Cassation judgment No. 03/HDTP-KT dated april 26, 2005 regarding dispute over joint venture agreement

THE SUPREME PEOPLE’S COURT  

CASSATION JUDGMENT NO. 03/HDTP-KT DATED APRIL 26, 2005 REGARDING DISPUTE OVER JOINT VENTURE AGREEMENT

On April 26, 2005, the cassation trial was conducted at the office of the Supreme People’s Court to hear the business case of dispute over joint venture (hereinafter referred to as JV) agreement between:

Petitioner:  YU RIH LIH CO.LTD (Taiwan)

Representative: Mrs. Uong Thoai Tran, residing at 490/29/12, Nguyen Tri Phuong, ward 9, district 10, Ho Chi Minh City.

Respondent:  Trien Hung production and trade limited liability company

Representative: Mr. Huynh Trien Bang, residing at 267A, Nguyen Thi Nho, ward 16, district 11, Ho Chi Minh City.

Person with related interests and obligations:

Mrs. Luong Nu, residing at 267A, Nguyen Thi Nho, ward 16, district 11, Ho Chi Minh City.

FINDING THAT

Trien Hung paper packaging joint venture, incorporated in under the investment license No. 10/GP-LA dated June 1, 2001 of the People’s Committee of Long An province, including:

Vietnamese party: Trien Hung production and trade limited liability company.

Foreign party: YOU RIH LIH CO.LTD (Taiwan).

with the business line of production and trade in carton packaging.

Registered investment capital of the JV: USD 500,000.

Legal capital: USD 500,000.

in which Vietnamese party contributed USD 250,000, accounting for 50% of legal capital by the right to use buildings and machinery.

The foreign party contributed USD 250,000, accounting for 50% of legal capital in cash.

The operation duration of the joint venture is 20 years since the date on which the investment license was issued.

This JV has operated for more than one year, JV parties have involved in the serious dispute. They submitted a petition to the People’s Committee of Long An province requesting dissolution of the JV.

On August 23, 2002, the People’s Committee of Long An province issued the Decision No. 2749/QD-UB to cease operation of business of Trien Hung paper packaging joint venture; request JV parties to establish enterprise liquidation board as prescribed in Government's Decree No. 24/2000/ND-CP dated July 31, 2000. Within 30 days as prescribed in Decree No. 24/2000/ND-CP, JV parties cannot establish a liquidation board.

On August 3, 2002, YU RIH LIH CO.LTD filed a claim to specialized agencies and the People’s Court of Long An province stating that: Trien Hung paper packaging joint venture has run illegal business and maintained unclear bookkeeping, so request dissolution of the JV; with the resolution as follows: -making clear statements of profit and loss, valuation of assets, if the Taiwanese party or Vietnamese party wishes to acquire the JV, the JV shall be put on auction.

On September 2, 2002, YU RIH LIH CO.LTD filed a lawsuit petition with the People’s Court of Long An province requesting the resolution of the case.

On September 26, 2002, the People’s Court of Long An province sent the Official Dispatch No. 319/TA to the People’s Committee of Long An province and the Department of Planning and Investment of Long An province requesting a clarification if the People’s Committee of Long An province establish a liquidation board in order for the court has basis to resolve the case. On October 10, 2002, the People’s Committee of Long An province sent the Official Dispatch No. 3600/CV-UB to the People’s Court of Long An province notifying that the People’s Committee of Long An province does not establish a liquidation board and accept that JV parties will transfer their case file to the court for settlement.

On October 17, 2002, the People’s Court of Long An province accepted the case.

On April 25, 2003, the People’s Court of Long An province issued the Decision No. 06 on adoption of temporary emergency measure which is distraint of assets of the JV.

In the First Instance Economic Judgment No. 01/KTST dated October 14, 2003, the People’s Court of Long An province judged:

Accept the petition of Mr. Yu Stung Ming and Mr. Huynh Trien Bang for termination of the joint venture agreement dated April 1, 2001 between Trien Hung production and trade limited liability company and YU RIH LIH CO.LTD (Taiwan).

Accept the request of Mr. Yu Stung Ming for withdrawal of capital by receiving the entire assets of Trien Hung paper packaging joint venture and forcing Mr. Yu to repaying the JV debts to the following enterprises and individuals:

1- Mrs. Luong Le Ha: VND 206,503,150

2- Hong Phat facility: VND 300,000,000

3-Trinh Quan Phu: VND 60,000,000

4- Cung Van Hung: VND 150,000,000

5- Tan Phu Thinh facility: VND 198,388,690

6- Van Phat Co., Ltd: VND 200,000,000

- Compel Mr. Huynh Trien Bang to reimburse Mr. Yu Stung Ming the capital after subtraction below: VND 1,646,915,645.

- Mr. Yu Stung Ming is obliged to complete paperwork to terminate the joint venture agreement with Trien Hung production and trade limited liability company with regulatory agencies and register assets and land as per the law.

Uphold the decision to adopt temporary emergency measure No. 06 dated April 25, 2003 of the People’s Court of Long An province until the judgment has been completely enforced.

- Split the amount which Long Ich company pays to Mr. Yu to cover the cost of machinery for the JV under the contract for machinery purchase dated March 25, 2002 in order for Mr. Bang and Mr. Yu to contact directly to Vinh Trung (Taiwan) to resolve.

Split the claim amount of the Judgment No. 02/KTST dated June 18, 2002 and distribute Mr. Bang and Mr. Yu a half of the remaining amount of VND 85,525,6000 each.

Handover the carton in stock of Trien Hung JV and in stock of Tuong Vi facility to JV parties for self-settlement and split this amount or goods into halves.

- Compel Mr. Bang to transfer all of his private assets out of the premises of Trien Hung JV to hand over the assets of the JV to Mr. Yu Stung Ming after the judgment becomes legally effective.

First instance economic court fee: Mr. Huynh Trien Bang has to pay VND 28,689,000.

Mrs. Luong Nu has to pay VND 30,500,000.

On October 17, 2003, Mr. Huynh Trien Bang appealed the entire First Instance Judgment.

On October 17, 2003, Mrs. Luong Nu made an appeal that the land and buildings are privates not related to the JV.

In the Appellate Economic Civil Judgment No. 10/KTPT dated March 16, 2004, the Appellate Court of People’s Supreme Court in Ho Chi Minh City judged:

- Correct partial First Instance Economic Judgment; recognize the agreement of Mr. Yu Stung Ming to reimburse Mr. Bang USD 26,468.35 at the judgment enforcement stage.

- Other decisions are upheld.

After the case was tried under appellate procedure, Trien Hung paper packaging joint venture and Mrs. Luong Nu has filed many claims for retrial under cassation procedure.

In the appeal decision No. 04/2004/KT-TK dated December 13, 2004 against the appellate economic judgment No. 10/KTPT dated March 16, 2004 of the Court of Appeal of the Supreme People’s Court in Ho Chi Minh City judged, the Chief Justice of the Supreme People's Court judged:

[1]- Regarding proceedings:

On August 23, 2002, the People’s Committee of Long An province issued the Decision No. 2749/QD-UB to cease operation of business of Trien Hung paper packaging joint venture; request JV parties to establish enterprise liquidation board and liquidate the enterprise as prescribed in Government's Decree No. 24/2000/ND-CP dated July 31, 2000. Upon expiry of 30-day period, pursuant to Decree No. 24/2000/ND-CP, JV parties failed to establish a liquidation board and on October 10, 2012, the People’s Committee of Long An province sent the Official Dispatch No. 3600/CV-UB to the People’s Court of Long An province notifying the People’s Committee of Long An province that it does not establish the liquidation board, accepting that JV parties may bring the case to the court; hence, YU RIH LIH CO.LTD filed a lawsuit with the People’s Court of Long An province to resolve the case.

The People’s Court of Long An province, pursuant to Article 12 of the Ordinance on resolution of economic cases and Article 122 of Government's Decree No. 24/2000/ND-CP, accepted the case. This acceptance was under its jurisdiction.

[2]- With reference to content:

The Court of First Instance and the Court of Appeal, upon settling the case, did not determine correctly that JV parties have liquidated assets of the enterprise for dissolution of the JV, so they did not base on the investment license and regulations on foreign investment to settle the dissolution of enterprises as prescribed in Article 40 of Government's Decree No. 24/2000/ND-CP but resolve it as a dispute over business contract or dispute between members of the company. This decision was wrong.  In specific:

a- With reference to determination of stakes:

Clause 20 Article 2 of the Law on Foreign Investment in Vietnam stipulates that “stake” means the capital contributed by each party to the legal capital of the enterprise.

Clause 3 Article 34 of Government's Decree No. 24/2000/ND-CP dated July 31, 2000 stipulates that: “The restructuring of investment capital and/or legal capital as well as the change of the percentages of capital contribution by the joint-venture parties shall be decided by the Managing Board of the enterprise and approved by the investment licensing agency”

Article 10 of the Law on Foreign Investment in Vietnam stipulates that “the parties shall distribute profits and incur risks according to their rates of stakes.”

According to the joint venture agreement between Trien Hung production and trade limited liability company and YU RIH LIH CO.LTD dated April 1, 2001 and the investment license No. 10/GP-LA dated June 1, 2001 of the People’s Committee of Long An province, Trien Hung paper packaging joint venture has the legal capital of USD 500,000, in which each JV party contributes USD 250,000; this is the basis for division of remaining assets of Trien Hung paper packaging joint venture. Until dissolution of the JV, it has not had any change of its legal capital. The fact that Mr. Yu Stung Ming transferred extra USD 250,000 to the foreign currency account of Trien Hung paper packaging joint venture (from October 18, 2001 to March 19, 2002) for business operation cannot be deemed as additional contribution to the legal capital, because the increase of legal capital must conform to Clause 3 Article 34 of Government's Decree No. 24/2000/ND-CP dated July 31, 2000; thus, there is only valid ground for determining that, until the first-instance trial, the legal capital of the JV is still USD 500,000, each JV party contributes USD 250,000.

The Court of First Instance and the Court of Appeal were ungrounded when determining that each JV party contributed USD 380,000 only based on the capital contribution agreement dated November 1, 2001 (or November 1, 2000); because this agreement has no term or condition that each JV party will contribute USD 380,000 but JV parties only agreed that the fixed capital of the JV is USD 380,000 to be contributed by both JV parties, in which Trien Hung party will contribute USD 250,000 by buildings and machinery and Taiwan party will contribute USD 130,000. Moreover, this agreement was not registered with the foreign investment cooperation authority.

b- Division of remaining assets of Trien Hung paper packaging joint venture:

Article 21 of the Charter of the JV indicates that: “Upon termination of operation, the remaining assets of the JV, after payment of all liabilities as prescribed in Vietnamese law, shall be distributed according to the each party's rate of contribution to the legal capital. Hence, in order to resolve the case, it is necessary to identify the value of all remaining assets of the JV and distribute each party according to the rate of 50/50.

With reference to right to use 3,546m2 of Mrs. Luong Nu (Mr. Huynh Trien Bang’s wife), the Court of First Instance and the Court of Appeal were wrong when determining it as an asset of the JV and allowing the foreign party to claim and register it as its property; because:

- The land use right certificate No. 1470/QSDD dated October 6, 1999 associated with this piece of land was issued to Mrs. Luong Nu by the People’s Committee of Ben Luc district, Long An province; buildings were constructed on this piece of land and the certificate of building ownership No. 680/CN-SXD on December 29, 1999 by Department of Construction of Long An province on behalf of the President of the People’s Committee of Long An province was issued to Mrs. Luong Nu; the construction area is 708.5m2.

- Mrs. Luong Nu is a member of Trien Hung production and trade limited liability company (this company has 2 members: Mr. Huynh Trien Bang and Mrs. Luong Nu). According to the business certificate No. 500200025 dated December 21, 2000 of the Department of Planning and Investment of Long An province, the charter capital of this company is one billion dong, in which Mrs. Luong Nu contributed VND 400,000,000 and Mr. Bang contributed VND 600,000,000; there is no document stating that Mrs. Luong Nu contributed the right to use 3,546m2 as the capital to Trien Hung production and trade limited liability company.

- According to the application for issuance of investment license and the investment license, Trien Hung production and trade limited liability company contributed USD 250,000 to Trien Hung paper packaging joint venture, in specific: USD 150,000 of machinery, equipment, USD 100,000 of 708.5m2 of buildings; there is no document stating that Mrs. Luong Nu accepting that she would contribute the right to use 3,546m2 as capital to the JV.

- Moreover, pursuant to the Law on Foreign Investment in Vietnam, the Land Law 1993 and guiding documents, the State does not permit a privately-owned company to contribute land use right to a joint venture with a foreign company; the Official Dispatch No. 5793/BKH-PC dated September 14, 2004 of the Ministry of Planning and Investment in reply to the Official Dispatch No. 86/2004/KT dated August 13, 2004 of the Supreme People’s Court states that: “The foreign party may only receive land use right through land lease by the state”. Thus, the Court of First Instance and the Court of Appeal including the value of the piece of land in the name of Mrs. Luong Nu of VND 2,304,900,000 in the remaining value of the JV and allowing the foreign party to receive the land use right goes against the law and land management policy of the state.

Therefore, the Court of First Instance and the Court of Appeal was wrong when determining the remaining value of Trien Hung paper packaging joint venture to distribute it according to each party’s contribution rate.

Upon incorporation of Trien Hung paper packaging joint venture, the Vietnamese party contributed capital by buildings and machinery, the foreign party contributed capital in cash. So, when liquidating assets to dissolve Trien Hung paper packaging joint venture, the foreign party proposed to receive all buildings, land, and machinery; but the Vietnamese party rejected; the Court of First Instance and the Court of Appeal’s failure to let JV parties agree on distribution of assets but hand over all of them to YU RIH LIH CO.LTD was deemed improper.

According to the above analysis, the Court of First Instance and the Court of Appeal’s resolution of asset liquidation after termination of operation of Trien Hung paper packaging joint venture was considered incorrect and incomplete. Request the Council of Judges of the Supreme People's Court to review the case under cassation procedure towards quashing the Appellate Economic Judgment No. 10/KTPT dated March 16, 2004 of the Court of Appeal of the Supreme People's Court in Ho Chi Minh City and First Instance Economic Judgment No. 01/KTST dated October 14, 2003 of the People’s Court of Long An province. Remand the case back to the People’s Court of Long An province for retrial under general procedures.

In Conclusion No. 02/VKSTC-AKT dated December 31, 2004, the Chief Procurator of the Supreme People's Procuracy considered that the protest of the Chief Justice of the Supreme People's Court was necessary and proposed to the Council of Judges of the Supreme People's Court, pursuant to Clause 3, Article 279; Clause 1 and 2 Article 299 of the Civil Procedure Code, overturn the foregoing Appellate Judgment and First Instance Judgment, and then remand the case file back to the People's Court of Long An province for re-trial in the first instance proceedings.

CONSIDERING THAT

Pursuant to Article 10 of the Law on Foreign Investment in Vietnam and Article 21 of the Charter of Trien Hung paper packaging joint venture, in order to liquidate assets upon dissolution of Trien Hung paper packaging joint venture, it is necessary to determine the remaining assets of the JV, after payment of all liabilities as prescribed in Vietnamese law and determine the contribution rates of each JV party to distribute the remaining assets based on these rates as per the Vietnamese law.

Pursuant to Article 2 of the Law on Foreign Investment in Vietnam and Article 34 of Government's Decree No. 24/2000/ND-CP dated July 31, 2000, the rates of contribution to legal capital of JV parties shall be decided by the Board of Directors and approved by the investment licensing agency. According to the documents and evidence available in the case file presented by parties and collected by the courts (such as application for issuance of investment license, joint venture agreement, investment license, etc.), there are justifiable grounds to determine that the legal capital of Trien Hung paper packaging joint venture is USD 500,000, in which Vietnamese party (Trien Hung production and trade limited liability company) contributed USD 250,000 (including USD 150,000 of machinery and USD 100,000 of buildings on 708.5m2) and Taiwanese party (YU RIH LIH CO.LTD) contributed USD 250,000 in cash to working capital. So, the rate of contribution to the legal capital of each party is 50%.

The Court of First Instance and the Court of Appeal were ungrounded when determining that each JV party contributed USD 380,000, in which Vietnamese party contributed land use right of 3,546m2, only based on the report enclosed with the “contribution agreement” dated November 1, 2001 (or November 1, 2000) and the shareholder meeting minutes of the JV dated May 14, 2002 between Mr. Yu Stung Ming and Mr. Huynh Trien Bang regarding dissolution of the JV with discussion about the value of the land use right of 3,546m2 ( in the name of Mrs. Luong Nu) with 708.5m2 buildings thereon. Because the “contribution agreement” concludes that: “Both parties confirmed the stakes as follows:  Vietnamese party and Taiwanese party both contribute: USD 380,000

working capital: USD 120,000

Total:  USD 500.000”

rather than each JV party contributed USD 380,000; otherwise, according to the investment license, the investment license authority only approves and certifies that the legal of Trien Hung paper packaging joint venture is USD 500,000 and each party contributes USD 250,000. Thus, it needs further verification to clarify specific amounts and assets which JV parties contributed to the JV, the portions which are not capital contribution to resolve the case as per the law.

- The Court of First Instance and the Court of Appeal were ungrounded when determining that the remaining assets of Trien Hung paper packaging joint venture include the right to use 3,546m2 in the name of Mrs. Luong Nu in the land use right certificate No. 1470/QSDD dated October 6, 1999 issued by the People’s Committee of Ben Luc district, Long An province and handing over this land use right to the Taiwanese party.  Because: Because the Court of First Instance and the Court of Appeal has not specified that if the land use right of 3,546m2 of Mrs. Luong Nu was previously contributed to Trien Hung production and trade limited liability company. If yes, whether Trien Hung production and trade limited liability company would contribute this land use right to the JV thereafter. If yes, whether the contribution of land use right to the JV was made in accordance with procedures in Article 38 of Government's Decree No. 17/1999/ND-CP dated March 29, 1999 on guidelines for the Land Law 1993; and whether it has been recognized as the asset of the JV by the competent authority.

During the lawsuit settlement process, Mr. Huynh Trien Bang and Mrs. Luong Nu proposed to claim the remaining assets of the JV (including buildings) and reimburse the Taiwanese party the equivalent value and opposed the court’s decision to hand over the land use right of 3,546m2 to the foreign party because it was not contributed as capital to the JV; but the Court of First Instance and the Court of Appeal still decided to hand over it to the foreign party. These decisions were wrong and against Article 85 of Government's Decree No. 24/2000/ND-CP dated July 31, 2000 and Clause 4 Article 40 of Government's Decree No. 17/1999/ND-CP dated March 29, 1999.

Therefore, it is necessary to quash the above First Instance Judgment and Appellate Judgment, and then remand the case back to the Court of First Instance for retrial to determine correctly the contribution rates, debts, value of remaining assets, etc. of the JV and distribute the remaining assets according to their actual rates of contribution to the JV in accordance with Article 41 and Article 43 of Government's Decree No. 24/2000/ND-CP dated July 31, 2000 and applicable law.

According to facts and matters, pursuant to Clause 3 Article 297, Clause 1 Article 2 and Article 299 of the Civil Procedure Code;

HEREBY DECIDES

Quash the Appellate Economic Judgment No. 10/KTPT dated March 16, 2004 of the Court of Appeal of the Supreme People's Court in Ho Chi Minh City and First Instance Economic Judgment No. 01/KTST dated October 14, 2003 of the People’s Court of Long An province.

Remand the case file back to People’s Court of Long An province for re-conducting the first-instance trial as per the law.

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- Grounds for quashing the First Instance Judgment and Appellate Judgment:

1. Certain important facts in the case need further clarification, such as: stakes, debts, value of remaining assets of the JV;

2. The decisions of the Court of First Instance and the Court of Appeal go against Article 85 of Government's Decree No. 24/2000/ND-CP dated July 31, 2000 and Clause 4 Article 40 of Government's Decree No. 17/1999/ND-CP dated March 29, 1999.

- Reasons for overturning the First Instance Judgment and Appellate Judgment:

1. Inadequacies in identification of evidence;

2. Inadequacies in application of regulations of the Law on Foreign Investment in Vietnam, guiding documents and Government's Decree No. 17/1999/ND-CP on guidelines for the Land Law 1993”.