KEY WORDS
Construction Qualification, Validity of Contract, Payment of the Construction Project Funds, Legal Liability
DISPUTED ISSUES
1. Where the construction contract is invalid, are the assignors or subcontractors obliged to pay the project funds to the actual constructors?
2. Where the registration of a company was not cancelled in accordance to legal requirements, what legal consequences shall the shareholders undertake?
KEY POINTS OF JUDGMENT
1. If the construction project has been completed and accepted through inspection, the (in)validity of the construction contract shall not affect the actual constructors’ claim for the project funds on the basis of the law and the contract;
2. If the shareholders of a limited liability company fail to perform their obligations in the case of liquidation obligations to cancel the registration of the company, the shareholders shall be jointly liable for the debts of the company.
TABLE OF LEGISLATION
1. Article 194 and 198 of the Company Law of the People’s Republic of China (hereinafter “Company Law”);
2. Article 11 of the Provisions of the Supreme People's Court on Several Issues concerning the Application of the Company Law of the People's Republic of China (II (hereinafter “Provision (II) of Company Law”);
3. Article 2 and Article 26 (2) of the Interpretation of the Supreme People's Court on Issues concerning the Application of Law in the Trial of Cases Regarding Disputes over Construction Contracts for Construction Projects (hereinafter “Interpretation of Construction Contracts for Construction Projects”).
CASE INDEXING
First Instance: Dalian Maritime Court, Case Number: (2012) Da Hai Shang Chu Zi No. 247
Court of Appeal: Liaoning Provincial Higher People’s Court, Case Number: (2015) Liao Min San Zhong Zi No. 300
FACTS
Claimant: Zhejiang Jianlong Shipping Ltd. (hereinafter “Jianlong Ltd.”)
Defendants:
Lixin Huang;
Jian Huang;
Qinhuangdao Haizhixing Port Construction Ltd (hereinafter “Haizhixing Ltd.”);
China Ocean Engineering Construction General Bureau Dalian Engineering Bureau (hereinafter “Dalian Engineering Bureau”)
The Start-up Project and Land Reclamation Project of Shanhaiguan port area, Qinhuangdao Port was assigned by Tianhang Ltd. to China Ocean Engineering Construction General Bureau, who then handed over the project to the defendant Dalian Engineering Bureau.
On June 20, 2008, Dalian Engineering Bureau signed a cooperative agreement with Haizhixing Ltd., agreeing that Haizhixing Ltd. contracted for the first phase of channel dredging project of Shanhaiguan port area, Qinhuangdao Port, and concluded a dredging construction contract with the contract awarding party in the name of Dalian Engineering Bureau; The legal representative of Haizhixing Ltd. was also authorized to be the representative of Dalian Engineering Bureau.
On the same day, Haizhixing Ltd. signed the contract with Aoshun Ltd. for the Construction of the Start-up Project and Land Reclamation Project of Shanhaiguan port area, Qinhuangdao Port, which stipulated that Haizhixing Ltd. will assign part of the works such as berths, upper layers of wharf base tank, harbor basins and channels to Aoshun Ltd., 60% of the amount of the monthly progress payment of Aoshun Ltd will be paid by Haizhixing Ltd. within seven days after receiving the progress payment from their contractor in the same period., and the remaining 40% shall be paid upon the completion of projects (10% of which as the performance bond); The contract provided that any form of assignment of sub-contracting by Aoshun Ltd is prohibited under the agreement, in the case of breach, Haizhixing Ltd may terminate the contract and Aoshun Ltd shall be liable for all consequences and expenses caused thereby.
After signing the contract, Aoshun Ltd. concluded another contract with Jianlong Ltd. regarding the first phase of Wharf Dredging Project of Shanhaiguan port area, Qinhuangdao Port, which stipulated that Aoshun Ltd. shall subcontract the part of the project; the project progress payment shall be paid by Aoshun Ltd. upon the completion of 80% of the work, while the remaining 20% shall be paid after passing the acceptance inspection.
On the basis of the aforementioned contract, Jianlong Ltd. began the construction work, and filled in the progress report of subcontracted work monthly to Aoshun Ltd. from July to November in 2008.
The project constructed by Jianlong Ltd. was put into use on January 8, 2009. On December 23, 2009, Jianlong Ltd. signed the construction settlement form of Shanhaiguan Start-up Project of Qinhuangdao Port with Aoshun Ltd., in order to confirm the work and total settlement price of channel dredging project and Southeast Revetment Project completed by Jianlong Ltd.. Until July 24, 2014, the unpaid principal of the project funds to Jianlong Ltd. was RMB 2,373,323.40.
In addition, on October 18, 2012, Tianhang Ltd. paid RMB 14,841,907 for the Dredging and Land Reclamation Project of the Start-up Project of Shanhaiguan port area, Qinhuangdao Port to China Ocean Engineering Construction General Bureau.
On March 26, 2008, the State Administration for Industry and Commerce approved the establishment of Aoshun Ltd., where the defendants Lixin Huang, Jian Huang acted as shareholders and its business scope was to engage in port engineering and dredging engineering according to the qualification certificate issued by the Construction Department.
Lixin Huang, as the legal representative of Aoshun Ltd., held a shareholders' meeting on November 9, 2011, deciding that Lixin Huang and Jian Huang set up a liquidation group to cancel the registration of the company. On November 9, 2011, Lixin Huang published an announcement on clearing up the creditor's rights and debts in the municipal newspaper Qinhuangdao Evening News.
On December 26, 2011, the liquidation group submitted a liquidation report to Qinhuangdao Administration for Industry and Commerce. The Report says that there was no external investment or branch office, also the creditor's rights and debts had been cleared up, and the remaining assets of the company, RMB 834,000 were distributed by the proportion of investment. Subsequently, Aoshun Ltd. cancelled its registration.
Jianlong Ltd claimed that:
(1) Firstly, Aoshun Ltd. was in arrears of the payment of project funds to Jianlong Ltd.. Lixin Huang and Jian Huang, as members of the company's liquidation group, failed to notify the company's creditor, Jianlong Ltd., in the process of liquidation. This is incompatible with the legal requirements regarding companies’ obligations in terms of liquidation and cancellation of registration. Thus, the aforementioned shareholders shall be liable for the loss of Jianlong Ltd. concerning the balance of project funds.
(2) Secondly, Haizhixing Ltd. and Dalian Engineering Bureau assigned and subcontracted the aforementioned projects to the companies without corresponding construction qualification, hence these construction contracts at issue shall be invalid by law. Haizhixing Ltd. and Dalian Engineering Bureau shall be jointly and severally liable for compensation of the principal and interests of the project funds owed by Aoshun Ltd. to Jianlong Ltd. according to law.
Lixin Huang and Jian Huang did not defend.
Haizhixing Ltd. submitted in writing that:
(1) First, there was no contractual relationship between Haizhixing Ltd. and Jianlong Ltd., hence the party of action sued by Jianlong Ltd. was incorrect;
(2) Secondly, according to the agreement between Haizhixing Ltd. and Aoshun Ltd., Haizhixing Ltd. shall not bear joint liability in case that the owner did not pay for the project funds;
(3) Thirdly, the claim of Jianlong Ltd. that the project contract shall be rendered void was in conflict with their claim for the payment of construction project funds. If such contract was invalid, they shall lose the ground to claim the project funds and related expenses as well.
JUDGMENT
According to the Article 198 (3) of the Company Law, Article 11 of The Interpretation (II) of Company Law, Article 17, 18 and 26 of the Interpretation of Construction Contracts for Construction Projects, and Article 144 of the Civil Procedure Law of the People's Republic of China, the court held that the defendants, Lixin Huang and Jian Huang, shall be jointly and severally liable for the project funds of 2,373,323.40 RMB and its interests accrued by reference to the loan interest rate stipulated by the related bank for the corresponding period within 10 days from the judgment coming into force; the defendants, Haizhixing Ltd. and Dalian Engineering Bureau, shall be jointly and severally liable to the claimant Jianlong Ltd. for the same principal and interest of the project funds subjected to the amount of the unpaid project payment; and other claims of the claimant Jianlong Ltd. shall be rejected.
Haizhixing Ltd. appealed to Liaoning High People's Court against the judgment of first instance. On 25 December, 2015, Liaoning High People's Court made a civil judgment of (2015) Liao Min San Zhong Zi No. 300, rejected the appeal and sustained the first instance judgment.
JUDICIARY REASONING
The court of first instance held that, the issues in this case were surrounding the validity of the construction contracts, whether the project funds should be paid and the legal liability of the four defendants.
The validity of the construction contract in dispute
Jianlong Ltd. claimed that, the construction contract with Aoshun Ltd. and the construction contract between Haizhixing Ltd. and Aoshun Ltd. were invalid, on the ground that Aoshun Ltd. did not have port construction qualifications, but Jianlong Ltd. did not provide any evidence to prove whether Aoshun Ltd. has legally required construction qualifications at the time of signing the contract with Jianlong Ltd. and during the performance of the contract. Haizhixing Ltd. and Dalian Engineering Bureau also failed to provide qualification certificates to prove the relevant facts, so it is impossible to find out whether Aoshun Ltd. or Haizhixing Ltd. has construction qualifications in this case. As Jianlong Ltd. did not provide sufficient evidence to support its claim that the contracts were invalid, the court cannot determine the validity of the construction contracts in the case.
Whether the construction project funds shall be paid
As for whether the construction project funds shall be paid, given that the project has been completed by Jianlong Ltd. and put into use, the parties did not provide any evidence for proving any non-compliance to the prescribed quality requirements, thus Jianlong Ltd.’s claim for the construction project funds shall be upheld, assuming that the construction contracts were valid.
Even if the construction contracts were invalid, in accordance with the Article 2 of the Interpretation of Construction Contracts for Construction Projects, "where a contract on undertaking a construction project is invalid, but the construction project is inspected at the time of completion to be satisfactory, the contractor's request for payment of the construction cost by considering the contractual stipulations for reference shall be sustained." Jianlong Ltd. still shall be entitled to claim the payment of the construction project funds.
Therefore, the claimant's claims for the payment of construction project funds as evidenced by the project financial settlement statement should be upheld.
The legal liability of four defendants
On the one hand, Lixin Huang and Jian Huang, as the shareholders and members of the liquidation group of Aoshun Ltd., failed to notify the known creditors in accordance with the Company Law, also failed to publicize their liquidation matters in provincial influential newspapers in accordance with the Interpretation II of the Company Law. In consequence both of them shall bear the liability of the loss Jianlong Ltd. due to these two defendants’ faults.
Due to the violation of the law relating to the obligations of the liquidation group, the two defendants should be jointly and severally liable for the outstanding construction project funds and interests owed to Jianlong Ltd.;
On the other hand, Dalian Engineering Bureau undertook the construction task of the construction project employed by the China Ocean Engineering Construction General Bureau, and subcontracted the projects to Haizhixing Ltd., accordingly Dalian Engineering Bureau should also be identified as the contract-awarding party of the projects, and Haizhixing Ltd. should be deemed to be the contract-awarding party to Aoshun Ltd. in the projects.
Neither the defendant Haizhixing Ltd. proved that it had paid the project funds in full to Aoshun Ltd. or to Lixin Huang and Jian Huang, nor did Dalian Engineering Bureau prove that it had done so to Haizhixing Ltd..
According to Article 26(2) of the Interpretation of Construction Contracts for Construction Projects, both Haizhixing Ltd. and Dalian Engineering Bureau were the contract-awarding party of the projects to Jianlong Ltd. in this case, they shall be jointly and severally liable to Jianlong Ltd. subjected to the amount of unpaid project funds and the corresponding interests.
Based upon Haizhixing Ltd.’s confirmation of the outstanding payment and the fact that Jianlong Ltd. received additional payment of 500,000 RMB on July 24, 2014, the amount of the construction project funds in arrears shall adequately cover the claimed amount of RMB 2,725,879.6 up to the date of judgment.
The submission of Haizhixing Ltd. that, they shall not bear joint liability because of prescribed contract with Aoshun Ltd. and unpaid construction costs by the project owner, were incompatible with the provisions by law and consequently were not upheld by the court of first instance.
The Court of Appeal held that according to Article 26 (1) of the Interpretation of Construction Contracts for Construction Projects, Jianlong Ltd. as the actual constructor of the project, was entitled to claim the construction project funds from the assignors and illegal subcontractors.
The facts of the original judgment were clear, the application of law was correct and the procedure of judging was legal.
The appellate court did not support the grounds of Haizhixing Ltd. for appeal, due to the lack of facts and legal basis.
CASE NOTES
The liability of the assignors and subcontractors
The laws and regulations stipulating civil and commercial affairs has a relatively late start in our country, and it is still somewhat in existence that administrative regulations adjust and interfere the civil and commercial affairs.
As far as the construction contracts of construction projects are concerned, violating these mandatory rules of administrative regulations does not necessarily invalidate the contracts.
Article 1 of the Interpretation of Construction Contracts for Construction Projects further specifies the "violation of the mandatory provisions of laws and administrative regulations" in Article 52 (5) of the Contract Law, and clearly enumerates three grounds that may invalidate the construction contract, from the aspects of the eligibility of the contractor, the eligibility of the actual constructor and the project bidding.
In practice, it is quite common that the project would be assigned and contracted out. Under these circumstances that the actual constructor is eligible, whereas the eligibility of subcontractor is unascertainable, the determination of the validity of the contracts concluded between the assignor and subcontractor, and between the subcontractor and the actual constructor, shall depend on whether the subcontractor is eligible construction undertaking enterprise.
If the subcontractor has been eligible as a construction undertaking enterprise, the construction contract shall be valid, and otherwise, the construction contract shall be invalid.
However, according to Article 2 of the Interpretation of Construction Contracts for Construction Projects, as long as the completion of the construction project has passed the acceptance inspection, the actual constructor’s request for payment of the construction project funds by considering the contractual stipulations for reference shall be upheld.
Article 26 of the Interpretation of Construction Contracts for Construction Projects stipulates the contract awarding party’s liability of compensation to the actual constructor within the scope of outstanding project price.
This Article breaks the privity of the contract and provides legal safeguard for the exercise of the actual constructor’s rights except the right to claim by a contract.
However in practice, there is no clear definition of contract awarding parties falling within the scope of application of this Article.
In port construction projects similar to this case, most of the construction entities and prime contractors are mostly state-owned large-scale enterprises, meanwhile the circumstances of assigning and subcontracting the construction projects are mostly prevalent, as well as the existence of the arrears of the construction project funds.
In the proceedings, the issues that whether all the subcontractors and assignors, even the prime contractor and the construction entity who have not paid for the project price shall be governed by this Article as the contract-awarding parties, and how the contract-awarding parties who bears the liability for compensation can be identified accurately shall be taken into account more carefully.
In this case, such issues can be considered from the matters of facts that the works of actual constructors, the relationship between defendants and actual constructors, the items of paid projects funds and the amounts of outstanding project funds and so on. Thus all the defendants in this case were determined to be the contract-awarding parties towards the actual constructors, i.e. the claimant, since the claimant, are directly associated with construction subcontracted by the defendants, such as project subcontracting, assigning and the payments of construction project funds, while the defendants failed to pay for the construction project funds, so that the defendants shall bear the joint liabilities of payments within the scope of outstanding project funds.
Legal liability of shareholders in the case of illegal deregistration of the company
According to Article 183 of the Company law and Article 11 of the Interpretation（II）of Company Law, a liquidation group composed of shareholders of a limited liability company shall be formed to commence the liquidation, who shall notify all the known creditors in writing of the matters of dissolution and liquidation of the company, and make an announcement at least in the influential newspapers of the province where the company is registered.
During liquidation, if the shareholders fail to notify the creditors or publish the announcement at the required level, it shall be deemed as the illegal deregistration of the company.
Where a company goes through the deregistration formalities illegally, the creditors fail to declare the creditor's rights in a timely manner, so that they cannot receive the repayment. At this time, the company has no legal personality of assuming independent civil liability, due to the completion of deregistration and the liquidation. Hence the company, without legal personality of assuming independent civil liability, cannot participate in the litigation and bear any liability as a civil subject.
The shareholders shall be jointly and severally liable for the losses caused to the creditors due to the illegal deregistration of the company by the shareholders.
Author: Xin Xin, Chief Judge of Admiralty Adjudication Tribunal, Dalian Maritime Court, Senior Judge of the Fourth Rank
Editor: Jing Wang, Judge Assistant of the Research Office, Dalian Maritime Court