Key words: in-depth investigation, objective evaluation, accurate judgment, dare to bear responsibility, find the pressure point accurately, insist on non-litigation collection, unstable counter-argument, notarized mailing.
Case Main Points
Due to the China Oriental Group Co’s (hereinafter referred to “COGC”) default in payment for a long term, JN (China) Ltd (hereinafter referred to “JN”) entrusted attorney to collect the account receivable. After the initial investigation upon COGO, the attorney found the company has suffered in the operation and financial problems and employees have organized many group events to claim for their unpaid salary. In consideration of the courts are involved in a lot of cases with huge target value, the attorney considered that the creditor’s right will be difficult to be realized by litigation.
After the initial investigation, the attorney chose to do the in-depth investigation instead of initiating a lawsuit immediately. The attorney and JN found the weakness of COGC together and implemented the right of unstable counter-argument which urged the overseas holding company of COGC to pay all of the debt between JN and COGC. Then the COGC entered into the bankruptcy proceedings in no time.
Introduction of the Case
JN is one of the long-term suppliers of COGC, however, COGC has no longer paid JN the due payment since 2003, accumulative total RMB 5,000,000. No results in repeated dunning by JN, so JN entrusted the attorney to carry out the collection of account receivable.
After accepting the entrustment, the attorney investigated JN preliminary in the first time and found that the JN has mostly stopped production except for several workshops. The number of employees has decreased from approximately 10,000 to less than 1000. In addition, JN is in front of the financial crisis and in arrears of the wage and social security funds for the employees. Employees have organized many group events to claim for their unpaid salary, which have been widely known in the local. By checking the system of the courts, the attorney found that COGC has involved in more than 100 cases. According to the preliminary statistics, more than 40 cases that involving more than RMB 100,000,000 have been executed upon COGC and the cases are distributed in the courts around the country.
Therefore, the attorney suggested JN to make decision after the in-depth investigation by attorney instead of initiating the lawsuit immediately, and JN accepted this suggestion. After investigation, the attorney found that the COGC is a wholly-owned subsidiary of the company DF who has listed in Singapore. However, the stock price of the company DF kept steady during this time, moreover, DF and JN have the same legal representative. In regard of this, the lawyer carried out a further investigation and found it is strange for JN to suddenly fall in trouble. Even though the international economic environment has deteriorated significantly, JN is unable to get into trouble so fast since it has productions with considerable competitiveness in the international market. Therefore, the only thing is JN may hid the assets abroad. According to this clue, the attorney found JN has established factories in many countries in south-east Asia to produce productions.
On the other hand, after the communication with several courts who accept the maximum number of cases, the attorney found that the COGC has been blacklisted by the government. The company has involved in more than 50 cases of the courts at two levels in the local. Most of the cases were sued by suppliers and employees, with the lawsuit subjects ranging from several thousand yuan to tens of millions of yuan, and the total amount of action has exceeded 200 million yuan. The COGC has mortgaged the land, plant and equipment to the bank, and all of the bank accounts have been closed and frozen by the courts, although there is only a little bit of deposits in these bank accounts.
Based on the investigation results from various aspects, the attorney issued a detailed investigation report to JN company, which detailed demonstrated the current situation of the OCGC, the fled funds and its involvement in lawsuits. Meanwhile, the facts and reasons that JN company is impossible to recover the arrears after the litigation was comprehensively demonstrated. JN paid seriously attention to this investigation report, the company organized the attorney and the management to discuss upon this plan. In the process of the meeting, the attorney understood that a shipment of a value of nearly 80 million products of COGC are waiting for transport in Hong Kong port, and the COGC needs KM to issue a certificate as the key to be allowed to import, and the contract made by two parties requires JM to fulfill its obligation ahead. With this information, the attorney suggested JM to exercise the ‘unstable counter-argument right’, and drafted the Notification of Exercising Unstable Counter-argument Right and fixed the evidence by notarized mail.
In the meeting, the management of the JN doubts the feasibility of the ‘unstable counter-argument right’ and questioned whether it will be considered as the breach of contract and be required to make a claim by the COGC. After the accurately judgement, the attorney committed that the exercise of the ‘unstable counter-argument right’ is legal and reasonable, and the attorney promised to be responsible for this advice. The attorney signed the meeting minutes.
Next, the attorney, on behalf of JN, negotiated with the attorney of the COGC, adhere to the position of ‘non-payment, non-certificate’, the attorney of the COGC claimed to initiate the lawsuit. However, when the lawyer of JM showed the survey results of the COGC and demonstrated the validity and legality to exercise the ‘unstable counter-argument right’, the attorney of the COGC kept silence of it. The deputy general manager of the COGC claims that the company is bankrupt and is able to pay the payment for JN unless export the goods to abroad and collect the payment. The attorney listed the connection between the COGC and the company DF and the company DF has established several factories in the countries in the south-east Asia, and approved the fact that COGC is transferring its assets.
After that, the parties started multiple rounds of negotiations and signed the Settlement Agreement. It agreed that the company DF will pay the debt to the overseas holding company of JN directly on behalf of the COGC. JN will give the certificate to the COGC after payment. Therefore, this case came to the successful end with the recovery of all of the arrears. The COGC was declared bankrupt by the court shortly after that case.
Case Analysis
I. In-depth Investigation is the Basis to Judge the Operation Plan of this Case Accurately
In this case, the attorney took the in-depth investigation after preliminary survey and knew that JN is on the verge of bankruptcy, instead of initiating the lawsuit immediately, finally, they suggested JN to choose the method of non-litigation. The attorney is under great risks to make this decision. If the attorney fell to conduct the in-depth investigation, it is impossible for them to make this judgment.
In addition, if the attorney decided to initiate the lawsuit without in-depth investigation, other than the debt, it will cause much more loss to JN, such as the high court costs, the cost of preservation and the margin. Therefore, the cases have similarities, but the character of a case is often crucial to make an accurate judgment, which cannot be made without an in-depth investigation.
II. The key point to turn the situation around lies in the proper use of law
Considering all of the factors, although the evidence in this case is clear, it does not have the conditions to realize the creditor’s right by judicial approaches. In this case, it is necessary to try to find efficient conditions to contain the opponents, find the point of pressure, put pressure on the opponents accurately, and realize the creditor’s right through non-litigation approaches.
In this case, after the attorney found that JN never provide certificate to COGC which is one of the certificates that required to import goods. In combination with the early findings of COGC, the attorney suggested that JN shall exercise the ‘unstable counter-argument right’ to COGC. After the approval of JN, the attorney sent the Notification of Exercising Unstable Counter-argument Right to COGC which enable the JN to realize its creditor’s right. In conclusion, the key point to turn the unfavorable situation around in this case lies in the proper use of law and the proper use of law requires accurately and powerful basis of facts.
III. The attorney makes accurate judgement and shall be responsible for the plan
In this case, the attorney provided the suggestion that JN shall exercise the ‘unstable counter-argument right’ immediately based on the survey result. It is doubted by the management of JN since the company worried that the COGC will claim for the loss after JN exercise the ‘unstable counter-argument right’. In this situation, the attorney made judgement based on their professional knowledge and practice experience and took the responsibility of this decision initiatively. The above has played a key role in the successful resolution of the case.
Please try to imagine that, if the attorney did not master a large number of facts through serious investigations, or they are not well understand the legal provisions and jurisprudence accurately, or they have doubts on their own judgment, it is impossible for them to bear such significant responsibility for JN, thus, the client will not adopt the lawyer’s suggestion and the final result is undoubtedly that JN company failed to realize the claims and the collection work is completely failed.
In conclusion, it is the most basic professional quality for attorney to dare to take responsibility for their own professional advice, and it is also the basis for them to effectively protect the rights and interests of their clients.
Conclusion
As many serious problems appeared in the process of this case, the attorney is under great pressure and risks. First, the attorney suggested to claim the debt avoid the judicial way after investigation; then, the attorney is required to be responsible for the consequence which may result from the proper implementation of unstable counter-argument right. In this regard, it amplified the risks of the attorney in practice. However, from the perspective of protecting the benefits of their clients, if the attorney, who are the professional legal practitioners, cannot provide the professional help and suggestions for their clients, the value of this engagement will be lost and the benefits of the clients will not be guaranteed.
In conclusion, the successful result of this case is inseparable from the lawyer’s insistence on providing professional advice and the courage to assume the responsibility. At the same time, it requires the client’s fully trust. The joint efforts of both sides make the creditor’s rights of this case completely realized.
2. Application and Analysis of Legal Service Products in Capital Market
With the rapid development of the socialist market economy, the market demands more and more capital investment and financing, the expansion of enterprises and the integration of social resources. The demand is higher and higher, and the service for professional institutions is more and more diversified. In order to meet the needs of the market, SHAOYU is constantly exploring and innovating more specialized legal service products, forming a comprehensive, systematic and personalized legal service. It can not only provide better legal services for customers, but also provide customers with deeper value discovery, risk control and compliance development. Professional services.
2.1 Application of Legal Service Products in Capital Market
Investors often receive Business Plan (BP) provided by the project side in the process of looking for investment and financing projects, but how to confirm that the information written in the business plan provided by the project side is true; how to confirm the clear ownership structure and clear ownership of the target company; how to confirm the owner of the target company; how to confirm whether the target company has significant loans or guarantees and other important issues related to the sustainable development of the enterprise? Investors want to know as much as possible about the subject matter they are going to participate in, and they hope that the withdrawal of funds will be guaranteed.
In order to understand the above situation, it is necessary for investors to conduct legal due diligence investigation through professional law firms. Its main purpose is to solve the problem of information authenticity and information asymmetry in the transaction process, and take the results of due diligence as an important basis for customers to make investment and financing decisions. According to the final transaction situation of both parties, the law firm customizes the transaction plan and transaction template to realize the delivery and post-investment management of the whole project (see "Introduction to SHAOYU Legal Business").
The role of due diligence is mainly reflected as follows:
The Risk. Through the verification of the above-mentioned problems, investors need to assess whether the project has significant legal risks or is merely a general flaw; whether this risk causes substantial obstacles to the project and whether it will affect the realization of the ultimate investment purpose. It is a qualitative judgment.
The Valuation. If the results of the above-mentioned verification are within acceptable risk range, then whether there are further problems affecting valuation, such as the lack of appropriate qualifications in the business scope of special industries, incomplete legal compliance in labor employment, the high cost of future standardization, or the existence of ongoing litigation. If losing a lawsuit requires corresponding compensation. It is a quantitative judgment.
2.2 Project Case and Legal Analysis
2.2.1 Equity rights
2.2.1.1 Equity Ownership
Project status：Company A has a registered capital of 10 million, which is funded by three shareholders of X,Y and Z. Among them, shareholder X transfers 40% of its shares to investor B. After the delivery of the shares, the actual shareholder of C requests that investor B return 40% of the transferred shares.
Legal Analysis：
（1）C is the actual holder of 40% of A company’s equity, X has no right of disposition, decision-making and income for 40% of its equity.
（2）Without C’s authorization and written permission, the unauthorized transfer of X’s equity holdings constitutes a breach of contract. Therefore, there are defects in all 40% of investor B’s equity transfers and there is a risk of being revoked according to law.
Lawyer’s advice：Before investing, B investor should investigate the history of A company and the establishment of capital contribution, interview shareholders of A company to ensure that there is no surrogate ownership of company equity, or in the case of substitution, after obtaining the consent of the actual shareholder, the stock rights shall be delivered.
2.2.1.2 Ownership structure
Project status：A company’s main business is advertising business. There are many business partners. In order to facilitate the business in various provinces and cities, the shareholders of the company negotiate with the salesmen of different regions to set up operation companies in different places, and the shares of the company are held by the salesmen.
Legal Analysis：
（1）Because Company A is the actual operator of the business and the companies in different places hold shares by salesmen, Company A can not directly control the operation situation and business income of the companies in different places.
（2）Local companies are independent entities, and revenue can not be merged into company A’s operating performance and profits, which will have an important impact on the company’s valuation and compliance in external financing.
Lawyer’s advice：Company A maintains the controlling rights of Companies in different regions, guarantees the company’s decision-making power and financial situation under the control of Company A, and strips off the irregular assets.
2.2.2 Contingent liabilities
Project status：Company A’s main business is logistics business. Because of the market downturn, the company’s revenue is decreasing, which affects the normal operation of the company. However, the franchisor of the company itself is its real valuable asset, so the investor B intends to buy the company A. Due to the non-standard operation of the company before and the confusion of the contracts signed by the company, all the expenditure and income of the company outside have not been carried out through the company’s external account, and the company receives and pays out with private account outside.
Legal Analysis：
（1）Company A’s franchisees sign a franchise agreement with Company A, which is the code of conduct for the two sides to cooperate in franchising.
（2）The non-standard signing of foreign contracts brings significant compliance risks to the company.
（3）The company receives and receives money from private accounts, and there exists illegal tax evasion and tax avoidance.
（4）The performance of the contract is inconsistent with the flow of capital, and there may be misappropriation of the company’s funds, which will affect the normal operation of the company.
Lawyer’s advice：Verify the authenticity of the franchisors under the company; investigate all the contracts and capital flow outside the company to verify the performance of the contract; investigate the contingent liabilities that the company may have due to various irregular operations.
2.2.3 Management and Core Personnel Stability
Project status：Company A’s main business is integrated circuit manufacturing. Because the industry relies heavily on professional and technical personnel, shareholders of the company are to stabilize the management and core personnel, and give a certain share of the company on the basis of increasing salary level.
Legal Analysis：The management and core personnel are the workers employed by the company. They have certain liquidity. Direct ownership of the company’s equity will cause the instability of the company’s equity. Therefore, indirect ownership of the company’s equity will enable the company’s employees not only to enjoy the dividend of the company, but also to meet their expectations of increasing their income.
Lawyer’s advice：Providing equity incentive scheme, setting up equity incentive institution, formulating staff KPI assessment rules, and signing equity incentive agreement with employees.
2.2.4 Post-investment management and repurchase
Project status：After signing the investment agreement between company A and investor B, the investment agreement stipulates the terms of gambling, requiring that the company’s annual performance must meet certain targets within three years. However, if Company A fails to meet the above-mentioned betting targets within the prescribed time, the investor has the right to ask it to repurchase its equity.
Legal Analysis：When the conditions for the repurchase of the gambling clause are satisfied, the investor has the right to request the company and its shareholders to repurchase the equity invested before.
Lawyer’s advice：Investor B should sue Company A and its shareholders as soon as possible, seal up the accounts of the company and its shareholders, so as to achieve the completion of repurchase faster.