Research Report on Cases of Disputes over Financial Lease Contract

Preface

Financial leasing is a result of world financial innovation after World War II. It has achieved unprecedented development, an average annual increase of 30%, for its unique competitive advantages and important role in the capital market comparing to traditional financing methods since its forming. A new recognition of financial leasing is gradually acknowledged by society, which is that the value of equipment is derived from its right to use instead of its ownership. Equipment leasingmay bring funding in productive assets, economic growth and increase in production rate. Leasingindustry develops along with economic development. Financial leasing has extremelyimportant positive impact on the development of real economy. Currently, it has become the second financing method tobank credit, playing a crucialrole in international capital market. Leasing industry has developed rapidly since the 1950s. The global leasing businessturnover surged to USD 760 billion from USD 290 billion in the last decade, increasing by 10% annually. Such growth is far higher than global GDP growth inthe same period, which fully manifests the vigorous vitality of financial leasing. The interactive relationship between economic development and leasing development is mainly demonstratedfromthe following two perspectives: 1. Equipment leasingis relatively common in developed countries; 2. Developed countries have a large leasing business turnover. At present, equipment leasingenjoys high penetration mainly in the US, the UK, France, Italy, Canada and Japan, which are also the top ten developed countries with largest leasing business turnover.

Leasing industry starts up a little late in China. CITIC Trust Co., Ltd. ("CITIC”) was founded in October 1979, beginning its early practice in leasing industry. The first Sino-foreign leasingjoint venture, China Dongfang International Leasing Co., Ltd. was co-invested by CITIC and Japan Dongfang Leasing Co., Ltd. in April 1981; the first financial leasingcompany, China Leasing Company was established by CITIC and the former Ministry of Materials and Equipment of China in July 1981. The establishment of saidtwo financial leasing companies marks the forming of financial leasing industry and system. China’s financial leasing industry has gone through mainly 4 development phases including the newly-established phase lasting from 1981 to 1983, the fast-growing phase from 1984 to 1987, the steadily-developing phase from 1988 to 1996, the stagnatingand reorganization phase from 1997 to 2001, the actively-preparing phase seeking for development from 2002 to 2007, and the fast-growing phase from 2008 till now. The development of China’s leasing industry is not comparable to its economic status in the world as its annual turnover of financial leasing business accounts for less than 1.5% of aggregate investment in equipment nationwide, while the world average proportion is between 10% to 15. According to the dataprovided by the national statistics office, the aggregate investment in fixed equipment nationwide in 2008 is RMB 17 trillion, so China’s leasing industry turnover should be from RMB 1.7 trillion to RMB 2.55 trillion according to the average leasing penetration of 10% to 15% in developed countries. Financial leasinghas not developed to the scale it should have as there is still much room up to 90% for it. In 2013, the market penetration of financial leasingindustry nationwide was about 5%, which is still far behind the average penetration of about 17% in the world. From this aspect, it shows that China has just started its financial leasingindustry, which makesmuch room for it. In the future, China will change itsextensive economic development mode to intensive economic development mode, during which emerging industries and equipment manufacturing industry are booming rapidly, while traditional industries are waiting for upgrade. This will definitely increase the demand for high-end equipment. Meanwhile, livelihood projects like security housing construction and steady construction of infrastructure in Midwest China will result in sustainable growth of relevant fixed-asset investment and demand for newly-addedequipment investment, which all brings extraordinary development opportunities and room for China’s financial leasingindustry. Shenzhen’s financial leasing industry started later than Tianjin’s andShanghai’s, etc. However, since Qianhai Cooperation Zone was approved in 2010, Shenzhen took the opportunity and strived to develop financial leasing industry by taking full advantage of the preferential policy for Qianhai Cooperation Zone, becoming the third largest clusterof financial leasing in China besides Tianjin and Shanghai. According to the 2015 Report on Development of China’s Financial leasing Industry issued by the Department of Circulation Industry Development under the Ministry of Commerce of the People’s Republic of China in August 2015, China had 2,045 registered financial leasing companies till the end of 2014, ofwhich Shanghai had the most, reaching up to 452,Tianjin had 335, ranking second,and Shenzhen had 273, ranking third. The number of financial leasing companies registered in saidthree cities accounted for 51.8% of the same nationwide, among which Shenzhen had 200 new comparing to 2013, which were basically all founded in Qianhai Cooperation Zone.

This report is to study the financial leasingcases tried by the district courts and the Intermediate People’s Court of Shenzhen during the period of2011 through the first half of 2015, hoping it will be beneficial to government decision-making and the healthy development of financial leasing.

Part I

Analysis on Judgment of Cases of Disputes over Financial lease Contract in Shenzhen from 2011 to 2015

1.      Analysis on Number of Cases and Amount of Money Involved

Chart 1: Number of Cases Established at First Instance from 2011 to 2014

Chart 2: Lawsuit Amount filed at First Instance from 2011 to 2014

Chart 1 and Chart 2 show that the number of cases of disputes over financial lease contract tried by the district courts and the Intermediate People’s Court of Shenzhen at first instance has increased dramatically from 2011 to 2014, among which the number of cases established in 2014 was 10.9 times ofthat in 2011 with an average annual increase reaching up to 273%. Accompanying the multiplication of accepted cases of disputes overfinancial lease contract, the amount of money involved in these cases from 2011 to 2014 also multiplied, increasing from RMB 40.69 million in 2011 to RMB 575 million in 2014 with an average increase of RMB 134 million. According to statistics, the number of cases of disputes over financial lease contract accepted by the district courts and the Intermediate People’s Court of Shenzhen is 822 during the period of2011 through2015. A specialexplanation is needed to be made hereby that the number of the cases of disputes over financial lease contract filed in the first half of 2015 is 50 and that integrating such data into the aforesaid tendency analysis will be meaningless considering occurring frequencyand prosecution of most cases are mainly in the second half of previousyears, therefore the aforesaid tendency analysis is up to 2014.

1.1 Reason for Multiplication of Number of Cases in 2012 and 2013

Speaking from the aspect of policies, various policies were introduced continuously following the Measures on Managementof Financial Leasing Company introduced in 2007. All major banks started to establish financial leasing companies in 2008, at whichtime China’s financial leasing industry began to boom. Banking tycoons brought capitaland customers to financial leasing industry, elevating its status and promoting its development. After that, a great number of foreign-funded and domestic-funded experimental financial leasing companies were born at the right moment. Financial leasing covered a broader domain and the market became more active following its market expansion. Besides policy, monetary investment pushed the development of financial leasing industry. RMB 4 trillion was put in the market as economic incentive from December 2008 to the end of 2010, whenfinancial leasing and financing leasing all participated actively in the project.

From the aspect of market situation, we can see that the demand for coal exceeded supply from 2009 to 2011. But the situation changed in 2012, when coal stock reached up to 344 million tons, resulting in deterioration of commercial vehicles forfinancial leasingand construction machinery industry, which are closely related to coal. Realty market and large-scale investment in infrastructure stayedflat, whichspread tothose industries related to financial leasing including construction industry and concrete industry, thus affecting financial leasing market of engineering machinery equipment like pumper, excavator and mixer truck. In addition, Shenzhen has the world’s fourth largest port, YantianPort. Shipment market’s and Baltic Dry Index’s staying flat (a special reference is made herebyto that ship financial leasing disputes are governed by maritime court) also had direct impact oncontainer industry and industries related with container transportation, thus involvingthe financial leasing of such special vehicles as container trailer and two-wheeler.

1.2 Reason for Minor Decrease in Number of Cases in 2014

Cases of disputes over financial lease contract in Shenzhen multiplied in 2012 and 2013, and began to decrease gently in number in 2014. Upon research, we found the main reason for the gentle decrease is taxation. According to an article issued by the State Administrationof Taxation in 2013, financial leasing is among the fieldsof whichbusiness tax is replaced with value-added tax. The issue concerninginvoice issuance and method of deduction, especially for medium, small and micro-sized customers, made financial leasing companies stagnant in certainfinancial leasing industries.

2. Analysis on Areas of Case Accepted and Distribution of Money Involved

Chart 3: Distribution of Cases of Disputes over Financial Lease Contract in Shenzhen from 2011 to 2015

From 2011 to June 2015, there were totally 822 cases involvingfinancial leasing accepted in Shenzhen. Seen from area distribution, the People’s court of Luohu District had accepted 486 cases in total, accounting for59.1% of all cases accepted in Shenzhen and ranking first; the People’s Court of Futian District had accepted 182 cases in total, acccounting for 22.1% of all cases accepted in Shenzhen and ranking second; the People’s court of Nanshan District had accepted 61 cases in total, acccounting for 7.4% of all cases accepted in Shenzhen and ranking third; the People’s court of Baoan District had accepted 43 cases in total, acccounting for 5.2% of all cases accepted in Shenzhen and ranking forth; the People’s Court of Longgang District had accepted 23 cases in total, acccounting for 2.8% of all cases accepted in Shenzhen and ranking fifth; the People’s Court of Yantian District had accepted 17 cases in total, acccounting for 2.1% of all cases accepted in Shenzhen and ranking sixth; the People’s Court of Qianhai Cooperation Zone, as a newly-established court, began to accept cases from February 2015 and had accepted 8 cases of disputes overfinancial lease contract in total till June 2015, acccounting for 1% of all cases accepted in Shenzhen and ranking seventh; and the Intermediate People’s Court of Shenzhen had accepted 2 first-instance cases, accounting for 0.2% of all cases accepted in Shenzhen and ranking eighth.

Chart 4: Amount of Money Involved in Cases Accepted by Courts in Shenzhen from 2011 to 2015

From 2011 to the first half of 2015, the total amount of subject matter of thelawsuit involving disputes over financial lease contract is RMB 1,481 million, whose distribution is approximately the same as distribution of areas where such cases were accepted. The total amount of subject matter involved in cases accepted by the People’s Court of Luohu District is RMB 679 million, accounting for 45.8% of the total amount of subject matter involved in all cases in Shenzhen and ranking first; that amount involved in cases accepted by the People’s Court of Futian District is RMB 439 million, accounting for 29.6% of the total amount of subject matter involved in all cases in Shenzhen and ranking second; that amount involved in cases accepted by the People’s Court of Nanshan District is RMB 251 million, accounting for 16.9% of the total amount of subject matter involved in all cases in Shenzhen and ranking third; that amount involved in cases accepted by the People’s Court of Baoan District is RMB 54.21 million, accounting for 3.7% of the total amount of subject matter involved in all cases in Shenzhen and ranking forth; that amount involved in cases accepted by the People’s Court of Qianhai Cooperation Zone is RMB 21.23 million, accounting for 1.4% of the total amount of subject matter involved in all cases in Shenzhen and ranking fifth; that amount involved in cases accepted by the People’s Court of Longgang District is RMB 20.66 million, accounting for 1.4% of the total amount of subject matter involved in all cases in Shenzhen and ranking sixth; that amount involved in cases accepted by the People’s Court of Yantian District is RMB 7.99 million, accounting for 0.54% of the total amount of subject matter involved in all cases in Shenzhen and ranking seventh; and that amount involved in cases accepted by the Intermediate People’s Court of Shenzhen is RMB 7.42 million, accounting for 0.5% of the total amount of subject matter involved in all cases in Shenzhen and ranking eighth. A special reference is made hereto that the Court of Qianhai Cooperation Zone only began to accept cases from February 2015. But as a free trade zone, Shenzhen-HK cooperation zone and socialism demonstration area ruled by law, Qianhai Cooperation Zone has gathered over 90% of financial leasing companies in Shenzhen whose scale is growing day by day. Therefore it can be anticipated that the number of cases of financial lease disputes and litigation amounts accepted by the Court of Qianhai Cooperation Zone will continue to grow and account for more proportion in Shenzhen.

3. Analysis on Types of Lessors

Chart 5: Distribution of Types of Financial leasing Enterprises Involved in Cases of Financial lease Contract Disputes in Shenzhen

The difference between financing lease and financial leasingis required to be addressed. “Financial Lease” is a borrowed word, which can be translated to financinglease or financial leasing. Financing lessee and financial leasing are not so different from each other in business operation. But from the aspects of industry division and supervision, they are quite different. Firstly, financing lease companies run financial lease businessunderother financial activities in financial industry (Type 7120, Industry J) if divided by industry. Financial leasing companies do not belong to any specific industry and only equipment lease inleasing industry can be found in leasing and business service industry (Type 7310, Industry L). Secondly, thereis industry difference. Financinglease companies are non-bank financial institutions, whose capitals come from short-term capital market ofthe same industry, while financial leasing companies are non-financial enterprises. The Notice ofIssues Concerning Strengthening Supervision on Shadow Banking issued by the State Council requires non-financial institutions like financial leasing companies to define their scope of business strictly…Financial leasing companies are required to carry out business by relying on appropriate leased propertybut not to lendbank loans or relevant assets. Thirdly, the authorities supervising the two types of lessors are different. Financinglease companies are examined and approved ahead of establishment and supervised by China Banking Regulatory Commission, while financial leasing companies are examined and approved ahead of establishment and supervised by the Ministry of Commerce of the People’s Republic of China.

Chart 6: Classification of Financial leasing Companies Involved in Cases of Disputes over Financial lease Contract in Shenzhen

According to the information of lessors involved in cases of disputes overfinancial leasecontract in Shenzhen from 2011 to July 2015, there are four types of lessors carrying out financial leasing business in Shenzhen: The first type is professional financial leasing companies mainly including Sino-foreign joint ventures or foreign-funded enterprises, accounting for 72% of the total lessors in question; the second type is state-owned financinglease companies. For example, China Development Bank Financial Leasing Co., Ltd. is the only financinglease company (bureau level) in Shenzhen, accounting for 17% of the total lessors in question; the third type is overseas institutions including overseas banks, SPV and foreign finance companies, accounting for 6% of the total lessors in question; and the fourth type is domestic-funded financial leasing companies, accounting for 5% of the total lessors in question.

Chart 7: Top Ten Financial Leasing Companies Involved in Financial Lease Contract Disputes in Shenzhen

If divided by the background of lessors’ capital resources, foreign capitals account for over 70% of the total capitals of financial leasing companies involved in cases of  disputes over financial lease contract in Shenzhen, state-owned capitals account for nearly 20%, and private-owned capitals account for less than 10%. This basically conforms to the current lessors’ situations in financial leasing market in Shenzhen. Financial leasing companies have developed rapidly since an experimental company wasfounded in 2004. Domestic-funded financial leasing companies are mainly established byindustrial capital or social capital whileforeign-funded ones entered China’s market along with financial leasing business mode. Among all financial leasing companies, foreign-funded ones are the most, accounting for over 80% of the total.

If divided by distributionareas of cases, cases in which professional financial leasing companies and financinglease companies are lessors are mainly occurred in Luohu District, Futian District and Nanshan District, which are close to the downtown area. Cases in which overseas legal persons and private-owned enterprises are lessors are mainly in Yantian District far away from the downtown, and Longgang District and Baoan District outside the former Shenzhen Special Economic Zone. This shows different types of lessors’ shares in Shenzhen market to some extent.

4. Analysis on Leased Property

Chart 8: Value of Leased PropertyInvolved in Cases of Disputesover Financial lease Contract in Shenzhen

Chart 9: Trial Procedures of Cases of Disputes over Financial lease Contract in Shenzhen

Judging from the information ofthe leased propertyin question, there are mainly four types of leased propertyin financial leasing transaction in Shenzhen: The first type is commercial vehicles, which is also the largest-scale type of leased propertyin financial leasing transaction, specifically including bus, dump truck, container trailer and two-wheeler; the second type is engineering machinery vehicles, mainly including excavator, cement mixer, road roller and crane; the third type is production equipment; and the fourth type is others.

Seen from the value of leased propertyin questionand trial procedures, the average amount of subject matter involved in litigation of disputes over financial lease contract in Shenzhen from 2011 to 2015 is more or less thanRMB 2 million (Chart 8), and cases applicable to simple procedures at first instance tried by the district courts and the Intermediate People’s Court of Shenzhen account for 49% of the total cases (Chart 9). The leased propertyinvolved in cases of disputes over financial lease contract in Shenzhen are mainly itemsused in the fields of enterprise production equipment, engineering machinery and commercial vehicles, which medium, small and micro-sized lessees specialize in. Most of these lessees are natural persons and medium small and micro-sized enterprises, easily affected by economic fluctuation and having low anti-pressure ability. The amount involved in a single lease contract in the aforesaidfields is not large, but the occurrence rate of disputes is high and such disputes are difficult to be settled with. Part of the cases may involve preservationand execution in other places.

5. Major TradingFormand Structure

	Financial Leasing Companies (Lessors)   Leased Item Purchase and Sales Contract

                                 Pay Rental

Chart 10：Flow Chart of Typical Financial leasing Transaction

					Factoring Bank
						Leased Item Purchase and Sales Contract   Financial Leasing Companies (Lessors)
	Factoring Financing

              Notify Assignment of Creditor’s Rightsand Pay Rental

Chart 11：Flow Chart of Typical Financial Leasing Factoring Transaction

Financial Leasing Companies (Lessors)			Pay Money for Goods   Equipment Leaseback and Pay Rental   Sell Leased Property

Chart 12: Flow Chart of Typical after-sales Leaseback Transaction

From the specific contentsof thecases, the subjects in financial leasing transaction in Shenzhen mainly include such organizations as financial leasing company (lessor), lessee, supplier, bank and commercial factoring company, which the structure of financial leasing transaction is mainly about. Charts 10, 11 and 12 are three basic and common structures of typical financial leasing transactions: general financial leasing, finance leasing integrating commercial factoring andafter-sales leaseback. More complicated structures can be derived from the aforesaid structures of financial leasing transaction in actual cases. For example, there are usually actual users besides lessees, i.e. lessees sublease the leased property, for whichthe leased propertyare not under the control of lessees’ but actual users’. Moreover, there areaffiliates and nominal owners of vehicles in cases in which commercial vehicles are leased property, which means that a new transaction relationship derives from lessees’ transaction network. These transaction relationships will even affect and cover up the existence of the basic legal relationship, i.e.financial leasing relationship. In general, financial leasing, as financial-alike transaction, will definitely derive more complicated transaction structures under the ever-diversifyingtransaction needs, especially following the continuous exploration and appearance of financial innovative products.

Part II

Typical Cases of Disputes over Financial Lease Contractin Shenzhen

I. Legal Relationship of Financial Leasing

1. Though its name is financial leasing contractual relationship, it actually includes staging purchase and sales contractual and affiliating operation contractual relationships.

1.1 Name of Case

Shenzhen He Xiang Container Transportation Co., Ltd. (“He Xiang Container”) v. HAN, Honglei for a dispute over financial lease contract

First-instance Trial: The People’s Court of Yantian District, [2013] Shen Yan Fa Min Er Chu Zi No. 197

Second-instance Trial: The Intermediate People’s Court of Shenzhen, [2014] Shen Zhong Fa Shang Zhong Zi No. 175

1.2 Basic Facts

On June 22, 2011, the lessor He Xiang Container and the lessee HAN, Honglei executed the Financial Lease Contract and the schedules thereto, agreeing on the following main contents: The leased property is Yue B** and Yue BD ** trailers, for which the payable rental is RMB 25,743.47 for each installment in the financing term of two (2) years commencing from July 20, 2011 and ending on June 20, 2013, by 24 installments in total. On August 4, 2011, He Xiang Container and First AutoMobile Finance Co., Ltd., outsider of this case, signed the Automobile Financial Lease Contract, agreeing on the following terms: First AutoMobile Finance Co., Ltd. as the lessor, provides the lessee He Xiang Container with the lease principal in the amount of RMB 4,314,236.42 for purchasing 18 vehicles including the vehicles in question, the ownership of which belongs to ** Finance Co., Ltd. However, for the purpose of He Xiang Container’s convenient operation & management, the lessee He Xiang Container was registered to be the owner of said vehicles when registering the vehicles with the competent vehicle management department. Meanwhile, He Xiang Container and ** Finance Co., Ltd. executed the Automobile Financial Lease Mortgage Contract, mortgaging the aforesaid 18 vehicles to ** Finance Co., Ltd. Moreover, on June 20, 2011, HAN, Honglei and ** Finance Co., Ltd. entered into the Automobile Financial Lease Guarantee Contract, agreeing that HAN, Honglei provides guarantee for RMB 478,307.50 of the financing fund under the abovementioned Automobile Financial Lease Contract which was executed by and between He Xiang Container and ** Finance Co., Ltd.

1.3 Key Articles of Law

The Contract Law of the People’s Republic of China

Article 237 Financial Lease Contract isa contract whereby the lessor, upon purchase of the lessee-selected leasedproperty from a lessee-selected seller, provides the leasedproperty to the lessee for its use, for which the lessee pays the rental.

The Interpretation of the Supreme People’s Court on the Application of Legal Issues concerning Trial of Cases of Disputes over Financial Lease Contracts

Article 1 The people’s court should, in compliance with Article 237 of the Contract Law of the People’s Republic of China, ascertain the legal relationship of financial lease in consideration of the nature, value and composition of the rental of the subject matter and the contractual rights and obligation of the parties concerned.

As to the legal relationship which is named financial lease contract yet actually not financial lease, the people’s court should settle the same according to its actual composition of legal relationship.

1.4 Court’s Findings

First, in the Automobile Finance Lease Contract executed by He Xiang Container and ** Finance Co., Ltd. it was agreed that the owner of the vehicles involved in this case shall be ** Finance Co., Ltd. and said vehicles were registered under the name of He Xiang Container for purpose of operation management. Meanwhile, both parties executed the Automobile Finance Lease Mortgage Contract, mortgaging the vehicles involved in this case to ** Finance Co., Ltd., and then HAN, Honglei and ** Finance Co., Ltd. executed the Automobile Finance Lease Guaranty Contract, agreeing that HAN, Honglei shall provide guaranty for He Xiang Container for the finance amount relating to the vehicles involved in this case. Therefore, the relation between He Xiang Container and ** Finance Co., Ltd. was in the name of finance lease and actually borrowing. The owner of the vehicles involved in this case shall be He Xiang Container; Second, He Xiang Container had no qualification of finance lease and thus not capable of operating the finance lease business, and no evidence proved that the vehicles involved in this case were purchased by He Xiang Container based on HAN, Honglei’schoice and provided to him for use; Third, the rent collected from HAN, Honglei by He Xiang Container was actually the principal and interest of the loan which He Xiang Container borrowed from ** Finance Co., Ltd., and meanwhile He Xiang Container also made a charge from HAN, Honglei for affiliating-operated vehicles. All above, in this case, He Xiang Container purchased the vehicles in the name of finance lease and actually by loan borrowed from ** Finance Co., Ltd., and He Xiang Container, taking advantage of the conditions that the vehicles were registered under its name and it had the qualification of road transport operation, provided these vehicles affiliated to He Xiang Container to HAN, Honglei for actual use by means of installment sales, who actually assumed the repayment of loan principal and interest and other obligations which shall be performed by He Xiang Container for ** Finance Co., Ltd. and paid He Xiang Container the affiliating management cost.

1.5 Comment

The financial lease contractual relationship should be affirmed upon comprehensive judgment in consideration of the nature, value and composition of the rental of subject matter and the rights and obligation of the parties to contract in accordance with Article 237 of the Contract Law of the People’s Republic of China. Where there is different structure of transaction from that of financial lease, it is inappropriate to affirm the financial lease contractual relationship. As to the circumstances where the financial lease contractual relationship fails to be affirmed not due to an ineffective contract as provided in Article 52 of the Contract Law of the People’s Republic of China, the effectiveness of the contract and the rights and obligation of the parties to contract may be affirmed in accordance with the law provisions corresponding to its actually constituted named contract.

2. Though both parties’ relationship is named financial lease contractual relationship, it is actually loan contractual relationship.

2.1 Name of Case

PlaintiffYongheng Finance Co., Ltd. v. Defendants Hong Kong Xinben Co., Ltd., Shenzhen Xinben Co., Ltd., YAN, Bin and ZHAO, Zhongmei, GUO, Hongwei and the third parties TAO, Baogang, XU, Luoping and CHEN, Renquan for a dispute over loan contract

The People’s Court of Yantian District, [2012] Shen Yan Fa Min Er Chong Zi No. 1

2.2 Basic Facts

On June 7, 2007, Plaintiff and Hong Kong Xinben Co., Ltd. executed the Sales Contract, in which Plaintiff purchased 3 brand-new “Jiefang” brand motor tractors from HongkongXinben Co., Ltd. at the price of HKD 960,000 (the license plate numbers are Yue B**220, Yue B**640 and Yue B**223, and the corresponding engine numbers are 50812342, 50812303 and 50812355 respectively). On the same day, Plaintiff and HongkongXinben Co., Ltd. signed the Lease Agreement, lending out the aforesaid 3 vehicles to Hong Kong Xinben Co., Ltd., and in the Lease Agreement and schedules thereto both parties reached agreement on their rights and obligations thereunder including: a. Term of lease: twenty-four (24) months commencing from the date of execution of the Lease Agreement, i.e. June 7, 2007; b. Method of rental payment and default interest: down payment of rental in the amount of HKD 360,000 paid in a lump sum on the date of execution of the Lease Agreement. And a monthly rental of HKD 27,875 for the following 24 installments after the down payment should be paid on schedule. In case that the lessee fails to pay the rental as scheduled, it shall pay default interest at a monthly rate of 3%; c. Upon settlement of all the rental as agreed, Hong Kong Xinben Co., Ltd. may purchase the aforesaid vehicles by paying another HKD 300, and before settlement of the rental, the ownership of the vehicles shall belong to Plaintiff; d. The Lease Agreement shall be interpreted according to the law of Hong Kong Special Administrative Region. Hong Kong Xinben Co., Ltd. is subject to the non-exclusive jurisdiction of the courts of Hong Kong.

On the same day, Plaintiff as the lessor, Defendant Hong Kong Xinben Co., Ltd., the lessee and Defendant ShenzhenXinben Co., Ltd. as the nominee, jointly executed the nomination Agreement, agreeing upon the following terms: According to the Lease Agreement executed by and between Plaintiff and Hong Kong Xinben Co., Ltd. and in order to allow the vehicles to be used in Chinese mainland, Hong Kong Xinben Co., Ltd. nominates ShenzhenXinben Co., Ltd. as the nominee, i.e. registrant of the vehicles listed in the Lease Agreement in the Chinese mainland, and Shenzhen Xinben Co., Ltd. shall undertake to hold the aforesaid vehicles only in the capacity of the nominee and acknowledge Plaintiff’s ownership of the vehicles.

And on that day Defendants Shenzhen Xinben Co., Ltd., YAN, Bin, ZHAO, Zhongmei and GUO, Hongwei respectively issued the Letter of Guaranty and Indemnity to Plaintiff, agreeing to provide joint and several guarantees for the debt owed by Hong Kong Xinben Co., Ltd.under the abovementioned Lease Agreement. The Letter of Guaranty and Indemnity shall be interpreted in accordance with the law of Hong Kong Special Administrative Region. The Letter of Guaranty and Indemnity was not approved by the State Administration Of Foreign Exchange, and it did not specify that which party shall be responsible for going through the examination and approval procedure with said Administration.

On the same day, Plaintiff, after deducting the down payment of rental in the amount of HKD 360,000 and the relevant fees of HKD 3,000 as agreed in the Lease Agreement, made payment of the loan in the amount of HKD 597,000 to Hong Kong Xinben Co., Ltd. by means of transfer. Later, Hong Kong Xinben Co., Ltd. successively made payment of 20 installments of rental under the Lease Agreement in the amount of HKD 557,500. By the closing argument of this court, Hong Kong Xinben Co., Ltd. had owed 4 installments of rent involving the vehicle Yue B**223 in the total amount of HKD 111,500. Up to March 23, 2011, Hong Kong Xinben Co., Ltd. had owed default interest in the amount of HKD 112,611.95 in total.

This court finds the facts related to this case as follows: a. Plaintiff submitted the Legal Opinion issued by Lawyer ZHUO, Longsheng from Oldham, Li &Nie Law Firm of Hong Kong Special Administrative Region, in which, however, the subject matter of contract mentioned is “equipment” rather than vehicle or means of transportation. b. The Letter of Civil Mediation ([2010] Shen Yan Fa Min Yi Chu Zi No. 314) issued by the People’s Court of Yantian District which is effective confirms that the motor tractor with license plate number of Yue B**223 and engine number of 50812355 was possessed by a third party, CHEN, Renquan. And the Civil Judgment ([2011] Shen Zhong Fa Min Yi Zhong Zi No. 952) issued by the Intermediate People’s Court of Shenzhen finds the fact that the motor tractor of Yue B**223 was purchased by another third party TAO, Baogang under entrustment of the third party CHEN, Renquan.

2.3 Key Articles of Law

The Interpretation of the Supreme People’s Court on the Application of Law in the Trial of Cases of Disputes over Financial Lease Contracts

Article 1 The people’s court shall, in compliance with Article 237 of the Contract Law of the People’s Republic of China, identify the legal relationship of financial lease in consideration of the nature, value and composition of the rental of subject matter and the contractual rights and obligation of the parties concerned.

The people’s court should determine the legal relationship of the contract in question, which is named financial lease contract but does not constitute the financial lease legal relationship in effect, based on its actually constituted legal relationship.

The Law of the Application of Law in Foreign-related Civil Relationships of the People’s Republic of China

Article 10 Foreign laws applicable to foreign-related civil relationships shall be checked by the people’s court, arbitral authority or administrative organ. If any party concerned chooses the applicable foreign laws, itshould provide the laws of that foreign country. 

If foreign laws cannot be traced or there are no provisions in the laws of thatforeign country, the laws of the People’s Republic of China shall apply.

Article 19As to the application of law to foreign-related civil relationships involving parties from Hong Kong Special Administrative Region and Macao Special Administrative Region, the provisions shall be referred to for application of law.

2.4 Court’s Findings

Plaintiff, Yongheng Finance Co., Ltd. and Defendant, Hong Kong Xinben Co., Ltd. are both enterprises incorporated and registered in Hong Kong, for which this case is a Hong Kong-related contract dispute.

i. Jurisdiction and application of law. The Lease Agreement executed by and between Plaintiff and Defendant Hong Kong Xinben Co., Ltd. and the Letter of Guaranty and Indemnity executed by and between Plaintiff and Defendants Shenzhen Xinben Co., Ltd., YAN, Bin, ZHAO, Zhongmei and GUO, Hongwei both agree on the non-exclusive jurisdiction of the courts of Hong Kong, which does not exclude the jurisdiction of the courts of Chinese mainland with competent authority. Therefore, if either party brings a lawsuit before a court of Chinese mainland, which has the right of competency in accordance with the Civil Procedure Law of the People’s Republic of China, such court of Chinese mainland may accept and hear the case. Defendant in this case, Shenzhen Xinben Co., Ltd. is located in Yantian District, Shenzhen, for which this court shall have the right of competency over this case. As to the application of law, although the Lease Agreement and the Letter of Guaranty and Indemnity agree on the law of Hong Kong Special Administrative Region as the governing law thereof, and Plaintiff claims for application of the laws of Hong Kong, the Legal Opinion which was issued by the Hong Kong lawyer and submitted by Plaintiff only mentioned the “equipment” rather than the motor vehicles in question and does not make it explicit whether the “equipment” includes motor vehicles. In accordance with the relevant theories and provisions of the real right law of the People’s Republic of China, equipment and means of transportation including motor vehicles are in different categories, and the former is not required to be registered while the latter is required to be registered for use, and they are different in application of law. Thus the aforesaid Legal Opinion is dismissed by this court. Since both parties fail to further provide the provisions of the law of Hong Kong Special Administrative Region concerning the financial lease contract on motor vehicles or related effective legal precedent, this court cannot ascertain the issue. In accordance with Article 10 of the Law of the Application of Law for Foreign-related Civil Relationships of the People’s Republic of China, foreign laws applicable to foreign-related civil relationships should be checked by the people’s court, arbitral authority or administrative organ. If any party chooses the application of foreign laws, it should provide the laws of the foreign country. If foreign laws cannot be ascertained or there are no provisions in the laws of the foreign country, the laws of the People’s Republic of China shall apply. And in accordance with Article 19 of the aforesaid Law, as to the application of law to civil relationships involving parties from Hong Kong Special Administrative Region and Macao Special Administrative Region, the provisions hereof shall be referred to for application of law. In accordance with the aforesaid law provisions, the law of the People’s Republic of China shall be applicable to this case.

ii. Identification of the legal character of the master contract. Plaintiff claims that this case is about dispute over financial lease contract, which lacks factual and legal basis. According to the relevant theories of the Contract Law of the People’s Republic of China, the parties to a financial lease contract generally include the seller, the lessor and the lessee. But in this case, according to Plaintiff’s statement, Defendant Hong Kong Xinben Co., Ltd. was both the seller and the lessee of the vehicles, and it sold the vehicles to Plaintiff and then rented said vehicles from Plaintiff, transferred the same to Defendant Shenzhen Xinben Co., Ltd. for use. In fact, Defendant Hong Kong Xinben Co., Ltd. did not deliver the vehicles in kind to Plaintiff, nor did it complete the formalities of ownership transfer and transfer the ownership of the vehicles to Plaintiff. No sufficient evidence supports that Defendant Hong Kong Xinben Co., Ltd. was the original “owner” of the vehicles, for the vehicles were initially registered under the name of Shen