Perspective | Analysis of the Situation Where Shareholders of a Limited Liability Company are Added as Defendants in Enforcement Actions

According to Articles 21, 23, and 50 of the Company Law, company shareholders shall abide by laws, administrative regulations, and the company's articles of association, exercise shareholder rights in accordance with the law, and shall not abuse shareholder rights to harm the interests of the company or other shareholders; they shall not abuse the independent status of the company and the limited liability of shareholders to harm the interests of the company's creditors. If shareholders abuse their rights and cause losses to the company or other shareholders, they shall bear compensation liability according to law. If shareholders abuse the independent status of the company and the limited liability of shareholders to evade debts, seriously harming the interests of the company's creditors, they shall bear joint liability for the company's debts. When a limited liability company is established, if shareholders do not actually pay their contributions in accordance with the provisions of the articles of association, or if the actual value of non-monetary property contributed is significantly lower than the subscribed amount, the other shareholders at the time of establishment shall bear joint liability within the scope of insufficient contributions with that shareholder. The Change and Addition Regulations provide detailed provisions for the circumstances under which shareholders, contributors, promoters, directors, etc. can be added as persons being executed, that is, in specific circumstances such as false contributions, withdrawal of contributions, cancellation of registration without liquidation, shareholders transferring shares without fully performing their contribution obligations, and abuse of shareholder rights leading to the company's inability to repay debts, if the applicant for execution submits an application and relevant proof materials, the execution procedure has the right to review and has the right to add shareholders as persons being executed under statutory circumstances where shareholders should bear responsibility, thus directly taking execution measures against shareholders who abuse limited liability to evade execution. The Nine Civil Minutes provide detailed provisions on the acceleration of shareholder contributions, clearly stating that under the subscribed capital system, shareholders enjoy the benefit of time according to law. If creditors request shareholders who have not reached the contribution deadline to bear supplementary compensation liability for the company's inability to repay debts on the grounds that the company cannot repay due debts, the people's court will not support it. However, the following circumstances are exceptions: (1) In cases where the company is the person being executed, the people's court has exhausted execution measures and has no property available for execution, and has met the bankruptcy reasons but does not apply for bankruptcy; (2) After the company's debts arise, the shareholders' meeting resolves or extends the shareholders' contribution period in other ways. At the same time, the Nine Civil Minutes provide a more detailed explanation of the corporate personality denial system, requiring that this system can only be applied when shareholders have abused the independent status of the company and the limited liability of shareholders, and such behavior has seriously harmed the interests of the company's creditors. Only shareholders who have engaged in such abusive behavior shall bear joint repayment responsibility for the company's debts, while other shareholders should not bear this responsibility. The denial of corporate personality is not a comprehensive, thorough, and permanent denial of the company's legal person status, but only in specific cases based on specific legal facts and legal relationships, breaking through the general rule that shareholders do not bear responsibility for the company's debts, and exceptionally ordering them to bear joint liability. The res judicata of the people's court's judgment denying corporate personality in individual cases only binds the parties involved in that litigation and does not automatically apply to other litigations involving the company, nor does it affect the continuation of the company's independent legal person status.

Shareholders' capital contribution defects include both situations where the contributions do not comply with legal provisions and situations where contributions are withdrawn after being made. The main manifestations are: 1. Insufficient contributions. Shareholders do not pay the full amount of contributions in accordance with the articles of association or legal provisions. 2. Defects in the contributed property. This includes situations where rights exist defects when contributing non-monetary property such as real estate or intellectual property, or where the rights have not been registered in the company's name. 3. Contribution forms do not meet regulations. For example, if the articles of association stipulate that shareholders contribute in kind other than currency, especially land, houses, or other physical assets that require property transfer, and shareholders have not completed the transfer procedures or have not delivered the physical assets. 4. The price of the contributed property is significantly insufficient. The actual value of physical or other non-monetary property contributed is significantly lower than the value stipulated in the articles of association. 5. The delivered subject matter does not meet the quality standards stipulated in the articles of association or national regulations, and does not have the necessary functions or utility. 6. The delivered subject matter is subject to legitimate rights of third parties, affecting the company's possession, use, and disposal of the subject matter. 7. Without legal procedures and reasons, the shareholders' meeting resolves to reduce the shareholders' actual contributions, which constitutes withdrawal of contributions, and the executing court may lawfully add that shareholder to bear joint repayment responsibility for the company's debts within the scope of false contributions.
 

It is particularly important to note that shareholders of a joint-stock company who contribute part of the years of land use rights as capital to the company, after the expiration of that part of the years, the value of the land use rights during that period has already been enjoyed and used by the company, and that part of the value has also been incorporated into the company's assets, and the promoters cannot actually withdraw it. Since the remaining years of land use rights have not been priced and used for contributions, the promoters' recovery of land use rights is an act of reclaiming their own property, which is significantly different from the act of withdrawing the originally contributed capital after the contribution, and should not be regarded as withdrawal of contributions. After the promoters recover the remaining years of land use rights, the company's capital does not change, so there is no need to fulfill the publicity procedure.

"Unpaid capital contributions" include situations such as completely unpaid, insufficiently paid, and false contributions. According to legal provisions, if the property of a corporate legal person is insufficient to pay off the debts determined by effective legal documents, the shareholders who have not fulfilled their capital contribution obligations can be added as defendants in the enforcement procedure, bearing the responsibility for the unpaid portion. If, at the time of the company's establishment, the shareholders did not actually pay the capital contributions as stipulated in the company's articles of association, or if the actual value of non-monetary assets contributed is significantly lower than the subscribed amount, the other shareholders at the time of establishment shall bear joint liability with the shareholder for the insufficient contribution, and the shareholder bearing joint liability can also be added as a defendant. Under the existing legal framework, shareholders enjoy the benefit of the contribution period, and generally, only when the contribution period expires without payment can it be recognized as a failure to fulfill the capital contribution obligation. Before the contribution period expires, shareholders enjoy the benefit of the period, and even if the company's existing assets cannot pay off debts, it cannot constitute "failure to fulfill or fully fulfill the capital contribution obligation." The "Minutes of the Ninth Civil Meeting" generally affirms the shareholders' benefit of the period, requiring that shareholders whose contribution period has not yet expired do not need to bear supplementary compensation responsibilities for the company's debts that cannot be paid off within the unpaid contribution range. However, to protect the rights of creditors, in cases where the company has bankruptcy reasons and is in bankruptcy proceedings, shareholders whose contribution period has not yet expired can apply the principle of acceleration of maturity and are no longer subject to the restrictions of the contribution period. After the company's debts arise, shareholders who maliciously extend the contribution period also apply the principle of acceleration of maturity. Once it is determined that the shareholders' contributions are accelerated to maturity, the court will rule that the shareholder bears the responsibility for repayment within the scope of the contribution amount.
 

The situation where shareholders transfer their equity while being in "unpaid capital contributions" is currently quite complex in enforcement. How the original shareholders and the transferee are added and what responsibilities they bear depend more on the court's discretion. Article 19 of the "Regulations on Changes and Additions" states, "If the company, as the defendant, has insufficient property to pay off the debts determined by effective legal documents, and its shareholders transfer their equity without fulfilling their capital contribution obligations, the applicant for enforcement may apply to change and add the original shareholder or the initiator who bears joint liability for the contribution according to company law as defendants, and the people's court should support this within the scope of unpaid contributions." This affirms the addition of the original shareholders and the initiator who bears joint liability as defendants, but in the court judgment document network, searching for keywords such as "equity transfer" and "adding defendants" will find that a significant number of courts will add both the original shareholders and the transferee as defendants. In addition to adding both parties as defendants, this can greatly improve the efficiency of enforcement and realize the creditors' claims, also because under the subscribed capital system, the shareholders' capital contribution obligations are accessory and will transfer with the equity transfer. Since the original shareholder has transferred all of their equity and completed the change registration before the subscribed capital due date, the transferee should continue to bear the capital contribution obligations. The court's review of adding the transferee focuses on the timing of the equity transfer and the occurrence of the debt, as well as the subjective mental state of the transferee. If the transferee knows or should know that the original shareholder has not fulfilled their capital contribution obligations when transferring equity after the debt arises, the court will usually add them as defendants, bearing joint liability with the original shareholder within the scope of the transferred equity.

"Capital withdrawal" is explained in the third judicial interpretation of the Company Law, detailing specific situations: After the company is established, if the company, shareholders, or company creditors request to determine that a shareholder has withdrawn capital based on the following behaviors that harm the company's interests, the people's court should support it: 1. Transferring the capital contribution to the company's account for verification and then withdrawing it; 2. Transferring their contribution through fictitious creditor-debtor relationships; 3. Creating false financial accounting statements to inflate profits for distribution; 4. Using related transactions to withdraw contributions; 5. Other behaviors of withdrawing contributions without legal procedures. Article 18 of the "Regulations on Changes and Additions" states, "If the profit-making legal person as the defendant has insufficient property to pay off the debts determined by effective legal documents, and the applicant for enforcement applies to change and add the shareholders or contributors who have withdrawn capital as defendants, the people's court should support this within the scope of the withdrawn capital." In practice, many company shareholders maliciously transfer company property to evade debts, resulting in winning creditors being unable to execute effectively. Therefore, it is recommended that after entering the enforcement procedure, if it is found that the company's property cannot pay off debts, the company's business registration information should be immediately retrieved, and evidence of shareholders withdrawing capital or failing to pay contributions should be collected. Then, through the procedure of raising objections to the enforcement court or applying for an enforcement objection lawsuit, shareholders can be included in the scope of defendants, thus maximizing the realization of creditors' rights and protecting their legitimate interests.

In practice, it is common for shareholders of one-person limited liability companies to evade debts and avoid enforcement by illegally deregistering the company or abusing the limited liability of the company, leading to a mixing of property and personality between the company and the shareholders. Article 23 of the Company Law of China stipulates the system of denial of legal personality for one-person limited liability companies, stating that "if a company has only one shareholder and the shareholder cannot prove that the company's property is independent of their own property, they shall bear joint liability for the company's debts." The "Regulations on Changes and Additions" stipulate that "if a one-person limited liability company as the defendant has insufficient property to pay off the debts determined by effective legal documents, and the shareholder cannot prove that the company's property is independent of their own property, the applicant for enforcement may apply to change and add that shareholder as a defendant, bearing joint liability for the company's debts, and the people's court should support this."
 

In the enforcement procedure, when the applicant for enforcement applies to add the shareholder of a one-person limited liability company as a defendant, the people's court usually conducts a formal review of whether the shareholder's property is independent of the company's property. After all, the enforcement procedure is based on efficiency as a fundamental principle, aiming to quickly and effectively realize the winning rights of the applicant for enforcement. The formal review is simple and easy to carry out, allowing for a quick review, and it aligns with the institutional design of the "Regulations on Changes and Additions." This formal review adopts a standard of proof based on a higher probability of facts. Shareholders should bear the preliminary burden of proof to distinguish their property from the company's property, which can be proven by submitting the company's financial accounting reports or audit reports from recent years. Shareholders of one-person limited liability companies should prove that their property is not mixed with the company's property by demonstrating the reasonableness and legitimacy of their financial transactions with the company, rather than indiscriminately throwing all the company's vouchers, statements, and accounting data at the court. The people's court should also focus on reviewing whether the transactions between the shareholder of the one-person limited liability company and the company are reasonable and legitimate. In the additional review procedure, shareholders only need to provide preliminary evidence to prove that their property is not mixed with the company's property. Property mixing refers to the inability to clearly distinguish between the company's property and the shareholder's property, mainly manifested as the company's books and the shareholder's books being the same or indistinguishable, or the income of the company and the shareholder not being differentiated, allowing the company's profits to be freely converted into the shareholder's personal property. In judicial practice, shareholders do not need to provide all financial accounting reports since becoming shareholders. If the applicant for enforcement does not recognize this but fails to provide contrary evidence, the enforcement court may determine that the shareholder's property is independent of the company's property and reject the applicant's request for addition. If the parties disagree with the ruling on the addition or rejection of the addition application, they can also seek relief through enforcement objection lawsuits in accordance with the law.

The procedure for adding a party to be executed is not a right exclusive to the applicant or the executing court; both parties have the right to initiate it. After the creditor becomes aware of the statutory grounds for adding a shareholder to the execution, they can submit an application to the people's court. If the applicant does not make a request, the court can also decide to add a party on its own, ultimately achieving the smooth conclusion of the case. In practice, most courts will initiate the addition procedure based on the parties' applications, but some courts may also proceed with the addition on their own authority without an application. Adding shareholders who have not paid their capital contributions as parties to be executed helps facilitate the execution process and the realization of creditors' rights. However, this action, which disposes of the substantive rights of shareholders without confirmation through statutory procedures, has a negative impact on the shareholders, and it is necessary to minimize this adverse effect through standardized procedural design. Especially in execution procedures, when applying for accelerated maturity and breaking through the shareholders' time interests, adding shareholders who have not yet reached the capital contribution deadline as parties to be executed must be examined for the legitimacy and feasibility of their early capital contributions. To address the difficulties in reviewing substantive issues in execution procedures, the 'Regulations on Changes and Additions' stipulate that a collegial panel can be formed for review and public hearings. Some local courts also stipulate that execution addition cases are reviewed separately by the execution agency and the civil trial court, with substantive matters reviewed by the trial court and non-substantive matters reviewed by the execution agency. Cases where the applicant adds shareholders as parties to be executed fall within the scope of review by the civil trial court. In some places, it is also stipulated that cases involving the addition of parties to be executed must first undergo a formal review by the execution implementation court, and those that meet the addition criteria will then be submitted to the adjudication court for a final ruling.

In terms of organizational review, most courts in practice will form a collegial panel for review, but some courts believe that for cases that are simple and clear, there is no need to form a collegial panel, and the execution judge can review it alone. To ensure procedural efficiency and execution effectiveness, for such cases, there is no need to conduct a hearing or public hearing; it is sufficient to review the evidence submitted by the parties and make a judgment based on self-investigation and inquiry, making an addition ruling if the circumstances for addition are met, and rejecting it if they are not.

Adding shareholders with defects in capital contributions as parties to be executed expands the enforcement power of effective legal documents to outside shareholders who did not participate in the previous dispute resolution process, requiring them to bear the repayment responsibility for the company's debts. If the court makes an erroneous addition ruling, it can cause great harm to the legitimate rights and interests of the shareholders. If the court's ruling to reject the addition application is incorrect, it can also cause irreparable losses to the creditors. Therefore, it is necessary to provide the parties involved in the execution, especially the added shareholders, with corresponding remedies to maximize the accuracy of the addition results. Article 236 of the Civil Procedure Law states, 'If a party or an interested party believes that the execution action violates legal provisions, they may submit a written objection to the people's court responsible for the execution. Upon receiving the written objection, the people's court shall review it within fifteen days. If the reasons are valid, it shall rule to revoke or correct; if the reasons are not valid, it shall rule to dismiss. If a party or an interested party is dissatisfied with the ruling, they may apply for a review to the higher-level people's court within ten days from the date of delivery of the ruling.' This grants the parties the right to raise execution objections or apply for a review to a higher-level court. Article 30 of the 'Regulations on Changes and Additions' states, 'If the respondent, applicant, or other parties involved in the execution are dissatisfied with the ruling made by the execution court regarding changes or additions, or the ruling to reject the application, they may apply for a review to the higher-level people's court within ten days from the date of delivery of the ruling, except where litigation is required according to Article 32 of these regulations.' Article 31 states, 'The higher-level people's court shall form a collegial panel to review the review application and shall make a review ruling within sixty days from the date of receipt of the application. If there are special circumstances that require an extension, it must be approved by the president of the court.' Article 32 states, 'If the respondent or applicant is dissatisfied with the ruling made by the execution court according to the provisions of the second paragraph of Article 14, and Articles 17 to 21 of these regulations, they may file an execution objection lawsuit against the execution court within fifteen days from the date of delivery of the ruling. If the respondent files an execution objection lawsuit, the applicant shall be the defendant. If the applicant files an execution objection lawsuit, the respondent shall be the defendant.'

From the above provisions, it can be seen that execution objection lawsuits and review applications are mutually exclusive; parties can either file an execution objection lawsuit or choose to apply for a review. The law clearly distinguishes the applicable circumstances for these two paths based on the different grounds for the parties' application for addition: 1. For a limited partnership that is a party to be executed, if the property is insufficient to repay the debts determined by the effective legal documents, and the court changes or adds limited partners who have not paid their capital contributions on time as parties to be executed, the applicant or respondent dissatisfied with the ruling should file an execution objection lawsuit within the scope of unpaid capital contributions. 2. For a profit-making legal person that is a party to be executed, if the property is insufficient to repay the debts determined by the effective legal documents, and the court changes or adds shareholders, contributors, or initiators who are jointly liable for the capital contributions according to company law as parties to be executed, the applicant or respondent dissatisfied with the ruling should file an execution objection lawsuit within the scope of unpaid or insufficient capital contributions. 3. For a company that is a party to be executed, if the property is insufficient to repay the debts determined by the effective legal documents, and its shareholders have not fulfilled their capital contribution obligations and have transferred their shares, the court changes or adds the original shareholders or initiators who are jointly liable for the capital contributions according to company law as parties to be executed, the applicant or respondent dissatisfied with the ruling should file an execution objection lawsuit within the scope of unpaid capital contributions. 4. For a one-person limited liability company that is a party to be executed, if the property is insufficient to repay the debts determined by the effective legal documents, and the shareholder cannot prove that the company's property is independent of their own property, the court changes or adds that shareholder as a party to be executed, bearing joint responsibility for the company's debts, the applicant or respondent dissatisfied with the ruling should file an execution objection lawsuit.