Adding shareholders as judgment debtors

A real estate consulting company in Guangzhou, acting as the lessor, filed a lawsuit against company A, an education investment company, in May 2020 due to a lease contract dispute. The lessor claimed that company A should be jointly liable for unpaid rent, late fees and other charges as per the contract. The court, after hearing the case, ruled in favour of the lessor’s claims.

The case then moved to the enforcement stage, but company A had no assets available for enforcement, leading the court to terminate the enforcement proceedings. As company A could not fulfil its payment obligations, the lessor applied to add shareholders who had not fully paid their capital contributions as judgment debtors. Following objections to the enforcement, and first and second-instance trials, the court ultimately ruled to add the shareholders as judgment debtors.

Case analysis

Pursuant to article 17 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Change or Addition of Parties in Civil Enforcement (2020 revision), if the assets of a profit-making legal person that is a judgment debtor are insufficient to satisfy the debts determined by a legally effective document, and the applicant for enforcement applies to change or add shareholders who have not paid or have not fully paid their capital contributions as judgment debtors, the people’s court shall grant such a request within the unpaid capital contribution scope.

Pursuant to point 6 of article 2(2) of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference, “under the registered capital subscription system, shareholders enjoy the entitlement of a certain contribution period. The people’s court will not support creditors’ claims for supplementary compensation from shareholders for the company’s unpaid debts if the capital contribution term has not yet expired. However, exceptions include cases where the company, as the judgment debtor, has no assets available for enforcement despite all enforcement measures being exhausted, has grounds for bankruptcy but has not applied for it.”

The enforcement ruling states that company A has no assets for enforcement and is involved in other civil enforcement cases. It has been listed as a dishonest judgment debtor by the court, with restrictions on high consumption. Thus, the shareholders should bear supplementary compensation responsibility within the scope of their unpaid capital contributions. This case requires verifying the fulfilment of each shareholder’s capital contribution obligations and defining their supplementary compensation responsibilities based on their subscribed and paid-in amounts.

Practical insights

The successful acceleration of shareholder contributions before maturity, making shareholders supplementary judgment debtors, involves them assuming company debt for unpaid portions. The 2021 Amendment Draft of the Company Law stipulates that early payment for unpaid contributions by shareholders applies to companies that are “unable to repay maturing debts and clearly lack repayment capacity”. Article 54 of the new Company Law adds that “if company A cannot repay maturing debts, the company or creditors of overdue debts have the right to request shareholders who have subscribed but not yet reached their contribution deadline to make early contributions”.

The amendment process of the legal provisions shows a shift in legislative focus from protecting shareholder’s entitlement of a certain contribution period to safeguarding creditors’ lawful rights, while respecting shareholders’ original entitlement. Although the subscribed capital system aims to lower barriers to company establishment and promote capital circulation, it has been abused by shareholders in recent years to evade debts. Extended subscription periods have increased difficulties for creditors to protect their rights.

In this case, company A was listed as a judgment debtor by the court. Although the shareholders’ contribution deadlines have not yet expired, the company meets the criteria for bankruptcy but has not filed for it. Therefore, the shareholders’ contribution obligations can be accelerated.

The court must strictly identify the valid procedures for shareholder contributions to overcome evidentiary difficulties and resolve execution deadlocks. The attorney argues that multiple transactions between the defendant shareholders and the judgment debtor – labelled as “transfers”, “investments”, “loans”, “shareholder advances” and “shareholder advances settlements” – are insufficient to be recognised as contribution payments. Paid-in capital must be verified through formal capital verification reports and contribution certificates.

Additionally, company bank statements must undergo comprehensive audits. Relying solely on bank statements, information disclosed by the defendant on the national enterprise credit information system, or self-provided audit data is inadequate to confirm paid-in capital. During the objection to enforcement proceedings, the attorney discovered evidence of private loans and business transactions between the company and shareholders from nearly 1,000 pages of bank statements temporarily provided by the defendant.

The attorney offered that relying solely on bank statements to identify contributions would seriously confuse shareholder contributions with financial transactions between the company and its shareholders, undermining the shareholders’ contribution responsibilities and shifting all company risks to the creditors. Ultimately, the attorney successfully challenged the enforcement judge’s initial determination of shareholder contributions, resulting in six defendant shareholders being held supplementarily liable for nearly RMB5 million (USD700,000) of unpaid contributions, covering all of the creditor’s claims and recovery costs.

“Piercing the corporate veil” prevented the company from using its independent legal status to evade debts and added shareholders as parties liable for enforcement. Company A had no assets available for execution. After the first-instance judgment, company A appealed but maliciously delayed paying the second-instance litigation fees, thus delaying the judgment’s effectiveness. At this critical juncture, the attorney conducted a comprehensive pre-litigation investigation into company A’s operations, engaging in multiple communications with relevant departments, courts and clients.

This revealed that six shareholders of company A had not fully paid their contributions. Following the conclusion of the execution, the attorney successfully applied to add these shareholders as parties liable for enforcement based on article 17 of the provisions. This move effectively combated the defendant’s abuse of the independence of corporate personality and limited liability to evade debts.

Liang Muzhou is a senior partner at ETR Law Firm. Wang Jianan and Yang Shiyu, associates at ETR Law Firm, also contributed to this article.