China Merchants Bank V. Hong Kong CMM Group Co. Ltd., and Shenzhen Zhongqiao Industrial Co. Ltd. Case On Contract Of Line Of Credit
Intermediate Court Of Shenzhen City, Guangdong Province
First Ruling No. 122 (2000) by the 2nd Economic Tribunal

Plaintiff: China Merchants Bank Address- News Mansion, Shennan Middle Street, Shenzhen City
Legal Representative: Liu Songjin, Chairman Of Board .
Agent per procuration: Zhou Chunmei and Wang Fan, employees of the Bank.
Defendant: Hong Kong CMM Group Co. Ltd., Address: ROOM 4702，47 FLOOR，CONVENTION　PLAZA，OFFICE TOWER，1 HARBOUR ROAD，WANCHAI，HONG KONG.
Legal Representative: Ma Jianying, Director Of The Corporation.
Agent per procuration: Wu Yaohong, Legal Counsel Of The Corporation.
Defendant: Shenzhen Zhongqiao Industrial Co. Ltd. Address: 3rd Floor, Xihu Garden, No.3014 Baoan South Street, Luohu District, Shenzhen City.
Legal Representative Huang Anmin, Chairman Of Board.
Agent per procuration: Wang Xinmiao, Employee Of The Corporation.
In view of the case on the contract of line of credit between above plaintiffs and defendants, the Court, after accepting the case, established a collegial panel in accordance with law, and heard the case openly. With the attendance of Zhou Chunmei and Wang Fan as agents ad litem of the plaintiff,. Wu Yaohong as agents ad litem of the defendant Hong Kong CMM Group Co Ltd. .(hereinafter referred to as CMM) and Wang Xinmiao as agents ad litem of the defendant Shenzhen Zhongqiao Industrial Co.Ltd. (hereinafter referred to as Zhongqiao), the hearing of this case is now completed.
Plaintiff claimed that: on June 20th, 1996 plaintiff made a contract of line of credit with CMM based on the application of CMM. The plaintiff was required to provide CMM a total of USD 3,000,000 with multiple currencies of short revolving credit for the use of opening credit, application of depositing of currencies and short drawing. The term of credit was from July 4th, 1996 to July 14th, 1997. The contract agreed that the interest rate of overdue was the rate fixed by the contract plus 2%. On July 1st, 1996, the defendant, Shenzhen ZhongQaio Industrial Co. Ltd. shown the plaintiff the letter of pledge. The defendant promised that it would provide 7,000,000 A shares as pledge guaranty of the above mentioned line of credit. The guaranty should be automatically invalid after the repayment of the principals and interest and relevant cost. The pledge was registered in Shenzhen Stock Registration Co.. On May 22, 1998, on the application of CMM, plaintiff deposited currencies of USD 2598521．79, with maturity on Aug. 22, 1997, and interest rate was PR+2％. After twice extension, on Feb. 22, 1997, the deposit was overdue, after CMM failed to repay the principal and interest with notices of plaintiff. Plaintiff negotiated with Zhongqiao on settlement of pledge, but no agreement was reached. Plaintiff thereafter required that: 1. CMM shall repay USD 2598521.79 for the total debt of deposit, punitive interest till repayment and costs of realization of debts; 2. plaintiff have right to dispose the pledge according to the letter of pledge and have priority for repayment of the above mentioned debt of CMM; 3. cost of litigation shall be borne by the two defendants. For support of claim, plaintiff provided court evidences prior to session: (1)contract of line of credit singed on June 20, 1996 between the plaintiff and CMM for proof of debt relation with CMM; (2) letter of pledge by Zhongqiao to plaintiff on Jul. 1, 1996, notarial deed by Shenzhen Notarial Office and letter of proof of stock pledge registration made by Shenzhen Stock Registration Co. , for proof of Zhongqiao voluntarily pledged the stock for line of credit and registration procedures had been transacted; (3)certificate of indebtedness by plaintiff on May 22, 1997, for proof of deposit of currencies under standby letter of credit by plaintiff to account of CMM; (4)correspondences among plaintiff and defendants including on May 21, 1997 signed by Teng Dexiang, legal representative of Zhongqiao,and stamped with seal of Zhongqiao for letter of affirmation of pledge by Zhongqiao to China Merchants Bank for standby letter of credit, letter of deposit overdue by CMM on Oct. 22,1998 by plaintiff to CMM and CMM signed and accepted, letter of deposit overdue by Zhongqiao on Oct. 22,1998 by plaintiff to Zhongqiao and Zhongqiao signed and accepted, and letter of repayment promise on Feb. 8, 1999 by CMM to plaintiff and Zhongqiao signed. The above correspondences proved the confirmation of the plaintiff and defendants and the process of the debts. During the hearing, plaintiff further provided: 1. contract of line of credit on Jun. 30, 1995 by plaintiff and CMM uniformed to the content of contract of line of credit on Jun. 20, 1996, for proof of contract of line of credit on Jun. 20, 1996 as extension of contract of line of credit on Jun. 30, 1995; 2. application of irrevocable letter of credit on Jul.7, 1995 by CMM, for proof of application by CMM to plaintiff for opening of letter of credit under by the two parties; 3. irrevocable standby letter of credit with No.CMOSLC958317 by plaintiff on demand of CMM to New York Branch of Bank of China with total of USD 3,000,000 on Jul. 14, 1995; application of alteration of letter of credit by CMM to plaintiff on Jun. 28, 1996, for proof of corresponding alteration of letter of credit after extension of contract of line of credit; 4. notice of payment by CMM to plaintiff on May. 20, 1997 for notice of plaintiff transaction of USD2595536．25 and service fee, telegraph fee, etc.
Defendant CMM argued that contract of line of credit signed on Jun. 20, 1996 was not specifically performed The two parties did not constitute relation of debt, claim by plaintiff on repayment under the contract is in discrepancy with the fact and law. After making the contract of line of credit on Jun. 20, 1996, CMM did not apply for opening letter of credit, deposit of currencies or drawing under terms of contract. Plaintiff did not provide loan or undertake duty of repayment for CMM, either. Therefore, no specific performance of contract had been made. Claims by plaintiff that plaintiff provided deposit of currencies of USD 2598521.79 on demand of CMM had no inherent relation to subject of case-contract of line of credit. The deposit of currencies was based on standby letter of credit of USD 3,000,000 by plaintiff on demand of CMM. Plaintiff undertook duty of payment based on the letter of credit to the beneficiary New York Branch of Bank of China. But the opening date of letter of credit was Jul.14, 1995, apparently not based on contract of line of credit which was opened on Jun. 20, 1996. Hence the claim of plaintiff was irrelevant to subject of the case. There was no dispute of performance of contract of line of credit between CMM and plaintiff, which is out of range of the hearing of this case.
Additionally, the claim of plaintiff that plaintiff having deposited currencies of USD 2598521．79 on demand of CMM is lacking of factual and legal background. On account of the fact that CMM was solely-owned subsidiary of Zhongqiao in Hong Kong, the seal and business of CMM were completely controlled by Zhongqiao. The claim of plaintiff of standby letter of credit of USD 3,000,000 by plaintiff for CMM and certificate of indebtedness and other correspondences were done by Zhongqiao in the name of CMM. CMM had no knowledge of this, but plaintiff had full knowledge of this. The claim of plaintiff about CMM's arrearage is severely flawed in evidence: 1. plaintiff failed to provide standby letter of credit of USD 3,000,000 on which it paid, and which was applied by CMM and was issued on Jul. 14, 1995 with beneficiary as New York Branch of Bank of China. 2. Plaintiff failed to provide certificate of payment for standby letter of credit to New York Branch of Bank of China, which should be proof of undertaking of plaintiff for payment of plaintiff for CMM and the payee was New York Branch of Bank of China. 3. Certificate of indebtedness provided by plaintiff had no stamp of borrower. The certificate of indebtedness was not genuine. In view of the reason mentioned above, although there were letter of promise on Feb.8, 1999 and notice of call on Oct.22, 1998 by CMM, plaintiff failed to provide full evidence of debt relation between plaintiff and CMM. What's more, the documents and their signing and accepting were done by Zhongqiao. Hence CMM refused to admit the debt claimed by plaintiff, and litigation by plaintiff was not established. Even if plaintiff paid USD 2598521．79 to New York Branch of Bank of China, the actual user of the money was branch of Zhongqiao in U.S.(Zhongwai Development Co. Ltd.). While Zhongqiao applied the letter of credit and provided pledge, CMM, as the nominal applicant, did not express true denotation, hence Zhongqiao shall undertake duty of debt and pledge. For the reasons mentioned above, CMM pleaded the court to dismiss the claim of plaintiff.
Defendant Zhongqiao did not issue letter of pleading. But during process of hearing, defendant claimed that certificate of indebtedness provided by plaintiff had no stamp of borrower, hence the debt was not genuine. Besides, claim by CMM that the transaction was controlled by us had no foundation. Even if there were debt, Zhongqiao shall undertake duty of vouch only.
The court found that: on Jun. 20, 1996, plaintiff and CMM signed a contract of line of credit, the content of which is: plaintiff provides CMM a total of USD 3,000,000 line of credit or other equivalent currencies of short revolving for the use of opening credit, application of depositing of currencies and short drawing. The term of the credit is from July 4, 1996 to July 14, 1997. The plaintiff have right to stop line of credit at any time, by which time all outstanding loan, interests and other relevant money shall be deemed as due. Debtor has right to inspect line of credit annually, and can decide extension unilaterally; each drawing shall be paid full with the same currencies on the day of payment. The repaid money can be redrawn in the term of credit, with exception of contrary clauses of contract; borrower shall pay annual interest on the date of payment decided by debtor. Interest of deposit of currencies is preferential interest of Hong Kong dollar and other currencies. If borrower fails to pay debt due, it shall pay with original interest plus 2%; The contract shall apply Chinese law, and be interpreted in Chinese law and governed by Chinese courts. On Jul. 1, 1996, Zhongqiao issued letter of pledge to the plaintiff, saying that “In view of the stipulations of contract of loan by you and CMM on Jun.20, 1996, the company pledges the following property for loan of USD 3,000,000 to the borrower. The term will be from Jul.14, 1996 to Jul.14, 1997. The letter of pledge is thereupon made. The letter of pledge is unconditional and irrevocable, which constitutes important part of the above contract of loan. The name of pledge is 7,000,000 A stocks by Shenzhen Zhongqiao Development Co. Ltd.” Teng Dexiang as legal representative signed and sealed with stamp of Zhongqiao on the letter of pledge. The pledge was registered in Shenzhen Stock Registration Co., and notarized by Shenzhen Notarial Office. On May 21, 1997, offshore operation department of plaintiff received” the affirmation of pledge by my company on standby letter of credit by your bank”, which was signed by Teng Dexiang as legal representative and sealed with stamp of Zhongqiao, saying that” CMM, solely-owned subsidiary of my company , in July 1995 applied and with approval of your bank, opened a standby letter of credit with term of 1 year for financing Zhongwai Development Co. Ltd., branch of Zhongqiao in U.S., with New York Branch of Bank of China, and the credit shall be vouched by the pledge of 7,000,000 A stocks by Shenzhoen Zhongqiao Development Co. Ltd. by Zhongqiao. On expired time of the credit, with the approval of your bank, the credit will be extended for 1 year till Jul. 4, 1997, with the same pledge. As Zhongwai Development Co. has problem of insolvency, New York Branch of Bank of China demands your bank currently to perform duty of payment prior to May 22, 1997(amount of USD2598521．79). In view of this, we affirm the continuance of pledge of 7,000,000 A stocks of Shenzhen Zhongqiao Development Co. Ltd. by Zhongqiao till the relevant default has been discharged. Meanwhile, we will try to raise money to pay the debt as soon as possible. On May 22, 1997, plaintiff transferred deposit of currencies of USD 2598521．79 to the account of CMM. On Oct. 22nd, 1998, plaintiff respectively issued letters of notice of call for overdue deposit of currencies to CMM and Zhongqiao. The two corporations respectively signed and accepted the letter. The letter described occurrence and extension of the debt in short, and demanded the two corporations to discharge principal and interest of the debt as soon as possible”. On Feb. 8, 1999, CMM wrote to offshore operation department of plaintiff, claiming that” my company opened standby letter of credit of USD 3,000,000 by your department on Jul.4, 1995, with beneficiary as New York Branch of Bank of China, is financially vouched by ISINO AMERICAN DEVELOPMENT INC. to New York Branch of Bank of China, and was pledged by Zhongqiao as 7,000,000 A stocks by Shenzhen Zhongqiao Development Co. Ltd. by Zhongqiao. On Jul.14, 1997, your department agreed to extend the above letter of credit for 1 year. On May 22, 1997, New York Branch of Bank of China demanded to your department for USD 2598521．79 on the standby letter of credit, because my company can not pay, your department performed duty of opening bank and discharged the above money, deposited currencies on it. The above deposit, after twice extension (total of 6 months), became due on Feb.22, 1998. Till December 20, 1998, my company defaulted principal of USD 2598521．79 and interest of USD 507994．04. my company affirms the above debt and promise to transact the debt as soon as possible.” On Feb. 10, 1999, Zhongqiao, on the letter of affirmation, indicated that” the transaction is act of breaching regulation, and will be listed as remaining problem, therefore bad condition towards both parties should be avoided. Our opinions are that:1. admitting the debt; 2. In view of the current situation of Zhongqiao, the debt will be setoff with real estates in compliance with China Merchants bank. The company agrees to sign and issue the letter.” But neither party performed the promise, and both of them defaulted on the above debt.
The court holds that: the contract of line of credit by plaintiff and CMM stipulates that the governing law shall be Chinese law and governing court shall be Chinese court, hence the applicable law shall be Chinese law. The issue of the case is whether the claim money is the money under the contract of line of credit by plaintiff and CMM in 1996, and whether plaintiff has factually paid. CMM claimed that the irrevocable standby letter of credit opened by plaintiff on Jul.14, 1995, with term of 1 year and beneficiary as New York Branch of Bank of China is not based on the contract of line of credit by plaintiff and CMM on Jun.20, 1996, but based on the contract of line of credit by plaintiff and CMM in 1995, which is proved in the evidence of plaintiff during the hearing. But the content of contract of line of credit by plaintiff and CMM on Jun.20, 1996 and the contract of line of credit by plaintiff and CMM in 1995 are fundamentally same, with the variance of extension to Jul.14, 1997. On Jun. 28, 1996, CMM issued letter of alteration of letter of credit, applying to change expired date of standby letter of credit with No. CMOSLC958317 as Jul. 14, 1997, in order to be uniformed to the contract of 1996. The above evidence can prove that standby letter of credit by plaintiff is related to the contract of line of credit by plaintiff and CMM in 1995. Though the letter of credit is opened on the contract of 1995, on account of particular commercial character of standby letter of credit, there was no fact of advancement of payment in the term of the original contract, therefore, there was a contract of 1996 that was fundamentally uniform to contract of 1995, and correspondingly extended letter of credit to Jul.14, 1997. In view of the above fact, defendants' pleading that non-performance of contract is not established. Regarding whether the money has been factually paid, CMM claimed that as no factual acceptance of money, it shall not undertake duty of payment. Defendant should notice that it financed for the relevant corporations in New York in terms of application of opening of standby letter of credit. After plaintiff performed the duty of opening bank with advancement of payment under the letter of credit, the defendant and applicant-CMM-must undertake duty of discharge. In fact, in the notice of call signed and accepted by both defendants and letters of promise to plaintiff, there are description and affirmation of this transaction in detail. Though plaintiff provided other relevant evidence during and after hearing, these evidences can collaterally prove the fact of the case. The refusal of inquisition of the evidence by defendants does not influence the confirmation of relation of debt between plaintiff and defendants by the court. The evidence by plaintiff prior to hearing is sufficient to prove the genuine relation of debt between plaintiff and defendants and relation of pledge vouch between plaintiff and Zhongqiao. The claim of CMM that stamp of CMM was controlled by Zhongqiao as CMM was subsidiary of Zhongqiao and the discharge should fall on Zhongqiao is not established and the court dismiss it. Pledger, Zhongqiao provides vouch for foreign company, in accordance with Chinese law, shall register under relevant regulations, but as the loan falls within the business of offshore, with the interpretations of the Supreme People's Court, the business of offshore prior to Jan.1, 1998 is not deemed void without registration. In this case, pledge by Zhongqiao is the true denotation of Zhongqiao and registration procedure has been made, the pledge is valid. The court noticed that the letter of the” affirmation of pledge by my company on standby letter of credit by your bank” received by plaintiff, though has been sealed with stamp of Shenzhen Zhongqiao Development Co. Ltd.., it can not disaffirm the identity of Zhongqiao as voucher of the credit. Letter of pledge, letter of proof of stock pledge registration, notarial deed, and later letters can prove that Zhongqiao is the holder of 7,000,000 A stocks by Shenzhen Zhongqiao Development Co.Ltd., and Zhongqiao pledged this for CMM. Zhongqiao shall undertake duty of discharge with the scope of pledge of 7,000,000 A stocks by Shenzhen Zhongqiao Development Co.Ltd. In accordance with article 90, 108 of General Principles Of Civil Law Of The People's Republic Of China , and article 71-2,3, 72, 78-1 of Law Of The People's Republic Of China On Security, the court renders the following verdict:
1. defendant CMM shall pay to plaintiff USD 2598521．79, interest and default interest(interest shall be calculated from May 22, 1997 to Feb. 22, 1998, and default interest shall be calculated from Feb. 23, 1998 till the date of discharge, the interest rate shall be decided as agreement).
2. if defendant CMM fails to discharge outstanding debt, plaintiff may recover on the money from the legal sale or auction of pledge by Zhongqiao.
3. Defendent Zhongqiao, after undertaking duty of vouch, have the right of recourse to CMM.
The above money shall be paid full in 10 days after the verdict becomes effective, in case of overdue, debt interest shall be paid in double for the period of delay.
The fee for accepting, totaling USD 23003 shall be borne by defendants.
As plaintiff has paid it in advance, defendants shall pay the fee to plaintiff directly.
If either party does not follow the verdict, he may issue writ of appeal within 15 days of serving of the verdict, and issues copies in accordance with number of the other party, appeal to the higher people's court of Guangdong Province.
Presiding judge: Meng Zhaowen
Judge: Xi Xiangyang
Judge: Liu fuweixian
May 6, 2001
Clerk: Wen Daren
Comments:
This case concerns dispute of contract of line of credit. The verdict describes fact of case objectively, emphasizes on the use of evidence, interprets contract clauses and relevant regulations reasonably, demonstrates in great detail and thoroughly.
This verdict is specific in the reasoning and analysis of the evidence. It is comprehensive and clear in the adduction and inquisition of evidence, confirmation of evidence, and description of fact. The verdict enumerates evidence provided by the parties, analyzes the evidence one by one, express conspicuously the reason of holding or refusal. On the basis of this, the finding of the facts of the case has strong foundation.
Based on the full use of procedures of inquisition, the verdict analyzes the inherent legal characteristics of standby letter of credit, and makes full anatomy of issue of the parties, which nails down the legal result of each party. The reasoning is clear, the frame is incisive, and the illustration is sufficient.