By You Yunting
By judicial practices in China, in case the Sino-foreign invested company, which however is operated under the management of Chinese shareholder, is trapped in the insolvency, the foreign investors could be judged to take all the debt of the company, not subject to the total amount of its investment, when Chinese partner chooses to disappear or refuse to clear the debt. And in recent, as per the latest 3rd guiding cases by China Supreme People’s Court, by a decision indicated in it, the non controlling shareholder shall be liable to the joint liability to the non-settled debt of the company, that obviously aggravates the burden of the company shareholder. Then, what is the fair way to avoid such risks? We put forward our answer to it in today’s post.
Case: Company A, the plaintiff, claims that it has supplied steel to Company B, who thereafter does not pay the consideration of RMB 1,395,228.6. The defendant C, D, E is the shareholder of Company B, yet Company B by then has taken no annual administration examination, and thereby be revoked the business license. But no liquidation is made after that. Due to that delay in liquidation, the property of the Company B has been seen gone, and thereby Company B is not fully liquidated. By corporate law and relevant judicial interpretations, C, D, E shall take the joint liability to the debt of Company B. With the consideration of that, Company A makes the demands that Company B shall pay it the purchase money, and C, D, E take the jointly liability for satisfaction to the Company B’s debt.
As argued by D and E: 1. they have never participated in the daily operation of Company B; 2. Company B is under the control of the strong holder of C, and therefore they shall not be liable to the liability of satisfaction of Company B’s debt; 3. For the bad management, Company B has already be sank into the debts, and actually insolvent to such debts, the property or asset erosion could not blame for the delay payment of D and E; 4. D and E once entrusted lawyers to make the liquidation on Company B, which, however, could not be fulfilled due to the asset has been seizure by other creditors. That can also explain that D and E is not engaged in the delayed clearance of the company debt. Basing on these, D and E demand to refuse any claims against them.
Company B and Shareholder C does not participate in the lawsuit, and make no reply to the claim by Company A.
Investigation by the court: on 28th June of 2007, Company A concluded a contract for steel transaction with Company B, and thereafter, Company A supplies the product valued RMB 7,095,006.6 and Company B paid RMB 5,699,778 with RMB 1,395,228.6 unpaid. On the other hand, C, D, E respectively occupies 40%, 30% and 30% of the total share option of Company B. For no annual examination has been made then, Company B was revoked the business license on 25th December of 2008 and no liquidation is made after then. Currently, Company B has no offices, and its account book and asset have both gone. As to other cases involved Company B in the process of enforcement has been ordered to cease for no asset to be found.
Decision: the judicial decision was made on 8th December of 2009: 1. Company B shall pay Company A RMB 1,395,228.6 and the penalty; 2. C, D, E shall take the joint liability to Company B’s debt. After the decision by the court, D and E filed an appeal, which is refused by Shanghai No.1 Intermediate People’s Court on 1st September of 2010.
Reasons for the judicial decision: Company B fails to pay the purchase after Company A provides the product, and shall thereby take the liability to pay the purchase and the penalty calculated then. C, D, E as the shareholder of Company B shall make the liquidation to Company B after it is revoked the business license. Due to the delayed liquidation by C, D and E, Company B has suffered the losses of account book and asses, which has made the liquidation no longer possible. Also the delayed liquidation has also violated the corporate law and relevant judicial interpretations, and C, D, E shall take the joint liability to the debt of Company B. Company B, as a LLC, all the shareholders of it by law shall be the liquidation obligor. There could be found no clauses to support the argument made by D and E, and therefore no matter the percentage of the share option held by shareholder D and E is, or whether they have participated in the daily operation, both of them shall be liable to make the liquidation within the legal period after the business license revocation.
As to the D and E’s claimed debt taken by Company B before the revocation of the business license, and if there was the delayed liquidation, it shall have no link to the asset erosion. By the investigated facts, Company B is of no asset to be enforced in other cases, could only prove no asset could be found in the enforcement case but no stands for all the assets of Company B has gone before the revocation of the business license. There is some connection between the delayed liquidation and the erosion of Company B’s account book and asset, so the argument of D and E could not be established. The contract submitted by D and E for the engagement of lawyer to participate in the liquidation could only prove their intension of the liquidation, yet in fact we have seen no such liquidation is actually made. With all these, it is fairly to confirm that D and E have fulfilled no obligation of liquidation, and therefore their claims shall not be accepted.
Legal basis: By Article 18 of Judicial Interpretation II of Corporate Law:
“the shareholders o liability limited company, the director of company limited by shares and controlling shareholder shall start the liquidation of the company within the statutory period, and on any failure or delay to fulfill such obligation which may lead to the devaluation, erosion, losses or damages to the company’s asset, the creditor may claim the liable shareholder to take the compensation liability within the scope of losses and shall be supported by the court. The shareholders of liability limited company and the director of the company limited by shares and their controlling shareholders shall be liable to the debt of the company in joint ways once they are delayed in fulfillment of the obligation which has led to the losses of account book, asset or important document, and the people’s court shall also support the claims for that.”
Opinions from lawyers: in the case, D and E as the shareholder of the company, by the corporate law could be exempted from the joint liability. Method: by Article 7 of Interpretation II, when shareholders detained the situation of dissolution of the company, like the revocation of the business license, they shall assemble the shareholder’s meeting within 15 days after that, and constitute a liquidation group, and make the liquidation then. So what shall D and E to do is to assemble the shareholder meeting and liquidation group within 15 days when finding the company assets have been seized and no normal operation could be continued then. No matter whether the court accept the application or not, once the shareholders go through the above procedures, they could be free of the relevant legal risk, and shall not be judge the joint liability to the company’s debt.
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