Perspective | Analyzing the Burden of Proof for Shareholders of a One-Person Company After Litigation Through Judicial Cases

Currently, the People's Courts have reached a unified opinion: for companies with only one shareholder, the shareholder must provide evidence to prove that the company's assets are separate from the shareholder's personal assets. Otherwise, the shareholder will be jointly and severally liable for the company's debts. However, in judicial practice, many shareholders of single-shareholder companies have submitted audited financial statements covering the past three years for their holding companies—but courts still rule that these shareholders bear joint and several liability for the company's debts. To address this issue, this article analyzes the situation based on case filings, typical court cases, and guiding cases.

Relevant Article: The Company Law of the People's Republic of China Article 23: If company shareholders abuse the company's legal person status and their limited liability as shareholders to evade debts, thereby seriously harming the interests of the company's creditors, they shall bear joint and several liability for the company's debts.

If shareholders use two or more companies under their control to carry out the actions specified in the preceding paragraph, each company shall bear joint and several liability for the debts of any one of the companies.

A company with only one shareholder shall bear joint and several liability for the company's debts if the shareholder cannot prove that the company's assets are separate from the shareholder's personal assets.

By studying and analyzing relevant court cases, it can be observed that currently In terms of judicial discretion, it is required that the annual audit report submitted by a shareholder of a one-person company undergo a substantive review. If the annual audit report fails to disclose a significant litigation case involving the one-person company, or if the report clearly includes qualified opinion clauses, such omissions or qualifications may be deemed as an audit failure. In this scenario, the shareholder would be considered to have failed in their obligation to provide sufficient evidence and could face adverse legal consequences. Through an analysis of relevant court cases, this article argues that when a one-person company becomes involved in litigation, the shareholder should not only submit the company’s historical audit reports but also commission an independent auditing firm to prepare a specialized audit report. This report should meticulously detail the financial and property transactions between the one-person company and its shareholder. Furthermore, the specialized report should evaluate and comment on critical aspects such as the company’s asset independence, the independence of its financial personnel, business operational independence, the integrity of its financial management system, and the independence of its accounting records. By doing so, the shareholder can effectively demonstrate that the company’s assets remain legally separate from their personal assets, thereby avoiding liability for joint and several repayment obligations. For specific reference, readers are encouraged to examine the included case studies as well as the following landmark and representative cases from the Supreme People’s Court.

[Key Points of the Ruling] 1. The people's court should conduct a substantive review of the evidence presented by the shareholder to determine whether there is any commingling between the company’s assets and the shareholder’s personal property. On one hand, it should examine whether the audit report was prepared as required at the end of each accounting year, whether the report is complete, and whether it bears the signature of a certified public accountant. On the other hand, The review should focus on whether the company has adequately disclosed transaction information in its explanations and notes for significant accounts, whether these disclosures align with the company's financial supporting documents, and whether any material omissions or false statements exist. As well as financial accounting items such as "Other Receivables" and "Other Payables," which may record financial transactions between a single-member company and its shareholder.

2. If creditors of a one-person company raise reasonable doubts about the audit report submitted by the shareholder—such as the failure to include debts confirmed by court rulings in the financial accounting report, or discrepancies between significant account entries in the audit report and the company’s actual business conditions—the shareholder must provide a plausible explanation. If necessary, the accountant who prepared the audit report should appear in court to answer questions. If the shareholder is unable to offer a reasonable explanation for the disputed matters, they will bear the legal consequences of failing to meet their burden of proof.

[This Court's Opinion] The central issue in this case is: Should Guo Minning bear joint and several liability for the debt of Yi Culture Company? Article 63 of the "Company Law of the People's Republic of China" (as amended in 2018) stipulates: "If a shareholder of a single-shareholder limited liability company cannot prove that the company's assets are separate from the shareholder's own personal assets, the shareholder shall bear joint and several liability for the company's debts." (This provision was later absorbed into Article 23 of the revised "Company Law of the People's Republic of China" enacted in 2023.) Article 20 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Amendment and Addition of Parties in Civil Enforcement Proceedings" further clarifies: "If a single-shareholder limited liability company serving as the judgment debtor has insufficient assets to fully satisfy the debts determined by the effective legal documents, and the shareholder fails to provide evidence proving that the company's assets are independent of their personal assets, the court shall support the application by the enforcement creditor to add the shareholder as a judgment debtor, holding them jointly and severally liable for the company's debts." Based on this, Lin Mouxi applied to include Guo Mouning as a judgment debtor, citing the commingling of assets between Guo Mouning’s individual property and those of his one-person company, Yi Mou Culture Co. Ltd. Consequently, Guo Mouning is now required to present evidence demonstrating that Yi Mou Culture Co.'s assets remain distinct from his personal wealth. However, since Guo Mouning has failed to provide such proof, he must therefore assume joint and several liability for Yi Mou Culture Co.'s debts. Specifically: First, in terms of the form of evidence, Guo Minning, a shareholder of Yi Cultural Company, submitted documents such as the "Annual Audit Report," yet the annual audit reports from 2016 to 2023 were not prepared within the respective accounting years—they were instead compiled collectively during the course of the litigation. In practice, single-person companies are typically small to micro-sized enterprises with limited capital, workforce, and operational scale. Some lack a sound financial accounting system, leading to situations where the annual audit report was not prepared within the current fiscal year. While the effectiveness of an audit report issued retrospectively cannot be directly denied, its evidential value is weaker than that of an audit report prepared in the same year. Therefore, the content of the audit report must undergo rigorous review. Second, based on the content of the evidence, the "Special Audit Report" and the "Annual Audit Report" submitted by Guo Mouning did not include the debts that had already entered enforcement proceedings in Yimou Culture Company's balance sheet, and these debts could be verified through public channels. From a financial perspective, the aforementioned debts total 240,000 yuan, accounting for nearly half of Yi Company's registered capital—yet these were matters that should have been recorded but were not. Therefore, Guo Ning's submission of evidence such as the "Special Audit Report" and the "Annual Audit Report" contains significant flaws. Third, from the perspective of the evidence examination procedure, The auditing firm that issued the "Special Audit Report" and the "Annual Audit Report" did not appear in court for questioning, and Guo Minning was unable to provide a reasonable explanation in response to the questions raised by Lin Xiqi. Guo Minning stated that he had contacted the auditing firm, which declined to appear in court, citing that being questioned by the court fell outside the scope of its services. However, a search through relevant platforms revealed that the auditing firm responsible for issuing both the "Special Audit Report" and the "Annual Audit Report" is currently deregistered. In light of these findings, Although Guo Minning submitted the "Special Audit Report" and the "Annual Audit Report," both pieces of evidence were prepared retrospectively in a集中 manner, and there were instances where material information that should have been recorded was omitted. Moreover, Guo Minning failed to provide a reasonable explanation in response to the creditors' concerns. According to the allocation of burden of proof, Guo Minning's current evidence does not meet the legal standard of proof required by law and thus must bear the adverse consequences. Therefore, Lin's claim regarding the commingling of assets between Yi Company and Guo Ning, as well as Guo Ning's legal liability to jointly bear the company's debts, is upheld.

[Key Points of the Ruling] The audit report, which reflects only the company's liabilities and profits but fails to reveal the flow of assets between the company and its shareholders, is insufficient to prove that the company's assets are independent from those of its shareholders.

[This Court's Opinion] Based on the established facts, Lizhao Company was founded on October 13, 2014, with Yu as its legal representative. The shareholders are Yu and Wang, holding 70% and 30% of the company's shares, respectively. Meanwhile, Shengzun Company was established on January 13, 2016, and is wholly owned by Lizhao Company, with Yu serving as its legal representative. Thus, it is clear that Shengzun Company is a single-shareholder limited liability company established by Lizhao Company. The second-instance evidence provided by Lizhao Company, including the "Audit Report," only reflects the company's liabilities and profitability. This evidence fails to reveal the flow of assets between Lizhao Company and Shengzun Company, and thus is insufficient to prove that Lizhao Company's assets are independent from those of Shengzun Company. According to Article 63 of the Company Law of the People's Republic of China, which states that "if a shareholder of a one-person limited liability company cannot prove that the company's assets are separate from their own, they shall bear joint and several liability for the company's debts," Lizhao Company is legally obligated to assume joint and several liability for Shengzun Company's debts.

[Key Points of the Ruling] The audit report failed to include the company's outstanding execution debts—information that could have been obtained through public inquiry—on the company's balance sheet, clearly indicating an audit failure that renders the report inadmissible under the law.

[This Court's Opinion] In this case, although Pang submitted evidence such as the audit report of Huayang Company issued by an accounting firm, which purported to demonstrate the company's financial independence, our court’s second-instance review revealed that the aforementioned audit report failed to include the execution debts involved in the case—debts that could have been readily verified through public inquiries—in Huayang Company’s balance sheet. This clearly indicates a significant audit failure, rendering the report inadmissible under the law. Furthermore, after Huayang Company became a single-member limited liability company, it violated Article 62 of the Company Law by failing to prepare financial accounting reports at the end of each fiscal year and submit them for audit by an accounting firm. The occurrence of these audit failures alone is sufficient to show that the company’s financial management was severely disorganized. As the sole shareholder of the company, Pang should therefore bear the adverse consequences arising from the commingling of corporate and personal assets.

【Key Points of the Ruling】 Although the capital contribution and other objective details of the company during business registration or change-of-registration can be verified, and although verification reports and audit reports reflecting the company's operational performance and cash flow—key aspects of its financial status—cannot prove that the company's assets are independent from those of its shareholders.

[This Court's Opinion] Regarding whether Jidong Company should bear joint and several liability. Article 63 of the Company Law of the People's Republic of China stipulates that if a shareholder of a single-shareholder limited liability company cannot prove that the company's assets are separate from the shareholder's own personal assets, the shareholder shall be jointly and severally liable for the company's debts. Meanwhile, according to Paragraph 2 of Article 57 of the same law, This Law defines a single-member limited liability company as one that has either a single natural person shareholder or a single corporate shareholder. In this case, Ruifeng Company's sole shareholder is Jidong Company. According to the aforementioned legal provisions, if Jidong Company fails to prove that Ruifeng Company's assets are separate from its own, it will be jointly and severally liable for Ruifeng Company's debts. Jidong Company and Ruifeng Company provided capital verification reports and audit reports in the first instance, which, while demonstrating objective facts such as the companies' capital contributions during business registration or change-of-registration procedures, failed to prove that Ruifeng Company's assets are independent of Jidong Company's assets. During the second-instance proceedings of this case, Jidong Company submitted Ruifeng Company's annual audit report, financial statements, organizational structure, and operating contracts. Notably, the audit report was prepared solely at Ruifeng Company's own initiative. Although the audit report confirmed that Ruifeng Company's financial statements were prepared in accordance with enterprise accounting standards and fairly reflected the company's operational performance and cash flows for 2015 and 2017—key aspects of the company's financial health—it still did not provide sufficient evidence to establish the independence of Jidong Company's assets from those of Ruifeng Company. The company's financial statements, organizational structure, and business contracts demonstrate that the company possesses legal personality and independently engages in business activities externally, but they fail to prove the complete separation of its assets from those of its shareholders. Therefore, this court does not accept the aforementioned evidence. The primary court's determination that Jidong Company bears joint and several liability for Ruifeng Company's debts is well-founded and appropriate. Jidong Company's claim that it should not be held jointly liable lacks sufficient basis and is thus rejected by this court.

[Key Points of the Ruling] Providing a special audit report detailing transactions between the sole shareholder and the assets of the one-person company, along with submitting the annual audit report of the one-person company as required by the Company Law, can demonstrate that the shareholder's personal assets are legally separate from those of the company.

[This Court's Opinion] In the first instance of this case, Beibu Gulf Port Co., Ltd. has already submitted a "Special Audit Report" to demonstrate that its assets are entirely separate from those of Xinli Company, with no evidence of commingling. Moreover, this evidence aligns seamlessly with other documents on file, such as Xinli Company's annual audit report. As a result, Beibu Gulf Port Co., Ltd. has successfully fulfilled its burden of proof. Given that the evidence on record is sufficient to establish the relevant facts, there is no need for an expert appraisal. Therefore, this court declines to support the appraisal request submitted by Wengfu International.