Viewpoint. Can the annual audit report be used as a basis for determining the independence of one-person limited liability company and shareholder property?
Published:
2024-07-19
This paper combines the trial ideas of the Supreme Court and the local court's effective judgment documents, aiming to provide reference ideas for the shareholders of a one-person limited liability company, and also provide reference for the evidence of such shareholders involved in the lawsuit.
Introduction
As we all know, the shareholders of a one-person limited liability company need to "prove their innocence" in order to avoid joint and several liability, and in judicial practice, it is generally believed that the burden of proof for the shareholders of a one-person limited liability company is to submit the company's annual audited financial and accounting report. however, in the trial of such cases, the determination standard is not completely unified, resulting in some difficulties for shareholders to provide evidence in such cases. Therefore, this paper will combine the trial ideas of the Supreme Court and the local court's effective judgment documents, aiming to provide reference ideas for the shareholders of one-person limited liability company, and also provide reference for the evidence of such shareholders involved in the lawsuit.
1. relevant legal provisions
Article 63 of the the People's Republic of China Company Law (as amended in 2018) (the "original Company Law") stipulates that if a shareholder of a one-person limited liability company cannot prove that the company's property is independent of the shareholder's own property, he shall be jointly and severally liable for the company's debts.
Article 23 of the the People's Republic of China Company Law (as amended in 2023) (hereinafter referred to as the "New Company Law") stipulates that if the shareholders of a company abuse the independent status of the company as a legal person and the limited liability of shareholders to evade debts and seriously harm the interests of the company's creditors, they shall be jointly and severally liable for the debts of the company. Where a shareholder uses two or more companies under its control to commit the acts specified in the preceding paragraph, each company shall be jointly and severally liable for the debts of any of the companies. In a company with only one shareholder, if the shareholder cannot prove that the company's property is independent of the shareholder's own property, he shall be jointly and severally liable for the company's debts.
As a result, Article 23 of the new Company Law, which came into effect on July 1, 2024, systematically amends and merges the provisions of Article 20 of the original Company Law on the abuse of rights and the legal liability of the independent status of the company legal person and the inversion of the burden of proof of one-person shareholders in Article 63 into one article. In addition, a paragraph is added to this article to clearly stipulate that shareholders use more than two companies under their control to abuse the independent status of the company legal person and limited liability, in the case of evading debts and seriously harming the interests of the company's creditors, we should bear joint and several liability, strictly restrict the rights of shareholders in essence, and resolve the risks of creditors, so as to achieve the goal of optimizing the business environment.
2. relevant referee ideas
(I) the shareholders of a one-person limited liability company shall submit the company's annual audited financial and accounting report, the company does not conduct an audit in each fiscal year, the presumption that the shareholders' personal property and the company's property are mixed cannot be ruled out.
[Case 1] Shanghai No.1 Intermediate People's Court (2014) Hu Yi Zhong Min Si (Shang) Zhong Zi No. S1267 Civil Judgment (Bulletin of the Supreme People's Court, No. 10, 2016)
The court held that Chen Huimei provided the relevant audit report of Jiamei Company, which can reflect that Jiamei Company has an independent and complete financial system, and the relevant financial statements also conform to the accounting standards and the provisions of the state foreign exchange management, and there is no sign of mixing the company's property with the personal property of shareholders, which can basically reflect the fact that Jiamei Company's property is separated from Chen Huimei's personal property.
[Case 2] Shandong Higher People's Court (2020) Lu Min Zhong No. 2239 Civil Judgment
The court held that according to the industrial and commercial registration data, Changqi Company is a one-person limited liability company with Shao Huaiyong as a shareholder. Article 63 of the the People's Republic of China Company Law stipulates that if a shareholder of a one-person limited liability company cannot prove that the company's property is independent of the shareholder's own property, he shall be jointly and severally liable for the company's debts. In the first instance, Shao Huaiyong submitted evidence such as bank statements and bookkeeping vouchers of the company, which could not prove that the company's property was independent of its personal property. Changqi Company shall establish its financial and accounting systems in accordance with laws, administrative regulations and the provisions of the financial department of the State Council, and shall prepare financial and accounting reports at the end of each fiscal year and shall be audited by an accounting firm in accordance with the law. As a shareholder and actual controller of Changqi Company, Shao Huaiyong failed to fulfill the above obligations and should bear the corresponding consequences.
If the (II) shareholder can provide a complete annual audit report issued by an accounting firm, and the contents of the report can reflect the independence of property, it may be determined that the shareholder's property is independent of the company's property, and if the creditor considers that the audit report is not evidential, it is still necessary to provide evidence to the contrary.
[Case 1] Civil Judgment No. 25477 of the Intermediate People's Court of Guangzhou City, Guangdong Province (2022)
The court held that Southern Media Company, as the sole shareholder of Southern Shopping Company, should bear the burden of proof to prove that the property of Southern Shopping Company is independent of its company property. The court held that Southern Media Company had completed the burden of proof for the following reasons: first, the two audit reports were issued on March 30, 2021, which was not suspected of being issued to cope with the lawsuit in this case and evade the responsibility of one shareholder; Secondly, the two audit reports were submitted in full and were made within the normal annual audit period. Thirdly, although Xuyuge Company does not recognize the probative power of the audit report, however, it did not specify the objection to the audit report, that is, where the property of the two companies was mixed. Therefore, Southern Media Company has completed its burden of proof and Xuyuge Company has not proved to overturn the above proof, Xuyuge Company sued Southern Media Company to bear joint and several liability for the debts involved in the case of Southern Shopping Company.
[Case 2] Beijing No.3 Intermediate People's Court (2023) Beijing 03 Civil Judgment No. 7534
The Court believes that Xinxing Company appeals that there is property mixing between Material Company and Qinhai Company. However, according to the documented evidence and the statements of the parties concerned, Qinhai Company and Material Company have submitted corresponding audit reports, investment certificates, etc., which are sufficient to prove the property independence of Material Company and Qinhai Company. Now Xinxing Company has failed to submit sufficient evidence to overturn the evidence such as audit reports submitted by Qinhai Company and Material Company, it also failed to submit sufficient evidence to prove that the material company had a practical interest in the transaction involved, so the Court did not accept the appeal of the emerging company.
[Case 3] Civil Judgment No. 14244 of Chengdu Intermediate People's Court of Sichuan Province (2023)
The court held that according to the 2021 Financial statements and Audit report of China Railway second Bureau Group Co., Ltd. and the 2021 Audit report of China Railway second Bureau Group Construction Co., Ltd., both China Railway second Bureau Construction Company and China Railway second Bureau Group Co., Ltd. have independent financial systems, which fairly reflect their financial status, operating results and cash flow, and there is no sign of mixing company property with shareholders' property. The shareholders and the company have assumed the preliminary burden of proof of the independence of the company's property and the shareholders' property, and Mingqiang Brick Factory has not presented any evidence that the China Railway Second Bureau Group Company and the China Railway Second Bureau Construction Company constitute a mix of property, nor has it pointed out what may constitute a mix of property in the audit report. In summary, the court of first instance did not support Mingqiang Brick Factory's request for China Railway Second Bureau Group to bear joint and several liability.
(III) the audit report provided by the shareholders is incomplete, the scope of the audit is incomplete, or the audit report produced by the macro accounting statement as the object of the audit can not meet the standard of independence of the company's property and the shareholders' property, the shareholders are jointly and severally liable for the company's debts.
[Case 1] Civil Judgment No. 727 of the Supreme People's Court (2020)
The court held that the question of whether the company should be jointly and severally liable for the debts of Shengzun. The "audit report" and other evidence provided by the second instance of the company can only reflect the company's liabilities and profits, the evidence can not reflect the property trend of the company and Shengzun company, is not enough to prove that the property of the company is independent of Shengzun company. According to Article 63 of the the People's Republic of China Company Law, which stipulates that "if the shareholders of a one-person limited company cannot prove that the company's property is independent of their own property, they shall bear joint and several liability for the company's debts", Lizhao Company shall bear joint and several liability for the debts of Shengzun Company in accordance with the law.
[Case 2] Civil Judgment No. 2575 of the Intermediate People's Court of Zibo City, Shandong Province (2022)
The court held that the Audit Report submitted by the shareholders in the first instance could not prove that the shareholders' property was independent of the company's property. The analysis was as follows: 1. the audit report was an audit of the company's financial statements, the audit scope was the income statement and notes to relevant financial statements from June 2018 to January 2021, and the balance sheet on January 31, 2021. It was not an independent audit report on whether the shareholders' property was independent, and the audit report is a qualified opinion, and the comprehensiveness and authenticity of the report are uncertain; 2. the audit report does not implement correspondence to the company's current accounts, nor can it implement alternative procedures to obtain sufficient and appropriate audit evidence for the current accounts; 3. the audit scope does not include shareholders' bank accounts and company bank accounts, and the audit procedures are not implemented for the current income and expenditure between accounts, and there is no audit process, it is not possible to conclude that the shareholders' property is independent of the company's property.
[Case 3] Civil Judgment No. 12881 of Beijing No.2 Intermediate People's Court (2023)
The court held that before September 14, 2022, Zhang was the sole shareholder of a company. However, a company did not prepare financial accounting reports in accordance with the relevant provisions of the the People's Republic of China Company Law and the the People's Republic of China Accounting Law and audited by an accounting firm. Although Zhang submitted an audit report on the financial statements of a company in 2020, the report was issued on April 8, 2021, which was not audited at the end of each fiscal year according to the law, and the time range involved in the audit could not cover the entire period when Zhang was a shareholder of the company, so the evidence submitted by Zhang was not sufficient to prove that the personal property of a company and Zhang were independent of each other.
Advice from 3. lawyers
According to the analysis of the above-mentioned judgment point of view, the author believes that the shareholders of a one-person limited liability company in such cases to respond to the evidence, depending on the different circumstances of creditors and the ability to provide evidence to distinguish between treatment. First, the company's financial audit at the end of the year is the original "Company Law" on the company's statutory requirements, the new "Company Law" after the implementation of the same applies, the company should submit annual audited financial accounting reports. Second, if the creditor further submits evidence that may be found by the court to be a mixture of property, the shareholders of a one-person company should also make further explanations in conjunction with the financial books and financial transactions, so as to avoid being found to be a mixture of property or abuse of shareholders' rights and thus bear joint and several liability, and may consider entrusting a special audit if necessary. Third, if, in addition to financial mixing, creditors have prima facie evidence that the shareholders of a one-person limited liability company may abuse their limited liability and independent status to evade debts, the shareholders of a one-person limited liability company should provide comprehensive evidence from the aspects of management, business, personnel and venue.
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