned enterprise, and the state-owned enterprise before the restructuring and the newly established company after the restructuring is in law really one person. For this reason, Article 4 stipulates that the obligations of the enterprise restructured shall be borne by the post-restructuring newly established company. Where state-owned enterprises are restructured as a whole to limited liability companies or companies limited by shares, the result of the restructure of the enterprise as a whole is that the property and the rights and obligations of the original enterprise are taken over as a whole by the newly established company and the newly established company and the original enterprise, in respect of the assets, rights and obligations, belongs to a kind of inheritance relationship.

True it is that this reasoning is directed to explaining Article 4 of the Fa Shi 2003 which is concerned with obligations, rather than rights, but the reasoning seems to me to be obviously applicable to the question whether the limited liability company that results from a state enterprise restructuring has vested in it the state enterprise’s contractual rights.

I am bound to say that I found Daiichi’s case extremely uncommercial and highly technical. If a state enterprise’s obligations pass to the limited liability company where there has been a restructuring, it makes no commercial sense for the state enterprise’s contractual rights not also to pass to the limited liability company by reason of the same restructuring process. Professor Dicks accepted that obligations that pass to the limited company would be affected by closely connected contractual rights that give rise to a set-off or abatement and it is hard to see why this is so unless contractual rights pass generally on a restructuring.

It follows that I have come to the clear conclusion that CNC Limited is entitled as a matter of Chinese law to bring its claim against the Daiichi. I shall therefore answer the preliminary issue “Yes”.