The director lends funds to the company and charges interest. Can the company exercise the right of attribution?
Author | Lawyer Zou Yongyuan
introduction
ZHIHENG
The right of incorporation of a company refers to the right of the company to the property obtained by the dishonest directors, supervisors, and senior executives, which is a special remedy granted to the company by law. Article 182 of the Company Law of our country (2023) includes the dishonest behavior of directors and senior executives in violation of the obligation to prohibit self-trading in the cause of incorporation of the company.
This case is a lawsuit filed by the company's shareholders on the grounds that the company's directors engaged in illegal self-transactions with the company.
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Prohibit directors, supervisors, and senior executives from breaching self-dealing obligations
The relevant legal provisions
Article 22 of the Company Law of the People's Republic of China (2023 Revision):
"The controlling shareholders, actual controllers, directors, supervisors, and senior management personnel of the company shall not use related relationships to harm the interests of the company.
Anyone who violates the provisions of the preceding paragraph and causes losses to the company shall be liable for compensation. "
This clause regulates the related party transactions of directors, supervisors, and senior executives and their liability for compensation.
Article 182 of the Company Law of the People's Republic of China (2023 Revision):
"Directors, supervisors, and senior management personnel who directly or indirectly enter into contracts or conduct transactions with the company shall report to the board of directors or shareholders' meeting on matters related to the conclusion of contracts or transactions, and shall pass the resolution of the board of directors or shareholders' meeting in accordance with the provisions of the company's articles of association.
The provisions of the preceding paragraph shall apply to the close relatives of directors, supervisors and senior management personnel, enterprises directly or indirectly controlled by directors, supervisors and senior management personnel or their close relatives, and related persons who have other related relationships with directors, supervisors and senior management personnel. "
This clause further regulates the self-trading behavior of directors, supervisors, and senior executives in the related party transaction behavior, and extends the composition of self-trading behavior.
Article 186 of the Company Law of the People's Republic of China (2023 Revision):
"The income earned by directors, supervisors and senior managers in violation of the provisions of Articles 181 to 184 of this Law shall belong to the company."
This clause is the legal basis for the company to exercise the right of attribution against the directors, supervisors, and senior executives who violate the obligation of self-trading prohibition.
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Typical Case (2020) Yumin End No. 543
1. Basic case
Yunchuang Company was incorporated on January 4, 2015 with a registered capital of 20 million yuan. The shareholders are Xie Hu (50% shareholding) and Leng Jiafeng (50% shareholding). Leng Jiafeng is the legal representative of Yunchuang Company and serves as the executive director and general manager. Xie Hu serves as the supervisor of Yunchuang Company.
From January to March 2016, Yunchuang Company needed external loans due to financial difficulties. Leng Jiafeng lent the equity fund to Yunchuang Company under the guise of "Xia Xiaoping", "Tao Jun" (two people do not exist) and Li Zhengrong. Among them, 5.40 million yuan under the name of "Xia Xiaoping", 7 million yuan under the name of "Tao Jun" and Li Zhengrong, totaling 12.40 million yuan.
After Yunchuang Company paid interest at the agreed daily interest rate of 5 to 6 cents, Yunchuang Company cited evidence such as Yunchuang Company's application form for receiving (borrowing) money and expense reimbursement form to prove that Yunchuang Company repaid all the principal and interest of the loan to "Xia Xiaoping", "Tao Jun" and Li Zhengrong in accordance with the IOU agreement. The total interest paid was 148404
35yuan.
Shareholder Xie Hu sued as a supervisor of Yunchuang Company, arguing that Leng Jiafeng conducted self-trading and should return illegal interest income.
2. Referee results
The Fifth Intermediate People's Court of Chongqing Municipality issued a (2019) Yu05 Minchu No. 112 civil court verdict, which: 1. Leng Jiafeng shall pay Yunchuang Company 13583386 yuan within ten days from the effective date of the judgment; 2. Reject Xie Hu's other claims. After the judgment was made, Leng Jiafeng appealed, and the Higher People's Court of Chongqing Municipality issued a (2020) Yuminzhan No. 543 civil court verdict, confirming the facts found by the Fifth Intermediate People's Court of Chongqing Municipality, rejecting Leng Jiafeng's appeal and upholding the original judgment.
3. Reasons for adjudication
The court of first instance held that with regard to Xie Hu's claim that Leng Jiafeng illegally obtained high interest by entering into a contract or conducting transactions with the company without the consent of the shareholders' meeting, Leng Jiafeng invented the names "Xia Xiaoping, Tao Jun, and Li Zhengrong" and lent money to Yunchuang Company in the names of these three people.
Although Xie Hu signed the IOU, he did not know that the lender was actually Leng Jiafeng. Without the consent of the shareholder Xie Hu, Leng Jiafeng actually entered into a contract with Yunchuang Company by making up the names "Xia Xiaoping, Tao Jun, Li Zhengrong". The income, that is, the interest income, should belong to the company.
The second-instance Court held that: In this case, Leng Jiafeng, as the executive director and general manager of Yunchuang Company, belongs to the senior management personnel stipulated in this article, and should perform the duty of loyalty to the company. Since there is no clear provision in the articles of association of Yunchuang Company that allows directors and senior management personnel to enter into contracts or conduct transactions with the company, and Leng Jiafeng entered into a loan contract with Yunchuang Company under the guise of others and lent funds to Yunchuang Company without the consent of the shareholders' meeting or the consent of Xie Hu, another shareholder.
The aforementioned behavior of Leng Jiafeng has violated the provisions of Article 148 of the Company Law of our country (2018). Leng Jiafeng lent funds to Yunchuang Company and charged high interest. According to the aforementioned provisions, the interest income obtained by Leng Jiafeng from Yunchuang Company shall belong to the company.
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Case review
If the directors of the company lend funds to the company and receive interest, it is a self-transaction. If the transaction has not passed the resolution of the shareholders' meeting and has not fulfilled the obligation of information disclosure, which neither meets the procedural fairness standard nor the substantive fairness standard, then the directors' self-transaction income based on this illegitimacy should belong to the company.
In the past judicial practice, the standards for determining the legitimacy of related party transactions are usually as follows:
1. Rigorous procedures: reviewed and approved by the shareholders' meeting or shareholders' meeting
In this case, the external loan of Yunchuang Company is obviously a major investment and operation matter of the company, which should be deliberated by the shareholders' meeting and voted by other non-related shareholders except Leng Jiafeng. However, the transaction has not been resolved by the shareholders' meeting, so the transaction is procedural illegitimate in the first place.
2. Transparency: Full disclosure of related party transaction information
In this case, in the process of lending funds to Yunchuang Company and collecting interest, Leng Jiafeng did not disclose self-trading information to the shareholders' meeting before the transaction. Leng Jiafeng was suspected of maliciously concealing self-trading to avoid review, so the self-trading was illegitimate at the level of information transparency.
3. Substantive justice: compliance with arm's length transaction rules
In this case, Leng Jiafeng's self-trading behavior was measured from the perspective of substantive fairness. Leng Jiafeng did not provide evidence to prove the necessity of Yunchuang's external loans and the rationality of Leng Jiafeng's high interest charges. Therefore, the judgment of the self-trading involved in the case encountered obstacles at the level of substantive fairness.
author
brief introduction
Zou Yongyuan
Partner of
Member of Zhiheng Securities and capital markets Legal Affairs Department
Member of the Youth Industry Committee of
Since 2022, it has independently handled 160 + civil and commercial disputes, including 30 + real estate disputes.
Areas of expertise:
Civil and commercial litigation, corporate legal counsel
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