Exceptions to the bearing of limited liability by shareholders

Q: Do the shareholders of a limited liability company always only bear limited liability for the debts of the company?

A: Pursuant to the Company Law, a company is an enterprise with legal personality that has independent legal person property and the property rights of a legal person. A company bears liability for its debts to the extent of all of its property.

The shareholders of a limited liability company bear liability for the company to the extent of the capital contributions subscribed for by them, while the shareholders of a joint stock limited company bear liability to the company to extent of the shares subscribed for by them. These are the principles regarding the way that shareholders bear liability for the company’s debts. However, the Company Law and the judicial interpretations additionally provide that, under certain special circumstances, shareholders are required to bear joint and several liability for the company’s debts, namely, what is called the “system of lifting the corporate veil” or the “system of disregard of corporate personality”. From this it can be seen that the bearing of limited liability by shareholders is the principle while the bearing of joint and several liability is the exception.

Q: When are shareholders required to bear joint and several liability for the company’s debts?

A: Pursuant to the Company Law and the judicial interpretations, the circumstances in judicial practice mainly included the following:

A flaw or defect in the shareholder’s capital contribution. For example, a fraudulent capital contribution, incomplete payment of capital contribution, illegal withdrawal of capital contribution, etc. Common cases in judicial practice include: an investor makes his capital contribution in the form of property, such as premises, land use rights or intellectual property for which the carrying out of registration of title is required, but fails to carry out the procedures for registering the change in title; a shareholder fails to timely make his capital contribution by the deadline specified in the company’s articles of association; the company illegally withdraws a capital contribution by way of a connected transaction, makes allocations to a reserve, makes a loan to a connected party without collecting on the same, etc.

A shareholder abusing his rights to harm the interests of creditors. Common practices include: mixing and not differentiating the assets/funds/business/personnel of the company and its shareholders, and unclear financial accounts; a shareholder uses a connected transaction to divert company profits or harm the company’s interests; the company and a shareholder mix their operations, using the same people but operating under two names, and mixes their finances, personnel, assets and business; when the operations of the company run into difficulty, a shareholder transfers the company’s main business, profits, personnel, etc. to a newly established company, harming the interests of the original company’s creditors; etc.

Pan Xiang is a partner and Liu Yujia is an associate at AnJie Law Firm