Defendant's Statement
Presiding Judge, Judges:
In the process of Guangdong Flying Dragon Group acquiring 40% equity interest in Sichuan Chengdu Lianyi Group, was there any intention of Fraud? Was Guangdong Flying Dragon Group intended will to provide mutual beneficial development of business cooperation with each other or intended illegal possession of the other party's property? On this issue, we hold different grounds from the public prosecutor. After the court cross-examination, numerous evidence show that in the whole equity acquisition process, Guangdong Flying Dragon Group did not harbour any intention of fraud; the purpose of equity acquisition was to seek business development, rather than illegal possession of the other party's property. Therefore, we believe that the public prosecutor's allegation on Guangdong Flying Dragon Group and Defendant Zeng Hanlin constituting a contract fraud was groundless.
1. Guangdong Flying Dragon Group did not commit fraud
The public prosecutor assumed that in the event of acquiring 40% equity stake in Sichuan Chengdu Lianyi, Guangdong Flying Dragon Group concealed the company's liabilities information and provided false financial audit report; in the process of Guangdong High-speed Passenger Ferry transferring 75% equity stake in Guangdong Flying Dragon High-speed, Guangdong Flying Dragon Group concealed the fact that their main property had been mortgaged and the corresponding equity has been pledged as collateral; in the event when Chengdu Lianyi was pressing Guangdong Flying Dragon Group for the equity buyout repayment, forged bank statements, wire transfer documents and other materials to stall the creditors. These acts constitute fraud. We believe these entire serious allegation from the public prosecutor lack factual basis, is a serious deviation from the objective truth.
(A) Did Guangdong Flying Dragon Group committed a fraud in the acquisition of 40% equity stake:
i. If the audit report was genuine.
During the trial, the public prosecutors insisted that KPMG audited report for Guangdong High-speed Passenger Ferry was fictitious. Reason being that the audited report does not record Guangdong High-speed Passenger Ferry mortgaging their ship. The audit report was produced on 30 November 1996. Report had reflected the financial status of Guangdong High-speed Passenger Ferry from 31 December 1994 to 31 December 1995. The report had detailed and specifically accounted that as at the end of 31 December 1995 of the financial closing year, Guangdong High-speed Passenger Ferry company's liabilities amounted to 13.821 million yuan, net assets amounted to 81.586 million yuan. These figures are real and objectively reflect the financial situation of the company. Although the public prosecutor insisted that the audit reports did not truly reflect the actual financial condition of the company, and is fictitious, but the public prosecutor has not been able to provide any relevant evidence to prove the fiction and fabricated part of the audit report. This kind of false claim in court, without proper data and empty accusation obviously cannot convince anyone, and cannot be established. Although the audit reports did not record the company's mortgage situation, but all the numbers reflected there are true representation of the company's assets and liabilities status. There are no legal or institutional requirements on any audit report to compulsory record the company's asset mortgage situation, therefore the lack of record of the company's asset mortgage situation is not erroneous and above reproach, we cannot consider the report as fabricated simply because of the lack of collateral status in the report.
Public prosecutors also presumed that the financial statements submitted by Guangdong Flying Dragon Group was fallacious, apart from the verbal comments of Li Kai and Wen RuPei "The financial report must be fake", a no legal basis assumption, a very subjective assessment, public prosecutor had also failed to put forward any relevant evidence to support their accusations. A subjective assessment and personal evaluation does not constitute as evidence to judge an enterprise financial status. In the absence of objective evidence reflecting the financial status of the company and relevant documentary evidence to support their indictment, no one has substantial reason to deny the objectivity and reliability of the aforementioned audited reports and financial statements.
ii. If the liabilities status was concealed.
Public prosecutors assumed that in the process of the acquisition, Guangdong Flying Dragon Group cover up their liabilities conditions. During the cross-examination, public prosecutors presented the Guangzhou Intermediate People's Court statistical data of Guangdong Flying Dragon Group and related companies debt list and any other debts in progress, plus the list of witnesses testimony from Li Kai, Zhang Zhaohui, intending to explain at the point of acquisition (ie, October 1997) Guangdong Flying Dragon Group has been heavily indebted and disguising the truth. But after cross-examination, we found that in the aforementioned statistical data, out of the 17 debt items that Guangzhou Intermediate People's Court was executing, which amounted to more than 80 million yuan, there was a phenomenon duplication of more than 36 million of debt (first, second, third items and fifteenth, sixteenth, seventeenth items are all double-counted). In the statistical data for the 50 debt items that the Guangzhou Yuexiu Court was executing, which amounted to more than 47 million, there are 9.91 million yuan of debt that were duplicated (the eighth, ninth and tenth items, eleventh are all double-counted). Moreover, in the list of these statistical data, we also found that the Guangzhou Intermediate People's Court statistics data had included debt of Guangdong Flying Dragon Group that was in executive process from 1997 to 2005. This shows that in the statistical data presented, there was a part of the debt that had arises after the acquisition. Obviously, these statistical data are not true representation of Guangdong Flying Dragon Group financial situation before acquiring the 40% equity stake of Chengdu Lianyi in October 1997. Evidence presented by the public prosecutor is unconvincing, lack of objectivity with no appropriate proof of force. When the public prosecutor was counteract with existing objective fact of duplication by the defendant's counsel, the public prosecutor alter the original statement, and deliver the statement as follows: According to the evidence gathered by the public prosecutor, the debt liabilities by Guangdong Flying Dragon Group and related companies at the point of 1997 equity stake acquisition amounted to 30 million yuan. Regarding the testimonies of Zhang Zhaohui and Li Kai cited by the public prosecutor, the defendant's counsel has reasons to believe that Zhang and Li's statement on Guangdong Flying
Dragon Group total debt (Zhaohui said the assets of corporate assets was 56 million; Li said corporate debt was 1.2 billion, 200% debt ratio) and a series of documentary evidence cited by the public prosecutor demonstrated serious discrepancies and incongruity as compared to the asset assessment report produced by the defendant's counsel. Thus, the significant flaws in Zhang and Li's testimonies on the corporate debt with insufficient evidence render them null and void. Meanwhile, the defendant's counsel emphasized that the assets and liabilities situation of an enterprise should be determined by relevant financial documents and other documentary evidence; it must not be determined by a person's mere statement to be use as a judging standard. As mentioned earlier, since all evidence declared by the public prosecutor exhibit serious flaws on their own, they do not adequately reflect the assets situation of Guangdong Flying Dragon Group at that time and was not even substantial enough to negate the audit report, asset evaluation report and a series of documentary evidence put forward by the defendant's counsel. Inability to prove the company actual debts owing and failure to negate the relevant documentary evidence presented by the defendant's counsel, therefore, the public prosecutor allegation on Guangdong Flying Dragon Group concealing its company liabilities situation during the equity stake acquisition of Chengdu Lianyi Group cannot be established.
During the debate, the public prosecutor proclaim that when the defendant Zeng Han Lin was making introduction to Chengdu Lianyi Group on his company assets condition, he mentioned that the company has sufficient cash flow. Till date, except for the verbal confirmation from this Chengdu Lianyi group of executives who had reported this case, there are no further evident to sustain that. Needless to say, as both the case reporting side and the alleged victim, the several Chengdu Lianyi Group executives has personal interest associated with this case, their biasness ascertain their adversative authenticity of their testimonies, their credibility is relatively lower as well, without the support of other factual evidence, the relatively low credibility, such one-sided oral evidence cannot be identified as evidence of fact.
Defendant's Counsel ascertain that the audit report and other relevant materials submitted to Chengdu Lianyi Group by Guangdong Flying Dragon Group in the acquisition of 40% equity stake in Chengdu Lianyi as real and effective. These materials truly reflect the present assets condition of the enterprise at that time. Therefore, at that stage, Guangdong Flying Dragon Group did not instigate any fraud at all.
(B) Did Guangdong Flying Dragon Group instigates any fraud during the transfer of 75% stake:
1. On the stake ratio.
Public prosecutors assumed that Guangdong High-speed Passenger Ferry holds only a 10% stake in Guangdong Flying Dragon High-speed (during cross-examination, it was change to a 51% stake), and denied the fact of the Chinese shareholders of Guangdong High-speed Passenger Ferry holding 75% stake in Guangdong Flying Dragon High-speed, thus claiming that Guangdong Flying Dragon High-speed had committed a fraud during the signing of 75% equity transfer to Chengdu Lianyi Group. Public prosecutor basis is that Guangdong High-speed Passenger Ferry equity ratio in Guangdong Flying Dragon High-speed was adjusted to 75% without the approval of relevant authorities is considered as an unauthorized act, so the original equity ratio should be 51%. We believe that, on 26 February 1998, Guangdong Kexing Certified Public Accountants had produced a verification report issued by Guangdong Science Council (98) External Test No. 011 had clearly illustrate that Guangdong High-speed Passenger Ferry as the Chinese stakeholder had adjusted its investment funding in Guangdong Flying Dragon High-speed to 75% and was approved and gained consent under Guangdong Foreign Economic and Trade Commission (1997) No.416. During the cross-examination, the public prosecutor pointed that through the investigation on Guangdong Foreign Economic and Trade Commission (1997) No.416, the approved contents recorded Guangdong High-speed Passenger Ferry holds 51% stake in Guangdong Flying Dragon High-speed, and not the approval consent of the Chinese stakeholder 75% equity approval, and having doubts on approval in the aforementioned Guangdong Kexing Certified Public Accountants verification report stating the No. 416. In view of this, if the Court deems it necessary, we would request the Court to perform an investigation on the verification report mentioned by Guangdong Kexing Certified Public Accountants. To backtrack, even if the approval report mentioned by Guangdong Kexin Certified Public Accountant does not exist, even as the public prosecutor had highlighted, Guangdong High-speed Passenger Ferry adjusting stake holding to 75% in Guangdong Flying Dragon High-speed has not been approved by the relevant authorities, a self-authorised approval, but, so long as Guangdong High-speed Passenger Ferry being the fund sponsor of Guangdong Flying Dragon High-speed had actual contributed fund to raise the equity ratio to 75%, from the perspective of respect for facts, the flaw in the approval procedure does not deny the fact that the fund had been invested. So, in reality, how much capital has Guangdong High-speed Passenger Ferry had invested into Guangdong Flying Dragon High-speed? In the investigation case volume set forth by the investigating authorities had managed to retrieve an archival material from Guangdong Flying Dragon High-speed Business File under the title "Foreign-invested Enterprises Changing Registration Record" had clearly documented, as the Chinese shareholder in Guangdong High-speed Passenger Ferry own 75% stake, foreign stake as 25%. The changing registration record provide sufficient evidence of Guangdong High-speed Passenger Ferry holding 75% stake in Guangdong Flying Dragon High-speed, rather than the prosecutor assumption of 10% or 51%. The verification report by Guangdong Kexing Certified Public Accountant, further constitute that the 75% Guangdong High-speed Passenger Ferry was in fact inaugurated. Thus, the defendant’s counsel has good reason to believe that Guangdong High-speed Passenger Ferry stake in Guangdong Flying Dragon High-speed is indeed 75%. Public prosecutor claims that the company transfer 75% stake on the basis that they do not own the 75% shares, thus constituting fraud charges was baseless.
2. On whether Guangdong Flying Dragon High-speed has sufficient fund to inject into Chengdu Lianyi industrial shares.
Public prosecutor assume that Guangdong Flying Dragon Group (the actual shares transfer party was Guangdong High-speed Passenger Ferry) did not transfer 75% equity stake to Chengdu Liangyi Industrial shares, therefore, the high quality Guangdong Flying Dragon High-speed shares were not actually injected into Chengdu Lianyi Industrial shares, thus constitutes a fraud.
Defendant's Counsel do not deny the fact of 75% equity changing registration was not completed, but the Defendant' Counsel believes that the incompletion of equity changing registration was merely a procedural flaws, this do not contradict the fact that Guangdong Flying Dragon High-speed had injected its high quality assets into Chengdu Lianyi Industrial shares. Zeng Hanlin affirms that Chengdu Lianyi Industrial shares as the transferee of the 75% Guangdong Flying Dragon High-speed had registered with the Shenzhen Stock Exchange to process the changing of names (requesting the court to verify this fact). There is substantial evidence from Chengdu Lianyi Industrial shares announcing this information publicly on several occasions. At the same time, the evidence submitted to the court by the defendant's counsel confirming that in the Chengdu Lianyi Industrial Annual Financial Report for year 97, 98, 99 had clearly documented the company as a transferee of Guangdong Flying Dragon High-speed 75% stake. These effectively demonstrated that despite the changing registration was not completed, Guangdong High-speed Passenger Ferry had in fact transferred 75% stake to Chengdu Lianyi Industrial Company. Guangdong High-speed Passenger Ferry apart from transferring 75% of its stake to Chengdu Lianyi Industrial had also injected Guangdong Flying Dragon High-speed assets into the company. This fact was ascertained by the Chengdu Lianyi Industrial Company Annual Financial Report. These three Annual Financial Reports from Chengdu Lianyi Industrial shares had documented that "In accordance with Ministry of Finance, Accounting Association (1995) No. 11 <<Provisional Regulations on Consolidated Financial Statements>> notice, the parent company and the consolidated Guangdong High-speed Passenger Ferry combined financial statements was prepared." Both enterprises are situated in different areas, it is impossible for Guangdong Flying Dragon High-speed to relocate its assets and properties to Chengdu, the so-called asset mergers or injection can only be reflected as a financial merger, Chengdu Lianyi Industrial and Guangdong Flying Dragon High-speed had achieved financial merger, it is also a representation of capital injection by Guangdong Flying Dragon High-speed. Guangdong High-speed Passenger Ferry injected its Guangdong Flying Dragon High-speed assets into Chengdu Lianyi Industrial shares, and the assets injected are of high quality. Chengdu Lianyi Industrial shares Annual Financial Report for year 97, 98, 99 exhibits that after receiving the 75% share and absorbing Guangdong Flying Dragon High-speed assets, Guangdong Flying Dragon High-speed had created multiple millions of profit for the company for three consecutive years. Year 97 Annual Financial Report clearly documented: in 1997, the company achieve exceed expectations profit of 19.122 million yuan, actual realization of 32.857 million yuan, higher than profit forecast of 71.83%, all due to the restructuring of company assets by controlling shareholders injecting Guangdong Flying Dragon High-speed high-quality assets into the company. Owing to Guangdong Flying Dragon High-speed injection of quality assets, Chengdu Lianyi Industrial shares was able to implement a 10 shares plus 3 bonus shares compliment to all shareholders, Chengdu Lianyi Industrial Group Xu Huaizhong, Zhou Guangjun, etc who were the then Chengdu Lianyi Industrial shareholders had all benefitted from this bonus system and derived a huge amount of profit from it. Guangdong Flying Dragon Group had not only injected its high quality assets into Chengdu Lianyi Industrial shares, it had also infused its company's operating profit into Chengdu Lianyi Industrial. Chengdu Lianyi Industrial Annual Financial Report for year 97 under "other operating profit" column reads: According to the escrow agreement signed by its organisation subsidiary company Guangdong Flying Dragon High-speed and its affiliated enterprise Guangdong Asia Daily Chemical, Guangdong Flying Dragon High-speed was entrusted by Guangdong Flying Dragon Group to managed the operation of its affiliated company Guangdong Asia Daily Chemical from 01 January 1997 to 31 December 1998 only, and deployed its 85% profits as other business profits for Guangdong Flying Dragon High-speed Passenger Ferry. The 1997 project reap annual revenue of $9,485,090.03, expenditures of $2,791,131.35, operating profit of $6,693,958.68.
During the debate, the public prosecutors assumed since Zeng Hanlin was the chairman of Chengdu Lianyi Industrial Company at that time, the listed company's Annual Financial Report may be true and not reliable, and therefore decline the report on Guangdong Flying Dragon High-speed capital injection as high-quality assets, rebuffed the huge profit was yield after the injection by Guangdong Flying Dragon High-speed. We believe that the public prosecutor is in the state of denial and the statement made towards Guangdong Flying Dragon Group, whether in the eye of law or logic, is unfair, unjust and partial. Chengdu Lianyi Industrial General Manager, Assistant General Manager, finance staff are all original employees of Chengdu Lianyi Group, the aforementioned financial statements are prepared by these people and not the sole production of Zeng Hanlin. All these financial statements are also supported with relevant financial data, how would Zeng Hanlin as a Chairman solely manipulated that? Can the financial statements be untrue just purely because he is the chairman of the board? We strongly believe it is not the case. The public prosecutor definition of "probably untrue" is only a suspicion, but suspicion can only be suspicion, it does not represent reality. If the mere suspicion of a person has the power to negate everything, what is real in this world?
3. Whether the asset mortgages was concealed.
Public prosecutors also assumed that Guangdong Flying Dragon High-speed in the event of transferring its 75% equity, Guangdong Flying Dragon had concealed the fact that its main assets of 17 vessels had been mortgaged and its equity had been pledged to the bank, and therefore constitute a fraud.
First, the defendant's counsel believe that, as the transferor, Guangdong Flying Dragon Group (the actual transferor was Guangdong High-speed Passenger Ferry) had no obligation to disclose its mortgage conditions to the transferee in the process of transferring their shares. Since there is no such obligation, then the non-disclosure is not to conceal, and definitely not a fraud.
Secondly, from the Chengdu Lianyi Industrial 1998 Annual Financial Report, we can construe that the date of vessel mortgage by Guangdong Flying Dragon High-speed was in 1998, rather than in 1997 before Guangdong High-speed Passenger Ferry transfer its 75% stake. Thus, during the transferred of the 75% stake, Guangdong Flying Dragon High-speed vessel has not yet been mortgaged. No mortgage, of course, the concealed of mortgage conditions do not exist.
4. Whether the shares pledged was concealed.
Public prosecutors assumed that in the event of 75% stakes transferred, Guangdong High-speed Passenger Ferry had concealed the fact that its relevant shares had been pledge to the bank, and thus constitutes a fraud. During the cross-examination, the prosecutor did not produce any relevant evidence to support this point. We can understand from the case volume that on 03 February 1997 when Guangdong High-speed Passenger Ferry secure a loan of 10 million yuan from Guangdong China Everbright Bank Shenzhen Branch, the equity pledged was from the 51% stake of Guangdong High-speed Passenger Ferry owned by Zeng Hanlin and his son, Zeng Jian and not the 75% stake in Guangdong Flying Dragon High-speed held by Guangdong High-speed Passenger Ferry. Available evidence suggested that Guangdong Flying Dragon High-speed's equity had never been pledged to the bank. The public prosecutor's argument of Dragon Flying Dragon Group pledging its shares to the bank and concealing the fact to commit a fraud cannot be established.
(C) Did a fraud was committed during the debt collection process:
1. Regarding the false bank statements and wire transfer documents.
Public prosecutor assumed that, at the point when Chengdu Lianyi Group was pressing for the repayment of 40% stake, Zeng Hanlin had ordered Zhang Zhaohui to forge certificate of deposit amounting to USD3.18 million and wire transfer proof to Chengdu Lianyi Group for an amount of 2.5
million yuan, this constitute an act of fraud. We do not deny that these two documents were forged, but rather who had forged these two documents? Did Zeng Hanlin actually give orders to Zhang Zhaohui to do so? So far, the public prosecutor had only cited sole evidence of Zhang Zhaohui making these verbal claims against Zeng Hanlin that he had given the order without any further proof of evidence. However, the verbal claim of Zhang Zhaohui alone is insignificant to testify against Zeng Hanlin.
Public prosecutors also assumed that Zhou Guangjun and the rest from Chengdu Lianyi Group had confirmed that Zeng Hanlin had mentioned his company possesses several millions of US dollars in deposits, intending to imply that Zeng Hanlin had ordered Zhang Zhaohui to forge documents. On the pretext of whether Zeng Hanlin had mentioned his company possess several millions of US dollars in deposits, there are only one-sided confirmations from several executives in Chengdu Lianyi Group. As mentioned earlier, as both the case reporting side and the alleged victim, the several Chengdu Lianyi Group executives has personal interest associated with this case, and its corresponding testimonies lack of probative force, and because it is a one-sided oral evidence, it is absurd to base solely on the testimony of these executives to prove Zeng Hanlin had mentioned that he has several millions of US dollars in deposits, and using this basis to prove Zeng Hanlin had ordered Zhang Zhaohui to falsify documents. Zeng Hanlin did not instruct Zhang Zhaohui to counterfeit documents, therefore the scam behaviour is the sole responsibility of Zhang himself, not the responsibility of Zeng Hanlin and neither the responsibility of Guangdong Flying Dragon Group, identifying the forgery of Zhang Zhaohui as the crime of Guangdong Flying Dragon Group is definitely unfounded.
2. Regarding the supplementary agreement.
Public prosecutor also assumed that after pledging the 40% of the shares to the bank, Guangdong Flying Dragon Group had signed another supplementary agreement with Chengdu Lianyi Group on 30 September 1998, committing not to pledge the relevant shares before the repayment of the 40% equity price, Guangdong Flying Dragon Group such behaviour constitute a fraud. We do not deny that Guangdong Flying Dragon Group did not bring up this subject while signing this supplementary agreement and deceive the other party, but to note that such deception and the instigating of fraud alleged by the public prosecutor has no relation at all. We all know that to constitute a fraud, the mean of crime was to illegally possess another property, fraudulent behaviour must occur before obtaining the property in order to acquire it, the sequence will be to first have the intention to con, make sure you instigate a scam and acquire the property through fraud, only such trickery consequences accord with the logic of fraud. Only through fraudulent means that you had obtained the other's property is deemed as a fraud and a crime had been committed resulting in an accomplished state, then all consecutive deception associated with the fraud or criminal behaviour are no longer considered a fraud. Specifically to this case, Guangdong Flying Dragon Group and Chengdu Lianyi Group had signed an "Equity Transfer Agreement" back in 15 October 1997, in December 1997, Chengdu Lianyi Group transfer the shares ownership to Guangdong Flying Dragon Group. The "Supplementary Agreement" was signed on 30 September 1998, although the Guangdong Flying Dragon Group omitted the fact that the equity had been pledged and constitutes a fraud, but the fraud occurred only after Guangdong Flying Dragon Group had acquired 40% of the shares, this behaviour has no co-relation to the acquiring behaviour of Guangdong Flying Dragon Group, nor is the means of illegal possession of the equity by Guangdong Flying Dragon Group. As the public prosecutor and relevant witnesses had mentioned, Guangdong Flying Dragon Group concealed the fact that its equity has been pledged to delay repayment, intending to stall the Chengdu Lianyi's creditors. According to the public prosecutor's statement, this is a breach of contract. In order to delay repayment by cheating is clearly not the same as cheating for illegal possession of the other's property. Thus, the defendant's counsel does not agree the fraud instigated during the signing of the supplementary agreement constitute Guangdong Flying Dragon Group of criminal behaviour.
3. Does Guangdong Flying Dragon Group has the intention of illegal possession.
Public prosecutor believe Guangdong Flying Dragon Group was already heavily in debt during the acquisition of Chengdu Lianyi Group equity, as the vessels being the main asset of the company had been mortgaged, such that, Guangdong Flying Dragon Group do not possess the ability to pay the price of the acquisition. The aforementioned deduction was used to determine that the Guangdong Flying Dragon Group has intention to illegally possess the 40% equity of Chengdu Lianyi, was very subjective. So what was the fact? What was the corporate debt amount of Guangdong Flying Dragon Group during the 40% shares acquisition of Chengdu Lianyi Group? What was the amount of net assets? Are they heavily indebted as proclaims by the public prosecutor? After the vessels had been mortgaged, was the company really penniless? Were they not able to dispose of the assets? Were they stripped of the ability to pay share price?
The defendant’s counsellor had submitted a series of audit reports, asset appraisal reports to illustrate the existence of such objective evidence: Till 31 December 1995, Guangdong High-speed Passenger Ferry owns a new assets of 81.586 million yuan, till 18 December 1997, Guangdong Flying Dragon High-speed own net assets of 98.556 million yuan. In addition, Guangdong Flying Dragon Group owns several subsidiary companies such as Guangdong Asia Daily Chemical, Guangdong Poly Mechanical Engineering, Guangdong Ocean Shipping, etc. These subsidiaries each have its own assets. As per the public prosecutor's statement during the cross-examination on the corporate debt issue, during the acquisition of the shares, Guangdong Flying Dragon Group total debt was only 30 million yuan. By comparing the asset and liability figure, wasn't it misguided to conclude that the company was heavily indebted? Where does the inability to fulfil the share price repayment originated? The public prosecutor emphasize that at this time, Guangdong Flying Dragon Group has no cash flow, consequently the defendant's counsel would like to query if no cash flow would certainly equate to incapable to fulfil the shares price repayment? The company has multiple millions of non-cash assets, was that not sufficient to sustain the financial capabilities of making these shares acquisition?
Public prosecutors assumed that since Guangdong Flying Dragon Group had mortgaged all its vessels which happens to be their main assets, and mortgage associate to losing their rights to disposal of their collateral vessels, therefore Guangdong Flying Dragon Group do not enjoy its capabilities to acquire equity and make payment. But in fact, other than the vessels, whether Guangdong High-speed Passenger Ferry or Guangdong Flying Dragon High-speed, they still owned other properties and assets, including construction in progress, buildings, store ships and shipyards, machinery and equipments, land use rights, and so on. From the Guangdong Flying Dragon High-speed asset evaluation report, we can derived that the company has a total assets of 112.537 million yuan on 18 December 1997, of which the total value of the vessels were only 50.863 million, the vessels were just a fraction of the company assets, in particularly a small part of the assets. Needless to say in this case, those vessels were only pledged as collateral which in the future may be recovered, even if all these vessels have been lost and destroyed, the company still possess multiple millions of other assets, the company would still have the capability to go through this acquisition of equity and make payment.
Public prosecutor assumed that once the vessels had been mortgaged, Guangdong Flying Dragon Group would definitely loss its rights to the disposal of the vessels, resulting in loss of these properties. Defendant's Counsel does not concur with the public prosecutor on this point. From the perspective of guarantee law, the mortgagor pledge its property as collateral, under the consent of the mortgagee or repayment of the mortgage that result in debt-relief cases, the mortgagor shall be entitled to dispose of the collateral. When mortgagor pledged their collateral to the creditors, it does not mean that they had began to lose this part of the mortgaged property. When the mortgagee or the creditors disposed off the collateral through auction, sale, variable price program, after deduction from the funds received to meet the debt amount; the remaining funds will still be vested back into the mortgagor or the debtor. In this case, the mortgage rate from the bank hover around 20%, which means that even if the bank had finally disposed off the mortgage vessels, Guangdong Flying Dragon Group can still recover 80% from the total price of collateral funds. These reclaimed funds naturally represent the competency of Guangdong Flying Dragon Group to acquire equity, repay purchase price and to fulfil the contract. We believe that, despite having debt, despite the vessels had been mortgaged, despite the lack of cash flow, it is within the capacity of Guangdong Flying Dragon Group to honour the contract during the acquisition of 40% equity interest in Chengdu Lianyi. To say the least, even if Guangdong Flying Dragon Group had no property and zero net assets during the acquisition, as long as after the acquisition, he actually conduct business operations, no absconding, concealment or transferred of assets and continuous effort of managing the operations without interruption, it is nonsensical to deduce that due to zero assets and he is deemed not able to fulfil the contract. In theory, to determine whether a person has the ability to fulfil the contract, is not just merely based on how much assets he owned, but also what is his purpose and usage of the asset acquired according to the contract. We all know that if a penniless man borrow a chicken from someone, killed the chicken and ate the meat, we can infer that objectively, this penniless man do not have the ability to return the chicken and subjectively, his intention is to illegally possessed the other's property. This same man, if he borrowed the chicken, and reared it to lay eggs, then we cannot presume he is incapable of returning the chicken and subjectively accusing him illegal possession of the chicken. Even though he may be penniless, the chicken that he borrowed is still around, if this chicken laid eggs, the man has the ability to repay debt and service the interest, even if the chicken did not lay eggs, he still can return the chicken. This is what we would usually describe "Borrowing a chicken to lay eggs is not a fraud", if in the process of borrowing the chicken resulted in fraud, such fraud is defined as civil fraud and not criminal fraud. For a penniless person, borrowing the chicken to lay eggs and borrowing the chicken for consumption by its essential difference is that the latter do not have the ability to return the chicken, while the former is still capable of returning the chicken. In this case, Guangdong Flying Dragon Group is neither penniless nor borrowing a chicken for consumption, having multiple millions of net assets, and his commitment to business development and management undisputed his ability to acquired shares, repay purchase price and honour the contract.
After acquiring stake in Chengdu Lianyi, Guangdong Flying Dragon Group had in reality conduct business activities. After pledging of its company equity for a loan, in addition to repayment of 6 million yuan equity acquisition price, Guangdong Flying Dragon Group devoted all its remaining funds for business usage. After the acquisition of 40% stake in Chengdu Lianyi till prior to arrested by Chengdu Police, for more than two years time, Zeng Hanlin as the company's shareholders and legal representative of the company has been working and struggling together with the enterprise, never squandered any fund or absconded any money. These facts had strongly indicated that the subjective desire of Guangdong Flying Dragon Group and Zeng Hanlin was to constantly seek development for the enterprise and pursuit of economic efficiency, indicating that it is not an intention of illegal possession of Chengdu Lianyi 40% equity.
On the pretext of the absence of sufficient evidence to overturn the audit report, asset appraisal report had proven Guangdong Flying Dragon Group was in a superior asset position, we have no reason to advocate Guangdong Flying Dragon Group were heavily indebted, lack of ability to honour contract and made payment while acquiring Chengdu Lianyi's equity; thus there is no reason to advocate that Guangdong Flying Dragon Group while acquiring shares had instigate fraud by concealing its business liabilities, fabricated enterprise assets; and even less reason to assume Guangdong Flying Dragon Group and Zeng Hanlin committed contract fraud.
We seek the court's due verification and affirmation.
Sincerely to:
Chengdu Intermediate People's Court
Defendant’s Counsel: Beijing City, King & Capital Law firm
Lawyer: Yang Zhaodong
Zhu Yalin
17 November 2011
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