Shenyang Ya X Real Estate Development Co., Ltd., Li X Chuang, and Yan X with

Second-instance case of the equity transfer dispute involving Kim Byung-nyeon

[Keywords] Equity Transfer / Property-for-Debt Swap / Interest on Funds Occupied

[Plaintiff’s Status as a Litigant]

  Appellants: Shenyang Ya X Real Estate Development Co., Ltd., Li X Chuang, and Yan X (our side)

Appellant: Jin Bingnian

[Handling Attorney]

Zhang Linlin, Bai Yufan

[Case Summary]

In 2018, Jin Bingnian (Party B, the transferee) entered into a Share Transfer Agreement with Li Xchuang (Party A, the transferor), Yan X (Party C, a shareholder of Party D), and Shenyang Ya X Real Estate Development Co., Ltd. (Party D, the target company; hereinafter referred to as Ya X Company). The agreement stipulated that Party A would transfer to Party B its 49% equity interest in Party D, with the total consideration for the equity transfer amounting to RMB 12.25 million, payable by Party B no later than September 15, 2018. In addition, Party B was required to provide a loan of RMB 36.75 million to Party D as a prerequisite for this equity transfer. On August 22, 2018, and September 30, 2018, Jin Bingnian made cumulative transfers totaling RMB 40 million to the defendant, Ya X Company. On July 4, 2019, Jin Bingnian (Party B, the original assignee under the agreement) entered into a “Letter of Termination of Equity Transfer Agreement” with Li Xchuang (Party A, the original transferor under the agreement), Yan X (Party C, a shareholder of Party D), and Ya X Company (Party D, the target company under the original agreement). The agreement stipulates that, in light of the “Equity Transfer Agreement” signed on August 20, 2018 by Parties A, B, C, and D (including the loan contract dated August 22, 2018 between Party B and Party D), Party B had paid to Parties A, C, and D the equity transfer consideration of RMB 12.25 million on August 22, 2018 and RMB 27.75 million on September 30, 2018. However, the four parties had failed to jointly cooperate in handling the equity transfer procedures. Now, after mutual consultation, the parties have agreed to terminate the aforementioned agreement subject to certain conditions. Parties A, C, and D shall repay to Party B the equity transfer consideration of RMB 40 million in two installments: the first installment of RMB 30 million shall be returned within one day after the signing of this agreement; upon completion of this first installment, this agreement shall become effective, and the previously executed “Equity Transfer Agreement” and “Loan Contract” shall be terminated. The remaining balance of RMB 10 million shall be repaid within 60 days after the effective date of this agreement. The portion of the equity transfer consideration already paid shall be actually used by Party D, and the parties agree that Party D shall directly make the repayment. If Parties A, C, and D fail to repay the equity transfer consideration to Party B as agreed herein, they shall pay interest at a monthly rate of 2% on the amount due, and also bear a penalty equal to 10% of the amount due as liquidated damages. After the agreement was signed, on July 4, 2019, and July 16, 2019, Ya X Company paid a total of 32 million yuan in accordance with Jin Bingnian’s instructions, with the payment notes indicating “share repurchase.” After January 22, 2020, Ya X Company made additional payments totaling 6 million yuan to the companies designated by Jin Bingnian, with the payment notes indicating “repayment.”

During the second-instance proceedings, Jin Bingnian submitted audio recordings from June 27, 2019, and July 4, 2019, in which representatives of Jin Bingnian’s side negotiated with Yan X and others regarding the termination of the equity transfer agreement. In these recordings, Yan X mentioned providing Jin Bingnian with 8 million yuan in kind as settlement. During the negotiations, the two sides discussed how the interest amount of 8 million yuan was calculated and also agreed to have a lawyer draft the relevant agreement. The “House-for-Debt Agreement” executed on July 4, 2019, listed the following parties as contracting entities: Party A—Jin Bingnian; Party B—Ya X Company; Party C—Yan X; and Party D—Wu Yundong, an outsider. The agreement stipulated that Parties C and D would use their own houses as collateral to offset 6.01 million yuan of the no less than 8 million yuan in funds occupied interest that Party B was obligated to pay to Party A. The agreement further provided that it would become effective upon signature and official seals affixed by Parties A, B, C, and D, and would be executed in four copies, with each party holding one copy. However, at the signature section of the agreement, only Party A had signed and Party B had affixed its official seal; neither Party C nor Party D had signed the agreement.

Jin Bingnian filed a lawsuit against Ya X Company, Li Xchuang, and Yan X, claiming that they had failed to return the equity transfer payment of 4,404,809.01 yuan, along with interest on the overdue return of the equity transfer payment, a penalty of 800,000 yuan for the failure to pay the overdue equity transfer payment, and interest on the funds occupied amounting to 8 million yuan. In the first-instance judgment, the court ruled as follows: First, the defendants Li Xchuang, Yan X, and Shenyang Ya X Real Estate Development Co., Ltd. shall return to the plaintiff Jin Bingnian the sum of 4,398,674.76 yuan within ten days from the date this judgment becomes effective; Second, the defendants Li Xchuang, Yan X, and Shenyang Ya X Real Estate Development Co., Ltd. shall pay the plaintiff Jin Bingnian interest on the aforementioned sum within ten days from the date this judgment becomes effective, calculated at a rate of 2% per month based on a principal of 4,398,674.76 yuan, starting from January 19, 2021, until the date of actual repayment; Third, the defendants Li Xchuang, Yan X, and Shenyang Ya X Real Estate Development Co., Ltd. shall pay the plaintiff Jin Bingnian a penalty of 800,000 yuan within ten days from the date this judgment becomes effective; Fourth, Shenyang Ya X Real Estate Development Co., Ltd. shall pay the plaintiff Jin Bingnian interest on the funds occupied amounting to 8 million yuan within ten days from the date this judgment becomes effective; Fifth, the plaintiff’s other claims were dismissed. Dissatisfied with the first-instance judgment, Ya X Company, Li Xchuang, and Yan X filed an appeal, which was subsequently overturned by the Shenyang Intermediate People’s Court in the second instance.

[Content of the Second Instance Judgment]

1. Uphold Items 1 and 2 of Civil Judgment No. (2022) Liao 0102 Min Chu 9066 issued by the People's Court of Heping District, Shenyang City; 2. Revoke Items 3 and 5 of Civil Judgment No. (2022) Liao 0102 Min Chu 9066 issued by the People’s Court of Heping District, Shenyang City; 3. Amend Item 4 of Civil Judgment No. (2022) Liao 0102 Min Chu 9066 issued by the People’s Court of Heping District, Shenyang City, to read: “The defendant, Shenyang Ya X Real Estate Development Co., Ltd., shall pay the plaintiff, Jin Bingnian, a loss of funds occupied amounting to RMB 2,827,500 within ten days from the date this judgment becomes effective.”

[Case Summary]

This case is a dispute over equity transfer. The current second-instance trial is the second stage following the remand for retrial; the first-instance court had ruled against our client in the original judgment. The three clients hope that this second-instance trial will achieve the goal of minimizing the amount they are required to pay.

In response to the client’s claims, the lawyer conducted multiple rounds of argumentation prior to the trial, arguing that the key point worth pursuing in this case lies in the first-instance judgment’s rulings on interest for funds occupied and liquidated damages. To this end, during the appeal, the lawyer focused primarily on the “Equity Transfer Termination Agreement” signed by all parties and the transcripts of audio recordings provided by Jin Bingnian when preparing the appeal brief and supporting evidence. At the court hearing, the lawyer emphasized to the judge:

First, both recordings were made prior to the signing of the “Agreement on Termination of Equity Transfer,” and they merely document the parties’ negotiations aimed at terminating the equity transfer agreement. The recordings were illegally obtained by individuals acting on behalf of Jin Bingnian, and the appellant was unaware of their existence. Therefore, these recordings cannot be used as evidence to establish that a verbal agreement or commitment was reached, or that the appellant consented to payment. Moreover, during the negotiation process captured in the recordings, the appellant explicitly stated that the agreement should be drafted by a lawyer; thus, the written agreement signed by all parties should prevail. Furthermore, the recordings do not clearly specify either the interest on the 8 million yuan fund occupation or details regarding the property to be used as collateral. Consequently, the recordings cannot prove that the parties reached a mutual agreement or a verbal understanding. According to the terms of the property-for-debt agreement, such an agreement becomes effective only upon signature and official seal by all parties involved. At present, however, only Jin Bingnian’s signature and the official seal of Ya X Company are present. Additionally, Yan X himself—a key figure who participated in and discussed the property-for-debt arrangement in the recordings—did not sign the agreement on that day. Moreover, the owner of the property intended for debt offset also did not sign the agreement, nor has the property ownership been subsequently re-registered. This indicates that both parties have, through their actions, effectively refused to execute the “Property-for-Debt Agreement.” In other words, the parties have failed to reach a consensus on the compensation for the loss incurred during the period when the 8 million yuan was occupied. Furthermore, the interest on the 8 million yuan fund occupation is clearly excessive.

Second, Jin Bingnian both demands an interest rate of 2% per month and a penalty clause of 10%. The combination of these two amounts is clearly excessive, and Jin Bingnian has failed to provide evidence demonstrating that he has actually suffered any actual losses. Therefore, we request the court to reduce these amounts. As for the termination of the equity transfer agreement, our side bears no fault and there was no breach of contract. The audio recording presented by Jin Bingnian clearly shows that neither party breached the agreement; rather, the disagreement stemmed from incompatible cooperative philosophies. Jin Bingnian needed funds for working capital, but investing in the real estate sector requires substantial capital and long investment periods. Moreover, housing prices in Shenyang have recently plummeted dramatically. Consequently, Jin Bingnian proactively requested to withdraw from the investment. Even so, throughout the process of terminating the agreement and returning the equity transfer payment, our client has been fully cooperative. However, given the overall sluggish state of the real estate market, our client has faced severe cash flow difficulties. We therefore hope that the court will take into account our client’s difficult situation and adjust the interest on the funds occupied to the statutory standard.

Ultimately, the court recognized our claim and, at its discretion, adjusted the interest on the 8 million yuan of funds occupied to be calculated at 1.95 times the benchmark interest rate for similar loans prevailing at the time as set by the People's Bank of China—i.e., 50% above the benchmark rate for similar loans at the time. Furthermore, in accordance with the provision that liquidated damages should not exceed 30% of the actual losses incurred, the court further increased the amount by an additional 30%. With regard to the interest and liquidated damages arising from the delayed return of the equity transfer payment following the signing of the termination agreement for the equity transfer, the court held that calculating interest at a monthly rate of 2% until the date of actual payment was sufficient to compensate for the losses. The imposition of an additional liquidated damages of 800,000 yuan was found to significantly exceed the actual losses and was therefore corrected.

[Lawyer’s Insights]

This case has already gone through a second trial after being remanded, marking the final stage in which the parties are seeking to protect their rights and interests. However, both sides have already submitted all the evidence they could provide, and the legal grounds supporting their positions were fully articulated in earlier proceedings—leaving little room for lawyers to maneuver. Under these circumstances, the successful reversal of the original verdict in this retrial’s second-instance phase is largely attributable to the lawyer’s meticulous examination and repeated deliberation of the evidence. During the trial, the lawyer skillfully focused on the key issues at stake, responded adeptly to the judge’s questions by highlighting the evidence favorable to our position, succinctly summarized our main arguments, and helped the judge reconstruct the intentions expressed by all parties at the time of the incident, thereby establishing the true facts of the case and ensuring that justice is truly served.

【Relevant Statutes】

    Article 114 of the Contract Law of the People's Republic of China: The parties may agree that, in the event of a breach by one party, the breaching party shall pay the other party a liquidated damages amount determined according to the nature of the breach. They may also agree on a method for calculating the amount of compensation for losses arising from the breach. If the agreed liquidated damages are lower than the actual losses incurred, the party may request the people’s court or an arbitration institution to increase the amount. If the agreed liquidated damages are excessively higher than the actual losses incurred, the party may request the people’s court or an arbitration institution to reduce them appropriately.

Article 29 of the “Interpretation (II) of the Supreme People’s Court on Several Issues Concerning the Application of the Contract Law of the People’s Republic of China”: If a party claims that the agreed-upon liquidated damages are excessively high and requests a reasonable reduction, the people’s court shall, based on the actual loss incurred, take into account comprehensively such factors as the performance of the contract, the degree of fault of the parties, and the expected benefits, and make a ruling in accordance with the principles of fairness and good faith. Where the liquidated damages agreed upon by the parties exceed 30 percent of the loss caused, they may generally be deemed to constitute “excessively higher than the loss caused” as stipulated in Paragraph 2 of Article 114 of the Contract Law.