The assumption of civil liability in the transfer of defective shares -- the interpretation of Article 19 of the Company Law.

Abstract: The regulations on defective equity transfer agreements and the responsibility for capital contribution after the transfer are not comprehensive and uniform, such as the relevant regulations formulated by Beijing, Jiangsu, Shanghai and Shandong. The third interpretation of the company law makes clear provisions on this issue and unifies the treatment method. However, in Article 19, "the assignee knows or should know about it" also brings about a problem of presumption, how to determine "know"? How to presume "know"? There is no doubt that there is a lack of a standard.

Keywords: Defective equity transfer agreement to make up the bona fide transferee of capital contribution.

Article 19 of the third interpretation of the company law stipulates that "if a shareholder of a limited liability company fails to perform or fully performs the obligation of capital contribution, the transferee knows or should know that if the company requests the shareholder to perform the obligation of capital contribution and the transferee bears joint and several liability, the people's court shall support it; If the creditor of the company brings a lawsuit against the shareholder in accordance with the second paragraph of Article 13 of these Provisions, the people's court shall support the transferee. If the transferee, after assuming liability in accordance with the provisions of the preceding paragraph, recovers from the shareholder who has not fulfilled or has not fully fulfilled the obligation of capital contribution, the people's court shall support it. However, unless otherwise agreed by the parties." This article makes clear provisions on the liability of capital contribution after the transfer of defective capital contribution equity, and also puts an end to the long-standing dispute.

1. Shareholder's Capital Contribution Obligation and Shareholder's Qualification

(I) Shareholder's Capital Contribution Obligation

It refers to the obligation of shareholders to pay in full the amount of capital contribution to the company's capital, which is the most basic legal obligation of shareholders. It is formed after the emergence of the company system, along with the independent legal personality and the limited liability system of shareholders. It is a prerequisite for shareholders to enjoy the protection of the limited liability system given by law. It is not only a contractual obligation of shareholders, but also a legal obligation that shareholders must perform.

The shareholder's capital contribution obligation is very important, it determines the amount of the company's capital, affects the company's legal personality, involves the market transaction order and security. It has the following legal characteristics:(1) the performance of the shareholder's capital contribution obligation is the company. Except for the company, other entities may not accept capital contributions from shareholders, nor may shareholders perform their capital contribution obligations to other entities. The most striking feature of the contemporary corporate legal system is the establishment of the independent property liability of the company and the limited liability system of shareholders. The initial source of the company's legal person property is the shareholder's capital contribution, which is an important material condition for the company's development, therefore, the shareholder's performance of the capital contribution obligation is the basis for supporting the company. (2) The obligation of shareholders' capital contribution separates the liability of the company from the liability of the shareholders, which is the basic guarantee for the company to obtain an independent legal personality. On the one hand, the shareholder's capital contribution obligation limits the shareholder's responsibility to the company within the scope of capital contribution, in general, shareholders in addition to the capital contribution to the company's debts, there is no other responsibility. (3) If a shareholder violates the obligation of capital contribution and causes damage to other entities, he shall bear the corresponding civil liability. If the shareholder fails to perform or improperly performs the obligation of capital contribution, it will not only cause damage to the interests of the company and other shareholders, but also cause harm to the creditors of the company. Therefore, shareholders must bear corresponding civil liability for their violation of capital contribution obligations.

Qualification of (II) shareholders

Some experts believe that the identification of shareholders should be based on the articles of association, the register of shareholders or industrial and commercial registration. The company shall identify shareholders in accordance with the articles of association and the register of shareholders, and the public shall identify shareholders in accordance with industrial and commercial registration. In principle, shareholders recorded in the register of shareholders or the articles of association of the company do not lose their equity because they do not contribute capital.[1]For the failure of contributors or subscribers to pay their shares on time, national legislation generally gives companies and other claimants remedies, including loss of power procedures, recovery procedures, damages and so on. Article 11 of the "Guiding Opinions of the Beijing Higher People's Court on Several Issues Concerning the Trial of Corporate Dispute Cases" (for trial implementation) clearly stipulates that "shareholder qualification is the basis for investors to acquire and exercise shareholder rights and assume shareholder obligations. According to the relevant provisions of the Company Law, the confirmation of shareholder qualification of a limited liability company involves the actual amount of capital contribution, equity transfer contract, articles of association, register of shareholders, certificate of capital contribution, industrial and commercial registration, etc. The confirmation of shareholder qualification should take into account a variety of factors, and the examination and determination of factual evidence in a specific case should be based on the true intention of the parties to perform civil acts, and the criteria for confirming shareholder qualification should be selected." According to the provisions of the Company Law of the People's Republic of China, shareholders with defective capital contributions shall be ordered to make up their capital contributions and bear other civil liabilities arising therefrom, rather than directly denying their shareholder qualifications. As to whether and how to restrict the rights of shareholders who have not fully fulfilled their capital contribution obligations, the third interpretation of the Company Law also provides for in Article 17.

Therefore, the defect of capital contribution and the transfer of equity are two different problems, the shareholders whose capital contribution is not in place still have the qualification of shareholders, and the equity of the defective capital contribution does not lose its transferability. The transfer of defective equity shall be treated differently from the transfer of flawless equity. For shareholders who transfer flawless shares, as long as they comply with the relevant transfer provisions of the company law. In the case of a shareholder who transfers a defective equity interest, because the equity interest transferred is inherently defective, the transferor shall assume responsibility for the transferee's ability to fulfill its obligation of adequate capital, in addition to the duty of care that should be assumed by the person transferring the defective equity interest. When determining the validity of the transfer of shares by shareholders with defective capital contributions, in addition to the legal conditions such as the eligibility of the parties and the transfer of shares in accordance with the law, it should be dealt with in particular according to the true meaning of the transferee.

Principles for the Treatment of 2. Defective Equity Transfer Agreements

When the transferor conceals the fact that the capital contribution is defective and the transferee does not know or should not know about it, the equity transfer contract is a changeable and revocable contract. Whether the equity transfer contract is modified or revoked depends on the will of the transferee, and the transferee may claim to change the contract transfer price or cancel the contract on the grounds of fraud within the statutory period.

(I) principles of handling unknown to the assignee

According to the provisions of the Contract Law, if the parties are untrue because of fraud or coercion, they have the right to request the cancellation of the contract. If the transferor conceals the fact of capital contribution defects when signing the equity transfer contract with the transferee, and the transferee does not know and should not know the fact of capital contribution defects, and thus transfers the equity, the transferee has the right to request cancellation or modification of the equity transfer contract on the grounds of fraud. If the transferee is unwilling to cancel the equity transfer agreement considering the better business prospects of the company, the court shall confirm the validity of the contract. However, the Shanghai Higher People's Court's "(II) of Opinions on Several Issues Concerning the Trial of Cases Involving Company Litigation" has made stricter provisions: "The shareholders of a limited liability company transfer their equity without full capital contribution, and the transferee claims to cancel the contract on the grounds that the transfer subject is defective or If it is subject to fraud, the people's court will not support it, except for special circumstances stipulated by law."

(II) principles of treatment known or ought to be known by the assignee

When the transferee and the transferor enter into a contract for the transfer of equity, the transferee is informed of the fact of the defective capital contribution, or the transferee knows or should know the fact of the defective capital contribution, and the transferee still transfers the equity, the equity transfer contract is valid. Because, the equity transferee knows or should know that the transferor's capital contribution is defective, the transfer of equity is still the transfer of equity, no longer applies to the fixed article 54 of the Contract Law, the equity transfer contract is valid and cannot be revoked. The transferee shall be liable to make up for the defects in the capital contribution. As for the understanding of "should know", it needs to be determined according to the specific situation of the assignee.

(III) must not confront a third person

If there is a defective capital contribution in the equity transfer contract, the transferee cannot oppose the company's creditors on the grounds that he does not know and should not only contribute to the blind, and claim not to bear the corresponding responsibility. When the creditors of the company can prove that the registered capital of the company is not actually in place, they have the right to list the registered shareholders (including the transferee) and the company as defendants and investigate their corresponding joint and several liabilities. After the transferee has assumed the liability to the company's creditors, it has the right to recover from the transferor.

3. Defective Equity Transferor and Transferee's Liability for Capital Contribution

The issue of the liability for capital contribution of the transferor and the transferee of defective equity has always been an important issue in China's judicial practice, but the Company Law revised in 2005 has not clearly fixed this issue, only reflected in the relevant judicial interpretations and court decisions, and the opinions are not very unified, mainly from the following points of view:

The first point of view is that the transferor shall bear the responsibility for making up the capital contribution. For example, Article 28 of the 2003 "(I) of the Supreme People's Court on Several Issues Concerning the Trial of Corporate Dispute Cases" (draft for consultation) stipulates: "If a limited liability company transfers its equity without making full capital contribution, and the company or other shareholders request the transferor to use the transfer share price to make up for the capital contribution, the people's court shall support it. If the transfer price of the equity is not sufficient to make up the capital contribution, and the transferor does not continue to make up the capital contribution, and the company or other shareholders or creditors request the transferor to make up the capital contribution or to be liable for the company's debts within the scope of the insufficient amount of capital contribution and interest, the people's court shall support it." According to this provision, the transferor is expressly liable to the company, other shareholders and creditors to make up the capital contribution, and there is no reference to whether the transferee is also liable for insufficient capital contribution.

The second view is that the transferee bears the primary liability for capital contribution and the transferor bears the supplementary liability. For example, in the case of the Shanghai Bonded Production Material Market China Communication Products Trading Center v. Shanghai Anbao Enterprise Co., Ltd. and other six defendants in the inter-enterprise loan dispute, the final judgment held that: first of all, the company's actual shareholders at the time should be responsible for the company's debts, and at the same time, from the principle of fairness, as the other two original shareholders who did not contribute properly, they could not be exempted from liability because of the transfer of defective equity, it shall be liable for supplementary liquidation if the transferee is unable to repay the company's debts.

The third view is that the assignor and the assignee are jointly and severally liable. For example, Article 51 of the 2006 "Opinions of the Senior People's Court of Shandong Province on Several Issues Concerning the Trial of Company Dispute Cases (for Trial Implementation)" stipulates that "after the shareholders of defective capital contribution transfer their shares, the civil liability of the defective capital contribution shall be jointly and severally borne by the transferor and the transferee. The transferor or the transferee shall not oppose the company and the company's creditors with the internal agreement on liability." The case of Futian Leiwo International Heavy Industry Co., Ltd. against Ningxia Chengxin Yuan Engineering Sales Co., Ltd., etc., which the author contacted.[2]In the case of several transfers of defective equity, the transferor and all transferees are jointly and severally liable for the company's debts.

The fourth view is that the assignor is primarily responsible for making up the contribution, and the assignee may be listed as a third party without an independent claim. For example, Article 4 of the 2003 "(II) of the Shanghai Higher People's Court on Several Issues Concerning the Trial of Cases Involving Company Litigation" stipulates: "The shareholders of a limited liability company transfer their equity without full capital contribution, and the company or other shareholders request the transferor to transfer the equity. If the price is used to make up for the capital contribution, the people's court shall support it and may add the transferee to participate in the litigation as a third party." The assignee here is clearly involved in the litigation as a third party without an independent claim, and in judicial practice is often subject to supplementary liability when the assignor is unable to make up the contribution.

In defining the liability of the assignor and the assignee for capital contributions, civil law countries mostly provide for no-fault joint and several liability between the assignor and the assignee for making up the capital contribution, such as the provisions of the German, French, Italian and other corporate or civil codes. Common law countries emphasize that only when the transferee is not in good faith or in good faith, that is, the transferee knows or should know that there is a defect in the equity contribution, the company or the company's creditors should bear the responsibility of capital contribution, otherwise, the transferor shareholders generally bear the responsibility of capital contribution. The relevant provisions of the third interpretation of the company law are an eclectic combination of the laws of the common law system and the civil law system, that is, it includes the conditions that the common law system knows or should know about the transferee, and also includes the joint and several liability of the civil law system.

The transferor or in the case of multiple transfers of equity, I .e. when the transferee is the majority, the theoretical basis of the joint and several liability of the former shareholders who have transferred and transferred the equity is the liability for defective guarantees in the transaction and the liability for the existence and integrity of the subject matter of the transfer.

The theoretical basis of the responsibility of the 4. transferor -- the system of liability for defects.

An overview of the liability system for (I) defects.

Defective guarantee liability system is an important legal system in contract law. It originated from ancient Roman law and has undergone strict evolution for more than two thousand years. It mainly refers to the legal no-fault liability that the transferor must guarantee the existence and integrity of the subject matter of its transfer, which has the value, utility or quality that should be based on the meaning of the parties or the general social transaction concept, and the buyer should bear when violating the guarantee obligation, its immediate purpose is to adequately protect the assignee in a vulnerable position, thereby maintaining a balance of rights and obligations between the assignor and the assignee.

Liability for defects can be further divided into liability for defects in rem and liability for defects in rights. The warranty liability for defects in property refers to the responsibility that the transferor should guarantee that the subject matter is free from loss or defects that impair the promised value utility at the time of delivery, including the warranty liability for value defects and the warranty liability for utility defects; the warranty liability for defects in rights refers to the right that the transferor should guarantee that the third party does not have any claim on the subject matter of the transfer, including the warranty liability for defects that the rights do not exist and the rights are incomplete rights, in China's contract law, there are only incomplete provisions of rights, so there is no right to non-existence of defective guarantees, related issues are generally resolved in the fundamental breach of contract system.

The occurrence and development of the defect guarantee liability system has a great relationship with the general liability system for breach of contract, and there is a certain degree of intersection between the two in the scope of application, and if the subject matter delivered by the transferor is defective, it is entirely possible to meet the constituent elements of both at the same time, and there is a competition of liability. Therefore, as a liability system in contract law, there is a question of how to fit in with the general breach of contract system in contract law, which is of great significance to the perfection and systematization of civil legal liability system.

For the relationship between the two, there are mainly two kinds of legislative examples: coexistence doctrine and unionism. Coexistence legislation generally exists in civil law countries, mainly refers to the liability system of contract law, in addition to the liability for breach of contract, the civil liability for breach of the obligation of guarantee, to give special relief to the victim.[3]However, when there is a competition between the liability for defective guarantee and the general liability for breach of contract, how to choose the law is becoming an important issue for discussion, so some countries that adopt the coexistence doctrine have also begun to explore the proposal of a unified system of liability for breach of contract, including the liability for defective guarantee. Monism legislation generally exists in common law countries, mainly refers to the defect guarantee liability into the general breach of contract liability system, so that the defect guarantee liability is not independent,[4]However, such an approach agrees that there are problems, and the assignee who is disadvantaged in the contract of sale is treated indiscriminately according to the general breach of contract, so that the interests of the lack of limited special protection, so that the single-minded countries have also begun to try to change the "one size fits all" rule.

(II) the provisions of our civil law on the liability for defects.

1, the relevant provisions of the contract law.

China's legislation on the liability of warranty for defects is mainly concentrated in the Contract Law. First of all, according to Article 155 of the Contract Law, "If the subject matter delivered by the seller does not meet the quality requirements, the buyer may claim liability for breach of contract in accordance with the provisions of Article 111 of this Law". This shows that in China's contract law civil liability system, there is no independent liability for defects, the second is integrated into the liability for breach of contract, there is a single-minded color. Secondly, according to the relevant provisions of the Contract Law, the liability for defect guarantee is a kind of no-fault liability in our law, which is not completely regardless of subjective fault, and secondly, it is not based on subjective fault. In addition, the academic circles generally believe that the principle of attribution of liability for breach of contract in China is also no-fault liability, and the principle of presumption of fault in the contract law of the civil law system has taken a big step forward, increasing the protection of the interests of the debtor, which is the result of boldly drawing on the legislation of the common law system.

Articles 148 and 153-158 of the Contract Law stipulate the liability related to the guarantee of defects in goods, and make it clear that the seller shall be liable for breach of contract if the subject matter delivered by the seller does not meet the quality requirements. Its constituent elements include: the subject matter must have defects, which mainly refers to that the subject matter does not meet the quality requirements of relevant standards; The defects of this object still exist at the time of delivery; The buyer did not know or should not know the existence of the defects at the time of the establishment of the contract, and fulfilled the notification obligation within a reasonable period. The notification obligation period here should follow: if there is an agreed period, if there is no agreed period, the reasonable period shall apply, but the maximum period shall not exceed two years from the date when the buyer receives the subject matter, unless there is a longer quality shelf life.

Articles 150-152 of the Contract Law provide for liability for warranty for defects in rights, but there is no express provision for the content of liability for warranty for defects in rights. However, according to the general principle of contract, the provisions of liability for breach of contract should also be applied to those who violate the obligation of guarantee of defective rights. The constituent elements include: the subject matter of the assignment has a defect of rights; the defect of the right occurred before the conclusion of the contract and still exists at the time of delivery; and the buyer did not know or should not have known of the defect of the subject matter at the time of the conclusion of the contract. After meeting the above conditions, the transferor shall be liable for breach of contract in accordance with the agreement of the parties.

2, the defective equity transferor's right defect guarantee liability.

In the equity transfer contract, there is also the problem of defective guarantee liability, because like other transferable objects, the transfer of the underlying equity will inevitably have various defects due to many reasons, one of which is the equity defect caused by the transferor's incomplete performance of the capital contribution obligation Here is the so-called defective equity transferor's defective guarantee liability, which is caused by the transferor's complete performance of the capital contribution obligation, in the event that the assignee suffers damage as a result, the liability of the assignor is the liability for warranty of defects in rights rather than the liability for warranty of defects in rein.

According to the constituent elements of the liability for guarantee of defects in rights in the contract law, the constituent elements of the liability for guarantee of defects in the transfer of equity are as follows:(1) the transfer of equity has defects in rights. Specifically, because the transferor's capital contribution obligation is not fully fulfilled at the time of the transfer of equity, the company or the company's creditors have rights that can be claimed over the transferred equity, so that the transferee has the burden and limitation of rights other than the transfer contract. (2) The assignee did not know, and should not bear knowledge, of the existence of a defect in the right at the time of the formation of the contract of assignment. If the transferee does not know or should not know that the equity is defective, the legitimate interests of the non-fault transferee shall be fairly protected. If the assignee is aware of the existence of a defect in the right, it indicates that it has entered into a contract with the assignor on the basis of the facts underlying the defect in the right, at which point the assignor's liability for security for a defect in the right is naturally waived. unless otherwise agreed by the parties. (3) The defect of the right existed at the time of the formation of the contract of assignment and has not been eliminated at the time of delivery. The transferor is in a state of incomplete performance of its capital contribution obligations prior to the establishment of the equity transfer contract, and this state continues until the delivery of the equity. If the transferor makes up the capital contribution before delivery, there is, of course, no issue of equity defects. (4) There is no special agreement between the assignor and the assignee to waive liability for defects in rights. The legal fixation of liability for defects in rights is mostly arbitrary, and if the parties exclude its application by special agreement, it is natural to exempt the assignor from liability for defects in rights, unless the assignor intentionally fails to inform of the defects in rights. Of course, not all defective guarantee liabilities can be exempted. Some of them are clearly required by law. At this time, the parties cannot exclude the application by agreement. If the defect is caused by the transferor's intentional or gross negligence and brings property losses to the other party, the application cannot be excluded. The relevant exclusion agreement is invalid.

Article 19 of the Company Law Interpretation III provides for the liability for capital contribution after the transfer of defective shares, clarifies the operation of such issues in future judicial practice, and provides a definite and unified legal system. It combines the legislative achievements of the civil law system and the common law system, which is the development and progress of legislation, ends the disputes in the theoretical circle, and provides clear provisions for judicial practice.

Definition of 5. Bona Fide Assignee

Under the commercial appearance doctrine, after the transfer of defective equity, the transferee and the transferor jointly bear the joint and several liability, which is conducive to the maximum protection of the interests of the company's creditors and trading counterparts, and is also of great significance to the maintenance of transaction security. However, the protection of the legitimate rights and interests of bona fide transferees is also something that cannot be ignored. If defining a bona fide assignee is a difficult problem in practice.

In the case of Beijing Capital International Investment Management Co., Ltd. v. Anda New Century Giant Eagle Investment Development Co., Ltd.[5]In the second instance of the Supreme Court, the Supreme Court responded to the dispute of theory and judicial practice at that time, "whether the shareholders of the transferred shares should make up the capital contribution that their predecessors did not pay in full" "Anda Giant Eagle Company's equity in its income is not true, the shareholder qualification defects should be known. According to the definition of the agreement and the provisions of the articles of association of Concord Health Company, Anda Giant Eagle Company's performance of its capital contribution obligation to Concord Health Company is the true intention of both parties to the equity transfer, and does not violate the mandatory provisions of laws and regulations. It shall bear the legal responsibility of false capital contribution to Concord Health Company, that is, it shall perform its capital contribution obligation to Concord Health Company." This case is known as "the first judgment of the Supreme Court that the rights of shareholders should be restricted if the shareholders' capital contribution is not in place", and it also plays a great guiding role in making up the responsibility of capital contribution when the transferee knows that there are defects in the equity. Afterwards, the Supreme Court judge also wrote an article on this issue, in which he wrote, "As far as the transferee of the equity transfer is concerned, if he accepts the transfer knowing or should have known that the transferred equity is defective, he shall be presumed to know that he may bear the corresponding civil liability for the transfer of the defective equity, but he is willing to bear it. Therefore, the transferee shall bear the obligation to make up the registered capital."[6]It does not mention how to define knowing or knowing.

In my view, how to identify goodwill or not is a difficult problem, and the obligation to investigate attached to the assignee is also very reluctant. Because the transferee, when transferring the shares, is based on commercial appearance, only on the basis of trust in public documents such as the articles of association and the register of shareholders, and is not obliged to investigate whether the transferor has paid the capital contribution in full, it is unfair to require the bona fide transferee to bear the responsibility and risk of the transferor's false capital contribution.

This article won the third prize of Jinan lawyer's business paper selection in 2011

[1]Xi Xiaoming and Jin Jianfeng, Research on the Theory and Practice of Company Law, People's Court Press, 2008, p. 359

[2](2010) Wei Shang Chu Zi No. 31

[3]Translated by Luo Jiezhen, French Civil Code, Law Press, 1999, pp. 378-379

[4]Yang Zhen: Anglo-American Contract Law (Revised Edition), Peking University Press, 2000, pp. 293-294.

[5]Supreme People's Court [2007] Min Er Zhong Zi No. 93 Civil Judgment, Basic Case: Capital International Company is one of the shareholders of Concord Health Pharmaceutical Industry Development Co., Ltd. (hereinafter referred to as Concord Health). Anda Giant Eagle is the controlling shareholder of Concord Health and its shareholding is derived from the transfer of shares of other original shareholders. The original shareholders of Concord Health, which transferred their shares to Anda Giant Eagle, did not fulfill their capital contribution obligations, and Anda Giant Eagle was aware of this. After the transfer of equity, Anda Giant Eagle took control of Concord Health, but delayed in fulfilling its obligation to contribute to Concord Health.

[6]Yin Yuan: "Civil Liability in the Transfer of Defective Equity", Unit: Supreme People's Court.