Company liquidation means that when the company has a statutory cause for dissolution, a liquidation group shall be established within the statutory time from the date of the occurrence of the cause of dissolution and the liquidation shall begin. The person who has the obligation to initiate the liquidation procedure is the liquidation obligor. Article 232 of the new Company Law clearly lists directors as the liquidation obligors of the company, and the reasons why this provision should attract sufficient attention are as follows:
1. In terms of legislation, for the first time, the liquidation obligor of the company is clearly defined as a director, ending the confusion and uncertainty of the relevant provisions on liquidation obligors in the relevant legislation of the company.
2. In business practice, it will have a significant impact on the corporate governance structure, the design of the articles of association, the functions and powers of the board of directors, and the rights, obligations and responsibilities of directors and shareholders.
3. In trial practice, this provision may fundamentally change the previous thinking on the initiation, responsible entity and adjudication of cases related to shareholders' liability for liquidation, and further require the issuance of new judicial interpretations on the application of relevant laws, or at least the current judicial interpretations.
I. Legislative evolution of the relevant provisions on the liquidation obligor of the company (in order of implementation time)
1. The Minutes of the Symposium on the Trial of Compulsory Liquidation Cases of Companies (SPC 2009) clearly put forward the concept of liquidation obligor, and clarified that shareholders, directors and actual controllers are liquidation obligors.
Article 29 of the Minutes of the Symposium on the Trial of Cases of Compulsory Liquidation of Companies (SPC 2009) provides that if a creditor applies for compulsory liquidation and the people's court rules to terminate the compulsory liquidation procedure on the grounds that liquidation is impossible or full liquidation is impossible, it shall specify in the final ruling that the creditor may separately require the respondent's shareholders, directors, actual controllers and other liquidation obligors to bear the responsibility for repayment of their debts in accordance with the provisions of Article 18 of the Judicial Interpretation II of the Company Law. Where a shareholder applies for compulsory liquidation and the people's court makes a decision to terminate the compulsory liquidation procedure on the grounds that liquidation is impossible or cannot be fully liquidated, it shall specify in the final ruling that the shareholder may claim relevant rights against the controlling shareholder or other entity that actually controls the company.
2. The Company Law (2018) does not clearly stipulate the liquidation obligor, but stipulates that the liquidation group of a limited liability company shall be composed of shareholders, and the liquidation group of a company limited by shares shall be composed of directors or a general meeting of shareholders, which is actually equivalent to stipulating that the shareholders of a limited liability company, the directors of a company limited by shares or the general meeting of shareholders shall be the liquidation obligor.
Article 183 of the Company Law (2018) provides that if a company is dissolved due to the provisions of Article 180 (1), (2), (4) and (5) of this Law, a liquidation team shall be established within 15 days from the date of occurrence of the cause of dissolution and the liquidation shall begin. The liquidation group of a limited liability company is composed of shareholders, and the liquidation group of a company limited by shares is composed of directors or persons determined by the general meeting of shareholders. If a liquidation team is not established for liquidation within the time limit, the creditor may apply to the people's court to appoint relevant personnel to form a liquidation group for liquidation. The people's court shall accept the application and promptly organize a liquidation team to conduct liquidation.
3. The Minutes of the National Conference on Civil and Commercial Trial of Courts (2019) requires shareholders to perform liquidation obligations, and stipulates that shareholders do not constitute "negligence in performing obligations", but in fact, the shareholders of limited liability companies are regarded as liquidation obligors and required to bear liquidation liabilities.
Article 14 of the Minutes of the National Conference on the Trial of Civil and Commercial Cases by Courts (2019) (hereinafter referred to as the "Minutes") and Article 18, Paragraph 2 of the Judicial Interpretation (II) of the Company Law stipulates that "negligence in performing obligations" refers to the negative behavior of shareholders of a limited liability company who deliberately delay or refuse to perform their liquidation obligations when they are able to perform their liquidation obligations after the occurrence of statutory liquidation reasons, or fail to carry out liquidation due to negligence. Where a shareholder adduces evidence to prove that it has taken positive measures to fulfill its liquidation obligations, or a minority shareholder provides evidence to prove that it is neither a member of the company's board of directors nor the board of supervisors, nor has it appointed a person to serve as a member of the organ, and has never participated in the operation and management of the company, and claims that it should not be jointly and severally liable for the company's debts on the grounds that it does not constitute "negligence in performing its obligations", the people's court shall support it in accordance with law.
Article 15: Where a shareholder of a limited liability company adduces evidence to prove that there is no causal relationship between its passive omission of "negligence in performing its obligations" and the result that "the company's main property, account books, important documents, etc. are lost and cannot be liquidated", and the people's court shall support it in accordance with law.
4. The Civil Code (2021) stipulates that the directors and directors of a legal person and other members of the executive or decision-making body are liquidation obligors.
Article 70 of the Civil Code provides that the directors and directors of a legal person and other members of the executive or decision-making body are liquidation obligors. Where laws and administrative regulations provide otherwise, follow those provisions. If the liquidation obligor fails to perform the liquidation obligation in a timely manner and causes damage, it shall bear civil liability; The competent authority or interested parties may apply to the people's court to appoint relevant personnel to form a liquidation team to conduct liquidation.
5. Although the Judicial Interpretation II of the Company Law (2021) does not explicitly stipulate the liquidation obligor, it stipulates that the shareholders of a limited liability company, the directors and the controlling shareholders of a company limited by shares shall establish a liquidation group within the statutory time limit, which in fact treats the shareholders of the limited liability company, the directors and the controlling shareholders of the company limited by shares as the liquidation obligor, and at the same time extends the relevant liabilities to the actual controller.
Article 18 of the Judicial Interpretation II of the Company Law provides that if a shareholder of a limited liability company, a director or a controlling shareholder of a company limited by shares fails to establish a liquidation team to commence liquidation within the statutory time limit, resulting in the depreciation, loss, damage or loss of the company's property, and the creditor claims that it is liable for compensation for the company's debts within the scope of the losses caused, the people's court shall support it in accordance with law. Where the shareholders of a limited liability company, the directors and controlling shareholders of a company limited by shares are negligent in performing their obligations, resulting in the loss of the company's main property, account books, important documents, etc., and cannot be liquidated, and the creditors claim that they are jointly and severally liable for the company's debts, the people's court shall support them in accordance with law. If the above-mentioned circumstances are caused by the actual controller, and the creditor claims that the actual controller bears the corresponding civil liability for the company's debts, the people's court shall support it in accordance with law.
6. The new Company Law (2024) clearly stipulates that directors are liquidation obligors.
Article 232 of the new Company Law provides that a director is the liquidation obligor of the company and shall form a liquidation team for liquidation within 15 days from the date of occurrence of the cause of dissolution. The liquidation group shall be composed of directors, unless otherwise provided in the articles of association of the company or the resolution of the shareholders' meeting to elect another person. If the liquidation obligor fails to perform the liquidation obligation in a timely manner and causes losses to the company or creditors, it shall be liable for compensation.
2. Comparative analysis of the characteristics and comparative analysis of the provisions of the new Company Law on liquidation obligors
1. The concept of liquidation obligor is clearly stipulated.
In 2009, the Minutes of the Symposium on the Trial of Cases of Compulsory Liquidation of Companies (SPC 2009) explicitly used the concept of liquidation obligor, but it was not formally used in subsequent corporate legislation. The concept of liquidation obligor was first formally written into the law in Article 70 of the General Provisions of the Civil Law (repealed), which came into effect in 2017. Article 70 of the current Civil Code continues the relevant expressions of the General Provisions of the Civil Law, and the specific content has not been substantially changed. The new Company Law includes the expression of liquidation obligor into the formal provisions, which is the first time in terms of company law legislation. Moreover, the provisions on the subject of liquidation obligors are significantly different from those of the Civil Code and all previous laws and regulations.
2. The directors are clearly listed as liquidation obligors, and no longer distinguish between a limited liability company and a company limited by shares.
Prior to the promulgation of the new Company Law, the Company Law and related judicial interpretations have been in a state of change and ambiguity regarding the subject of the company's liquidation obligations. Article 183 of the Company Law (2018) stipulates that the liquidation group of a limited liability company shall be composed of shareholders, and the liquidation group of a company limited by shares shall be composed of directors or persons determined by the general meeting of shareholders. Second, the subject of liquidation obligations includes members of the executive body and decision-making body, i.e., shareholders, directors, and other personnel. Article 70 of the Civil Code stipulates that the directors and directors of a legal person and other members of the executive or decision-making body are liquidation obligors. The new Company Law clearly stipulates that directors are liquidation obligors, and does not distinguish between the organizational forms of companies.
3. Shareholders will no longer be legally obligated to liquidate.
Prior to the promulgation of the new Company Law, especially for limited liability companies, shareholders were always the ones liable for liquidation. In existing judgments, creditors often argue that shareholders are negligent in fulfilling their liquidation obligations; or due to negligence in performing obligations, resulting in the loss of the company's main property, account books, important documents, etc., and the liquidation cannot be carried out, and the shareholders are required to compensate or be jointly and severally liable for the company's debts. In addition, the gist of the Supreme People's Court's No. 9 case clearly states that the shareholders of a limited liability company, the directors and the controlling shareholders of a joint-stock limited liability company shall perform the liquidation obligation after the company's business license is revoked in accordance with the law, and cannot be exempted from the liquidation obligation on the grounds that they are not the actual controller or have not participated in the operation and management of the company. As a result, minority shareholders who do not actually participate in the operation often take on large debts that far exceed their affordability. In response to this situation, Articles 14 and 15 of the Minutes make adjustments to the non-liability of minority shareholders, and the Notice of the Supreme People's Court on the Non-Reference of Certain Guiding Cases also announces that Guiding Case No. 9 will no longer be referred to as of January 1, 2021. However, in practice, in the cases handled by the author, some court rulings are still influenced by Guiding Case No. 9 and hold minority shareholders liable. Even if some courts refer to and apply the provisions of Articles 14 and 15 of the Minutes, it is very difficult for minority shareholders who do not actually participate in the company's operation and have no control over the company's finances and other important account books and documents to fully adduce evidence that it does not constitute "negligence in performing obligations" or "there is no causal relationship between negligence in performing obligations and loss of account books, etc.", and they are ultimately held liable because they cannot provide evidence.
According to the provisions of the new Company Law, the shareholder is no longer the liquidation obligor, so the premise for the creditor to directly pursue the liquidation liability of the shareholder does not exist, and the liability of the shareholder who does not actually participate in the operation of the company can also be effectively avoided. In terms of the constitutive elements of the tort, there should be a tortious act first, and the consequences of the infringement should be caused, and there is a causal relationship between the act and the result, before the liability can be pursued.
4. The liquidation group shall be composed of directors, unless otherwise stipulated in the articles of association of the company or the resolution of the shareholders' meeting shall elect another person. Shareholders are not legally obligated to liquidate, but may become members of the liquidation group.
The new Company Law stipulates that the directors are the liquidation obligor, and at the same time, the liquidation group shall be composed of directors, but the members of the liquidation group may be separately specified in the articles of association or the resolution of the shareholders' meeting to elect another person. This provision has three meanings:
First, a distinction is made between the liquidation obligor and the members of the liquidation group, which may or may not coincide. Under normal circumstances, the liquidation group is composed of directors, and the two completely overlap. Otherwise, the members of the liquidation group may be other persons determined by the provisions of the articles of association or the resolution of the shareholders' meeting, and the shareholders are of course very likely to become members of the liquidation group.
Second, a distinction is made between the different stages of the commencement and execution of the liquidation proceedings. As the liquidation obligor, the director must first bear the obligation to initiate the liquidation, that is, a liquidation team shall be established within 15 days from the date of the occurrence of the cause of dissolution. The liquidation execution entity is the liquidation group.
Third, under special circumstances, the new Company Law does not have specific provisions on the issue of liability arising from different entities at different stages of liquidation initiation and enforcement, and it may be necessary to further issue relevant judicial interpretations to clarify them.
5. The directors are the liquidation obligor, which reflects the fairness principle of the unity of power and responsibility, but also may lead to excessive liquidation responsibilities of directors and improper evasion of responsibilities by shareholders.
The shareholders' meeting is the company's authority and decision-making body, and the liquidation of the company requires a valid resolution of the shareholders' meeting before it can be initiated. As the initiator of the company's liquidation procedure, the liquidation obligor should first have the right to commencement before it should bear the corresponding liability. Under the existing corporate structure, directors do not have decision-making power, so the following three situations may occur:
First, the directors and shareholders are completely overlapping, and there is no difference in nature between the law and who is the liquidation obligor.
Second, all directors are shareholders, but individual shareholders are not directors, which may lead individual shareholders to evade their responsibilities.
Third, some directors are shareholders and some directors are not, such as employee representative directors and directors appointed by corporate shareholders, etc., in which case non-shareholder directors may be subject to excessive liability. For example, according to Article 68 of the new Company Law, a limited company with more than 300 employees shall have employee representatives on the board of directors. In the event of liquidation liabilities caused by failure to liquidate in a timely manner under the control of shareholders, it is also debatable whether or to what extent the directors, as employee representatives, should bear the liquidation liabilities.
The original intention of the establishment of the liquidation obligor system is that if the company is unable to operate normally, if the liquidation obligor violates the duty of diligence and neglects to perform the liquidation obligation, which damages the rights of creditors, it shall be liable. However, from the analysis of the company's internal structure design and governance structure, shareholders are the source of the company's rights, directors are elected by the shareholders' meeting, and the board of directors is the company's internal governance and executive body. In essence, the rights of directors are derived from the shareholders, and the directors have formed the right to manage the company by transferring part of the rights of the shareholders. Treating directors as liquidation obligors may in fact lead to improper or misplaced aggravation of directors' responsibilities, and may also lead to improper evasion of liability by shareholders. How to balance the relationship may also require the refinement and clarification of subsequent relevant judicial interpretations.
3. Practical analysis of directors as liquidation obligors
1. Circumstances in which the director is liable as the liquidation obligor.
As the liquidation obligor, the basis and basis for the directors to perform the liquidation obligations are the provisions of Article 67 of the new Company Law on the functions and powers of the board of directors, and Article 180 of the new Company Law on the duties of loyalty and diligence of directors, supervisors and senior executives. The directors' duty of diligence to the company includes the whole process of the company from scratch and from existence to nothing, that is, from establishment, development, dissolution, liquidation to deregistration. As far as liquidation obligations are concerned, liquidation obligations consist of two stages: the commencement and execution of liquidation proceedings. Directors who fail to actively perform their liquidation obligations should of course be held liable.
According to Article 18 of the current Judicial Interpretation II of the Company Law, there are two situations in which liquidation liability is assumed: first, if a liquidation team is not established within the statutory time limit to start liquidation, resulting in the depreciation, loss, damage or loss of the company's property, the company shall be liable for compensation for the company's debts within the scope of the losses caused. Second, negligence in performing obligations, resulting in the loss of the company's main property, account books, important documents, etc., unable to liquidate, and jointly and severally liable for the company's debts.
According to the third paragraph of Article 232 of the new Company Law, if the liquidation obligor fails to perform the liquidation obligation in a timely manner and causes losses to the company or creditors, it shall be liable for compensation.
As a later legislation, the new Company Law does not adopt the provisions of Article 18 of the Judicial Interpretation II of the Company Law, and there is a clear difference between the two. In the author's opinion, the provisions of the new law are more in line with the constitutive elements of tort liability. However, from a practical and prudent point of view, it is not clear how the specific legal provisions will be applied, and Article 18 of the Judicial Interpretation II of the Company Law has not been repealed or amended, the new law and the old regulations should be taken into account. In the course of performing their duties, directors should also follow all the above provisions to restrain and guide specific behaviors.
2. The issue of whether the relevant provisions on the liquidation obligation of directors are applied retroactively.
The new Company Law will come into effect on 1 July 2024. When it comes to the application and convergence of the old and new laws, there are two main situations:
(1) The company has a statutory cause for dissolution, and the state of non-liquidation continues until after the implementation of the new Company Law. Taking a limited liability company as an example, if the company has a statutory cause for dissolution, but a liquidation group has not been established for liquidation within the statutory time, whether the liquidation obligor and the liability for liquidation should be attributed to the shareholders in accordance with the old law or to the directors in accordance with the new Company Law. In the author's opinion, the unliquidated state of the company will continue until the implementation of the new law, and after the implementation of the new law, the provisions of the new Company Law shall apply to the initiation of the liquidation procedure of the company, that is, the directors shall bear the obligation to commence.
(2) If the state of unliquidated company is in a continuous state, but the trial has been held in the first instance, but there is no effective judgment yet, whether the judgment can be changed in the second instance due to the new law. At present, the author has encountered such a situation, that is, the creditor pursues the liquidation liability of the company's shareholders, who are not directors of the company, but only minority shareholders. According to the provisions of the new Company Law, the minority shareholder is not a director of the company and is not a liquidation obligor, so he should not bear the liquidation liability. However, according to the current Company Law and relevant judicial interpretations, if the minority shareholder fails to provide evidence in accordance with the provisions of the Minutes of the Ninth People's Republic of China and is recognized by the court, there is a great probability that the minority shareholder will bear the liquidation liability. There is no clear opinion on how to deal with this situation. In the author's opinion, before the judgment takes effect, the fact that the company has not been liquidated is still in a continuous state even if it is involved in litigation, and the relevant provisions of the new Company Law should be applied if this state continues after the implementation of the new law.
3. Directors shall perform their duties of loyalty and diligence and actively fulfill their liquidation obligations
The new Company Law stipulates that directors are the only statutory liquidation obligors and should actively perform their duties of loyalty and diligence in strict accordance with the relevant provisions of the Company Law and the articles of association to avoid bearing unnecessary liabilities. Specifically, directors should:
(1) If the company has served as a director of the company before the implementation of the new law, and the company's current business status is abnormal, the company's situation should be investigated to confirm whether the company in which the director has the statutory reasons for dissolution stipulated in the Company Law, i.e., the expiration of the business period specified in the articles of association or other statutory reasons; The shareholders' meeting resolves to dissolve; The company's business license has been revoked, ordered to close down or revoked in accordance with the law; The shareholders requested the dissolution of the company and were judicially dissolved. As long as one of the above statutory reasons for dissolution is met, the directors, as the liquidation obligor, shall actively initiate the liquidation procedure within the statutory time.
(2) For those who are about to serve or are currently serving as directors of the company, and the company is in normal operation and there is no statutory cause for dissolution, the company shall clearly understand and confirm the duties of the directors of the company as stipulated in the Companies Act and the Articles of Incorporation, etc., and shall strictly perform the duties of loyalty and diligence. In the daily operation and management, the company's property, account books and other important documents should be kept to avoid the company's inability to liquidate. If the company has more than one director, it is even more important to clearly delineate the specific custody responsibilities.
4. Two dilemmas and reflections on the provisions on the appointment of directors and the assumption of liquidation responsibility
(1) If the original director resigns, but the new director does not take office, whether the original director should bear the liquidation liability.
According to Article 70 of the new Company Law, the term of office of directors shall be stipulated in the articles of association of the company, but each term shall not exceed three years. Upon expiration of the term of office, directors may be re-elected. If a director is not re-elected in a timely manner upon the expiration of his or her term of office, or if a director resigns during his term of office, resulting in a lower than the quorum of the board of directors, the original director shall still perform his or her duties as a director in accordance with the provisions of laws, administrative regulations and the articles of association before the re-elected director takes office. If a director resigns, the company shall be notified in writing, and the resignation shall take effect on the date the company receives the notice, but if there are any circumstances provided for in the preceding paragraph, the director shall continue to perform his duties.
In accordance with the provisions, if a director resigns, the resignation shall take effect from the date on which the company receives the written notice of resignation. However, if the re-elected director has not yet taken office, the director shall continue to perform his or her duties. In this case, if the company has a statutory cause for dissolution and needs to initiate the liquidation procedure, and the director does not initiate it, should he bear the liquidation liability at this time? In the author's opinion, the resignation of a director should take effect, and the company should appoint new directors within a reasonable period of time, and if this cannot be done, the corresponding responsibilities should be borne by the members of the company's resolution body.
(2) Whether the liability of directors who are only formal directors and fail to perform their liquidation obligations in a timely manner can be extended to the controlling shareholder and actual controller.
According to Article 180 of the new Company Law, directors, supervisors and senior managers have a duty of loyalty to the company, and shall take measures to avoid conflicts between their own interests and those of the company, and shall not use their power to seek improper benefits. Directors, supervisors and senior management have a duty of diligence to the company, and shall exercise reasonable care in the best interests of the company in the performance of their duties. Where the controlling shareholder or actual controller of a company does not serve as a director of the company but actually performs the company's affairs, the provisions of the preceding two paragraphs apply.
According to this article, the board of directors is the executive body of the company's affairs, and directors are liable based on their duty of loyalty and diligence. However, if the creditor has sufficient evidence to prove that the controlling shareholder or actual controller of the company does not serve as a director of the company but actually performs the company's affairs, the controlling shareholder or actual controller shall perform the duty of loyalty and diligence. Therefore, it is still inconclusive whether the liability of directors, as liquidation obligors, for failing to perform liquidation obligations in a timely manner can be extended to the controlling shareholders and actual controllers. In the author's opinion, in this case, the relevant provisions of Article 18 of the Judicial Interpretation II of the Company Law should be introduced, that is, if there is sufficient evidence to prove that it is the controlling shareholder and the actual controller who actually perform the duties of the director, then a substantive review of the facts should be conducted and the controlling shareholder and actual controller should be required to bear the liquidation liability of the director.
About the Author
Gu Yanhong
Partner of Hiways Yongtai
Ms. Gu Yanhong, Master of Laws. Mr. Gu specializes in corporate law, contract law and other business areas, and has rich experience in corporate governance, corporate legal risk control, equity incentives, corporate disputes, bankruptcy liquidation, contract dispute resolution, etc. At the same time, Mr. Gu has conducted in-depth research and written documents on relevant issues in case handling, including shareholder representative litigation, right to terminate contracts, company capital increase, company liquidation, etc., which have been published in books or important publications.