Out-of-the-box approach to winning lawsuits

By Rao Xiaomin and Hu Yongshuai, Zhong Lun Law Firm
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Under the final ruling made by the Guangdong Provincial High People’s Court on the dispute between a bank and company A, and some other legal persons and natural persons over loan and guarantee contracts, the principal debtor A is ordered to repay the bank the
principal of RMB130 million plus interest, and other guarantors shall be held jointly and severally liable for the debt repayment.

Rao_Xiaomin Partner Zhong Lun Law Firm
Rao_Xiaomin
Partner
Zhong Lun Law Firm

In the course of the execution of the court ruling in 2012, company G and company H voluntarily got involved in the execution process, and respectively submitted a letter of execution guarantee to the court and offered guarantees to the bank. The court thus terminated the execution. However, efforts to execute the court ruling were restarted at the request of the bank in 2015 as the debt and interest were yet to be paid off.

After the resumption of execution efforts, the bank requested the court to order H to repay the debt with its 35% stake in company I (target stake), but did not apply to sell the properties of other guarantors. As the target stake was H’s main equity asset with potential to make a profit, the company sought legal advice to avoid the execution. Difficulties in the case are explained as follows:

It was legally ungrounded to request the court not to sell the target stake. According to the Civil Procedure Law (2012 Amendment) and its judicial interpretations, if the person subjected to execution has no property to be executed or his property is not valuable enough to pay off the debt, the court shall issue a ruling to execute the guarantor’s property. As H and other persons subjected to execution were held jointly and severally liable, the bank had the priority to choose the property of H or any other person subject to the execution. There was no solid legal basis to request the court not to sell the target stake or raise an objection to the court’s execution.

The bank declined to apply to execute the property of another person subject to execution. H held many talks with the bank, but the latter refused to apply to execute the property of another person subject to execution or change the property of the company. The court deemed that the target stake could cover the debt owed to the bank. The court rejected an ex officio execution of the property of another person subject to execution at the same time or alone without the consent of the bank to apply for executing the property of other persons.

THE SOLUTION

To buy more time, we raised an objection to the execution on behalf of our client. However, as mentioned above, we concluded that the objection or other procedures could not help our client reach its goal.

Look for investors to take over the debt. Company I’s project in a port area, with a considerable asset value, is expected to return handsomely. G is I’s controlling shareholder with a 55% stake.

We suggested the client look for a third-party investor to take over the debt owed to the bank. On the part of the bank, the transfer of debt could lead to quick repayment without bearing the cost of evaluation and auction; on the part of the investor, the takeover of G’s holdings in I could enable it to have control over the project and achieve returns on the investment; more importantly, the investor, as the new creditor, could apply to execute G’s stake in I, pointing to the possibility of realizing H’s goal.

G and H reached a settlement by filing another lawsuit. As I’s controlling shareholder, G played an important role in the case. It was G that proposed to offer guarantees together with H, and the bank accepted the proposal. It was another way out of the case to strike a settlement with G, which could negotiate with the bank. However, it was unlikely for the two to reach a negotiated settlement since the beginning of the execution.

Hu Yongshuai Associate Zhong Lun Law Firm
Hu Yongshuai
Associate
Zhong Lun Law Firm

We learned that G offered a guarantee for the huge debt of its affiliated company without convening a shareholders’ meeting or a board meeting. In view of this, we reckoned that according to article 16 and article 21 of the Company Law, H could sue G for damaging shareholders’ interests and seek a settlement with G.

However, there was no evidence (only H’s oral statement) for the charge against G. Therefore on behalf of H, we first filed a lawsuit against I over shareholders’ right to be informed, and obtained prima facie evidence that I offered a guarantee for the huge debt of G’s affiliate. We then sued G, which later proposed a settlement with H over all the cases, including the execution case.

Finally, the execution ended with conciliation, and H’s target stake avoided being executed.

The legal issue in this case was not complicated. When advising the client, however, we found it sometimes difficult to meet the client’s goal by only focusing on the related laws and case study. To defend the client’s interest as strongly as possible, the lawyer should think out of the box to learn about the interests and weaknesses of related parties, break through by taking advantage of the opposite party’s weaknesses, and work out a win-win solution.

Rao Xiaomin is a partner and Hu Yongshuai is an associate of Zhong Lun Law Firm in Shenzhen

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