Viewpoint | Analysis of the rationality of directors as liquidators of limited liability companies and prevention of the risk of directors performing their duties

Published:

2022-07-19

Abstract: The Civil Code and the forthcoming revision of the Company Law will transform the liquidation obligor of a limited liability company from a shareholder of a limited liability company to a director. This change is reasonable. However, there are some disadvantages in practice, and the fairness of the distribution of responsibilities and the operability of the actual implementation are not completely uncontroversial. After the implementation of such provisions, the risk of directors performing their duties increases, and appropriate risk prevention measures should be taken. Keywords: liquidation obligor director performance risk prevention measures 1. Foreword The liquidation obligor refers to the subject who, according to its specific legal relationship with the company, shall bear the relevant obligations of "organizing the liquidation" of the company after the company has a legal or agreed liquidation cause, and shall bear the corresponding liability to the victim of the relevant rights in the event of failure to organize the liquidation of the company in a timely manner. The concept is different from the "liquidator" in that one is the organizer, the other is the executor, or expressed as the initiator, leader, and the other is the executor of the transaction. In 2021, the concept of "liquidation obligor" was formally proposed for the first time in the Civil Code. Prior to this, the Company Law and the (II) Law on Judicial Interpretation had continued the relevant provisions on "liquidation group", and its connotation should be consistent with that of "liquidation obligor". Understand. With the introduction of the Civil Code and the revision of the Company Law, there is a greater probability that the liquidation obligor of a limited liability company will change from a shareholder of a limited liability company to a director of the company in the future. This kind of change has advantages and disadvantages, this paper on the directors to assume the responsibility of the liquidation obligor is fair and reasonable in the operation of the transaction. Definition of the liability of the 2. liquidation obligor The definition of the liability of the company's liquidation obligor and the issue of liability for non-performance of the liquidation obligation are regulated by the (II) for Judicial Interpretation of the Company Law. The 2008 edition of the "(II) for Judicial Interpretation of the Company Law" stipulates: "The shareholders of a limited liability company, the directors and controlling shareholders of a joint stock limited company fail to establish a liquidation group within the statutory time limit to start liquidation, resulting in the devaluation, loss, damage or loss of the company's property. If the creditor claims that it is liable for compensation for the company's debts within the scope of the losses caused, the people's court shall support it in accordance with the law. If the shareholders of a limited liability company, the directors and controlling shareholders of a limited liability company are negligent in fulfilling their obligations, resulting in the loss of the company's main property, account books, important documents, etc., and cannot be liquidated, and the creditors claim that they are jointly and severally liable for the company's debts, the people's court shall support it in accordance with the law. If the above-mentioned situation is caused by the actual controller, and the creditor claims that the actual controller shall bear the corresponding civil liability for the company's debts, the people's court shall support it in accordance with the law". The Legislative Evolution of the Conversion of Liquidation Obligor of 3. Limited Companies At the beginning of the promulgation of the Company Law, some business entities in market economic activities chose to leave when they encountered operational difficulties, which seriously violated the interests of creditors and damaged the normal market transaction order and honest and trustworthy business atmosphere. In order to put an end to this phenomenon, the 1993 edition of the Company Law stipulates: "if a company is dissolved in accordance with items (I) and (II) of the preceding article, a liquidation group shall be established within 15 days, the liquidation group of a limited liability company shall be composed of shareholders, and the liquidation group of a joint stock limited company shall be determined by the general meeting of shareholders; if a liquidation group is not established within the time limit, the creditor may apply to the people's court to designate relevant personnel to form a liquidation group to carry out liquidation. The people's court shall accept the application and promptly designate members of the liquidation group to carry out liquidation". The legislative purpose of such a provision is to safeguard the rights of creditors and to preserve the legal order of distribution among interested parties in the distribution of the company's surplus assets. At the beginning of the company law legislation, the liquidation obligor (in this fashion, the liquidation obligation is expressed as "the establishment of a liquidation group") is a shareholder of a limited liability company, which has a certain historical background and rationality. Subsequently, the above provisions were retained in both the 1999 and 2004 editions, and the reasons for the statutory liquidation of the company were adjusted in the 2005 edition, but the liquidation obligor did not make any adjustments. The 2013 and 2018 versions have not been adjusted since then. In 2021, the Civil Code, based on the new economic and social development, provides for liquidation obligors in due course, which is different from the Company Law: "In the event of the dissolution of a legal person, the liquidation obligor shall promptly form a liquidation group for liquidation, except in the case of merger or separation." At this time, the current Company Law still recognizes shareholders as liquidation obligors. If the new law is superior to the old law, the director shall be the liquidation obligor in accordance with the provisions of the Civil Code. However, if the principle of lex specialis is superior to the general law, the shareholders should be the obligor of liquidation in accordance with the provisions of the company law. In order to avoid such contradictions, the Civil Code also stipulates: "If laws and administrative regulations provide otherwise, they shall be in accordance with their provisions". The purpose of this provision is to leave room for the periodic waiting for the revision of the Companies Act. Subsequently, in the "Draft Amendment to the Company Law (Draft for Comment)" issued by the Standing Committee of the National People's Congress on December 24, 2021, it is clearly stipulated that directors are liquidation obligors, and it is clear that shareholders do not belong to the scope of liquidation obligors. The liquidation obligor shall form a liquidation team for liquidation within 15 days from the date of dissolution. The liquidation group shall be composed of directors, unless the articles of association provide otherwise or the shareholders' meeting adopts a resolution to elect another person. If the liquidation obligor fails to perform the liquidation obligation in time and causes losses to the company or creditors, it shall be liable for compensation ". Based on the evolution of the above article, it can be roughly accurate to judge that the directors of a limited liability company will become the liquidation obligor of the limited liability company in the future and bear the legal responsibility for liquidation. However, the author analyzes that the directors of a limited liability company bear the obligation of liquidation, and there is still some controversy. Logic Analysis of 4. Liquidation Obligor from Shareholders to Directors Prior to the introduction of the Civil Code, the liquidation obligations of limited liability companies were held by shareholders. The implicit logic of the legislative adjustment of the Civil Code should be understood as follows: First, shareholders do not participate in the operation and management of the company, only to bear limited liability to the extent of the amount of capital contribution, through the resolution of the shareholders' meeting to make decisions on the company's major operations or investment behavior. Shareholders, as liquidators, to a certain extent, are contrary to the company's independent legal personality and violate the basic principle of separation of ownership and management rights. Second, because shareholders do not participate in the operation of the company, it is difficult to grasp the company's more comprehensive and in-depth relevant business information, can not timely judge whether the liquidation procedure should be initiated. Third, some minority shareholders (or financial investors with more shares) have no control over the company, it is difficult to control their resolutions at the shareholders' meeting level, they have not been appointed at the board level, and they cannot start the liquidation procedure in time (without control or even knowledge) after encountering illegal withdrawal of capital contributions or unfair related transactions by major shareholders, but it is unfair to bear joint and several liabilities that cannot start the liquidation procedure in time. Fourth, the board of directors, as the executive body under the shareholders' meeting, shall directly participate in and control the company's business behavior, have a relative understanding of the company's operating conditions, and control the company's core financial information and management tools relatively convenient. In summary, the obligation of liquidation by directors is reasonable relative to shareholders, especially to shareholders without actual control. However, based on the actual situation of the current operation of the board of directors of some enterprises, the author believes that for some cases, there are certain unfairness and operational risks for directors to assume liquidation obligations. Analysis of the disadvantages and hidden dangers of 5. directors acting as "liquidation obligors" Although the change of liquidation obligor from shareholders to directors has certain comparative advantages, there are also certain unreasonable factors for directors to act as liquidation obligors. First, in the current market environment, the directors of the company are mostly the "spokesmen" appointed by the superior shareholders, whose actions are subordinate to the superior shareholders and do not have independence, so the transformation of the liquidation obligor from a shareholder to a director may not be able to avoid malicious delay in liquidation, destruction of the books and other vicious acts. In addition, it should be noted that in the draft amendment of the new version of the company law, the relevant provisions on the decision-making matters of the board of directors have been deleted, which is only expressed as "the board of directors is the executive body of the company, and the exercise of the functions and powers beyond the functions and powers of the shareholders' meeting as stipulated in this law and the articles of association of the company." Under the influence of the general concept of "who contributes, who makes decisions", the future shareholders to increase the scope of decision-making matters of the shareholders' meeting will be called an overall trend, directors in the new environment, the right to independent decision-making is relatively small, the risk of losing decision-making independence increases. Second, in the event of a malicious infringement of the interests of creditors, the ability of directors to bear joint and several liability will generally be significantly lower than that of shareholders. In a general limited liability company, the majority of directors are appointed by superior shareholders, and in general, the amount of personal property of directors is difficult to compare with that of superior corporate shareholders. Superior shareholders are natural persons, and generally there is an employment-like relationship between shareholders and directors, which is evident in their solvency. In a few cases, the shareholder and the director are actually one person and there is no question of impairment of solvency. On the whole, however, the expectation of creditors to pursue joint and several liability to obtain the amount of compensation has been reduced. Third, as a director, his responsibilities and benefits do not want to match. In most cases, with the exception of the chairman, the directors themselves do not hold permanent positions within the company. The way to perform his duties is to attend the board of directors regularly or irregularly, to consider the issue and to vote on it with prior notice. If the shareholder is a legal entity, the director generally has a permanent full-time position within the superior shareholder and a part-time director in the subordinate company, and is generally not remunerated. If a director acts as a liquidation obligor, under such serious legal liability, the director must pay real-time attention to the company's operating conditions, and his legal liability and labor obligations are magnified and do not match the benefits he receives. Fourth, directors do not necessarily have the facilities to liquidate the portfolio. In the general business process of a company, the board of directors does not convene frequently. The regular organization that organizes the company's production and operation activities is the general manager or the general manager's team. It is common to convene the board of directors only several times a year. Under such conditions, directors may not be able to keep abreast of the reasons for liquidation that have arisen, nor may they have access to the core information and management tools for organizing liquidation, such as the company's books and official seal. There is a relatively high likelihood of a shareholder or a day-to-day operator of the company suffering from a malicious violation of the law. Fifth, in the case of a large number of directors, the issue of mutual disengagement and the allocation of responsibilities needs to be addressed. The current company law stipulates that the number of directors of a limited liability company should be 3-13. The draft of the company law only stipulates that "more than 3 people", and the upper limit control of the number of directors is deleted. In the case of a large number of directors, it is doubtful which director will take the lead in initiating the formation of the liquidation team. In addition, if the liquidation is not organized in a timely manner, resulting in losses to creditors, whether all directors bear undifferentiated joint and several liability, or find the corresponding rules for distribution, still need to be discussed in the academic community. Risk Avoidance Measures 6. Directors Can Take In order to avoid the above potential drawbacks and possible risks, from a practical point of view, the author believes that the following measures can be tentatively taken to avoid risks according to the actual situation of different enterprises: First, as a director of the company, the shareholders' meeting shall be required to clarify the specific system for the daily management of the company to report the production and operation status and financial status to the directors in the form of the articles of association. The general manager, chief financial officer and other relevant management personnel shall promptly submit the relevant information to the members of the board of directors in the event of a statutory liquidation or resolution of liquidation of the company. Second, as a director of the company, it should be clear with the company's superior shareholders, in the relevant acts involving the liquidation of the company, the director should have absolute autonomy, not to the will of the superior shareholders as a transfer. Third, the directors shall, as far as possible, take up real positions in the management of production and operation in the management structure of the company, and shall be remunerated accordingly. Fourth, among the directors, the articles of association or other effective forms shall be used to agree on the "first responsible person" of the liquidation group and the mechanism for the distribution of responsibilities in the event of failure to liquidate in a timely manner. Fifth, in the company's articles of association, it should be clear that after the directors issue the notice to organize the liquidation group, all relevant personnel should cooperate unconditionally and clarify the relevant responsibilities of the key personnel of the liquidation group. For example, the chief financial officer should provide financial books and relevant credentials in a timely manner; The person in charge of the recruitment department and the marketing department shall provide the company with contracts that have been performed, not performed and being performed in a timely manner; the general manager shall, in accordance with the requirements of the board of directors, employ external institutions (accounting firms, law firms, etc.) in the form of contracts in a timely manner and pay remuneration for liquidation affairs. 7. epilogue Under the modern corporate governance system of separation of ownership and management rights, it is reasonable for directors to assume the responsibility of the liquidation obligor of a limited liability company relative to shareholders. However, in the current economic practice, the objective environment for directors to independently exercise decision-making power and participate in the company's operation and management is relatively poor, so certain risk prevention measures should be taken after the new legal provisions come into effect.

Key words:

Director, liquidation, company, obligor, shareholder, commitment, limited liability, regulation, company law