King & Capital's litigation partner Liu Yang recently won a significant victory at appealing and reversing the Beijing Second Intermediate People's Court’s decision to suspend an asset preservation order (the "Order"), which Liu had obtained for King & Capital's client from a lower court. On appeal to the High People's Court of Beijing, Liu successfully proved that the funds held in a non-party limited partnership bank account were, in fact, due and owing to the defendant of this litigation, and thus subject to the Order.
The litigation win is significant. This win assures Liu's client that the defendant's assets - funds of RMB 90 million- are safeguarded pending a trial as Liu continues to litigate the breach of contract claim. Also significant is that the win has a referential value for those seeking asset preservation orders. Notably, the high court has determined the funds, which are the distributable gains owed to defendant (a limited partner in the limited partnership) and held in the limited partnership's bank account, are not the property of the partnership entity. Therefore, a court can freeze these funds pending the litigation outcome.
In August 2018, Liu had initially obtained the Order from the Beijing Second Intermediate Court. The Order had frozen funds of RMB 90 million held in the bank account by a limited partnership (the "Limited Partnership"), not a party in this litigation. The Limited Partnership principal investor, though, is the defendant (the "Defendant") as it owns a 99.9% interest and is the limited majority interest partner. Liu has claimed the funds are the distributable gains due to and belonging of the Defendant. Thus, Liu argued, the Limited Partnership has no interest in these funds.
Subsequently, after the funds were ordered frozen, the Limited Partnership had objected to the Order maintaining these belonged to the partnership. At the trial of the first instance, the Beijing Second Intermediate People's Court had ruled that the funds in the account belonged to the Limited Partnership and suspended the Order. It reasoned that Article 20 of the Partnership Enterprise Law provides that all profits and any other property lawfully obtained by the partnership is partnership property.
On appeal to the High People's Court of Beijing, Liu has argued that the funds maintained in the Limited Partnership bank account were not the Limited Partnership's property interest. Liu explained that the Beijing Second Intermediate People's Court had neglected to analyze the true nature of the funds. The Court had not focused on the real character of the funds instructive under Articles 158 of the Civil Procedural Law of the People's Republic of China and Article 51, Provisions of the Supreme People's Court on Several Issues Concerning Enforcement by the People's Courts (for Trial Implementation).?Article 158 authorizes a court to enact property preservation measures on earnings due a debtor. Article 51 further allows a court to prohibit a person due to income from the enterprise to withdraw it as well as banning the enterprise from paying it over to such a person. Both Articles focused on the preservation of funds due to the Defendant.
Liu further had shown the following evidence:
(1) The Limited Partnership Agreement provides that if the partnership distributes gains on its assets, the partnership pays its taxes, fees, operating expenses, preparation costs and other expenses.
(2) Article 41 of the Limited Partnership Agreement stipulates that the partnership shall distribute gains obtained from any of its investment projects within three business days after receipt.??
(3) The Side Agreement to the Limited Partnership Agreement provides the partnership first pay off the Defendant's loan made to a trust plan before paying the management fee from these investment gains.
(4) In July 2018, the Limited Partnership earned and received investment gains of 270 million yuan with the funds deposited into its bank account.
(4) Before the court entered the Order, the Limited Partnership distributed more than 180 million yuan, of which it distributed more than 80 million yuan to the Defendant. There remained in the bank account, however, further funds of 90 million yuan.?
Based on the evidence, Liu successfully argued:
(1) the Side Agreement, which stipulates the Limited Partnership preferentially pay the Defendant's trust fund loan from the investment gains ahead of the management fee sufficiently proves the rights and interest in the bank account funds are due and belong to the Defendant and can be ordered preserved.
(2) the Limited Partnership had distributed more than 80 million yuan from its bank account to Defendant, indicating it began the process of distributing investment gains due Defendant under Article 41 of the Limited Partnership Agreement.?
(3) There remained funds of 90 million yuan in the bank account available for distribution, owing and due to Defendant.
(4) Defendant held a majority interest of 99.9% as the limited majority interest partner of the Limited Partnership. Thus, based on its ownership percentage, Defendant held an acquirable interest in these remaining bank account funds for these are due and owing it.??
Therefore, because these funds of 90 million yuan were due Defendant, the court can order the Limited Partnership bank account frozen.??The High People's Court of Beijing agreed with Liu’s contentions made on the appeal. The court revoked the ruling of the Beijing Second Intermediate Court. The Order freezing funds over 90 million yuan remains in effect.
King & Capital's attorney Liu Yang and her litigation team exemplify our firm's attorneys who possess and exercise diligence, strong work ethics, and keen analytical skills necessary to protect the client's interests and win in significant litigation. Here, the goal of preserving the Defendant's property, subject to the client's interests, was finally achieved, and the client's legitimate rights and interests were successfully maintained.