Exploring the system of litigation for dissolution of companies

The Company Law establishes a judicial system of litigation for companies’ dissolution in mainland China. The trigger for such legal actions is a serious and unbreakable “company deadlock”. In the Provisions for Causes of Action in Civil Cases, the Supreme People’s Court classifies it as cause of action No. 263, a “company dissolution dispute”.

Entities involved

A company deadlock is a dispute situation in which a company’s decision making mechanism breaks down due to a conflict among shareholders or directors.

The plaintiff in a legal action for a company’s dissolution is generally a shareholder that finds it impossible to exercise its decision making rights or control. Although such actions result from a dispute among shareholders or directors, the defendant must be the company itself, not the shareholder or director with which the plaintiff is in conflict. Such shareholder or director may be named as a third party or added by the court as a materially interested “third party”.

The claim of the party seeking dissolution usually falls along these lines: serious difficulties have arisen in the operation and management of the company; the company is caught in a deadlock that cannot be resolved by other means; and the party’s interests have suffered material harm. This party emphasises that the company’s governance and decision making mechanism have broken down, resulting in the company being caught in a deadlock. The defendant and its actual controlling shareholder or controller will generally defend that the company is in a good operating state – operating normally and making a profit; the company can pay its taxes normally and its employees normally, so the condition for dissolution of “serious difficulties have arisen in the company’s operation and management” is not constituted.

It can be seen that one of the core issues in a legal action for a company’s dissolution is how to correctly determine the essential meaning of the statutory condition, that is, “serious difficulties have arisen in the company’s operation and management”.

Shi Anning is a senior partner at Dacheng Law Offices in Beijing