Husband and wife companies may be jointly and severally liable for company debts, and how to avoid them?

Author | Jia Xiaoya Lawyer

guide

Mr. Hu manages a company, and the company leases and operates a shopping mall. Recently, he was sued by the landlord for delinquent rent, involving an amount of about 2 million. In addition to asking the company to compensate for the rent, the landlord also requires Mr. Hu and his wife Zhang to bear joint and several liability for the company's debts.

In addition, I learned that the company run by Mr. Hu is owned by Mr. Hu and his wife.

1. What is a husband and wife company?

In short, it is a company established during the existence of the husband and wife relationship, and the shareholders are only the husband and wife.

Formally speaking, the husband and wife file company is not a one-person company, and of course it does not apply to legal liabilities such as personality confusion. But why is it that once a dispute occurs, the court will often find that the husband and wife are jointly and severally responsible for the company's debts?

The court's adjudication rules generally fall into two categories.

2. Rules of the Court

(1) Due to the particularity of shareholder identity, the confusion of company property and shareholder property, etc., the court determined that the husband and wife company was a one-person company in the substantive sense.

For example, Supreme Court Minzu Re-372 (2019) case, which is a typical case that is often referred to and applied in such cases.

The Supreme Court made this determination primarily based on the following considerations:

1. The company was established during the marriage of the husband and wife, and there is no written proof or agreement on the division of property between the husband and wife in the company's industrial and commercial registration records, that is, the creditor is unaware of it. Article 1065, paragraph 3 of the Civil Code stipulates that if the husband and wife have agreed on a system of property separation, the debt owed by the husband or wife to the outside world can be paid off with the personal property of one of the husband and wife if the other party knows it.

The point here is that the third person needs to know that they are the husband and wife separate property system. But in fact, there are few cases that can fully prove it.

2. The registered capital base of the company comes from the common property of the husband and wife, so the equity of the company belongs to the common property of the husband and wife;

3. All the shares of the company are essentially derived from the same property rights, and are jointly enjoyed and controlled by one ownership. The main body has a high degree of consistency of interests and a unity of substance, making it difficult to form effective internal supervision.

4. Shareholders are both owners and managers, and personal property and company property are confused.

(2) Adhere to the strict legal form of a one-person company without making an expanded interpretation.

For example, in the (2020) Supreme Court Minshen No. 6688 case, the Supreme Court held that according to the provisions of Article 57 (2) of the Company Law, a one-person limited liability company refers to a limited liability company with only one natural person shareholder or one legal person shareholder. Although the company shareholders in the case were established by the husband and wife with joint property, there is still no legal basis for characterizing it as a "one-person limited liability company".

(2020) Shanghai 01 Civil End No. 2552, the second-instance Court upheld the court of first instance's determination of this part, holding that family members, including husband and wife, are independent individuals and cannot be completely equivalent to one person. The relevant provisions of a one-person company cannot be applied to such husband and wife companies. If there is no evidence to prove that the husband and wife as shareholders are confused with the company's property, the husband and wife should not be jointly and severally liable for the company's debts.

The above court ruling rules explain that a husband-and-wife company is not necessarily recognized as a one-person company and is jointly and severally liable for the company's debts. But in essence, it also depends on whether there is evidence to prove that the shareholder's property is confused with the company's property. According to Article 63 of the Company Law, for the shareholder's property to be independent of the company's property, the burden of proof is reversed, that is, the shareholder needs to prove the independence between his property and the company's property.

Therefore, in the actual legal precedent, cases where joint and several liability is determined due to the difficulty of providing evidence have occurred from time to time.

Returning to the case in the guide, Mr. Hu and his wife are jointly shareholders of the company, Mr. Hu is the executive director and general manager, and Mrs. Hu is the supervisor, but does not participate in the actual operation. And in the process of business operation, especially with the owners and small businesses, Mr. Hu often uses Mr. Hu's personal account to collect the rent of small businesses, and uses the company account to pay the owner's rent, property management fees and other expenses.

For the owner, it is relatively easy to obtain the above evidence, so this case is undoubtedly likely to be identified as a mix of personal property and company property. This case is often the case of most husband and wife companies. So for such companies, how should we avoid risks?

3. Advice on avoiding joint and several liability for corporate debts

① Ownership structure

For husband and wife companies, especially in the early stage of development, the corporate governance is not perfect, so it is easy to appear non-compliant situation, it is best to adjust the shareholding structure. It is recommended that a third person other than the husband and wife can hold the equity of one of the husband and wife, and the shareholding ratio can be controlled within a small proportion; or third-party shareholders can be introduced through share transfer or capital increase.

② Avoid financial confusion in a substantive sense

(1) Ensure that shareholder property and company property are listed separately, accounted for separately, profits are distributed and kept separately, and risks are borne separately.

For example, the company's property should be registered in the name of the company, but the company registers the property used in production and operation in the name of the shareholders. For another example, if the shareholders contribute in the form of intellectual property or other property, the registration is not changed in time, and the shareholders continue to possess and use it; shareholders use the company's funds to repay their own debts.

(2) Avoid mixing company accounts with private accounts

For example, the use of shareholders or employees' private accounts to collect payments on behalf of the company. It is also common for the company to sign a transaction agreement with the outside world. The collection account stipulated in the agreement is the shareholder's account. If there is no reasonable reason to explain, it may be identified as financial confusion.

(3) The company shall establish a standardized financial system and prepare independent accounting books. If possible, it is recommended that the company prepare financial reports once a year and undergo financial audits by accounting firms.

4. Legal requirements

Company Law (2018 Amendment)

Article 57 The establishment and organization of a one-person limited liability company shall be governed by the provisions of this section; if there are no provisions in this section, the provisions of Sections 1 and 2 of this chapter shall apply.

The term one-person limited liability company as mentioned in this Law refers to a limited liability company with only one natural person shareholder or one legal person shareholder.

Article 63 A shareholder of a one-person limited liability company who cannot prove that the company's property is independent of the shareholder's own property shall be jointly and severally liable for the company's debts.

Civil Code

Article 1065 [The system of agreed property between husband and wife]

Both men and women may agree that the property acquired during the marriage relationship and the property before marriage shall be owned by each other or jointly or in part by each other or jointly. The agreement shall be in writing. If there is no agreement or the agreement is not clear, the provisions of Articles 10

62and 1063 of this Law shall apply.

The agreement between husband and wife on the property acquired during the marriage relationship and the property before marriage is legally binding on both parties.

The property obtained by the husband and wife during the existence of the marriage relationship shall be owned by each other, and the debts incurred by the husband or wife to the outside world shall be paid off with the personal property of the husband or wife if the opposite party knows the agreement.

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