For a long time, it has been a common challenge in China judicial practice that shareholders may use their limited liability status as shareholders to maliciously avoid or evade debts. In order to address this problem, the newly amended Company Law of China has strengthened the liability of shareholders.
The summary of shareholders potential joint and several liability under the new Company Law of China is as follows:
I. Joint and several liability in case of denial of legal personality
A shareholder of a company who abuses the independent status of the company and the limited liability of the shareholders, evades debts and seriously jeopardizes the interests of the company's creditors shall be jointly and severally liable for the debts of the company.
If a shareholder uses two or more companies under his control to commit the acts referred to in the preceding paragraph, each company shall be jointly and severally liable for the debts of any one of them.
In the case of a company with only one shareholder, the shareholders shall be jointly and severally liable for the company's debts if they cannot prove that the company's assets are independent of the shareholders' own assets.
II. Joint and several liability in the incorporation process
If, in the process of establishing a limited liability company, its shareholders engage in civil activities for the establishment of the company, the legal consequences of which are borne by the company.
If the company is not established, the legal consequences shall be borne by the shareholders at the time of the establishment of the company; if the shareholders at the time of the establishment of the company are more than two persons, they shall enjoy joint and several rights and bear joint and several obligations.
The third party shall have the right, at its option, to require the company or the shareholders at the time of establishment to bear the civil liability arising from the civil activities performed by the shareholders at the time of establishment in their own names for the purpose of establishing the company.
If the shareholders at the time of establishment cause damage to others while performing their duties for the establishment of the company, the company or the shareholders who are not at fault may, after assuming the liability, recover it from the shareholders who are at fault.
III. Joint and several liability in case of insufficient contributions
If, at the time of the establishment of a limited liability company, a shareholder fails to actually pay the capital contribution in accordance with the provisions of the articles of association of the company, or if the actual value of the non-monetary property actually contributed to the company is significantly less than the amount of the capital contribution subscribed to, the other shareholders at the time of the establishment of the company shall be jointly and severally liable with the shareholder to the extent of the shortfall in the capital contribution.
This is a major change in the new Company Law, which holds a shareholder jointly and severally liable for the breach of other shareholders' obligations.
IV. Joint and several liability for transfer defective shares
If a shareholder transfers a share for which a capital contribution has been subscribed but has not paid before the expiration, the transferee shall be liable to pay the capital contribution; if the transferee fails to pay the capital contribution in full on time, the transferor shall be additionally liable for the capital contribution that the transferee fails to pay on time.
If a shareholder who fails to pay the capital contribution in accordance with the capital contribution date stipulated in the articles of association or the actual value of the non-monetary property used as capital contribution is significantly lower than the amount of the capital contribution subscribed for transfers his equity interest, the transferor and the transferee shall be jointly and severally liable to the extent that the capital contribution is insufficient; if the transferee did not know and should not have known of the existence of the aforesaid circumstances, the transferor shall be held liable.
V. Joint and several liability of "shadow directors"
Controlling shareholders and de facto controllers of the Company who instruct directors and executive officers to commit acts detrimental to the interests of the Company or its shareholders shall be jointly and severally liable with such directors and executive officers.
Vi. Joint and several liability for false commitments in liquidation procedures
If the company has not incurred any debts during its existence or has settled all its debts, the registration of the company may be cancelled through a simplified procedure in accordance with the provisions upon the consent of all shareholders.
Cancellation of the company's registration through the simplified procedure shall be announced through the National Enterprise Credit Information Publicity System for a period of not less than twenty days. If there is no objection after the expiration of the notice period, the company may apply to the company registration authority for deregistration of the company within twenty days.
Where a company is deregistered through the simplified procedure, the shareholders who have made an untrue commitment to the contents of the first paragraph of this Article shall be jointly and severally liable for the debts incurred prior to the deregistration.
Disclaimer: This article is only for academic purpose and not intended for providing any legal advice for any specific cases, individuals or organizations.
For more information, please feel free to contact David Gao, a Chinese lawyer with With 20+ years of legal practice, focusing on business law and family law.
Email: gaohexin@163.com
Tel/Wechat：86 13611158067
