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

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

(Summary description)The denial of legal person personality, also known as "piercing the legal person veil", refers to an ex post regulation method set up to prevent shareholders of a limited liability company from abusing the basic principles of company law such as corporate personality independence and limited liability of shareholders to damage the interests of the company's creditors. Correcting the imbalance of the limited liability system in the protection of creditors when a specific legal fact occurs is an exception to the limited liability of the company.

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

(Summary description)The denial of legal person personality, also known as "piercing the legal person veil", refers to an ex post regulation method set up to prevent shareholders of a limited liability company from abusing the basic principles of company law such as corporate personality independence and limited liability of shareholders to damage the interests of the company's creditors. Correcting the imbalance of the limited liability system in the protection of creditors when a specific legal fact occurs is an exception to the limited liability of the company.

Information

I. Introduction

 

The denial of legal person personality, also known as "piercing the legal person veil", refers to an ex post regulation method set up to prevent shareholders of a limited liability company from abusing the basic principles of company law such as corporate personality independence and limited liability of shareholders to damage the interests of the company's creditors. Correcting the imbalance of the limited liability system in the protection of creditors when a specific legal fact occurs is an exception to the limited liability of the company. According to the current laws and regulations, the denial of legal person personality can make shareholders bear joint and several liability for the company's debts, that is, to realize the "forward" denial of legal person personality. However, whether the company can assume joint and several liability for its shareholders, and whether the controlling shareholder or actual controller controls multiple subsidiaries or affiliated companies, can assume joint and several liability, that is, to realize the "reverse" denial or "horizontal" denial of legal personality, There are disputes in judicial practice. This article aims to analyze the application of reverse denial and horizontal denial of legal person personality in judicial practice by sorting out relevant legal provisions and analyzing specific cases.

 

II. Relevant legal provisions and the Nine People's Minutes Regulations

 

(1) Relevant legal provisions

 

The third paragraph of Article 20 of the "Company Law" stipulates that if a company shareholder abuses the independent status of the company's legal person and the limited liability of the shareholders, evades debts, and seriously damages the interests of the company's creditors, they shall be jointly and severally liable for the company's debts.

 

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 and solicited opinions on December 24, 2021, states that if a company shareholder uses two or more companies controlled by him to carry out 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 effect)

 

(2) Relevant regulations of the Nine People's Minutes

 

In the "Minutes of the National Court Civil and Commercial Judgment Work Conference" (Fa [2019] No. 254) (hereinafter referred to as "Nine People's Minutes"), in "II. Hearing of company dispute cases" (IV) Company In the section "Personality Denial", the system content of legal person personality denial is refined, and the four principles applicable to the legal person personality denial system are confirmed.

 

First, it can only be applied if the shareholder has abused the independent status of the company as a legal person and the limited liability of the shareholder, and the behavior has seriously damaged 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 creditors' rights of the company. 【Causal logic】

 

Second, only the shareholders who abuse the independent status of legal persons and the limited liability of shareholders are jointly and severally liable for the company's debts, while other shareholders should not bear this responsibility. 【Subject scope limitation】

 

The third is that corporate personality denial is not a comprehensive, thorough and permanent denial of the company’s legal personality, but only in specific cases based on specific legal facts and legal relationships, breaking the general rule that shareholders are not responsible for the company’s debts, and exceptionally ordering their Jointly and severally liable. The res judgment of the people's court's judgment denying the company's personality in a case only binds the parties to the lawsuit, and does not of course apply to other lawsuits involving the company, and does not affect the existence of the company's independent legal personality. If other creditors file a lawsuit for corporate personality denial, the facts determined by the effective judgment can be used as evidence. 【Limited scope of res judgment】

 

Fourth, the abuses stipulated in Article 20, paragraph 3 of the Company Law. Common situations in practice include confusion of personalities, excessive domination and control, and significant lack of capital. When trying a case, it is necessary to make a comprehensive judgment based on the identified facts of the case, which should be applied prudently and used when appropriate. 【List of cases】

 

In addition, the Jiumin Minutes also specifically discussed the situation of "excessive domination and control": "The controlling shareholder or actual controller controls multiple subsidiaries or affiliated companies, and abuses the control power to make the property boundaries of multiple subsidiaries or affiliated companies inconsistent. If the clearing and financial affairs are mixed, the interests are transferred to each other, the independence of personality is lost, and the controlling shareholder is reduced to evading debts, operating illegally, or even a tool for illegal crimes, the facts of the case can be combined, the legal personality of the subsidiary or affiliated company can be denied, and joint and several liability can be ordered.” ;. This paragraph stated that, on the one hand, the scope of the subject of corporate personality denial was extended to controlling shareholders and actual controllers, and on the other hand, the feasibility of reverse denial and horizontal denial was further clarified.

 

III. Main disputes in judicial practice

 

The denial of corporate personality has its own independent value and significance in practice. From the perspective of legislative and judicial value orientation, it is necessary to maintain the principle of corporate independence represented by the system of personality denial, but also not to make the independence of legal person become a way for shareholders to abuse their rights. The Wall of Sighs". Therefore, the application of the system of personality denial in the current judicial practice is in a state of cautious permission. In general, the focus of the controversy lies in the following aspects:

 

(1) Lack of legal basis

 

The current legal provisions of the Company Law only stipulate forward denial, and it is difficult to cite it as a legal basis for reverse denial or horizontal denial in judicial decisions. Create a law suspect.

 

(2) Whether it is necessary to apply

 

The significance of forward denial of legal person personality is that when shareholders abuse the company's independent status as a legal person and make the company's property insufficient to repay the creditors' rights of the company, if the legal person veil cannot be pierced, it will make it difficult for the creditors' rights and interests to be relieved.

 

When the shareholders themselves have debts, the creditors can protect their own rights and interests by freezing and enforcing the company's equity held by the shareholders in accordance with the law, or exercising the creditor's right of revocation, etc., and there are various remedies. Whether it is necessary to carry out reverse denial and compel the company to bear joint and several liability for shareholders' debts is controversial.

 

However, the author believes that if only the company's equity is frozen, the shareholders may still dispose of the company's assets, which complicates the way for creditors to remedy their rights and interests. In addition, when the company has both executable assets and considerable liabilities, its equity value may be low (or even zero), at this time, the creditor cannot be relieved by freezing the company's equity, while the legal personality denial can be achieved by seizure And enforce the company's assets so that creditors' rights can be relieved.

 

(3) Whether it causes “good faith” damage to shareholders' rights

 

Judicial precedents of the Supreme People's Court have affirmed the application of reverse denial of legal personality to a one-person limited company, and the reasoning part includes the statement that the company's joint liability to shareholders will not harm the interests of others in this case. The Jiumin Minutes positioned the scope of abusers as "controlling shareholders or actual controllers", and Article 20 of the Company Law and Article 21 of the Company Law (Draft Amendment) both set the scope of abusers as "controlling shareholders or actual controllers". Positioning as a shareholder of the company shows that the possibility of denial of legal person personality in the case of multiple shareholders in the company is not excluded. At this time, while applying reverse denial of legal person personality or horizontal denial, how to protect the rights and interests of other "good faith" shareholders, The controversy and difficulty of denying legal person personality has expanded from the level of "shareholder-creditor" to the level of "shareholder-shareholder" and "controlling shareholder (actual controller)-small and medium shareholders", which further aggravates the issue of legal person personality. Controversy and difficulty of reverse denial and horizontal denial in practice.

 

IV. Related Cases

 

(1) Case 1: (2020) Supreme Court Minshen No. 2158

 

Basic facts: Defendant Zhongsenhua Real Estate Co., Ltd. is a wholly-owned subsidiary of defendant Zhongsenhua Investment Company. When Zhongsenhua Investment Company acquired the equity of the target company held by a third-party company, it agreed to use Zhongsenhua Real Estate Co., Ltd. Stores and other physical assets are priced to pay for the equity transfer. Afterwards, the third-party company sued the court and demanded that Zhongsenhua Investment Co., Ltd. and Zhongsenhua Real Estate Co., Ltd. compensate for the value of the shops that could not be delivered according to the contract.

 

Hubei Higher People's Court of the first instance court held that:Although Zhongsenhua Investment Company and Zhongsenhua Real Estate Company were both registered as corporate legal persons, they were 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 Co., Ltd. did not submit evidence to prove that the company's property is independent of the shareholders' 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, the company shall also be jointly and severally liable for the debts of the shareholders.

 

The Supreme Court supported the view of the court of first instance in the second instance and retrial review, and the reasoning in the retrial review ruling is as follows:

 

(1) It is not inappropriate for the original judgment to apply the above-mentioned provisions to determine that Zhongsenhua Investment Company and Zhongsenhua Real Estate Company constituted mixed personalities. First of all, from the industrial and commercial registration situation, Zhongsenhua Real Estate Co., Ltd. is a one-person limited liability company. Since July 2013, the shareholder of Zhongsenhua Real Estate Company is Zhongsenhua Investment Company, with a 100% shareholding ratio. Secondly, in the original trial, although Zhongsenhua Investment Co., Ltd. and Zhongsenhua Real Estate Co., Ltd. respectively submitted evidence such as industrial and commercial registration materials, annual inspection reports, tax payment certificates, etc., they cannot deny that Zhongsenhua Real Estate Co., Ltd. is a project company of Zhongsenhua Investment Co., Ltd. and the commitments of the two companies. Facts related to joint and several liability for the arrears of the project involved. The original judgment found that Zhongsenhua Investment Co., Ltd., as a 100% shareholder, did not provide sufficient evidence to prove that the property of Zhongsenhua Real Estate Co., Ltd. was independent of each other, which was not inappropriate. Third, Zhongsenhua Real Estate Company is a real estate project company established by Zhongsenhua Investment Company to develop the Zhongsenhua International City project. At the beginning of its establishment, Zhongsenhua Real Estate Company was actually controlled by Zhongsenhua Investment Company and its shareholders. It can be seen from the resolution of the shareholders' meeting of Zhongsenhua Real Estate Co., Ltd. and the "Entrusted Loan Contract" between Changfu Fund, Hua Xia Bank and Zhongsenhua Real Estate Co., Ltd., Zhongsenhua Real Estate Co., Ltd. and Zhongsenhua Investment Co., Ltd. jointly undertake to undertake the debt repayment of the real estate project involved in the case. responsibility. Although Zhongrong International Trust Co., Ltd. held 100% equity of Zhongsenhua Real Estate Company for a short time, it later changed the registration as Zhongsenhua Investment Company. Fourth, although Article 63 of the Company Law stipulates that shareholders bear joint and several liability for the debts of the company, in current judicial practice, the company can also bear joint and several liability for the debts of shareholders when the personalities of the shareholders and the company are mixed.

 

(2) It is not inappropriate for the original judgment to determine that the "Shop Transfer Contract" and "Supplementary Agreement" are valid. The above agreement signed by Zhongsenhua Investment Co., Ltd. and Aerospace Bellows Co., Ltd. clarifies the specific subject matter for which the equity transfer price is paid in kind. The original judgment found that Zhongsenhua Investment Co., Ltd. had the right to dispose of the real estate developed in the name of Zhongsenhua Real Estate Co., Ltd. based on the existence of personality confusion, and it was not inappropriate. This court does not support Zhongsenhua Real Estate's claim that it should not be held liable on the grounds that it is not the subject of the contract and violates the principle of privity of contract.

 

(2) Case 2: (2020) Ji 11 Min Zhong No. 27

 

Basic facts: The two defendants, Baijin Company and Baifu Company, are 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 Haijing Company, and Budweiser Company and Li Jing provided guarantee. The plaintiff sued and requested that the two defendants be jointly and severally liable for Li Jing's debts due to the above-mentioned loan. In this case, the first-instance court and the second-instance court held a different view.

 

The court of first instance (the People's Court of Taocheng District, Hengshui City, Hebei Province) held that: Regarding the relationship between the defendant Baijin Company and Li Jing. First, in the mortgage agreement signed by Budweiser, Li Jing and the plaintiff, Li Jing was the guarantor, but the bills mortgaged by Li Jing belonged to the defendant Baijin Company and were endorsed and transferred to the plaintiff by Baijin Company. , Baijin Company is liable for Li Jing’s personal debts with its own property; second, according to the facts identified in the (2016) Ji 11 Min Zhong No. 1269 Civil Judgment issued by the Hengshui Intermediate People’s Court, it can be seen that Baijin Company complained to the Chengxian Yinxin Small Loan Co., Ltd. borrowed, but all the loan items were transferred to Li Jing's personal account, and part of the interest was also paid to Gucheng County Yinxin Small Loan Co., Ltd. from Li Jing's personal account. The situation of static personal bank account. Based on the above two facts, it can be seen that the assets of the defendant Baijin Company are indistinguishable from Li Jing's personal property, and it should be determined that Li Jing's personal property and the assets of the defendant Baijin Company constitute an asset mix. Regarding the relationship between the defendant PFAFF and Li Jing. According to Article 63 of the "Company Law", when a shareholder's creditor claims to deny the company's legal personality and requires the company to bear joint and several liability for the shareholder's debts, the company shall bear the burden of proving that the property is independent. Since his own property and Li Jing's personal property are independent, it should be determined that the assets of the defendant Baifu Company and Li Jing constitute confusion. Because Li Jing's personal assets are mixed with the assets of the defendants Baijin Company and Baifu Company, it is impossible to ensure that the company implements the principle of capital maintenance and capital unchanged, and it is impossible to determine the difference between the shareholders' personal assets and the company's assets, which will affect the company and shareholders externally. As the material basis for undertaking the repayment of the debts, the legal persons of the defendants Baijin Company and Baifu Company were transformed into skeletons, resulting in a situation in which Li Jing and the defendant Baijin Company, Li Jing and Baifu Company were mixed into one, and the mixing of their assets has caused creditors The interests could not be realized, so the defendants Baijin Company and Baifu Company should be jointly and severally liable for Li Jing's debts.

 

The court of second instance (the People's Court of Hengshui City, Hebei Province) held that: Article 63 of the Company Law stipulates that in the case of a one-person limited company with external liabilities, the shareholders shall undertake the company's debts. In this case, Juhua Company, on the grounds that Li Jing’s personal property was mixed with Baifu Company’s property, required Baifu Company to assume joint and several liability for Li Jing’s personal debts, which did not comply with the above-mentioned legal provisions. Therefore, even if Li Jing's personal property is mixed with that of Baifu Company, there is no legal basis for Juhua Company to require Baifu Company to assume joint and several liability for Li Jing's personal debts. The claims filed by PFAFF are not supported. As for the claims of Li Jing's personal property and the property of Baifu Company that Pfford Company appealed, there is no confusion, and that Juhua Company's lawsuit in this case belongs to individual compensation, etc., this court will no longer consider it. Baijin Company did not appeal against the first-instance judgment, which is a free disposition of its own civil rights. This court upholds the content of the first-instance judgment that Baijin Company should be jointly and severally liable for the debts owed by Li Jing. To sum up, the appeal of Baifu Company that it should not be jointly and severally liable for Li Jing's personal debt is established, and this court supports it. In the first instance, it was an error in the applicable law that Baifu Company should be jointly and severally liable for Li Jing's personal debts, and this court will correct it.

 

(3) Case 3: (2018) Liao 03 Min Zhong No. 3920

 

Basic facts: This case is a lawsuit of objection to execution. After the appellee, Dongjian Engineering Company, applied for compulsory execution in the case of a construction contract dispute with the third party, Zongjun Real Estate Company, the court of first instance decided in 2017. An enforcement ruling was made on August 16, and the eight parcels of land (and all above-ground buildings on the eight parcels of land) registered in the name of the appellant Zongjun Trading Company were seized. The appellant, as an outsider, filed a written objection to enforcement, and requested to suspend the enforcement, which was rejected by the court of first instance, and then filed a lawsuit for objection to enforcement. The appellant is a limited liability company with a third party as the sole shareholder, which has not actually operated since its establishment. On June 19, 2013, the third party paid the land transfer fee of RMB 134.77 million to the Land and Resources Bureau of Dengta City, and obtained eight land use rights. On December 27, 2013, the above land was valued at RMB 20 million and RMB 10 10,000 yuan to set up the appellant Zongjun Trading Company.

 

The court of first instance held that: The plaintiff Zongjun Trading Company is a wholly-owned subsidiary established solely by a third party with a registered capital of 20.1 million yuan. It has not operated since its establishment, and the property it owns is the dispute in this case. The value of the eight plots of land is far greater than 20.1 million yuan, and the land cannot be regarded as the self-owned property of Zongjun Trading Company. Therefore, the court does not support the claim of the plaintiff Zongjun Trading Company.

 

The court of second instance held that: The independent property of the company is the material guarantee for the company to independently assume responsibility, and the independent personality of the company is also prominently manifested in the independence of the property. When the property of the affiliated company cannot be distinguished and the independent personality is lost, the basis for independent responsibility is lost. In this case, the appellant Zongjun Trading Company and Zongjun Real Estate Company, the third party in the original trial, had mixed personalities. The specific performance is as follows: 1. The actual controllers of the second company 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 an absolute controlling position. Shan Yingying is in a position of operational control in both companies. From the perspective of managers and investors, there is a close relationship between the two companies. 2. The two companies are financially mixed. The appellant admitted that the company did not actually operate after its establishment, and the company's source of funds was capital injection and loans from a third party. The actual investor of the land involved in the purchase case and the subject who signed the "Contract on Assignment of State-owned Construction Land Use Rights" with Dengta City Land and Resources Bureau are the third parties in the original trial, and the date of purchase of the land was before the establishment of the appellant's company. The third party in the original trial spent RMB 134.77 million to obtain the right to use the land involved in the case, but only paid RMB 20 million as the capital contribution in kind to the appellant's company. The amount of the capital contribution in kind far exceeded the registered capital. The amount is particularly huge. The action of the third party in the original trial violated the normal financial management system, degraded the company's assets, caused the company's assets to be lost improperly, and damaged the interests of its legitimate creditors. Suspected, its investment in the appellant should be found to be invalid. The factors that characterize the personality between the two companies, including the actual controller and financial affairs, are highly mixed, resulting in the indistinguishability of their respective properties and the loss of their independent personality, which constitutes a mix of personalities. In this case, although the two companies were registered with the industrial and commercial registration department as separate corporate legal persons, in fact, the boundaries between them were blurred and their personalities were mixed, which violated the purpose of the establishment of the legal person system, violated the principle of good faith, and the nature of their behavior and harmful results. It is equivalent to the situation stipulated in the third paragraph of Article 20 of the "Company Law of the People's Republic of China". The system of corporate personality denial includes forward denial, that is, the shareholders bear joint and several liability for the company's debts; reverse denial, that is, the company bears joint and several liability for the shareholders' debts; and horizontal denial, that is, it is jointly and severally liable for the debts of affiliated companies. Although the third paragraph of Article 20 of the "Company Law of the People's Republic of China" 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, operation and healthy development of enterprises, only the The application of the forward denial model cannot prevent the abuse of the company's legal personality, and it is difficult to form an effective remedy for the company's creditors. Although the land involved in the case was registered under the name of the appellant's company, but because the appellant and the third-party company in the original trial had constituted a mix of personalities, the appellant did not enjoy the civil rights and interests sufficient to exclude the enforcement of the land involved in the case. The first-instance judgment was not inappropriate to dismiss his claim, and this court upheld it.

 

V. Conclusion

 

The author believes that if only a strict literal interpretation of Article 63 of the "Company Law" is carried out, it is obviously impossible to draw the supportive conclusion of reverse denial and horizontal denial of legal person personality. Therefore, in judicial practice, the reverse denial and horizontal denial of legal person personality are usually prudent. However, in practice, it does happen that the company's shareholders abuse the company's independent status as a legal person and the limited liability of shareholders, and use subsidiaries or affiliated companies of subsidiaries to transfer interests, resulting in insufficient solvency of shareholders themselves and serious damage to the interests of creditors. It is necessary to apply reverse denial and horizontal denial of legal person personality. (2020) Supreme Court Minshen No. 2158 and other precedents are the response of judicial practice to real needs, and also raise a warning for corporate compliance governance. The author suggests that in the actual operation of the case, it is necessary to pay attention to whether the company has lost its personality independence for comprehensive research and judgment according to whether the company belongs to the category of one-person limited company, combined with mixed personality, excessive domination and control, and significant lack of capital.

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