Viewpoint... A brief analysis of the legal application of the reverse denial of legal personality and horizontal denial.

The denial of legal personality, also known as "piercing the veil of legal person", refers to a post-regulation means set up to prevent the shareholders of a limited liability company from abusing the basic principles of company law, such as the independence of corporate personality and the limited liability of shareholders, to harm the interests of the creditors of the company. According to the current law, the denial of legal personality can make the shareholders bear joint and several liability for the company's debts, that is, to realize the "forward" denial of legal personality. However, there are disputes in judicial practice whether the company can bear joint and several liabilities for shareholders, and control shareholders or actual controllers to control multiple subsidiaries or affiliated companies, that is, to realize the "reverse" denial or "horizontal" denial of legal personality. This paper aims to sort out the relevant legal provisions and analyze the application of reverse denial and horizontal denial of legal personality in judicial practice.

Article 20, paragraph 3, of the 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 creditors of the company, they shall bear joint and several liability for the debts of the company.

Article 63 of the 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 addition, the second paragraph of Article 21 of the Company Law (Revised Draft), which was publicly released on December 24, 2021 for comments, states that if the shareholders of a company use two or more companies under their control to commit the acts specified in the preceding paragraph, each company shall be jointly and severally liable for the debts of any one company. (Hint: The draft is not yet in force)

The Minutes of the National Court Conference on Civil and Commercial Trials (Law [2019] No. 254) (hereinafter referred to as the "Nine People's Minutes"), in the section on "(IV) Corporate Personality Denial" in "2. Trial of Corporate Dispute Cases", details the content of the system of corporate personality denial and confirms the four principles applicable to the system of corporate personality denial.

First, it can only be applied if the shareholders have committed an act of abusing the independent status of the company as a legal person and the limited liability of the shareholders, and the act has seriously harmed the interests of the company's creditors. Damage to the interests of creditors mainly refers to the abuse of rights by shareholders to make the company's property insufficient to pay off the claims of the company's creditors. causal logic]

Second, only the shareholders who have committed the abuse of the independent status of legal persons and the limited liability of shareholders shall bear joint and several liability for the company's debts, while other shareholders shall not bear this liability. subject scope limit]

Third, the denial of corporate personality is not a comprehensive, complete and permanent denial of the company's legal personality, but only in specific cases based on specific legal facts, legal relations, breaking through the general rule that shareholders are not responsible for the company's debts, exceptionally ordered to bear joint and several liability. The res judicata of the judgment of the people's court denying the personality of the company in the individual case only binds the parties to the action, does not apply to other litigation involving the company, and does not affect the survival of the company's independent legal personality. If other creditors file a corporate personality denial action, the facts found in the effective judgment can be used as evidence. res judicata range limit]

Fourth, the abuse provided for in article 20, paragraph 3, of the Companies Act, which is common in practice in situations such as mixed personalities, excessive dominance and control, and significant undercapitalization. When trying a case, it is necessary to make a comprehensive judgment based on the facts of the case identified, which is not only prudent to apply, but also when used. case enumeration]

In addition, when discussing the situation of "excessive domination and control" in detail, the Jiumin minutes clearly states that "controlling shareholders or actual controllers control multiple subsidiaries or affiliated companies, abuse control rights to make the property boundaries of multiple subsidiaries or affiliated companies unclear, financial mixing, mutual transmission of interests, loss of personality independence, and become controlling shareholders to evade debts, illegal operations, or even illegal and criminal tools, the facts of the case can be integrated, deny the legal personality of the subsidiary or related company, and order joint and several liability". The paragraph states that, on the one hand, the subject scope of the denial of legal personality extends to the controlling shareholder and the actual controller, and on the other hand, further clarifies the feasibility of reverse denial and horizontal denial.

Corporate personality denial has its independent value and significance in practice, from the legislative and judicial value orientation, not only to maintain the principle of corporate independence represented by the personality denial system, but also can not make the independence of legal personality become the "wall of sighs" for shareholders to abuse their rights ". Therefore, the application of the system of personality denial in judicial practice is in a state of caution and permission. Generally speaking, the focus of the dispute mainly lies in the following aspects:

The current legal provisions of the Company Law only provide for forward denial, and it is difficult to quote the judicial decision as a legal basis for reverse denial or horizontal denial, and if the third paragraph of Article 20 of the Company Law is applied directly, there is a suspicion of judicial creation of law.

The significance of the denial of legal personality is that when the shareholders abuse the independent status of the company's legal person so that the company's property is not enough to pay off the claims of the company's creditors, if the legal person veil can not be pierced, it will lead to the creditor's rights and interests difficult to remedy.

When the shareholders themselves have debts, creditors can protect their rights and interests in one or more ways, such as freezing and enforcing the shareholders' equity in the company, or exercising the creditor's right of avoidance, according to the law. It is controversial whether it is necessary to carry out reverse denial and force the company to bear joint and several liability for shareholders' debts.

However, the author believes that in the case of freezing the company's equity only, shareholders may still dispose of the company's assets, complicating the way for creditors to remedy their rights and interests. In addition, when a company has both enforceable assets and a sizeable liability, the value of its equity may be low (or even zero), at which point creditors will not be able to be remedied by freezing the company's equity, while creditors' interests can be remedied by sealing up and enforcing the company's assets through the denial of legal personality.

The judicial jurisprudence of the Supreme People's Court has affirmed the application of the reverse denial of legal personality of a one-person limited company, and its reasoning part contains the statement that the company's joint and several liability to shareholders in this case will not harm the interests of others. However, the summary of the nine people defines the scope of abuse of right holders as "controlling shareholders or actual controllers". Article 20 of the Company Law and Article 21 of the Company Law (Revised Draft) define the scope of abuse of right holders as shareholders of the company, which indicates that the possibility of denial of legal personality in the case of multiple shareholders in the company has not been ruled out. At this time, the reverse denial or horizontal denial of legal personality is applicable, how to protect the rights and interests of other "bona fide" shareholders and extend the controversy and difficulty of legal personality denial from the "shareholder-creditor" level to the "shareholder-shareholder" and "controlling shareholder (actual controller)-small and medium-sized shareholders" level, further aggravating the controversy and difficulty of reverse denial and horizontal denial of legal personality in practice.

Basic case:The defendant, Zhongsenhua Real Estate Company, is a wholly-owned subsidiary of the defendant, Zhongsenhua Investment Company, when acquiring the shares of the subject company held by a third party company, agreed to pay the equity transfer at the price of the physical assets such as the shops transformed and constructed by Zhongsenhua Real Estate Company. Later, the third-party company sued the court for compensation from Zhongsen Hua Investment Company and Zhongsen Hua Real Estate Company for the value of the store that could not be delivered under the contract.

The Hubei Provincial Higher People's Court, the court of first instance, held that:Although both China Senhua Investment Company and China Senhua Real Estate Company are registered as corporate entities, they are closely related. Zhongsenhua Real Estate Company is a project company initiated and established by Zhongsenhua Investment Company. During the period when Zhongsenhua Real Estate Company has more than two shareholders, Zhongsenhua Investment Company has an absolute controlling position. Zhongsenhua Investment Company has not submitted evidence to prove that the company's property is independent of the shareholder's property, and the two companies have mixed personalities and should be regarded as the same subject in law. The law stipulates that the shareholders shall be jointly and severally liable for the debts of the company, and vice versa, and the company shall also be jointly and severally liable for the debts of the shareholders.

The Supreme Court supported the views of the court of first instance in the second instance and retrial review, and the retrial review ruling argued as follows:

The original judgment of the (I) applied the above provisions to determine that Zhongsenhua Investment Company and Zhongsenhua Real Estate Company constitute a personality mix, and there is nothing improper. First of all, from the industrial and commercial registration, Zhongsenhua Real Estate Company is a one-person limited liability company. Since July 2013, the shareholder of China Senhua Real Estate Company is China Senhua Investment Company, with a shareholding ratio of 100. Secondly, in the original trial, although China Senhua Investment Company and China Senhua Real Estate Company respectively submitted industrial and commercial registration data, annual inspection reports, tax payment certificates and other evidence, it was not possible to determine the fact that China Senhua Real Estate Company is the project company of China Senhua Investment Company and the two companies promised to bear joint and several liability for the arrears of the project involved. The original judgment found that Zhongsenhua Investment Company, as a 100 per cent controlling shareholder, did not adduce sufficient evidence to prove that the property of Zhongsenhua Real Estate Company was independent of each other and was not improper. Third, Zhongsenhua Real Estate Company is a real estate project company established by Zhongsenhua Investment Company for the development of the Zhongsenhua International City project. At the beginning of its establishment, Zhongsenhua Real Estate Company was effectively controlled by Zhongsenhua Investment Company and its shareholders. It can be seen from the resolution of the shareholders' meeting of Zhongsenhua Real Estate Company and the "entrusted loan contract" of Changfu Fund, Huaxia Bank and Zhongsenhua Real Estate Company that Zhongsenhua Real Estate Company and Zhongsenhua Investment Company jointly undertake to bear joint and several liability for the debt settlement of the real estate project involved in the case. Although Zhongrong International Trust Co., Ltd. held a short-term 100 per cent stake in Zhongsenhua Real Estate Company, it later changed its registration to Zhongsenhua Investment Company. Fourth, although the provisions of Article 63 of the Company Law are that shareholders bear joint and several liability for the company's debts, in the current judicial practice, the company can also bear joint and several liability for the shareholders' debts in the case of the mixing of shareholders and the company's personality.

The original judgment of the (II) found that the Store Transfer Contract and the Supplementary Agreement were valid and not improper. The above-mentioned agreement between Zhongsenhua Investment Company and Aerospace Bellows Company specifies the specific subject matter of the equity transfer price to be paid in kind. The original judgment found that Zhongsenhua Investment Company had the right to dispose of the real estate developed in the name of Zhongsenhua Real Estate Company, which was not improper. Zhongsenhua Real Estate Company on the grounds that it is not the subject of the contract, in violation of the principle of contract relativity, etc., argues that it should not be liable, and the Court does not support it.

Basic case:The two defendants, Baijin Company and Baifu Company, are both limited liability companies with natural person Li Jing as the sole shareholder. On December 13, 2015, the plaintiff Juhua Company borrowed 10 million yuan from Seascape Company, and Budweiser Company and Li Jing provided guarantee. The plaintiff sued for a judgment that the second defendant was jointly and severally liable for the debts incurred by Li Jing as a result of the above-mentioned loans. In this case, the court of first instance and the court of second instance have very different views.

The court of first instance (Taocheng District People's Court of Hengshui City, Hebei Province) held that:Regarding the relationship between the defendant Baijin Company and Li Jing. First, Li Jing is the guarantor in the mortgage agreement signed by Budweiser Company, Li Jing and the plaintiff, but the bills mortgaged by Li Jing are owned by the defendant Baijin Company and endorsed and transferred to the plaintiff by Baijin Company. Therefore, Baijin Company is liable for Li Jing's personal debts with its own property. Second, according to the facts found in the civil judgment No. 1269 (2016) Ji 11 min zong made by Hengshui municipal people's court, baijin Company borrowed money from Gucheng County Yinxin Microfinance Co., Ltd., but all the loans were transferred to Li Jing's personal account, and part of the interest was also paid to Gucheng County Yinxin Microfinance Co., Ltd., which shows that the defendant Baijin Company used Li Jing's personal bank account. According to the above two facts, it can be seen that the assets of the defendant Baijin Company cannot be distinguished from Li Jing's personal property, and it should be determined that Li Jing's personal property is mixed with the assets of the defendant Baijin Company. Regarding the relationship between the defendant Baifu Company and Li Jing. According to Article 63 of the Company Law, when the creditors of shareholders claim to deny the corporate personality of the company and require the company to bear joint and several liability for the debts of shareholders, the company shall bear the burden of proof for the independence of property. In this case, the defendant Baifu Company did not provide evidence to prove that his property is independent of Li Jing's personal property, and it should be determined that the assets of the defendant Baifu Company and Li Jing are mixed. Because Li Jing's personal assets are mixed with the assets of the defendant Baijin Company and Baifu Company, which can not guarantee the company to implement the principle of capital maintenance and capital unchanged, but also can not determine the difference between the shareholders' personal assets and the company's assets, and then affect the material basis for the company and shareholders to undertake to pay off debts, the legal personality of the defendant Baijin Company and Baifu Company is skeletal, the formation of Li Jing and the defendant Baijin Company, Li Jing and Baifu Company mixed into one situation, and its assets mixed has caused the interests of creditors can not be realized, so the defendant Baijin Company, Baifu Company should bear joint and several liability for the debts of Li Jing.

The Court of Second Instance (the People's Court of Hengshui City, Hebei Province) held that:Article 63 of the Company Law provides for the commitment of shareholders to the company's debts in the case of external liabilities of a one-person limited company. In this case, Juhua Company required Baifu Company to bear joint and several liability for the debts owed by Li Jing personally on the grounds that the property of Li Jing was mixed with Baifu Company, which did not comply with the above-mentioned legal provisions. Therefore, even if Li Jing's personal property and Baifu's property are mixed, Juhua Company requires Baifu Company to bear joint and several liability for Li Jing's personal debts, there is no corresponding legal basis, and the Court does not support Juhua's claim against Baifu Company in this case. As for Baifu Company's appeal claim that Li Jing's personal property and Baifu Company's property are not mixed, Juhua Company's lawsuit in this case belongs to individual settlement and other claims, the Court will no longer be involved. Baijin Company did not appeal against the judgment of the first instance, which was a free punishment of its own civil rights, and the court upheld the judgment of the first instance that Baijin Company was jointly and severally liable for the debts owed by Li Jing. In summary, Baifu's appeal that it should not bear joint and several liability for Li Jing's personal debts was established, and the Court supported it. The first instance ruled that Baifu Company's joint and several liability for Li Jing's personal debts was an error of applicable law, and the Court corrected it.

Basic case:This case is an enforcement objection. After the appellee Dongjian Engineering Company applied for enforcement due to a dispute over a construction contract with a third party Zongjun Real Estate Company, the court of first instance made an enforcement ruling on August 16, 2017, sealing up Eight pieces of land (and all above-ground buildings of the eight pieces of land) registered under the name of the appellee Zongjun Trading Company. The appellant, as an outsider, filed a written objection to the execution and requested suspension of the execution, which was rejected by the court of first instance and filed a lawsuit against the execution. The appellant is a limited liability company with a third party as the sole shareholder and has not actually operated since its establishment. On June 19, 2013, the third party paid a land transfer fee of RMB 134.77 million to the Dengta City Land and Resources Bureau and obtained eight land use rights. On December 27, 2013, the above-mentioned land was priced at RMB 20 million and RMB 100000. The appellant Zongjun Trading Company was established.

The court of first instance held that:The plaintiff Zongjun Trading Company is a wholly-owned subsidiary wholly owned by a third party with a registered capital of 20.1 million yuan. It has not operated since its establishment. The value of its property, namely the eight lands disputed in this case, is far greater than that of 20.1 million yuan. The land cannot be regarded as the own property of Zongjun Trading Company. Therefore, the court does not support the lawsuit request of the plaintiff Zongjun Trading Company.

The court of second instance held that:The independent property of the company is the material guarantee of the company's independent responsibility, and the independent personality of the company is also highlighted in the independence of property. When the property of the affiliated company is indistinguishable and loses its independent personality, it loses the basis for independent responsibility. In this case, the appellant Zongjun Trading Company and the third person in the original trial Zongjun Real Estate Company had mixed personalities. The specific performance is as follows: 1. The actual controllers of the two companies are mixed. Shan Yingying has served as the legal representative of the appellant company for a long time, and her shareholding ratio in the third party company is as high as 95%, which is in an absolute controlling position. Shan Yingying is in the position of operating control in both companies. From the perspective of managers and investors, there is a close relationship between the two companies. 2. The financial mix of the two companies. The appellant admitted that the company did not actually operate after its establishment, and that the company's source of funds was capital injection and loans from third parties. The actual investor of the land involved in the purchase and the subject of signing the contract for the transfer of the right to the use of state-owned construction land with the Lighthouse Municipal Bureau of Land and Resources are the third party in the original trial, and the date of land purchase is before the establishment of the appellant company. The third party in the original trial spent 134.77 million yuan to obtain the right to use the land involved in the case, but only made 20 million yuan as the in-kind contribution to the appellant company, the in-kind contribution far exceeded the registered capital, of which the price difference was more than 0.1 billion yuan, the amount is particularly huge. The third party in the original trial violated the normal financial management system, derogated the company's assets, caused the company's assets to be improperly lost, and harmed the interests of its legitimate creditors. Therefore, the third party in the original trial and the appellant were suspected of shelling operations. Its investment in the appellant should be deemed invalid. The factors characterizing personality between the two companies, including the actual controller and the financial high degree of confusion, resulting in their respective property can not be distinguished, has lost their independent personality, constitute personality confusion. In this case, although the two companies are registered as independent enterprise legal persons in the industrial and commercial registration department, in fact, the boundaries between them are blurred and the personalities are mixed, which violates the purpose of the establishment of the legal person system and the principle of good faith. The nature of their behavior and harmful results are equivalent to those stipulated in the third paragraph of Article 20 of the the People's Republic of China Company Law. The system of corporate personality denial includes the forward denial, that is, the shareholders are jointly and severally liable for the debts of the company, the reverse denial, that is, the company is jointly and severally liable for the debts of the shareholders, and the horizontal denial, that is, the joint and several liability for the debts of the related company. Although the third paragraph of Article 20 of the the People's Republic of China Company Law only stipulates forward denial, from the perspective of protecting the rights and interests of creditors, regulating the business behavior of affiliated companies, and promoting the legal production and operation and healthy development of enterprises, only applying the forward denial mode can not prevent the abuse of corporate personality, and it is difficult to form effective relief to the company's creditors. Therefore, refer to the aforementioned provisions of the the People's Republic of China Company Law, according to the principle of good faith stipulated in Article 7 of the General Principles of the People's Republic of China Civil Law, although the land involved in the case is registered in the name of the appellant's company, because the appellant and the third party company in the original trial have formed a mixed personality, the appellant does not enjoy civil rights and interests sufficient to exclude enforcement. The first-instance judgment rejected his claim and the court upheld it.