Casedescription:

Inthe second half of 2009, Wu and Zheng agreed to jointly fund theestablishment of Shanghai XX Industrial Co., Ltd., and in December of the same year, Wu paid Zheng an investment of RMB50,000.

OnJanuary 14, 2010, Shanghai XX Industrial Co., Ltd. was approved forestablishment by the Jinshan Branch of the Shanghai Administration ofIndustry and Commerce, inwhich Zheng and his son were the shareholders of the company. OnMarch 12 of the same year, Shanghai XX Industrial Co., Ltd. issued areceipt in the name of the companyto Wu, which reads “I,Zheng X, have now receiveda sum of RMB 50,000 from Wu to invest in Shanghai XXIndustrial Co., Ltd.”. The signature is affixedwith the official seal of Shanghai XX Industrial Co., Ltd.

OnDecember 28, 2011, Wu (asthe Plaintiff) filed alawsuit against Shanghai XX Industrial Co., Ltd. (as the Defendant) to the Putuo District People’sCourt of Shanghai,demanding Shanghai XX Industrial Co., Ltd. toreturn its investment money and interest.

Zhengattended the first court hearing as the legal representative ofShanghai XX IndustrialCo., Ltd. and denied that the Wu was a shareholder of the company.Later, after the judge explained the need to hire an attorney agent for the litigation, Zhou Haibo was appointed torepresent the case.

Afteraccepting the commission, Zhou Haibo has made the following analysis after consulting the case files and corresponding laws and regulations, and retrieved the trialtranscript of Zheng’sparticipation in the first court hearing:

1. Is there a legal basis forthe plaintiff Wu to request the return of his investment?

Oneof the pieces of evidence submitted by Wu to thecourt was the receipt issued by ShanghaiXX Industrial Co., Ltd. toWu on behalf of the company, which reads “I, Zheng X, have nowreceived a sum of RMB 50,000 from Wu to invest in Shanghai XXIndustrial Co., Ltd.”,with the official seal ofShanghai XX Industrial Co., Ltd. affixed at the place of signature.

Accordingto the Article 1 of the Provisions ofthe Supreme People’s Court on Several Issues Concerningthe Application of the Company Law of the People's Republic ofChina (III), “Whoeverconcludes the articles of association for the purpose of establishinga company, subscribes to capital contributions or shares and performsthe duties of establishing the company shall be deemed as a promoterof the company, including the shareholders at the time ofestablishment of a limited liability company.” In the process of founding the company, Wu’s payment of investmentmoney to Zheng should be recognized as the capital subscription to the company, asevidenced by the receiptissued by the defendant to the plaintiff on behalf of the company onMarch 12, 2011, after its establishment. Therefore,the plaintiff Wu should be an actual contributor to the defendant. According to the Company Law, contributorsand shareholders can only request the return of their capitalcontributions after the liquidation of the company basedon the actual financialsituation of the company. Giventhat Wu requested the defendant to return the investment money, andthe investment money is not a loan legal relationship, the investmentmoney therefore does not belong to the loan. The risk is borne by theinvestors themselves and they cannot claim back their investment dueto the loss of the project, which is not justified by law.

2. Did Zheng’sdenial at the court’sfirst hearing that the plaintiff Wu was not a shareholder of thedefendant Shanghai XX Industrial Co., Ltd. constitute a statement against him?

ZhengX misunderstood the facts legally. As Zheng believed that the plaintiff Wu is an investor, but did not know that such actualcontributor in the law is recognized as a dormant shareholder. Zheng believed that only those registered with the business sector are shareholdersof the company. Andbecause the plaintiff Wu also identified himself as a contributor toShanghai XX IndustrialCo., Ltd., together withthe receipt provided by him, so the statementdoes not constitute a statement against him.

Accordingto the Article 25 of the Provisions ofthe Supreme People’s Court on Several Issues Concerningthe Application of the Company Law of the People's Republic ofChina (III), “Where the actualcontributor of a limited liability company enters into a contractwith a nominal contributor, reaching agreement that the actualcontributor should make capital contributions and enjoy the return oninvestment, and the nominal contributor should be the nominalshareholder, and there are disputes between the actual contributorand the nominal shareholder over the validity of the contract, if itdoes not fall under any of the circumstances as prescribed by law,the people’scourt shall determine the contract valid.” Although there wasno written contract between the Wu and Zheng, all the evidences show that Wu and Zheng did have an agreement between them, and theoral agreement is also protected by law, sothe conduct between the Wuand Zheng is protected by law. Wu should be the actualcontributor of Shanghai XX IndustrialCo., Ltd. as a dormant shareholder, and Zheng is the nominal shareholder.

Insummary, there is no legal basis for the Wu’sclaim and shouldbe rejected.

Thecourt finally adoptedthe lawyer’sopinion and suggested the plaintiff Wu to withdraw the lawsuit duringthe third court hearing. Wu also agreed to withdrawthe lawsuit and went through the procedure of withdrawal.

Article written by: Zhou Haibo