Article 3 of the Company Law provides that the liability of a shareholder of a limited liability company is limited to the amount of its capital contribution. This principle leads most investors to believe that, no matter what happens, they can completely isolate shareholders’ risks by losing all paid-in registered capital.
However, in practice, the shareholder of a limited company may bear additional legal responsibilities besides its subscribed capital contribution, for various reasons. Some clearly provided legal responsibilities have not attracted enough attention from most shareholders, so here is a brief list.
Joint and several liability of promoters
The “promoter” here is not limited to the promoter of a company limited by shares, but is also applicable to the founding shareholder of a limited liability company. In addition to the capital contribution obligation for the registered capital subscribed by itself, a promoter may also need to undertake joint and several repayment obligations to the creditors of the company for the unpaid registered capital of other promoters. Therefore, it is very important to choose reliable partners when starting a new company. Otherwise, a promoter may have to pay for its business partners’ capital contribution.
Joint and several liability of both parties in an equity transfer transaction
If the equity transferor fails to fully fulfil its capital contribution obligation, the company or creditors of the company will have the right to require the transferor to fulfil its capital contribution obligation (to the company) or secondary compensation responsibility (to creditors) within the scope of unpaid contributions.
If the transferee knows, or should have known, that the transferor has not fully fulfilled its capital contribution obligation, the transferee will bear joint and several liabilities. Therefore, the transferee should pay attention to the paid-in situation of subscribed capital contribution, to avoid unnecessary risks.
The equity transferor should not take it for granted that, as long as the equity is transferred out, it can avoid the unfulfilled capital contribution obligation. It is worth mentioning that, in the case of capital contribution in instalments, shareholders still enjoy the interest of payment time for the undue capital contribution, and the transferor will no longer bear the capital contribution obligation of this part of registered capital after the equity transfer, which will be borne by the transferee.
Liability of atypical piercing of the corporate veil
In addition to the typical situation of “piercing of the corporate veil” as provided in the Company Law, the pyramid shareholding structure of “controlling large business with small investment” may also lead the upper shareholders to bear corresponding responsibilities. For example, a parent company has a registered capital of RMB1 million (US$153,000), and then sets up a subsidiary that subscribes for RMB10 million of registered capital, but the parent company does not fully pay the capital contribution to the subsidiary.
When the subsidiary is insolvent and bankrupt, the creditors of the subsidiary are likely to find that although the parent company has not fulfilled its paid-in obligation, it will be difficult to pursue the legal liability of the parent company, or its shareholders, as long as such shareholders have paid in the capital contribution of RMB1 million to the parent company. This kind of shareholding structure is equivalent to the company’s shareholders maliciously “transferring investment risks to creditors”, so the shareholders may have to bear corresponding responsibilities.
Shareholder liability of deemed one-person limited company structure
In addition to the typical one-person limited liability company provided in article 63 of the Company Law, in judicial practice, if a company is set up with the joint contribution of husband and wife in order to deliberately avoid the legal risks of a one-person company, such company may also be directly treated as a one-person company.
As in the case of the shareholders of a one-person company, if the husband and wife can’t prove that the company’s property is independent of their own property, they may be jointly and severally liable for the company’s debts. In addition to the relationship between husband and wife, in practice, there are cases in which the company is essentially regarded as a one-person company based on the relationship between parents and children, brothers and sisters, or other relatives among shareholders.
Liabilities related to liquidation
If a company cancels its registration without liquidation, or if shareholders undertake to bear liability for the company’s debts at the time of cancellation of registration, the shareholders of the company will be directly added as the person subject to enforcement of the case, and bear liability to the creditors for the company’s debts.
If the company fails to form a liquidation group for liquidation in time, after the dissolution of the company, which leads to the depreciation and damage of the company’s property, the shareholders will be liable for compensation to the creditors within the scope of losses.
Even if a liquidation group is formed for liquidation, where the liquidation cannot be carried out due to the loss of the company’s property, account books and important documents, or where the liquidation cannot be carried out due to the same reasons in the bankruptcy liquidation procedure, shareholders will still bear joint and several liabilities for the company’s debts.
With the promulgation of the Minutes of the National Working Conference on the Trial of Civil and Commercial Cases by Courts, the above-mentioned two provisions no longer adopt the “one size fits all” method. If shareholders can prove that they have taken active measures to fulfil liquidation obligations, or if minority shareholders can prove that they have not participated in the company’s operation, and have not appointed directors or supervisors, they can be exempted from corresponding liabilities.
In addition, shareholders, as members of the liquidation group, may also assume the corresponding liabilities of the liquidation group due to defects in liquidation procedures (such as failing to announce or notify known creditors in accordance with the law).
This article cannot exhaust all the situations of breaking shareholders’ limited liability. It is very important to have a clear understanding of shareholders’ related liabilities to help creditors to realise their creditor’s rights on the one hand, and help shareholders avoid unnecessary risks to the greatest extent in the process of corporate structure design, operation, equity transfer and liquidation, on the other hand.