Circular on Issuing the 21st Batch of Guiding Cases of the Supreme People's Procuratorate
Circular on Issuing the 21st Batch of Guiding Cases of the Supreme People's Procuratorate
Circular on Issuing the 21st Batch of Guiding Cases of the Supreme People's Procuratorate
July 28, 2020
People's procuratorates at all levels,
Upon a decision being made at the 45th session of the 13th procuratorial committee of the Supreme People's Procuratorate on July 24, 2020, four guiding cases (Jian Li No.77 to No.80) including the case of protest concerning a dispute over the liability of accused shareholders of Shenzhen C Investment Enterprise (Limited Partnership) for damages are issued as the 21st batch of guiding cases for reference and application.
Case of Protest concerning a Dispute over the Liability of Accused Shareholders of Shenzhen C Investment Enterprise (Limited Partnership) for Damages (Jian Li No.77)
[Keywords]
Enterprise Asset Restructuring / Protection of Shareholders' Personal Legal Property / Optimization of Business Environment / Supervision of Protest
[Keystone]
A company's shareholders shall assume limited liability to the company to the extent of their respective capital contributions. Where a shareholder does not abuse the company's independent status as a legal person to evade the payment of a debt but seriously harms the interests of the company's creditors, it shall not assume joint and several liability for the company's debt. Procuratorial authorities shall strictly apply such property rights systems as shareholders' limited liability to legally protect investors' personal property, thus allowing those who possess a piece of land to have peace of mind.
[Basic Facts]
In November 2007, Huizhou A Real Estate Development Co., Ltd. (hereinafter referred to as "Company A") was registered and established as a real estate project company for the development of * real estate in Huizhou, Guangdong province. Company A had repeatedly borrowed money from outside. In January 2010, due to the insolvency of Company A, the Guangdong Huizhou Intermediate People's Court accepted the bankruptcy application filed by creditors against Company A. After Huizhou B Development Co., Ltd. (hereinafter referred to as "Company B") provided CNY50 million as bankruptcy restructuring margin, the relevant creditors withdrew the bankruptcy liquidation application in May 2011. In August 2011, Shenzhen C Investment Enterprise (Limited Partnership) (hereinafter referred to as "Enterprise C") and Company A, Huizhou D Real Estate Development Co., Ltd. (hereinafter referred to as "Company D"), Chen *jun as well as Company B executed an Investment Cooperation Agreement and supplementary agreements, stipulating that Enterprise C accepted the transfer of 100% of the equity of Company A held by Company D at a cost of CNY20 million, and provided Company A with an entrusted loan of CNY148 million, while Company A provided a guarantee for Enterprise C's credit investment backed by the involved state-owned land use rights, etc. and Company D, Chen *jun and Company B also provided a joint and several liability guarantee.
On August 9, 2011, Company A's shareholders were changed to Enterprise C and Chen *jun, of which the capital contribution of Enterprise C as a shareholder accounted for 99.9%. On August 10, 2011, Enterprise C entrusted * Branch of China Construction Bank Co., Ltd. to loan a sum of CNY148 million owned by it to Company A for Company A to run * Project and conduct business operations, for which Company A and Company D provided mortgage guarantees as agreed. On the same day, the entrusted loan of CNY148 million and the equity transfer funds of CNY20 million were transferred to Company A. After the funds were received, during the period from August 2011 to April 2012, with a view to completing debt pay-off in the bankruptcy restructuring procedure and such relevant derivative matters occurring during the period thereof as loan and guarantee, as contractually stipulated and instructed by Company B and the creditor Chen *zhong et al., Company A successively transferred funds to multiple companies including Company D, Shenzhen E Company, and Shenzhen F Company totally amounting to CNY160.5 million.
On November 1, 2012, Zhu ** transferred its creditors' right of CNY8 million against Company A to Zhao *xin and notified the debtor thereof. On November 5, 2012, Zhao *xin filed a lawsuit with the Zhejiang Lanxi People's Court, claiming that Company A shall repay the arrears of CNY8 million, and Enterprise C shall assume joint and several liability therefor.
The Lanxi People's Court held in the first instance that Enterprise C, as the absolute controlling shareholder of Company A, abused the company's independent status as a legal person and shareholders' limited liability to improperly dominate and control Company A, and failed to use the loan for real estate development, while its acts of transferring assets and evading payment of debt seriously harmed the interests of the company's creditors, so it shall assume joint and several liability for Company A's debt. The court thus made a judgment that Company A shall repay the loan of CNY8 million to Zhao *xin, and Enterprise C shall assume joint and several liability therefor. Enterprise C refused to accept the judgment and appealed to the Zhejiang Jinhua Intermediate People's Court. The judgment of second instance rejected the appeal and upheld the original judgment. Enterprise C applied for a retrial, but the Zhejiang Higher People's Court rejected its application for a retrial.
[Supervision by Procuratorial Authority]
Acceptance and examination. Enterprise C claimed that Company A's external transfer of funds was not a transfer of assets, but always for specific purposes, and Enterprise C itself committed no act of abusing the company's independent status as a legal person and shareholders' limited liability, so it shall not assume joint and several liability. Therefore, it applied to the Zhejiang Jinhua People's Procuratorate for supervision in February 2016, and the procuratorate accepted the case for examination.
On the issue whether Enterprise C committed an act of abusing the company's independent status as a legal person and shareholders' limited liability to evade payment of the company's debt, the procuratorial authority legally retrieved and accessed the original case files, verified the relevant industrial and commercial registration information, and made inquiries with key witnesses to the case. Relevant evidence could confirm that Company A's external transfer of funds during the period from August 2011 to April 2012 was not a malicious transfer of assets to evade payment of debt, but was based on due causes.
Supervision opinions. The Jinhua People's Procuratorate filed a protest with the Zhejiang Provincial People's Procuratorate in terms of the case. Upon examination, the Zhejiang Provincial People's Procuratorate held that Enterprise C actually did not dominate and control Company A's capital expenditure, and after Enterprise C accepted the transfer of equity, Company A was still managed by personnel appointed by the original shareholder Company D and there was no change to its management personnel; Company A's transfer of funds to Company D and other companies multiple times was not malicious transfer of assets, but for definite purposes; and there was no overlapping or mixing-up of personnel, business or finance between Enterprise C and such enterprises as Company A and Company D. Therefore, that the judgment of final instance identified that Enterprise C took advantage of the independent status as a legal person and shareholders' limited liability to evade payment of debt was an error in the identification of facts and application of laws. On November 25, 2016, the Zhejiang Provincial People's Procuratorate lodged a protest with the Zhejiang Higher People's Court in accordance with the law.
Supervision results.
......
July 28, 2020
People's procuratorates at all levels,
Upon a decision being made at the 45th session of the 13th procuratorial committee of the Supreme People's Procuratorate on July 24, 2020, four guiding cases (Jian Li No.77 to No.80) including the case of protest concerning a dispute over the liability of accused shareholders of Shenzhen C Investment Enterprise (Limited Partnership) for damages are issued as the 21st batch of guiding cases for reference and application.
Case of Protest concerning a Dispute over the Liability of Accused Shareholders of Shenzhen C Investment Enterprise (Limited Partnership) for Damages (Jian Li No.77)
[Keywords]
Enterprise Asset Restructuring / Protection of Shareholders' Personal Legal Property / Optimization of Business Environment / Supervision of Protest
[Keystone]
A company's shareholders shall assume limited liability to the company to the extent of their respective capital contributions. Where a shareholder does not abuse the company's independent status as a legal person to evade the payment of a debt but seriously harms the interests of the company's creditors, it shall not assume joint and several liability for the company's debt. Procuratorial authorities shall strictly apply such property rights systems as shareholders' limited liability to legally protect investors' personal property, thus allowing those who possess a piece of land to have peace of mind.
[Basic Facts]
In November 2007, Huizhou A Real Estate Development Co., Ltd. (hereinafter referred to as "Company A") was registered and established as a real estate project company for the development of * real estate in Huizhou, Guangdong province. Company A had repeatedly borrowed money from outside. In January 2010, due to the insolvency of Company A, the Guangdong Huizhou Intermediate People's Court accepted the bankruptcy application filed by creditors against Company A. After Huizhou B Development Co., Ltd. (hereinafter referred to as "Company B") provided CNY50 million as bankruptcy restructuring margin, the relevant creditors withdrew the bankruptcy liquidation application in May 2011. In August 2011, Shenzhen C Investment Enterprise (Limited Partnership) (hereinafter referred to as "Enterprise C") and Company A, Huizhou D Real Estate Development Co., Ltd. (hereinafter referred to as "Company D"), Chen *jun as well as Company B executed an Investment Cooperation Agreement and supplementary agreements, stipulating that Enterprise C accepted the transfer of 100% of the equity of Company A held by Company D at a cost of CNY20 million, and provided Company A with an entrusted loan of CNY148 million, while Company A provided a guarantee for Enterprise C's credit investment backed by the involved state-owned land use rights, etc. and Company D, Chen *jun and Company B also provided a joint and several liability guarantee.
On August 9, 2011, Company A's shareholders were changed to Enterprise C and Chen *jun, of which the capital contribution of Enterprise C as a shareholder accounted for 99.9%. On August 10, 2011, Enterprise C entrusted * Branch of China Construction Bank Co., Ltd. to loan a sum of CNY148 million owned by it to Company A for Company A to run * Project and conduct business operations, for which Company A and Company D provided mortgage guarantees as agreed. On the same day, the entrusted loan of CNY148 million and the equity transfer funds of CNY20 million were transferred to Company A. After the funds were received, during the period from August 2011 to April 2012, with a view to completing debt pay-off in the bankruptcy restructuring procedure and such relevant derivative matters occurring during the period thereof as loan and guarantee, as contractually stipulated and instructed by Company B and the creditor Chen *zhong et al., Company A successively transferred funds to multiple companies including Company D, Shenzhen E Company, and Shenzhen F Company totally amounting to CNY160.5 million.
On November 1, 2012, Zhu ** transferred its creditors' right of CNY8 million against Company A to Zhao *xin and notified the debtor thereof. On November 5, 2012, Zhao *xin filed a lawsuit with the Zhejiang Lanxi People's Court, claiming that Company A shall repay the arrears of CNY8 million, and Enterprise C shall assume joint and several liability therefor.
The Lanxi People's Court held in the first instance that Enterprise C, as the absolute controlling shareholder of Company A, abused the company's independent status as a legal person and shareholders' limited liability to improperly dominate and control Company A, and failed to use the loan for real estate development, while its acts of transferring assets and evading payment of debt seriously harmed the interests of the company's creditors, so it shall assume joint and several liability for Company A's debt. The court thus made a judgment that Company A shall repay the loan of CNY8 million to Zhao *xin, and Enterprise C shall assume joint and several liability therefor. Enterprise C refused to accept the judgment and appealed to the Zhejiang Jinhua Intermediate People's Court. The judgment of second instance rejected the appeal and upheld the original judgment. Enterprise C applied for a retrial, but the Zhejiang Higher People's Court rejected its application for a retrial.
[Supervision by Procuratorial Authority]
Acceptance and examination. Enterprise C claimed that Company A's external transfer of funds was not a transfer of assets, but always for specific purposes, and Enterprise C itself committed no act of abusing the company's independent status as a legal person and shareholders' limited liability, so it shall not assume joint and several liability. Therefore, it applied to the Zhejiang Jinhua People's Procuratorate for supervision in February 2016, and the procuratorate accepted the case for examination.
On the issue whether Enterprise C committed an act of abusing the company's independent status as a legal person and shareholders' limited liability to evade payment of the company's debt, the procuratorial authority legally retrieved and accessed the original case files, verified the relevant industrial and commercial registration information, and made inquiries with key witnesses to the case. Relevant evidence could confirm that Company A's external transfer of funds during the period from August 2011 to April 2012 was not a malicious transfer of assets to evade payment of debt, but was based on due causes.
Supervision opinions. The Jinhua People's Procuratorate filed a protest with the Zhejiang Provincial People's Procuratorate in terms of the case. Upon examination, the Zhejiang Provincial People's Procuratorate held that Enterprise C actually did not dominate and control Company A's capital expenditure, and after Enterprise C accepted the transfer of equity, Company A was still managed by personnel appointed by the original shareholder Company D and there was no change to its management personnel; Company A's transfer of funds to Company D and other companies multiple times was not malicious transfer of assets, but for definite purposes; and there was no overlapping or mixing-up of personnel, business or finance between Enterprise C and such enterprises as Company A and Company D. Therefore, that the judgment of final instance identified that Enterprise C took advantage of the independent status as a legal person and shareholders' limited liability to evade payment of debt was an error in the identification of facts and application of laws. On November 25, 2016, the Zhejiang Provincial People's Procuratorate lodged a protest with the Zhejiang Higher People's Court in accordance with the law.
Supervision results.
......