Are husband-and-wife and one-person companies the same?

Shareholders are liable for the company’s debts to the extent of their own capital contribution. However, many sole shareholders of one-person companies have taken advantage of this Company Law provision by comingling personal and company property, thereby avoiding company debts.

For this reason, article 63 of the Company Law sets in place the burden on one-person company shareholders to prove their independence from company property. If such separation of property cannot be proven, the shareholder must be jointly and severally liable for company debts.

A husband-and-wife company is a limited liability company that a husband and wife, as shareholders and capital contributors, set up during their marriage. Being married, the shareholders’ interests are highly concentrated and their expression of intent is also often highly consistent, which makes personal and company property mix-up extremely likely, compromising creditors’ interests.

Cases at hand

Case research indicates that husband-and-wife companies are highly similar, or even identical, to one-person companies in terms of constituent elements and normative purposes. Therefore, in a dispute with a husband-and-wife company, one may argue that it is essentially a one-person company, and so article 63 of the Company Law is relevant in relation to the burden of proof.

In the case of Lu 17 Min Zhong No. 93 (2022), the court held that while the defendant company was established by two persons, they were a married couple who established the company during their marriage, and failed to prove that their joint properties were divided at the time of establishment.

According to article 17 of China’s Marriage Law, properties acquired during the period of marriage are in the couple’s joint possession. This means that all equity of the defendant company can in reality be traced to the same property rights, exhibiting both a concentration of interests and singularity in substance. Furthermore, the shareholders in this case used their personal accounts to repay company loans, proving the comingling of personal and company properties.

In Foshan Zhangkong Trading v Tianfu Hardware Industry (2023), the court believed that while the number of shareholders in a husband-and-wife company is not singular, the two are indivisible subjects of rights that possess all equities of the company. The capital contribution was considered joint property of the couple, the interests were highly concentrated and the expression of intent highly consistent, so provisions on one-person companies under the Company Law should apply.

In Millow v Xiong and Shen (2019), the court pointed out that, in terms of capital contribution, the husband-and-wife company’s equities essentially originated from the same property rights, under the possession and disposal of the same ownership (i.e. the joint property of the couple during marriage). In terms of shareholders, the subjects had concentrated interests and are substantially singular.

In terms of comingling of property, since the company was under the actual control of the same ownership, it would be difficult to avoid a mix-up between company property and others belonging to the couple. In terms of legal and social effects, a husband-and-wife company is inherently flawed when it comes to protecting the creditors’ rights.

Much needs to be done by legislators and legal practitioners in this regard. If husband-and-wife companies are deemed to have limited liabilities without enhancing or regulating the other obligations of the couple, it would go against the principle of fairness of civil law, and fall short of protecting the interests of the counterparty in an equal manner.

However, due to gaps in current legislation and judicial interpretations, court opinions are not unanimous when it comes to regarding husband-and-wife companies as one-person companies. Reasons to the contrary include: (1) the lack of clear legal stipulation and sufficient legal basis to support such a designation; and (2) it is inconsistent with the law to determine a one-person company as such simply because the shareholders are a married couple. The plaintiff creditor still bears the burden of proof of comingling between the shareholders’ personal property and company property.

Opinions and advice

In the authors’ opinion, there is little fault in regarding a husband-and-wife company as essentially a one-person company. While there are two shareholders, the company was set up during their marriage, and the company properties were jointly owned by them. The interests are highly concentrated and all equities are in substance derived from the same property rights, under the possession and disposal of the same ownership. Clearly, there is only one will at work in either operation or control.

In internal management, there are no other shareholders or directors, which, coupled with the nature of closedness typical with limited liability companies, results in weak supervision and difficulty for counterparties to fully understand the company’s operations. The above traits of husband-and-wife companies are similar to those of one-person companies, so treating them as such is in line with the principles of fairness and integrity.

Under the circumstances, the authors advise creditors collecting from a husband-and-wife company to assert that it is essentially a one-person company, and the married couple should assume joint and several liabilities for the company debts. In litigation, creditors should pay attention to the following:

(1) Research favourable precedence from the same jurisdiction where the husband-and-wife company was deemed essentially a one-person company;

(2) Name the husband-and-wife company, as well as the husband and wife, as co-defenders, rather than adding the couple as persons subject to enforcement at a later stage. Enforcement judges may not think along the same lines as civil court judges, favouring formal review based on the implementation of the relevant provisions, which often makes it more difficult to achieve any breakthrough where analogies are concerned; and

(3) Collect as much evidence as possible that points to comingling of property, such as frequent large-sum fund transactions between the shareholders and the company. If for any reason the creditor cannot personally collect evidence such as company books, accounting documents and minutes, it may apply to the court to investigate and collect evidence in its stead.

Xie Yang is a senior partner and Chen Yuqi is an associate at Zhilin Law Firm