Disregarding corporate personality of husband-and-wife companies

By Wang Zheng, ETR Law Firm
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Judicial authorities continue to face a practical dilemma in deciding to disregard personality of husband-and-wife companies in disputes. In this article, the author empirically analyses the issue based on judgments and case facts.

STATISTICAL ANALYSIS

The author conducted a search on precedents regarding disputes of husband-and-wife companies from 1 January 2020 to 31 October 31 2021 using keywords of “husband-and-wife company”, “one-person company” and “joint and several liability”. A total of 185 closed civil cases came up. After excluding repeated and invalid cases, 74 cases remained, including 13 still in execution procedures.

Geographically, the top three provinces with the most cases were Guangdong (22 cases), Shandong (12) and Zhejiang (6). Among the Guangdong cases, 12 were in Foshan, all of which disregarded the personality of husband-and-wife companies.

Among the total 74 cases, 35 (47%) were second-instance cases, of which only two revised the first-instance judgment, indicating an extremely low revision rate.

In 48 (65%) of the 74 cases, personality of husband-and-wife companies was disregarded. In 43 of such cases, husband-and-wife companies were expressly identified as essentially one-person companies, accounting for about 90%.

PERSONALITY PRESERVED

In the 26 cases not supporting disregard of personality of husband-and-wife companies, most courts held that a husband-and-wife company was established by two shareholders, inconsistent with the formal requirements of one-person companies, making it difficult to apply rules on the distribution of burden of proof provided by the Company Law for one-person companies.

Wang Zheng, ETR Law Firm
Wang Zheng
Partner
ETR Law Firm

The civil judgment of Li Guanhua v Guangzhou Jiaming Plastic Products (2020) held the company and its shareholders as independent civil subjects, with their respective properties separated from one another, and that all benefits created by the husband-and-wife company were hence company property – not joint property of the husband and wife.

The pre-investment property status – whether joint property of the husband and wife or existence of any property division agreement – had no substantial impact on the company’s capital structure and asset status. Therefore, the legal personality and separate liability of a husband-and-wife company were considered no different than those of a general limited liability company.

Seemingly, the above-mentioned judgments mainly distinguish husband-and-wife companies from one-person companies in terms of shareholding structure.

Factors weighing heavily on judges’ determinations of the legal nature of husband-and-wife companies included: whether the husband and wife fully fulfilled their capital contribution obligations; whether it was founded as a husband-and-wife company; whether the company’s debts were formed during the husband and wife’s shareholding; and whether the husband-and-wife company could produce independent financial statements to prove separation of company property from that of the shareholders.

PERSONALITY DISREGARDED

In such cases, the vast majority of courts held that husband-and-wife companies were essentially one-person companies – mainly on the grounds that if there was no agreement between the shareholders of a husband-and-wife company on the ownership of their pre-marital and marital property, capital contribution from shareholders essentially derives from the same property right, shared and controlled by a single ownership. Thus the equity owners are consistent and singular in their interests, very similar to one-person companies.

In the civil judgment of Foshan Nanhai Shunyang Footwear v Luo Weixin et al (2020), the trial court held that it conformed to the legislative purpose of the Company Law to judge and regulate the personality of husband-and-wife companies by reference to relevant provisions of the Company Law on one-person companies.

On 28 June 2020, in the retrial of objection to execution by a Mr Xiong, the Supreme People’s Court clarified that the husband-and-wife company was essentially a one-person company, and reasoned from the aspects of legal theory and judicial effect. Although it was not a guiding case, the court’s opinion has subsequently been quoted many times by litigants and judges. The author believes that the judgment had great impact on the trial of subsequent similar cases. Certain courts able to identify a commingling of property have directly applied the provisions of article 20.3 of the Company Law – disregarding the personality of the husband-and-wife company and avoiding the argument over whether the husband-and wife company is a one-person company altogether.

VIEWS IN EXECUTION

According to the author’s research, courts are unlikely to disregard the personality of a husband-and-wife company during enforcement objections, thereby directly adding the shareholders as the persons subject to execution. The main reason is that most court execution divisions believe that the review of adding persons subject to execution should follow the principle of limited expansion of res judice (a matter already adjudicated), without expanding the scope of explanation.

It is not appropriate to deem a husband-and-wife company as a one-person company and add the shareholders, according to article 20 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Change and Addition of Parties.

Although it is difficult to support the opponent’s procedural application in the non-litigation review of execution, the ruling result does not affect the outcome of the substantive trial of an execution objection procedure.

Therefore, if the objecting party insists that the husband-and-wife company is a one-person company in essence, it may initiate a lawful enforcement objection. According to research, in enforcement objection, the proportion of cases in which courts support the disregard of personality of husband-and-wife companies is higher.

KEY TAKEAWAYS

The current law does not clearly specify the conditions, requirements or identification standards for whether shareholders of a husband-and-wife company should be jointly and severally liable for the company’s debts. Therefore, judicial authorities still have a practical dilemma in deciding to disregard personality of husband-and-wife companies.

The author believes it is necessary to make more reasonable and clear legal provisions for the identification standards of disregarding the personality of husband-and-wife companies according to their particularities.

In commercial trial practice, judicial authorities should determine whether to disregard the legal personality of husband-and-wife companies, and not allow husband-and-wife companies to make limited defences on the disregard of personality of limited companies.

Wang Zheng is a partner at ETR Law Firm

10 & 29/F, Chow Tai Fook Finance Centre
No. 6 Zhujiang Dong Road, Tianhe District
Guangzhou 510623, China

510623

Tel: +86 20 3718 1333

Fax: +86 20 3718 1388

Email:

wzlawyer@etrlawfirm.com

www.etrlawfirm.cn

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