Wonderful Cases... In bankruptcy proceedings, shareholders do not provide information on the company's financial books, should they be liable for compensation?

Author | Lawyer Ouyang Rong

Introduction

ZHIHENG

The company's legal representative, financial management personnel and other management personnel did not provide financial account books and other information during the bankruptcy proceedings, and the manager did not take over the company's relevant financial information and could not liquidate the company. Should the company's legal representative, financial management personnel and other management personnel be liable for the company's debts?

Case:(2021) Yue 01 Min Zhong No. 30465

Basic facts of the case:

Yinhe Company is a limited liability company (invested or controlled by natural persons) established on August 25, 2003. The shareholders are Sun Hongjiang and Fang Wenzhou, and the legal representative is Zhang Luozhi. On December 19, 2019, Guangzhou Intermediate People's Court issued (2019) Yue 01 Po Shen No. 191 Civil Ruling, ruling to accept Liang Jinpei's bankruptcy liquidation application for Yinhe Company on November 27, 2020, the Guangzhou Intermediate People's Court issued (2020) Yue 01 Po No. 13 Civil Ruling Letter, which found out that the work report submitted by the manager recorded that it failed to take over the property, account books, important documents and other relevant information of Yinhe Company and could not be audited. Check Yinhe Company has no property or property rights such as real estate, vehicles, intellectual property rights and foreign investment.

The Guangzhou Intermediate People's Court found that after verification by the administrator, Yinhe Company was unable to pay off its due debts, and its assets were insufficient to pay off all its debts. It was insolvent, met the conditions for bankruptcy, and had no property to distribute. Therefore, it ruled that the 1. declared Yinhe Company bankrupt. The bankruptcy procedure of Yinhe Company was 2. terminated. Yinhe Company filed a lawsuit with the court, requiring shareholders Sun Hongjiang and Fang Wenzhou, the legal representative Zhang Luozhi is liable for the bankruptcy debts of Galaxy.

the court of first instance decision point of view:

First of all, bankruptcy liquidation and liquidation after the dissolution of the company belong to different systems. The implicit premise underlying the liquidation following a company's dissolution is that the company's assets exceed its liabilities, meaning creditors could have received full compensation through liquidation after the company's dissolution. Therefore, the Company Law of the People's Republic of China and its judicial interpretations explicitly stipulate the liquidation obligations of relevant parties and provide that if failure to fulfill these obligations in a timely manner under the law results in losses to creditors, the creditors may seek compensation from the parties obligated to carry out the liquidation.

ButThe premise of bankruptcy liquidation is that the company is insolvent. The the People's Republic of China Enterprise Bankruptcy Law and its judicial interpretation do not stipulate that when the debtor meets the cause of bankruptcy, the relevant subjects of the debtor shall all have the obligation to apply for bankruptcy liquidation, nor do they stipulate that when the relevant subjects of the debtor fail to cooperate with the bankruptcy liquidation in accordance with the law, they shall all bear joint and several liability for liquidation of the company's debts.

The third paragraph of the "Supreme People's Court's Reply on How to Deal with the Application for Bankruptcy Liquidation Cases for Debtors with Unknown Personnel or Unclear Property Status" stipulates that "if the relevant personnel of the debtor fail to perform their legal obligations, the people's court may investigate them in accordance with relevant laws and regulations. Corresponding legal liabilities" refers to the failure of the relevant personnel of the debtor to perform the liquidation obligations stipulated in the the People's Republic of China Enterprise Bankruptcy Law, therefore, the responsibilities that should be borne according to the "the People's Republic of China Enterprise Bankruptcy Law" specifically refer to the fines and other responsibilities stipulated in Article 126 and Article 127 of the "the People's Republic of China Enterprise Bankruptcy Law", rather than the "the People's Republic of China The company law and its judicial interpretation stipulate that it fails to perform the liquidation obligations after dissolution in time and shall bear the responsibility for the company's debts.

Therefore, this case does not apply the provisions of Article 18 of the (II) of the Supreme People's Court on Certain Issues Concerning the Application of the the People's Republic of China Company Law, which stipulates that the shareholders of a limited liability company shall bear joint and several liability for the debts of the company due to their negligence in performing their liquidation obligations.

Secondly, Yinhe claimed that Zhang Luozhi, Sun Hongjiang and Fang Wenzhou were jointly and severally liable for the losses suffered by Yinhe and related creditors as a result of their failure to cooperate with the liquidation in accordance with the law,is essentially a tort liability,Therefore, Yinhe has the burden of proof to prove that there is a causal relationship between the tort and the consequences of the damage.

Due to the inability to pay off the debts due and the obvious lack of solvency, the company was applied for bankruptcy liquidation by the creditor Liang Jinpei. Zhang Luozhi, Sun Hongjiang, and Fang Wenzhou’s failure to fulfill their statutory obligations to cooperate with the bankruptcy liquidation proceedings does not necessarily mean that the actual insolvency of Yinhe Company was caused by the wrongful acts of Zhang Luozhi, Sun Hongjiang, and Fang Wenzhou.

Now Yinyu Company did not provide evidence to prove that Zhang Luozhi, Sun Hongjiang, Fang Wenzhou did not cooperate with the bankruptcy liquidation behavior and Yinyu Company can not pay off the bankruptcy claims, bankruptcy costs between the direct causal relationship, so Yinyu Company claimed tort liability can not be established.In addition,Yinhe Company also did not provide evidence to prove that Zhang Luozhi, Sun Hongjiang and Fang Wenzhou, during their tenure as legal representatives, key management personnel and shareholders of Yinhe Company, infringed on the interests of Yinhe Company, or abused the independent status of the company as a legal person and the limited liability of shareholders, evaded debts and seriously harmed the interests of the company's creditors,Therefore, Yinhe Company claimed that Zhang Luozhi, Sun Hongjiang and Fang Wenzhou were jointly and severally liable for the company's debts and the expenses arising from the bankruptcy liquidation, which was not supported by the court of first instance.

the court of second instance decision point of view:

Because bankruptcy liquidation and liquidation after the dissolution of the company have different system objectives, applicable conditions and specific system design,Therefore, in determining whether and what liability the debtor's related persons are liable, the basis should be based on the performance of the corresponding obligations under the enterprise bankruptcy law,It is inappropriate to make a determination by direct reference to the provisions of the the People's Republic of China Company Law and its judicial interpretations relating to the dissolution and liquidation or compulsory liquidation of the company,The court of first instance found that this case does not apply the provisions of Article 18 of the (II) of the Supreme People's Court on Several Issues Concerning the Application of the the People's Republic of China Company Law, which stipulates that the shareholders of a limited liability company are unable to liquidate due to their negligence in performing their liquidation obligations and shall bear joint and several liability for the company's debts., This court agrees.

Paragraph 3 of the Reply of the Supreme People's Court on How to Handle Cases of Creditors Applying for Bankruptcy Liquidation for Debtors with Unknown Personnel or Unknown Property Status (Fa Shi [2008] No. 10) stipulates: "If the relevant personnel of the debtor fail to perform their legal obligations, the people's court may investigate their corresponding legal liabilities according to relevant laws and regulations; if their actions lead to the inability to liquidate or cause losses, if the relevant right holder sues and requests it to bear the corresponding civil liability, the people's court shall support it in accordance with the law.

”The "relevant personnel of the debtor" as stipulated in the third paragraph of the approval refers to the legal representative, financial management personnel and other management personnel of the debtor. According to the business registration information, Zhang Luozhi served as the legal representative of Yinhe Company during its bankruptcy liquidation period and is, in accordance with the law, classified as “relevant personnel of the debtor” under Article 15, Paragraph 2 of the Enterprise Bankruptcy Law of the People's Republic of China.

Yinhe Company failed to provide evidence to prove that during the liquidation of Yinhe Company, Sun Hongjiang and Fang Wenzhou have been confirmed by the people's court as financial management personnel or other management personnel, and shall bear the burden of proof. The court does not support Yinhe Company's opinion that Sun Hongjiang and Fang Wenzhou are subjects with the obligation to cooperate in liquidation as stipulated in Article 15 of the the People's Republic of China Enterprise Bankruptcy Law.

As stipulated in the third paragraph of the above-mentioned reply, "its behavior leads to the inability to liquidate or cause losses", which means that the relevant personnel of the debtor do not cooperate with the liquidation, resulting in the unclear property status of the debtor, or the person responsible for liquidation according to law fails to perform the obligation of bankruptcy application in time in accordance with the third paragraph of Article 7 of the the People's Republic of China enterprise bankruptcy law, resulting in the loss of the debtor's main property, account books and important documents, As a result, damage to the interests of creditors.

According to the evidence submitted by Yinhe Company, during the liquidation process of Yinhe Company, Zhang Luozhi, as the legal representative of Yinhe Company, neither fulfilled the obligation to hand over important information such as financial account books and important documents, nor did he cooperate with the administrator to state the debt and property status. His behavior of not fulfilling the obligation of cooperating with liquidation resulted in the unclear property status of Yinhe Company and indirectly damaged the interests of creditors, therefore, there is a causal relationship between Zhang Luozhi's failure to cooperate with the liquidation and the inability to pay off the debts incurred by Silver Wo.

The third paragraph of the aforementioned approval stipulates that "the relevant right holder sues for the corresponding civil liability" means that the administrator requests the subject with the obligation to cooperate with the liquidation to bear the corresponding liability for damages and to attribute the compensation obtained in this way to the debtor's property. The Civil Ruling (2020) Yue 01 Po 13-1 rendered by this Court has confirmed the amount of the creditor Liang Jinpei’s claim as RMB 3,801,183. Silverhe Company’s request that Zhang Luozhi bear liability for compensation with respect to the total amount of claims confirmed in the bankruptcy proceedings, namely RMB 3,801,183, is well-founded and is hereby upheld by this Court.

point of view analysis]

A strict distinction should be made between the two systems of dissolution and liquidation and bankruptcy liquidation. The company’s legal representative, financial management personnel, and other business management personnel are not automatically deemed bankruptcy liquidation obligors. Therefore, in the bankruptcy liquidation procedure, the responsibilities of relevant obligors should not be determined based on those stipulated in Article 18, Paragraph 2 of the Judicial Interpretation (II) of the Company Law for dissolution and liquidation procedures. In other words, creditors may not, pursuant to the aforementioned provision, require the shareholders or other relevant liable parties of the debtor company to bear joint and several liability for the company’s debts; instead, their liabilities should be pursued in accordance with the relevant provisions of the Bankruptcy Law.

However, the Bankruptcy Law only stipulates that the relevant responsible subjects of the debtor company should keep the financial books and other obligations, and does not make relevant provisions on the legal consequences of violating this obligation. Therefore, the relevant responsible subjects of the debtor company fail to comply with the law in the bankruptcy proceedings. If the company's financial information is provided, it shall bear tort liability to creditors.

There are two kinds of judgment results in the above cases in practice. One is to judge according to the point of view of the court of first instance, that is, if the creditor cannot provide sufficient evidence to prove that the behavior of the debtor company's shareholders and other responsible personnel who did not provide financial books and other information has a causal relationship with the company's failure to liquidate. The other is to judge according to the point of view of the court of second instance, that is, if it is directly determined that the shareholders of the debtor company and other responsible persons have not provided financial information such as the company's books and other financial information, and there is a causal relationship between the administrator's inability to carry out liquidation, they shall bear the corresponding liability for damages and attribute the compensation thus obtained to the debtor's property.

Personally, if shareholders and other relevant responsible personnel actively cooperate with the manager in liquidation, and the inability to provide financial books and other information is not caused by their fault, in this case, shareholders and other relevant responsible personnel do not need to bear the liability, but how to provide evidence will be difficult.

Relevant legal provisions:

Article 118 of the Minutes of the National Court Conference on Civil and Commercial Trials (Law (2019) No. 254)"When the people's court applies the provisions of paragraph 3 of the" Reply of the Supreme People's Court on How to Deal with the Application for Bankruptcy Liquidation Cases by Creditors with Unknown Personnel or Unclear Property Status ", and determines that the relevant personnel of the debtor are liable, it shall be in accordance with the enterprise bankruptcy law. The relevant provisions of Article 18, Paragraph 2 of the Judicial Interpretation (II) of the Company Law shall not determine the responsibility of the relevant subjects."

Article 18, paragraph 2, of the (II) for Judicial Interpretation of the Company Law"If the shareholders of a limited liability company, the directors and controlling shareholders of a joint stock limited company fail to set up a liquidation group to begin liquidation within the statutory time limit, resulting in the devaluation, loss, damage or loss of the company's property, and the creditors claim that they are liable for the company's debts within the scope of the losses caused, the people's court shall support it in accordance with the law.

If the shareholders of a limited liability company, the directors and controlling shareholders of a joint stock limited company fail to perform 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 it in accordance with the law."

Article 15 of the Bankruptcy Law"From the date on which the people's court's decision to accept the bankruptcy application is served on the debtor to the date on which the bankruptcy proceedings are concluded, the relevant personnel of the debtor shall bear the following obligations:

The (I) shall properly keep the property, seals, account books, documents and other information in its possession and management;

(II) carry out work according to the requirements of the people's court and the administrator, and truthfully answer inquiries;

(III) attend creditors' meetings and truthfully answer creditors' inquiries;

A (IV) may not leave his place of residence without the permission of the people's court;

(V) may not appoint new directors, supervisors or senior managers of other enterprises.

The term "relevant personnel" as mentioned in the preceding paragraph refers to the legal representative of the enterprise; upon decision of the people's court, it may include the financial management personnel and other management personnel of the enterprise."

Author Introduction

Ouyang Rong

Zhiheng (Longgang) law firm full-time lawyer

Areas of Expertise:Contract dispute, labor dispute, personal injury

He has participated in handling hundreds of civil and commercial cases, and is good at handling contract disputes, tort disputes, labor disputes, marriage and family disputes, perennial legal counsel and other civil and commercial businesses. The practice philosophy is: respecting the law and understanding; Being entrusted by others and being loyal to others.

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Zhiheng · Introduction