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Case Background

A and B are friends. In May 2018, the two parties communicated via WeChat on the matter of A's investment in the education and training institution to be established by B. Afterwards, A transferred a total investment sum of RMB 177,000 to B through bank transfer and WeChat. On April 23, 2020, A demanded that B refund the investment sum on the ground that B failed to establish the aforesaid training institution as agreed. The two parties subsequently failed to reach a consensus on the refund of the investment sum, and A thereupon filed a lawsuit against B with the court.

B pleaded that he had established Company Jia, the agreed-upon training institution, as contracted. The registered shareholders of Company Jia are B's spouse and third party C, each holding a 50% equity stake, and A was fully aware of this circumstance. At the time of Company Jia's incorporation, A and B were ineligible to be registered as shareholders due to personal reasons, and A consented to have his equity stake held by B's spouse as a nominee. B asserted that A only requested the refund of investment funds because the training institution had been unable to realize profits continuously as a result of the COVID-19 pandemic. Furthermore, B contended that the investment funds had been fully depleted through operating losses and thus were not refundable, and he proposed to transfer the equity stake of Company Jia held by his spouse as a nominee for A to A directly.

Opinions of the Court of First Instance

The court of first instance holds that, judging from the initial mutual manifestation of intent between the two parties in this case, when the two parties concluded the oral agreement, there was no manifestation of partnership intent featuring shared profits and joint risk bearing, nor any implied intent to make joint capital contributions and incorporate a company. The transaction was essentially a pure investment act: B, as the initiator of the education and training institution project, made promises on the investment ratio and cost recovery to A and other investors for the purpose of raising funds, and A paid the investment funds to B accordingly. The court further holds that the relationship between the two parties is an open investment relationship, rather than a relationship where A is admitted as a shareholder of Company Jia. After A paid the investment funds, Company Jia was duly incorporated and put into actual operation. A also attended the opening ceremony of the training center, hence had explicit knowledge of the operation status of the project. B has no breach of contract concerning the use of investment funds and the establishment of the project.

With respect to the investment activities, the two parties have not reached an explicit agreement on the investment term. Therefore, Party A may request to withdraw its capital at any time, provided that it shall notify Party B within a reasonable period in advance. Based on the evidence available in the present case, Party B has never made any commitment to guarantee the preservation of the investment principal. Accordingly, Party A shall bear on its own the risk of project losses corresponding to its investment proportion at the time of capital withdrawal. After deducting the amount of losses, Party A shall have the right to claim the return of the remaining investment funds. As Party B fails to adduce evidence proving that Company Jia has incurred financial losses, it is adjudged that Party B shall return the full amount of the investment principal to Party A, and compensate for the interest losses arising from the overdue return of the investment funds.

Views of the Second Instance

The court of second instance holds that, based on the facts unanimously confirmed by all parties on record, the purpose of capital contribution made by A and other relevant persons is to jointly incorporate a company engaging in education and training operations with B and three other individuals. However, as a matter of fact, after receiving the capital contribution funds from A, B failed to set up the corresponding company as agreed. With regard to the company registered and incorporated on October 22, 2019, in light of its registered capital, shareholder structure information, and the statement of the third party C, a shareholder holding 50% of the shares therein, it cannot be deemed as the company originally agreed to be established by the five persons including A and B. During the proceedings, B alleged that A and the other three persons were undisclosed shareholders whose equity interests were held under B's name, and that the originally agreed capital contribution ratio, registered capital and shareholder roster had been altered upon mutual consensus. This allegation was not only denied by A, but also not recognized by the third party C as one of the shareholders. Furthermore, B failed to provide corresponding evidence to support such claim, therefore B's aforesaid allegation shall not be accepted. Accordingly, it shall be determined that the subject matter of A's investment has not been fulfilled, and A's contractual purpose of contributing capital to incorporate the target company has not been realized. The court of first instance held that "the relationship between A and B is neither a partnership nor a relationship of joint capital contribution for company incorporation, but a pure investment relationship concerning the 'a certain training center' project". Such holding is not only contrary to the statements of the parties, but also lacks reasoning and legal basis, which is not recognized by the court of second instance. Since Company Jia has no connection with A's investment, the profits and losses of Company Jia are also irrelevant to A. Under the circumstance that A's investment purpose cannot be realized, A's claims for rescinding the oral investment agreement with B, and requiring B to refund the full amount of investment funds and compensate for the corresponding interest loss arising from fund occupation are well-founded. A has no objection to the first instance judgment that the investment agreement is rescinded as of June 30, 2020 and the relevant interest loss from fund occupation shall be calculated from July 1, 2020, and the court of second instance hereby affirms the aforesaid part of the judgment.

Lawyer's Notes

Although the subject matter of this case is not high in value, as the two parties were friends, all relevant matters such as investment and company establishment were negotiated orally in person without any corresponding written communication records retained, which brought certain difficulties to the trial of the case. During the trial of this case, for the purpose of ascertaining facts, the court of first instance joined Third Party D who jointly participated in the investment of the training institution, Company Jia, and C, another shareholder of Company Jia, as third parties to participate in the trial of this case. However, on the basis of the ascertained facts, the court of first instance and the court of second instance made entirely different findings on the investment relationship between the two parties.

The author hereby reminds that when investing in the establishment of a company, all investors shall, under the guidance of professionals, confirm in writing such matters as the type, name, domicile, registered capital, business scope and name of the legal representative of the company to be established, so as to avoid any disputes arising during and after the establishment of the company.

Case No. (2021) Hu 01 Min Zhong 13922