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First instance: The Intermediate People's Court of Dalian City, Liaoning Province, issued (2016) Liao 02 Minchu No. 248, a civil judgment of the first instance on August 22, 2018. Second instance: The Higher People's Court of Liaoning Province issued (2019) Liao Min Zhong No. 868, a civil judgment of the second instance on August 5, 2019. Retrial: The Supreme People's Court issued (2019) Supreme Law Minshen No. 6099 on September 24, 2020, retrial civil ruling.

Basic case

1. On February 13, 2009, Zhonghong Furniture Company had its business license revoked due to failure to conduct annual inspections. It has not been liquidated so far. The office and business location, account books and property are unknown. 2. Zhonghong Development, one of the shareholders of Zhonghong Furniture Company, was established on November 9, 1992 as a collectively owned enterprise in Xiaoxin Village. Its business license was revoked on November 23, 2006 due to two years of non-annual inspection.

3. As of August 31, 2006, China CITIC Bank Dalian Zhongshan Sub-branch had a total principal of 35 million Yuan in credits to Zhonghong Furniture. Zhonghong Development is the joint liability guarantor, and assumes joint liability for the 27 million Yuan of debts involved in the case.

4. The outsider, Xiaoxin Village, first filed an execution objection, and then filed an execution objection. After hearings by the two levels of courts, until March 16, 2013, the Liaoning Provincial Higher People's Court made a judgment, and China CITIC Bank Dalian Zhongshan Sub-branch applied for the seizure of the land. Owned by outsider Xiaoxin Village, execution of the land has been suspended. So far, there is no property available for execution under the name of Zhonghong Furniture.

5. On March 6, 2014, Orient Assets Beijing Office purchased the non-performing asset package from China CITIC Bank that included the creditor's rights involved in the case. On April 16, 2014, China CITIC Bank Dalian Branch issued an announcement in the International Business Daily, claiming rights to the liquidation entity.

6. On August 5, 2014, Orient Asset Beijing Office transferred the creditor's rights involved in the case to Hengyu Company. On August 11, 2014, Orient Assets Beijing Office issued an announcement in the International Business Daily, claiming rights again to the liquidation entity.

7. Hengyu Company filed a lawsuit on June 14, 2016 after the transfer of the creditor's rights involved.

Focus of controversy (partial)

Whether Hengyu's lawsuit has exceeded the statute of limitations

The court of second instance held that (in part): Hengyu Company required Zhonghong Development and Changqing Co., Ltd. to bear the loss of Zhonghong Furniture’s main property, account books and important documents in accordance with Article 18, paragraph 2, of the judicial interpretation of the law, which caused Zhonghong Furniture to fail. The liquidation further resulted in Hengyu Company unable to inquire about the whereabouts of Zhonghong Furniture’s assets and creditor’s rights and debts, and was unable to realize the infringement liability of the creditor’s rights through other means. Therefore, during the statute of limitations in this case, the creditors should know or should know the main assets, account books and important documents of Zhonghong Furniture Calculated from the date of the loss and the person responsible for the loss of the main property, account books and important documents of Zhonghong Furniture. Although Zhonghong Furniture's business license was revoked on February 13, 2009 because of failure to conduct annual inspections, it cannot be presumed that Zhonghong Development and Changqing Co., Ltd. may not perform shareholder duties and do not preserve Zhonghong Furniture because of its business license being revoked. The company’s main assets, account books, and important documents are in good condition. Even if it can be presumed that China CITIC Bank Dalian Zhongshan Sub-branch should have known that Zhonghong Development and Changqing Co., Ltd. had the obligation to liquidate Zhonghong Furniture on February 28, 2009, it cannot be concluded that China CITIC Bank Dalian Zhongshan Sub-branch was on February 28, 2009. That is to say, it is known or should be known that Zhonghong Development and Changqing Co., Ltd. have not fulfilled the obligation of keeping Zhonghong Furniture's main property, account books and important documents, which led to the conclusion that Zhonghong Furniture's main property, account books and important documents were lost. Since the Dalian Branch of China CITIC Bank announced on April 16, 2014 that it requested that the liquidation entity perform its obligations or assume liquidation responsibilities on its behalf, it should be presumed that China CITIC Bank Dalian Zhongshan Sub-branch issued an agreement to Zhonghong Furniture’s shareholder Zhonghong Development and Development on April 16, 2014. For the rights claimed by Changqing Co., Ltd., the time effect of the litigation in this case will be calculated from April 16, 2014. On August 11, 2014, the Beijing Office of Orient Assets issued the same announcement in the International Business Daily, so the statute of limitations in this case was suspended on August 11, 2014 and recalculated.

Should the two shareholders of Zhonghong Furniture bear joint liability for liquidation? The court of second instance held that (in part): Zhonghong Furniture is a limited liability company, and Zhonghong Development and Changqing Co., Ltd., as shareholders of Zhonghong Furniture, have the responsibility and obligation to promptly deal with Zhonghong Furniture when it is difficult to continue operations and other liquidation situations. The furniture is liquidated. Even if it is not liquidated in time, the company’s main assets, account books, and important documents should be kept intact so that the company can liquidate at any time to ensure that the interests of the company’s creditors are not infringed. However, Zhonghong Development and Changqing Co., Ltd. still failed to provide Zhonghong Furniture's account books and important documents until the second instance of the case was concluded, resulting in Zhonghong Furniture being unable to conduct liquidation. Moreover, neither Zhonghong Development nor Changqing Co., Ltd. provided evidence to prove that the two companies had actively performed their liquidation obligations; nor did they provide evidence to prove that the main property, account books, and important documents of Zhonghong Furniture were controlled by other entities, and they were unable to exercise their liquidation rights; Nor did it prove that Zhonghong Furniture’s failure to liquidate has nothing to do with the loss of Zhonghong Furniture’s main assets, account books, and important documents. Therefore, the original judgment ordered Zhonghong Development and Changqing Co., Ltd. to bear joint and several liabilities for Zhonghong Furniture’s debts. The focus of the above disputes, the courts of first instance and retrial and the court of second instance have the same views.

Practice enrichment

1. Creditors should always claim their rights without interruption and retain the evidentiary materials for their claims.

2. According to the relevant provisions of the Company Law, the creditor claims joint and several liability to the company's shareholders as tort debts. The limitation period for the claim will be calculated from the date when the creditor knew or should have known that the company's shareholders' failure to perform the liquidation obligation caused damage to their claims. In conjunction with this case, the announcement asserted that the claims clarified the statute of limitations in this case. Although the right holder has experienced many litigations, it is still difficult to be the starting point for determining that the shareholder is slack in fulfilling the obligation of liquidation. In another case that the author found, the statute of limitations in the second-instance civil judgment (2020) Shaan Min Zhong No. 341 issued by the Higher People’s Court of Shaanxi Province on June 18, 2020 was calculated from the date when the creditor knew or should have known that the debt company could not be liquidated. It is calculated from the date of expiry of the court's ruling to terminate the liquidation procedure announcement. In this case, the creditor’s lawsuit against the shareholders of the debtor company for claiming their joint liabilities was regarded as an interruption of the statute of limitations, and the first and second instance of the case where the shareholders of the debtor company appealed to the court for confirmation of shareholder qualifications were deemed to have also extended the reasons for the interruption of the statute of limitations. The statute of limitations for "liquidation liability disputes" will only be recalculated from the date when the second-instance ruling of the company's shareholder confirmation comes into effect.

3. Allocation of burden of proof for the failure of shareholders to perform liquidation obligations to the company’s main property, account books, and documents: This type of case involves negative facts that prove that shareholders have failed to perform liquidation obligations, and the shareholder’s contingent omissions caused creditors The difficulty of proof is greatly increased. Therefore, in judicial practice, the courts generally maintain the principles of justice and good faith by reducing the burden of proof by creditors to ensure the substantive fairness of the case. Creditors generally only need to provide indirect evidence such as the company has no office, no personnel, and the business registration is revoked. Based on the above indirect evidence, the court finds that the company’s shareholders are negligent in fulfilling the liquidation obligations; important documents and other evidence to prove that the liquidation obligation has been fulfilled. If the shareholder fails to provide the company’s main assets, account books, important documents, etc., it is deemed that the shareholder cannot provide evidence against the facts and bears adverse consequences. Therefore, in the process of handling such cases, the creditor needs to collect as much evidence as possible that the company cannot be liquidated. Even if it is only circumstantial evidence, it may also play a key role in the case.

4. The actual investor or actual controller is not the company’s liquidation obligor, and therefore will not be jointly and severally liable to the company’s creditors for the failure of the company’s liquidation due to the loss of the company’s main property, account books, and important documents due to the failure of the shareholders to perform the liquidation obligations. In this case, the court denied the actual controller Xiaoxin Village’s joint and several liability for this reason. The author found another case, the Foshan Intermediate People’s Court of Guangdong Province, issued (2020) Guangdong 06 Civil Final 2243 on July 22, 2020. The Civil Judgment No. 2 also denied this type of liability of the actual investor.

5. For the shareholders of a limited liability company in this case, as long as there is a reason for the dissolution of the company, they must establish a liquidation team within the statutory time limit to start liquidation, even if other shareholders or actual controllers hinder or fail to cooperate, it will be treated as a liquidation regardless of the number of shares held by the obligor, regardless of whether it can actually control the company, it should also take further measures to require other liquidation obligors or actual controllers to organize liquidation until the court compulsory liquidation, otherwise it would violate the statutory liquidation obligation. It should take the corresponding responsibilities. However, the author also found two opposite cases. The Civil Judgment of the Second Instance (2020) Shaan Min Zhong No. 341 issued by the Higher People’s Court of Shaanxi Province on June 18, 2020 denied such liabilities of minority shareholders holding 5% of the shares. The reason stated is that as a minority shareholder, he did not serve as a senior executive of the company or participate in the company's operations, and was unable to grasp the company's main assets, account books, important documents, etc., so the company could not be liquidated and irresponsible for such losses. In the civil judgment of the second instance (2019) Zhe 01 Min Zhong No. 5953 issued by the Hangzhou Intermediate People’s Court of Zhejiang Province on January 16, 2020, the 15 minority shareholders who held 0.15% to 1.5% of the shares also claimed that they had not participated in the management and failed to participate in the operation and management. Obtaining cash dividends, unable to grasp the company’s property, account books and important documents, and that there is no causal relationship between this behavior and the company’s inability to liquidate, it is determined that the company does not bear joint liability for the debts of the company.

6. As a shareholder of a company that is difficult to continue operations and other liquidation situations, the company should be liquidated in a timely manner. Even if the company is not liquidated in time, the company's main assets, account books, and important documents should be kept intact or can explain whereabouts or can prove that it has actively performed corresponding responsibilities. Only by ensuring that the interests of the company’s creditors are not violated can the independent personality of the legal person be guaranteed not to be broken, thereby protecting the limited liability of shareholders.

Core law

Article 18 of the Provisions of the Supreme People's Court on Several Issues Concerning the Application of the "Company Law of the People's Republic of China" (2): The shareholders of a limited liability company, directors and controlling shareholders of a joint stock limited company fail to establish a liquidation team within the statutory time limit to start liquidation, resulting in the devaluation, loss, damage or loss of the company’s property. The people’s court will support it in accordance with the law.

If shareholders of a limited liability company, directors and controlling shareholders of a company limited by shares fail to perform their obligations, resulting in the destruction of the company’s main property, account books, important documents, etc., and cannot be liquidated, and the creditors claim that they bear joint and several liability for the company’s debts, the people’s court should be supported in accordance with the law.

“Statement:

This article was originally created by the lawyers of JAVY Law Firm. It only represents the author's own views and should not be regarded as a formal legal opinion or suggestion issued by JAVY Law Firm or its lawyers. If you need to reprint or quote any content in this article, please indicate the source.