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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Gard Maritime & Energy Ltd v China National Chartering Co. Ltd [2012] EWHC 2109 (Comm) (26 July 2012) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2012/2109.html Cite as: [2012] EWHC 2109 (Comm)

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		26/07/2012

Mr Justice Field:

Introduction

1. China National Chartering Corporation ("CNC Corp") was established in 1955 as an emanation of the Chinese Ministry of Foreign Trade. In 1964 it re-registered as a state-run enterprise (an "enterprise owned by the whole people") with a business licence issued by the Beijing Administration for Industry and Commerce. In 1984 CNC Corp re-registered with the State Administration for Industry & Commerce ("SAIC") which issued it with a business licence. At all material times CNC Corp traded under the name Sinochart. In 1996 CNC Corp was placed within a group headed by China National Foreign Trade Transportation Company ("Sinotrans").
2. On 2^nd August 2006, Ocean Line Holdings Ltd ("OLHL") time chartered the vessel "OCEAN VICTORY" ("the vessel") to CNC Corp under a time charterparty in an amended NYPE form and on 13 September 2006 CNC Corp sub-time chartered the vessel to the Third Party ("Daiichi").
3. At the time the vessel was chartered to CNC Corp she was owned and demised chartered by OLCH and Ocean Victory Maritime Inc ("OVMI"), both of whom claim to have assigned all relevant rights under these arrangements to the Claimant ("GME Ltd").
4. On 24^th October 2006, the vessel grounded on a breakwater whilst leaving Kashima Port, Japan, in heavy weather. She subsequently broke up and became a total loss in December 2006.
5. Following an application made in August 2008 to SAIC under the Chinese Company Law 2005, CNC Corp changed from being a state-owned enterprise to being a state-owned limited liability company called China National Chartering Co. Ltd ("CNC Ltd"). CNC Ltd uses the same trade name – Sinochart – as CNC Corp used.
6. On 21^st April 2010, GME Ltd issued a claim against CNC Ltd in this court seeking damages of approximately US$ 178 million and/or an indemnity in respect of the loss of the vessel alleging unsafety of the port.
7. On 21^st June 2010 CNC Ltd commenced Part 20 proceedings against Daiichi seeking to pass on GME Ltd's claim down the line under the sub-time charterparty dated 13 September 2006. In its Defence, Daiichi makes no admissions as to the nature effect, or consequences of the re-registration of CNC Corp as CNC Ltd and denies (if it be alleged) that there is any provision of Chinese law relating to "re-registration" that would have the effect of rendering CNC Ltd liable in respect of the debts and obligations of CNC Corp arising under the time charterparty dated 2^nd August 2006 and/or entitling CNC Ltd to sue Daiichi in respect of the rights of CNC Corp under the sub-time charterparty dated 13^th September 2006.
8. On CNC Ltd's application, Blair J ordered on 11 November 2011 that there be a trial of a preliminary issue, namely: whether the Defendant is entitled as a matter of Chinese law to bring its claim against the Third Party. This judgement is the decision of the court on that preliminary issue.
9. The court has been much assisted by the expert witnesses on Chinese law called by both sides. Dr Zhu Sanzhu was the expert called by CNC Ltd. He is a senior lecturer at the School of Law, School of Oriental and African Studies (SOAS), University of London. The courses he convenes and teaches include Chinese Commercial Law and Foundations of Chinese Law and his recent publications include Law and Institutions of Modern China and Securities Dispute Resolution in China. The expert for Daiichi was Professor Anthony Richard Dicks who, since October 2001, has been Professor Emeritus of Chinese Law at the University of London, having retired in 2001 from a Chair at SOAS he had occupied since January 1995. He is currently a Professorial Research Associate in the Centre for Chinese Studies at SOAS and is also in practice as a Senior Counsel in Hong Kong where he was admitted to the Bar in 1965.

The relevant Regulations and Laws

10. It is necessary to set out certain of the Regulations and Laws referred to by the experts.

The 1993 Companies Law

11. In 1992, the Fourteenth Congress of the Communist Party announced that the establishment of a socialist market economy was the future direction for the reform of China's economic system and in that year the State Council promulgated the Regulations on Transformation of Operating Mechanism of Industrial Enterprises Owned by the Whole People. In 1993, the Decision of the Central Committee of the Communist Party on Several Issues Concerning Establishment of Socialist Market Economic System was adopted, calling for the establishment of a modern enterprise system of state-owned enterprises with clearly defined and distinct property rights, clearly defined and distinct rights and obligations, the separation of government and enterprises, and a new management system.
12. In April 1993, the State Council promulgated the Provisional Regulations on Administration of Issuing and Trading of Shares, which standardized the shareholding reform of state-owned enterprises and on 29 December 1993 the Standing Committee of the National People's Congress adopted the Company Law 1993 which was promulgated on the same day and came into force on 1 July 1994.
13. The following Articles of the Company Law 1993 are material:

Article 1 This law is formulated in accordance with the Constitution of the People's Republic of China in order to meet the needs of establishing a modern enterprise system, to standardize the organization and activities of companies, to protect the legitimate rights and interests of companies, shareholders and creditors, to maintain the socio-economic order and to promote the development of the socialist market economy.

Article 2 The term "company" as mentioned in this Law refers to a limited liability company or a joint stock limited company incorporated within the territory of the People's Republic of China in accordance with this Law.

Article 7 State owned enterprises restructured to form companies must transform their operating mechanism, gradually provide an inventory of their assets and verify their funds, delimit their property rights, clear off their claims and debts, evaluate their assets and establish a standard internal management mechanism in accordance with the conditions and requirements set by laws, administrative rules and regulations.

Article 20 A limited liability company shall be jointly invested and incorporated by not less than two and not more than 50 shareholders. State authorised investment institutions or departments authorized by the State may independently invest in and establish wholly State-owned limited liability companies.

Article 21 If State-owned enterprises established prior to the implementation of this Law comply with the conditions stipulated in this Law for the incorporation of limited liability companies, they may, in the case of enterprises with a single investing entity, be restructured as wholly State-owned limited liability companies in accordance with this Law, or in the case of enterprises with multiple investing entities, be restructured as limited liability companies as specified in the first paragraph of the preceding Article. The implementation procedures and specific measures for restructuring State-owned enterprises as companies shall be formulated separately by the State Council.

Article 229 Companies registered and incorporated in accordance with the law, administrative rules and regulations, local regulations or the Opinion on Standardization of Limited Liability Companies and the Opinion on Standardization of Joint Stock Limited Companies formulated by the relevant competent departments under the State Council prior to the implementation of this Law shall continue to exist; companies which do not fully meet the requirements as stipulated in this Law shall meet the requirements within a prescribed time limit. Specific measures for the implementation thereof shall be formulated separately by the State Council.

The 1994 Regulations

14. On 24 June 1994 the State Council promulgated the Ordinance for the Administration of the Registration of Companies of the People's Republic of China ("the 1994 Regulations") which included the following provisions:

Article 1: These Regulations are formulated in accordance with the PRC, Company Law (the "Company Law") in order to confirm the enterprise legal person qualification of companies and to standardize the registration of companies.

Article 2: The establishment, change and termination of limited liability companies and companies limited by shares (hereinafter collectively referred to as "companies") shall be subject to company registration in accordance with these Regulations.

PART TWO: JURISDICTION OF REGISTRATION

Article 6: The State Administration for Industry and Commerce shall be responsible for the registration of the following types of company:

1 companies in which the State-owned assets supervision and administration institutions of the State Council perform their duties as investors and the companies invested in and established by them, of which they hold at least 50% of the shares

2. foreign-invested companies.

3. companies subject to registration by the State Administration for industry and commerce in accordance with the provisions of laws, administrative regulations or decisions of the State Council; and

4. other companies that shall be registered by the State Administration for Industry and Commerce as stipulated by the State Administration for industry and Commerce..

PART THREE: REGISTRATION ITEMS

Article 9: The registration items of a company shall include:

1. name;

2. domicle;

3. name of the legal representative;

4. registered capital;

5. paid-in capital;

6. type of company;

7. scope of business;

8. term of operation; and

9. the names of the shareholders of a limited company, or the promoters of a company limited by shares, as well as the amount of capital contribution subscribed for and actually paid, and the time and form of capital contribution.

Article 16: The types of company include limited liability companies and companies limited by shares.

A one-person limited liability company shall state in the company registration whether it is wholly owned by a natural person or legal person, and the information shall be stated on the company's business licence.

PART FOUR: REGISTRATION OF ESTABLISHMENT

Article 17: To establish a company; an application shall be made for

preliminary verification and approval of the company name.

If the establishment of a company must be reported for approval as stipulated in laws; administrative regulations or decision of the State Council, or if an item within the scope of business of a company is subject to approval before registration as stipulated in laws; administrative regulations or decisions of the State Council, the preliminary verification and approval of the company name shall be completed before submission for approval. The company name as verified and approved by a company registry shall be used for submission for approval.

Article 18: To establish a limited liability company, an application for

Preliminary verification and approval of the company name shall be submitted by a representative designated or and agent jointly commissioned by all of the shareholders to a company registry. To establish a company limited by shares, an application for preliminary verification and approval of the company name shall be submitted by a representative designated or an agent jointly commissioned by all of the promoters to a company registry….

Article 25: A company established in accordance with the law shall be issued an Enterprise Legal Person Business Licence by the company registry. The date of issue on the company's business licence shall be the date of establishment of the company. A company engrave its seal, opens a bank account and applies to register for tax payments on the strength of its Enterprise Legal Person Business Licence verified and issued by the company registry.

PART FIVE: REGISTRATION OF CHANGE

Article 26: To apply to register a change, a company shall submit the following documents to the company registry;

1. an application to register the change singed by the legal

representative of the company;

2. the resolution or decision on the change made in

accordance with the Company Law;

a. other documents as required for submission by the State Administration for Industry and Commerce

Article 34: if a company changes its type, it shall apply to register the change at a company registry within the stipulated time limit according to the conditions for establishment of the proposed type of company, and submit the relevant document.

Article 40: If a change of the registered items involves the items specified in the Enterprise legal Person Business Licence, the company shall replace the business licence.

15. Revisions to 1994 Regulations immaterial to this trial were agreed by the State Council on 18 December 2005 to come into effect on 1 January 2006. The revised Regulations are referred to hereafter as "the 1994 Regulations".

The SAIC Registration Regulations 1998

16. These Regulations were promulgated by SAIC on 8 May 1998. They were repealed in 2006. Regulations 5, 6 and 7 provided:

5. The state-owned enterprise which is restructured to company should be registered to the jurisdictions to the regulations of "The People's Republic of China Company Registration Regulations" (hereinafter referred to as Company Registration Regulations). Former registration department without registration right should transfer the application documents and registration files to company registration departments with jurisdiction right.

6. In turning the state-owned enterprise into a company, the decision to turn into a company should be made by the state-owned enterprise's investors legally. After reporting to the government and receiving authorization, all shareholders and founders shall, according to the provisions of Company Law and Company Registration Regulations, apply to the Registration Management Department as a company to be registered. In the cases that local governments have regulations for approving state-owned enterprise to be established as companies; the process shall be proceeded according to the local government regulations.

7. When one of the following conditions applies to the conversation of the whole state-owned enterprises into a company, the company should submit documents for registration as required, file the change of registration accordingly and renew business licenses:

(1) Converting into a state-owned enterprise of sole proprietorship or a solely founded company limited by shares;

(2) Forming a company by absorbing investments by new shareholders;

(3) Absorbing and merging to form a company.

Newly established merged companies should register according to establishment.

The party being merged and all parties of a new merger should follow the Corporate Regulations of the People's Republic of China (hereinafter referred to as Corporate Regulations) and its enforcement rules to file a cancellation of registration.

The 2005 SASAC Regulations

17. On 19 December 2005, the State Council, having approved the Opinions of the State-owned Assets Supervision and Administration Commission ("SASAC") on Implementation of Further Standardization of the Work of Restructure of State-owned Enterprises, the Office of the State Council issued the Opinions in the form of a set of regulations designed to apply where a state-owned enterprise was restructuring so as to become a limited liability company or a joint stock limited liability company.
18. Regulation I (iv) required a legal opinion letter concerning the restructuring scheme to be issued by the legal counselor (sic) of the enterprise. Regulation III (iii) imposed requirements in respect of the net assets added from the benchmark date of asset appraisal to the date of industrial and commercial registration.
19. These Regulations remain in force.

THE COMPANY LAW 2005

20. On 27 October 2005 the Standing Committee of the National People's Congress promulgated the 2005 Companies Law which re-enacted the 1993 Law in an amended form. The 2005 Companies Law came into force on 1 January 2006.
21. Article 1 of the 1993 Companies Law was replaced by a new Article 1:

Article 1 This Law is enacted for the purposes of regulating the organization and operation of companies, protecting the legitimate rights and interests of companies, shareholders and creditors, maintaining the socialist order, and promoting the development of the socialist market economy.

22. Article 2 of the 2005 Companies Law remained the same as in the 1993 Companies Law. Articles 7, 21 and 229 were repealed and in the case of the first two Articles were replaced by completely new provisions.
23. Article 6 provides:

To establish a company, an application for establishment registration shall be filed with the company registration authority. If the application meets the establishment requirements of this Law, the company registration authority shall register the company as a limited liability company or joint stock limited company. If the application does not meet the establishment requirements of this Law, it shall not be registered as a limited liability company or joint stock limited company.

24. The new Article 7 provides:

Article 7: For a lawfully established company, the company registration authority shall issue to it a company business license. The date of issuance of the company business license shall be the date of establishment of the company. The company business license shall state the name, domicile, registered capital, actually paid capital, business scope, legal representative, etc. If any of the items as stated in the business license is changed, the company shall modify the registration and the company registration authority shall replace its old business license by a new one.

25. Article 9 provides:

Article 9 A limited liability company to be changed into a joint stock limited company shall satisfy the requirements as prescribed in this Law for joint stock limited liability companies. A joint stock limited company to be changed into a limited liability company shall conform to the conditions as prescribed in this Law for limited liability companies. In either of the foresaid cases, the creditor's rights and debts of the company prior to the change shall be succeeded by the company after the change.

CNC Corp's application to re-register as a limited liability company.

26. CNC Corp submitted a Registration Examination Form for re-structuring as a limited liability company on 14 August 2008. The application was expressed to be made under the Company Law of the People's Republic of China (the 2005 Companies Law) and the Regulations on Administration of Registration of Companies (the revised 1994 Regulations, Part Five).
27. By notice dated 14 August 2008, SAIC approved the "modification to registration" and directed that the business licence be replaced within 10 days. The replacement business licence issued by SAIC was also dated 14 August 2008. It stated that the Type of Company was "One-Person Limited Liability Company (Legal Person Sole Investment)" and that the "Date of Establishment" was June 9, 1984. SAIC had been asked to make the Date of Establishment the date in 1955 when CNC Corp was first created but this request was refused. The date specified was the date on which CNC Corp was first issued a licence by SAIC.
28. CNC Ltd's re-registration was supported by a legal opinion provided by Kingfield Law Firm dated 26 August 2008 produced in accordance with Regulation I (iv) of the 2005 SASAC Regulations. Paragraph III 4 of the opinion states:

All the rights/credits and liabilities/debts (including contingent liabilities such as litigations and guarantees) of CNC Corp are entirely transferred into the restructured company and are fully entitled to and borne by the restructured company.

29. On 31 December 2008, upon completion of the formalities for the restructure and registration, CNC Limited made a public announcement in national newspapers including the People's Daily (Renmin Ribao, both Chinese and English editions), notifying the public that CNC Corp was re-registered as CNC Limited:

…The address, registered capital, scope of business and other items of registration remain unchanged. Please also note that in accordance with the relevant provisions of Chinese laws, all rights and obligations of the former China National Chartering Corporation have been succeeded by China National Chartering Co. Ltd. as from the date of re-registration.

30. The evidence is that there have been many instances where state-owned enterprises have restructured to become limited liability companies by applying for re-registration under the 2005 Companies Law and Part Five of the 1994 Regulations.

The Parties' Contentions

Daiichi's case

31. Professor Dicks accepted that from the inception of the 1993 Company Law and the 1994 Regulations to the inception of the 2005 Company Law, a state enterprise could become a limited liability company by obtaining SAIC's approval to an application for change of registration as to type of company under Part Five of the 1994 Regulations, notwithstanding the definition of "company" in Article 2 of the 1993 Companies Law. However, in his view, by reason of the repeal of Articles 1, 7 and 192 of the 1993 Companies Law and the wording of Articles 2 and 9 and Article 192 (which defines a "foreign company") of the 2005 Company Law, the latter Law contemplates only three types of company: limited liability companies, joint stock limited liability companies and foreign companies. Thus, after the implementation of the 2005 Companies Law, a state enterprise could only become a limited liability company by ceasing to exist (by cancelling its registration) and establishing a new company under Article 6 to which a company business licence bearing the date of establishment of the new company would be issued under Article 7. It followed that CNC Ltd must be a new company established under Article 6 and CNC Corp will have ceased to exist since a legal person must have the necessary funds and ability independently to bear civil responsibility under Article 37 of the General Principles of the Civil Law 1986. Accordingly, CNC Ltd will not have vested in it the contractual rights that were vested in CNC Corp unless CNC Corp has assigned those rights to CNC Ltd which, on the evidence, it has not. It further followed that the date of establishment specified in CNC Ltd's business licence was erroneous, since under Article 7, this date was the date CNC Ltd as a limited liability company came into existence.
32. Professor Dicks was of the opinion that Article 9 supported this conclusion because Article 9 was in terms limited to situations where a limited liability company became a joint stock limited liability company, or vice versa, which strongly suggested that state enterprises could not become limited liability companies by re-registering under Part Five of the 1994 Regulations.
33. In his first report, Professor Dicks said that the reasons for the repeal of the former Articles 7 and 21 could be deduced from the notes to a comparative table of the texts of the 1993 and 2005 versions of the Company Law provided in the Company Law Annotated 2008 Volume 2 where it is stated (p.1895) in respect of Article 7 that it was repealed because "the restructuring (gaijian) of state-owned enterprises is no longer at the legislative heart of this Law and for this reason [this provision] has been deleted"; and in respect of repealed Article 21, "Dealt with by other law (falü)" (p. 1907). In the case of the repeal of Article 229 of the 1993 Company Law 1993 the comment is: "Deleted because circumstances have changed with the passage of time." (p. 2025)
34. In Professor Dicks' opinion, even if CNC Corp could have restructured by registering a change of "type of company" under the 2005 Companies Act and the 1994 Regulations, the change from being a state enterprise to a limited liability was so profound that the limited liability company should be treated as a completely new entity that does not have vested in it CNC Corp's contractual rights, unless those rights have been assigned to it by CNC Corp. In support of this view he pointed to the concluding words of Article 9 of the 2005 Companies Law contending that it was necessary to provide that rights and obligations were transferred where there was a change from a limited liability company to a joint stock limited liability company because otherwise there would be no such transfer by reason of the radical difference between the change of types of company contemplated by the Article. Using his own "very literal" translation, Professor Dicks quotes from the commentary on Article 9 in the Company Law Annotated 2008 (Volume 1 at p. 101):

After a limited liability company in accordance with law changes to become a joint stock limited company the original limited liability company is no longer in existence, but the rights and obligations of the original limited liability company should not automatically disappear simply because the original limited liability company no longer exists. For this reason, this Article provides that when a limited liability company in accordance with law is changed into a joint stock limited company the joint stock limited company succeeds to the rights and obligations of the original limited liability company after the change. That is to say, the joint stock limited company which results from the change enjoys the rights of the original limited liability company and the joint stock limited company which results from the change undertakes the obligations of the original limited liability company, so that the joint stock limited liability company which results from the change cannot take the non-existence of the original limited liability company as a reason not to accept liability for the obligations of the original limited liability company.

35. Professor Dicks and Daiichi's counsel, Mr Goldstone QC accepted that CNC Corp's obligations as distinct from its contractual rights were inherited by CNC Ltd. As I understood it, this was by reason of The Provisions of the Supreme People's Court on Several Issues in Adjudication of Civil Dispute Cases Concerning Restructuring of Enterprises ("the Fa Shi 2003") issued pursuant to the power of the Supreme People's Court to issue interpretations on questions involving the specific application of laws and decrees in the adjudication work of the courts. I return to the Fa Shi 2003 below. Suffice it to say at this stage that it was Professor Dicks' opinion that: (i) there was a vital distinction between the Fa Shi 2003 and the appended Explanatory Note; (ii) the Fa Shi itself dealt only with the transfer of obligations and was concerned with a public policy issue of fraud (iii) the Explanatory Note was contradictory and was not to be taken as propounding a general rule that the contractual rights of a state enterprise passed to the restructured limited liability company as well as its obligations.

CNC Ltd's case

36. Founding on the views of Dr Zhu, Mr Rainey QC for CNC Ltd submitted that it was plain that after the inception of the 1993 Companies Law a state enterprise could restructure by applying under Articles 9, 26 and 34 of the 1994 Regulations and upon being re-registered as a limited liability company and being issued with a new business licence, it continued to exist in this different corporate form and as such was possessed of its pre-re-registration rights and subject to its pre-re-registration obligations. This, argued Mr Rainey, was clearly demonstrated by the 1998 SAIC Regulations^[1] which are predicated on re-registration under the 1994 Regulations being the process for conversion from state enterprise to limited liability company.
37. Mr Rainey further submitted that it was equally plain that the state enterprise/limited company conversion process remained exactly the same after the implementation of 2005 Company Law notwithstanding the repeal of the former Articles 7, 21 and 229 and the insertion of the new Article 9. This was so because: (i) the 1994 Regulations and the 2005 SASAC Regulations continued to apply just as before; (ii) many state enterprises had not restructured by 1 January 2006 and there was no sensible reason for switching to the process posited by Professor Dicks; and (iii) as revealed by the evidence, state enterprises with the active participation of SAIC had continued to restructure by re-registering under the 1994 Regulations. The new Article 9 was an "avoidance of doubt" provision and did not denote that the rights and obligations of a state enterprise were not vested in the restructured company. And in any event, Professor Dicks had mistranslated the last part of the last sentence of the commentary on Article 9 contained in the Company Law Annotated 2008. In the words of Dr Zhu:

The last sentence …. is not "in a very literal translation" as claimed by Dicks Report (para 4.11). In original Chinese text … the sentence is expressed as including the words "itself no longer is" (ziji bu zaishi ). Correct literal translation should be:"…, the joint stock limited liability company after the change cannot take as a reason (the fact that) itself is no longer the former limited liability company, not to undertake the former limited liability company's obligations."

This original Chinese sentence shows that the author of the commentary takes the former limited liability company and the joint stock limited liability company as one and same entity except each with a different form. The word "itself" (ziji ) indicates the joint stock limited liability company is the former limited liability company, there never existed two different entities at the same time, and all that happened is a change of "clothes" of a different legal form. Indeed, in the whole Chinese passage of the commentary there is no single word indicating the change of "legal person" (faren) of the company. (Zhu, 2^nd report, paras 150-151)

38. On the question whether the state enterprise's contractual rights passed to the restructured company, Mr Rainey submitted that the effect of re-registration was that the former entity continued to exist although in a different corporate form. The registration of a change of "type of company" was not intended to have any different consequence than that resulting from the registration of a change of any of the other items listed in Article 9 of the 1994 Regulations and no-one was suggesting that the registration of change of any of those other items led to the extinguishment of the applicant entity and the creation of a new company.
39. Mr Rainey relied on a passage in Issue 3 of 2003 of the Research Office of the People's Judicature (Renmin Sifa,), an official bi-monthly magazine of the Supreme People's Court, reporting the opinion of judge Liu Jiachen, Deputy President of the Supreme People's Court. As Dr Zhu explained, the People's Judicature is an important publication of the Supreme People's Court which relays the opinion, interpretation, annotation, provision, or explanation of the Supreme People's Court on certain issues or points of law and judicial practice. It is relied upon by lawyers, academics, government officials, companies and business people, as a source of judicial opinion, interpretation and court practice. The passage in question reads:

"…where the change of a company's name has been re-registered with registration authority, if the company's shareholder and business have not been changed, the company prior to the change and the post-change company are still the same legal entity. When the company's name has been changed, the name prior to the change is no longer existed; the post-change company cannot possibly enter any agreement with the company prior to the name change on the rights and obligations of the company. Therefore, the rights and obligations prior to the change of the company's name shall be entitled and undertaken by the post-change company in accordance with law, including of course those rights and obligation relating to litigation."

40. Mr Rainey further relied on the Fa Shi 2003 and the Explanatory Note. The preamble to the Fa Shi recites the laws it addresses and amongst those laws is "the RPC Company Law". Articles 4 and 5 read:

4. Where a state-owned enterprise is restructured as a whole to a state-owned limited liability company with a sole investor in accordance with the Company Law, the liabilities of the former enterprise shall be borne by the post-restructure limited liability company.

5. If an enterprise achieves third-party participation in the enterprise by means of capital and share increase or by partial assignment of equity, and is thereby completely restructured as a limited liability company or company limited by shares, the debts of the original enterprise shall be borne by the new company formed by the restructuring.

41. The Explanatory Note is by Judge YE Xiaoqing, senior judge of Civil Court Division Two of the Supreme People's Court. It was Judge YE Xiaoqing who drafted the Fa Shi 2003. Dr Zhu's translation of the relevant parts of the Explanatory Note reads:

1. The issue of assumption of obligations after enterprises are restructured as a whole ( zhengti) to companies in accordance with the Company Law

The restructuring of enterprises as a whole to companies in accordance with the Company Law refers to a readjustment of the original capital structure on the basis of the assets of the original legal person, in which the organization (or department) authorized by the state to make the investment puts into effect a control of shares of the enterprise as a sole investor and the original enterprise is restructured as a state-owned limited liability company with a sole investor, or, the enterprise achieves a participation of other persons as shareholders of the enterprise by means of capital and share increase or by partial assignment of equity and thereby the enterprise is restructured as a whole to a limited liability company or company limited by shares. In the restructuring of enterprises as companies, what is restructured is the original system of property rights of the enterprise, the changes of the original investment structure, capital structure and organizational form of the state-owned enterprise. Since the newly established company is established on the basis of the restructuring of the original enterprise, therefore, it ought to ( yingdang) be said that the legal status of the state-owned enterprise as a subject in law ( guoyou qiye de falü zhuti diwei) has undergone no change in substance after the restructuring of state-owned enterprises as companies. Where state-owned enterprises are restructured as solely state-owned companies, the whole assets of the state-owned enterprise are put into the solely state-owned company, the qualification of legal person ( faren zige) of the original state-owned enterprise terminates ( zhongzhi), the post-restructure solely state-owned company shall ( yingdang) be the continuation ( yanxu) of the original state-owned enterprise, and the state-owned enterprise before the restructuring and the newly established company after the restructuring is in law really one legal person ( zai falü shang shi wei yige faren). For this reason, Article 4 stipulates that the obligations of the enterprise restructured shall be borne by the post-restructuring newly established company. Where state-owned enterprises are restructured as a whole to limited liability companies or companies limited by shares, the result of the restructure of the enterprise as a whole is that the property and the rights and obligations of the original enterprise are taken over as a whole by the newly established company ( yuan qiye caichan ji zhai quan, zhaiwu zhengti bei xinshe gongsi jieshou), the original enterprise legal person extinct ( xiaomie), and the newly established company and the original enterprise, in respect of the assets, rights and obligations, belongs to a kind of inheritance ( chengji) relationship. Even though the restructuring as companies brings about an addition of new shareholders, however, when the new shareholders accepted stock ownership it was carried out on the basis of a valuation of the assets of the original enterprise, a sorting out of the creditor's rights and debts, a compensation of debts with assets, and followed by a valued conversion to shares. The new shareholders at the time of participating in as shareholders, had a full knowledge of, and already accepted, the obligations of the restructuring enterprise. For this reason, Article 5 stipulates that the obligations of the enterprise restructured shall be borne by the post-restructuring newly established company.

42. Dr Zhu's opinion that the Fa Shi 2003 applies to cases both before and after the 2005 Companies Law was not disputed by Daiichi and Mr Rainey submitted that the Explanatory Note is of very high persuasive authority for the proposition that a state enterprise's contractual rights pass to the limited liability company on a re-structuring as well as its obligations.

Discussion

43. On the question whether CNC Corp restructured under Part Five of the 1994 Regulations or must be taken to have established a new limited liability company under Article 6 of the 2005 Companies Law, I accept Mr Rainey's submissions in preference to the views of Professor Dicks attractively advanced though they were by Mr Goldstone. It was common ground that in the period from the inception of the 1993 Companies Law to the inception of the 2005 Companies Law, a state enterprise desiring to restructure as a limited liability company did so by registering a change of "type of company" with SAIC under Part Five of the 1994 Regulations, and I am quite satisfied that it was intended that this restructure process should continue notwithstanding the amendments made to the 2003 Companies Law by the 2005 Companies Law. In this connection I regard it as highly significant that SAIC, the state entity responsible for administering the process of registration under the 1994 Regulations, has routinely dealt with state enterprise restructuring since 1 January 2006 under Part Five of the 1994 Regulations. This in my view is hardly surprising for it must have be manifest that come 1 January 2006 there would be many state enterprises that had still not become limited liability companies and there is no conceivable reason that makes any sense for requiring those enterprises to establish a new company under Article 6 rather than use the existing machinery contained in the 1994 Regulations.
44. I accept Dr Zhu's translation of the commentary on Article 9 contained in the Company Law Annotated 2008 and agree with his conclusion that the author of the commentary regarded the former limited liability company and the joint stock limited liability company as one and the same entity save that each had a different form. I am also of the opinion that Article 9 functions as a "for the avoidance of doubt" provision and as such does not support the proposition that a limited liability company that is the result of a state enterprise restructuring is a completely new company that does not have vested in it the state enterprises' contractual rights.
45. I also accept Mr Rainey's submissions on the question whether CNC Ltd had vested in it at all material times CNC Corp's contractual rights. In my judgement, the scheme for the registration of changes to the matters listed in Article 9 of the 1994 Regulations provided under Part Five is clearly intended to operate uniformly in all respects, including in relation to the outcome of re-registration in terms of corporate form. It follows that if the registration of a change of the company's name or a change of the legal representative's name would not result in the demise of the applicant and the creation of a completely new company --- which would obviously be the case --- this would also be the outcome of the registration of a change of "type of company", whether the applicant is a limited liability company or a state enterprise.
46. I am also persuaded that a Chinese Court would reach the same conclusion on the authority of the Explanatory Note to the Fa Shi 2003. With respect to Professor Dicks, his facility with written Chinese is not as good as Dr Zhu's, who is a native speaker, and for this reason I accept Dr Zhu's translation of the Explanatory Note where it differs from that of Professor Dicks.
47. The key passage in the Note is:

Where state-owned enterprises are restructured as solely state-owned companies, the whole assets of the state-owned enterprise are put into the solely state-owned company, the qualification of legal person of the original state-owned enterprise terminates the post-restructure solely state-owned enterprise shall be the continuation of the original state-owned enterprise, and the state-owned enterprise before the restructuring and the newly established company after the restructuring is in law really one person. For this reason, Article 4 stipulates that the obligations of the enterprise restructured shall be borne by the post-restructuring newly established company. Where state-owned enterprises are restructured as a whole to limited liability companies or companies limited by shares, the result of the restructure of the enterprise as a whole is that the property and the rights and obligations of the original enterprise are taken over as a whole by the newly established company and the newly established company and the original enterprise, in respect of the assets, rights and obligations, belongs to a kind of inheritance relationship.

48. True it is that this reasoning is directed to explaining Article 4 of the Fa Shi 2003 which is concerned with obligations, rather than rights, but the reasoning seems to me to be obviously applicable to the question whether the limited liability company that results from a state enterprise restructuring has vested in it the state enterprise's contractual rights.
49. I am bound to say that I found Daiichi's case extremely uncommercial and highly technical. If a state enterprise's obligations pass to the limited liability company where there has been a restructuring, it makes no commercial sense for the state enterprise's contractual rights not also to pass to the limited liability company by reason of the same restructuring process. Professor Dicks accepted that obligations that pass to the limited company would be affected by closely connected contractual rights that give rise to a set-off or abatement and it is hard to see why this is so unless contractual rights pass generally on a restructuring.

Conclusion

50. It follows that I have come to the clear conclusion that CNC Limited is entitled as a matter of Chinese law to bring its claim against the Daiichi. I shall therefore answer the preliminary issue "Yes".

Note 1   See especially Regulations 5 and 7.    [Back]