Viewpoint... If the equity transferor conceals the company's debt, how the transferee should remedy it.

As for "what kind of civil liability should the equity transferor bear if the equity transferor conceals the debt of the target company and signs the equity transfer contract with the transferee", the Sixth Circuit Court of the Supreme People's court replied: "according to the relevant judicial interpretation, the equity transfer contract signed by the shareholders of the company shall be adjusted by the relevant provisions of the company law and the contract code of the civil code. There is an agreement in the equity transfer contract for the debt situation of the target company, and if the equity transferor conceals the debt situation of the target company and enters into an equity transfer contract with the transferee, it shall be liable for breach of contract in accordance with the agreement of the equity transfer contract." SuchShandong Supreme People's Court (2016) Lu Min Zhong No. 638 Judgment"The Company's Equity Transfer Agreement signed by Hu Sishui, Wang Junying and Liu Qiang and Xue Mei stipulates that Liu Qiang and Xue Mei shall be fully liable for the repayment of undisclosed debts incurred by Shuiyuntian Company prior to the equity transfer. The agreement belongs to Liu Qiang and Xue Mei's commitment to participate in the repayment of the corresponding creditors of the undisclosed debt that occurred before the equity transfer. Hu Sishui and Wang Junying have the right to disclose to the corresponding creditor the" Company Equity Transfer Agreement "involved in the case, and the corresponding creditor has the right to choose whether to accept the commitment. However, when the parties in this case did not agree that there was an undisclosed debt, Liu Qiang and Xue Mei should pay Hu Sishui and Wang Junying directly an amount equal to the amount of the undisclosed debt or return the same amount of equity transfer. Hu Sishui and Wang Junying may, in accordance with the provisions of the Company's Equity Transfer Agreement, require Liu Qiang and Xue Mei to compensate for the loss, which is an actual loss resulting from the actual reduction in the value of the shareholders' equity held by Shui Yuntian Company because it has not disclosed the debt."

In addition, the reply of the sixth Circuit Court of the Supreme people's Court also said that "if there is no agreement on the debt situation of the target company in the equity transfer contract, according to item 2 of Article 500 of the Civil Code, in the process of concluding the contract, if the parties deliberately conceal important facts related to the conclusion of the contract or provide false information, causing losses to the other party, they shall be liable for compensation. The liability provided for in this article of the Civil Code is the liability for contracting negligence in the theory of civil law. The subject matter of the equity transfer contract is the equity of the relevant company, and if the equity itself has no burden of rights and can be transferred according to law, there is no way to talk about the existence of defects in the subject matter. Therefore, the above-mentioned circumstances meet the constituent elements of liability for contracting negligence, and the civil liability of the transferor to the transferee is the liability for contracting negligence."

Article 148 of the the People's Republic of China Civil Code stipulates that "if one party fraudulently causes the other party to commit a civil juristic act against its true will, the defrauded party shall have the right to request the people's court or arbitration institution to revoke it.", Although the article gives the defrauded party the right to cancel the contract, can the assignor's concealment of the debt be considered fraudulent?

Fujian Higher People's Court (2020) Min Min Shen No. 1836 Judgment holds that "the liabilities of the target company is an important consideration for the valuation of the target company in the process of equity transfer. Zhang Yiling did not truthfully inform Yao Xiaoling of the liabilities of Reed Company in the process of equity transfer, resulting in Yao Xiaoling being unable to make an objective and accurate judgment on the value of Reed Company, and a large proportion of the external liabilities of Reed Company is personal liabilities, therefore, Zhang Yiling's behavior of concealing the company's liabilities constitutes fraud."

The Intermediate People's Court of Xining City, Qinghai Province (2020) Qing01 Minzhong No. 1153 Judgment held that "According to the law, if one party deliberately informs the other party of the false situation, or deliberately conceals the true situation, and induces the other party to make a wrong expression of intention, it can be deemed Fraud. Thus, the identification of fraud should have the following conditions: 1. have the intention to cheat; 2. inform the other party of the false situation or conceal the true situation; 3. the other party falls into a wrong understanding and makes a statement of intention based on the wrong understanding." At the same time, "combined with this case, first of all, ...... Li Yang, Li Yi, Long Hai in the signing of the" equity transfer agreement ", knowing that Qinghai Hengyi financing guarantee company has external security, and there has been a lawsuit that has not yet been pronounced, but concealing the true situation to make false guarantees and promises, so that Liu Zhixian Qinghai Hengyi financing guarantee company into a wrong judgment and make the intention of the transfer of equity, there is fraud. Secondly, ...... Li Yang stated that there are currently a number of financing guarantee businesses in the state of litigation, not to develop new financing guarantee business, only to do non-financing guarantee business, and there is another business involving a criminal case is currently under trial, other companies should be compensated for the guarantee. In fact, the Qinghai Provincial Higher People's Court has issued an effective judgment (2017) Qingminzong No. 119 on the above case on September 25, 2017, ruling that Qinghai Hengyi Financing Guarantee Co., Ltd. shall pay Hualong County Jinghua Concrete Co., Ltd. to Hualong Hui Autonomous County Rural Credit Cooperative Association. Long Hui Autonomous County Rural Credit Cooperative assumed joint and several liability for repayment of 15166513.90 yuan, and Qinghai Hengyi Financing Guarantee Company also fulfilled 90600 yuan during the execution of the case. Li Yang's statement at this time is not clear enough, and does not match the objective facts, deliberately conceal the effective judgment to determine the debt, so that Liu Zhixian, Ji Delen's misconceptions continue, there is fraud. Thirdly, the" Equity Transfer Agreement of Qinghai Hengyi Financing Guarantee Co., Ltd. "signed by the parties is a supplementary agreement to the" Equity Transfer Agreement ", which is a clarification of the transferred shares and is in the same line. The purpose of Liu Zhixian and Ji Deren's investment of 5 million yuan to transfer the equity of Qinghai Hengyi Financing Guarantee Co., Ltd. is to carry out business operations and obtain income, not to deal with debts, and when they signed the Equity Transfer Agreement, they required the equity transferor to make relevant matters. Guarantees and promises have fulfilled reasonable obligations of care. Finally, Liu Zhixian and Ji Delen were aware of the above-mentioned debts determined by the effective judgment in the course of taking over Qinghai Hengyi financing guarantee Co., Ltd. in December 2018, and filed a lawsuit with the people's Court of Chengbei District of Xining City in October 2019, which did not exceed the one-year exclusion period for exercising the right of revocation stipulated by law. In summary, according to the second paragraph of Article 54 of the the People's Republic of China Contract Law," If one party uses fraud, coercion or takes advantage of the danger of others to cause the other party to conclude a contract in violation of its true intention, the injured party shall have the right to request the people's court or arbitration institution to change or cancel the contract. "according to the provisions, the nature of the Equity Transfer Agreement and the Equity Transfer Agreement of Qinghai Hengyi Financing Guarantee Co., Ltd. signed by the parties in this case shall be determined as a revocable contract. Since the revocable contract is not legally binding from the beginning, the 1950000 yuan equity transfer received by Li Yang, Li Yi and Long Haibo shall be returned to Liu Zhixian and Ji Delen, while Liu Zhixian and Ji Delen shall change their equity to Li Yang, Li Yi and Long Haibo. Liu Zhixian and Ji Delen's appeal for the cancellation of the contract was established and supported."

The Supreme People's Court (2021) Supreme Fa Min Shen No. 1599 ruled that "the court of first instance has found out that a C advertising company of the target company has inflated bank deposits, untrue profits, fictitious accounts receivable and concealed guarantees and liabilities. Therefore, the original judgment determined that a C advertising company of the target company and its actual controller Chen Mouhong intentionally provided false information and intentionally concealed the true situation, it is not improper for the investor A biological company to accept the equity transfer conditions constitute fraud."

According to the aforementioned decision, in judicial practice, for the transferor to conceal the debt, the transferee can exercise the right of avoidance on the grounds of fraud, revoke the equity transfer agreement.

According to the interpretation of the Supreme People's Court on the application of legal issues in the trial of disputes over sales contracts, paragraph 1 of Article 32, "if laws or administrative regulations have provisions on the transfer of rights, such as the transfer of creditor's rights and equity, the relevant provisions of the contract of sale shall be followed; if there are no provisions, the people's court may, in accordance with the provisions of articles 467 and 646 of the civil code, Refer to the relevant provisions of the applicable sales contract." It can be seen that the equity transfer agreement is a special purchase and sale contract for the subject matter of the company's equity. In conjunction with Article 115 of the the People's Republic of China Civil Code, "The seller shall deliver the subject matter in accordance with the agreed quality requirements. Where the seller provides a description of the quality of the subject matter, the subject matter delivered shall meet the quality requirements of the description." And Article 617 "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 Articles 582 to 584 of this Law." The transferor shall be liable for defects in the equity transfer in accordance with the provisions of the agreement. And equity as a comprehensive right, the company's assets, claims, debt changes will directly affect its value, the transferor's concealment of debt behavior, will make the transferee mistakenly understand the value of equity, and the company's commitment to debt, will also lead to the loss of equity value, damage the interests of the transferee, the transferee can ask the transferor to compensate for the loss.

Hubei Higher People's Court (2015) E Min Jian San Zai Zhong Zi No. 00009 Judgment"If Zhang Hongxing, Zhou Congjun, Nie Anlin, Xiao Qiuling and Wang Shaohua conceal or omit the company's debts outside the Schedule of Creditor's Rights and Debts, and Xie Liyou is not aware of this, the actions of Zhang Hongxing, Zhou Congjun, Nie Anlin, Xiao Qiuling and Wang Shaohua have caused Xie Liyou to have a wrong understanding of the value of the equity and should be held liable for the subject matter of the guarantee."

Mianyang Intermediate People's Court of Sichuan Province (2017) Mianmin Zhong Zi No. 3120 Judgment"The debt before the transfer of the company's equity is borne by the company after the transfer, which will inevitably bring economic losses to the shareholders of the transferred company's equity. A contract for the transfer of shares of a limited liability company is a contract of sale and purchase based on the shares held by the shareholders of a limited liability company. Therefore, the provisions of the contract law on the contract of sale should be applied. According to Article 153 of the the People's Republic of China Contract Law," The seller shall deliver the subject matter in accordance with the agreed quality requirements. Where the seller provides a description of the quality of the subject matter, the subject matter delivered shall meet the quality requirements of that description. "the equity transferor, as a seller in the sense of contract law, shall bear the obligation of defect guarantee for the quality of the subject matter. In the case of a contract for the transfer of shares of a limited liability company, the transferor is also liable to the transferee for defects. When transferring shares in a limited liability company, especially to persons other than shareholders, the transferee is usually required to assess the value of the company's existing assets in order to determine the transfer price, and the transferor is required to inform the transferee of the company's existing assets and liabilities. If the transferor conceals the company's debt, it will inevitably inflate the value of the company's existing assets, so that the transfer price is separated from the actual price of the company's equity, against the interests of the transferee. Therefore, the transferor has an obligation to assure the transferee that the company does not have undisclosed debts. In this case, the defendant had no evidence to prove that he had fulfilled the disclosure obligation of the above-mentioned debt to the plaintiff or a third party at the time of the equity transfer, and should bear the burden of proof. The plaintiff has an actual obligation to compensate the subsequent transferee shareholders because of the defendant's concealment, and the loss shall be compensated by the defendant to the plaintiff on the basis of its original proportion of the company's shares."