Answer: In most circumstances, the shareholders or boss of a limited liability company do not need to bear personal liability for wages or other employment debts owed. This is because under the legal framework of a limited company, the company is only liable for the debts within the limits of the company’s assets, isolating the owner from the liability.
Whether the boss or shareholder of a company should use their personal assets to repay the wages owed to their employees is the issue of “piercing the corporate veil” (or denial of legal personality) under the company law to pursue the personal liability of them to pay off debts. According to the Company Law, the judicial interpretation of the Supreme Court and judicial decisions, in the following exceptional cases, the shareholders or owners of a company shall bear the obligation to repay the debts of the company:
The first situation is the commingling of company assets and the personal assets of the boss and shareholder. For example, Article 63 of the Company Law stipulates that “if a shareholder of a one-person limited liability company cannot prove that the company’s assets are independent of the shareholder’s own assets, they shall bear joint and several liability for the company’s debts”. In the case of Cao Jianqiao in 2021, the Intermediate People’s Court of Zibo City, Shandong Province, found that the shareholder failed to prove the independence of the company’s assets and personal assets, and that there was a personal act of paying wages to employees, and thus it ordered the shareholder to compensate for the wages owed to employees.1Cao Jianqiao, Wang Wenyu and Other Labor Providers’ Liability Dispute Civil Judgment of Second Instance Civil Judgment of Zibo Intermediate People’s Court of Shandong Province (2021) Lu 03 Min Zhong No.1668.
The commingling of shareholders’ property in an ordinary limited liability company is more complicated. The denial of the legal personality of a limited company is mainly based on Article 20 of the Company Law and the 2019 Summary of the National Civil and Commercial Trial Work Conference. 2The 2019 Summary of the National Court Civil and Commercial Trial Work Conference points out that “the independence of corporate personality and the limited liability of shareholders are the basic principles of the Company Law. In judicial practice, we should accurately grasp the spirit of Article 20, paragraph 3, of the Company Law: First, only when shareholders abuse the independent status of corporate legal person and the limited liability of shareholders and act seriously damages the interests of the creditors of the company can it be applied. Damaging the interests of creditors mainly refers to the abuse of rights by shareholders to make the company’s property insufficient to pay off the creditor’s rights to the company. Secondly, only the shareholders who abuse the independent status of legal person and the limited liability of shareholders bear joint and several liability for the company’s debts, while other shareholders should not bear this liability. Thirdly, the denial of corporate personality is not a comprehensive, thorough, and permanent denial of the company’s legal personality, but a breakthrough in the general rule that shareholders are not liable for the company’s debts only in specific cases according to specific legal facts and legal relations, as exceptional decisions ordering them jointly and severally liable.” 10. Personality commingling. To determine whether there is commingling between corporate personality and shareholder personality, the most fundamental criterion is whether the company has independent will and independent property, and the most important manifestation is whether the company’s property and shareholder’s property are commingled and can not be distinguished. The follow factors should be taken into consideration when determine whether it constitutes a personality commingling: (1) the shareholder uses the company’s fund or property without compensation and no financial records are made; (2) the shareholder uses the company’s funds to repay the shareholder’s debts, or uses the company’s funds for affiliated companies without compensation and no financial records are made; (3) There is no distinction between the account books of the company and the account books of the shareholder, which makes it impossible to distinguish the company’s property from the shareholder’ property; (4) There is no distinction between the shareholder’ own income and the company’s profits, which makes the interests of both parties unclear; (5) The company’s property is recorded under the name of the shareholder and is occupied and used by the shareholder; (6) Other circumstances of personality commingling. In the case of personality commingling, the following commingling often occurs at the same time: commingling of company business and shareholder business; commingling of company employees and shareholder employees, especially financial personnel; commingling of company residence and shareholder residence. When the people’s court hears a case, the key is to examine whether it constitutes a personality commingling, but not to require the commingling of other aspects at the same time, which is often only the reinforcement of the personality commingling.The Summary stipulates that the commingling of shareholders’ and company’s assets should have the following characteristics: the first characteristic is that shareholders abuse the legal system of limited liability company (mainly shareholders encroach on the interests of the company);3Article 10 of the Summary of the 2019 National Court Civil and Commercial Trial Work Conference points out that the most fundamental criterion for denying the personality of a legal person is whether the company has independent will and property, and the most important manifestation is whether the property of the company is commingled with that of shareholders and can not be distinguished. We are in the view that this kind of non-independence and commingling actually includes two situations: the shareholders encroache on the company’s property or the company uses the shareholders’ property. In the judicial practice in our country, the court denying legal personality and investigating the shareholder’s responsibility are only the first situation.the second characteristic is that this behavior causes the loss of creditors’ interests. If it can be determined that the shareholders’ and the company’s assets are commingled, the shareholders should bear personal liability for the company’s debts.
The second situation is that shareholders make false capital contributions, insufficient capital contributions, or withdraw capital contributions or help other shareholders to make false capital contributions when the company is established. As limited companies are publicly registered business entity, the law requires shareholders to make real capital contributions, otherwise it is a dishonest act related asset credibility to the general public and specific traders. When the company is unable to discharge its debts, creditors certainly have the right to require the shareholders to bear the liability within the scope of their false or insufficient capital contributions.
In practice, the biggest challenge for creditors (including employees) to pursue shareholders is evidence collection. Because shareholders’ investment records and other information are controlled by the company, ordinary people and even lawyers may not be able to access them, and the courts are not necessarily willing to take the initiative to investigate and collect evidence in the process of hearing the case in China.
The third situation is that shareholders violate the law and harm the interests of creditors in the course of the company’s operation, such as failing to liquidate in time after the company’s closure, abusing shareholders’ power to transfer assets, and violating the law in the process of deregistration of the company (such as providing false information in deregistration procedures).
Article 20 of the Company Law of the People’s Republic of China stipulates that shareholders of a company shall abide by laws, administrative regulations, and the articles of association, exercise their rights in accordance with the law, and shall not abuse the independent status of the company (a legal person) and the limited liability of shareholders to damage the interests of creditors of the company. Where any of the shareholders of a company evades the payment of its debts by abusing the independent status of legal person or the limited liabilities of the shareholders, thus seriously damaging the interests of any creditor, they shall bear joint and several liabilities for the debts of the company.
Article 19 of the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (2) stipulates that “where shareholders of limited liability companies, directors and controlling shareholders of joint stock limited companies, and actual controllers of companies maliciously dispose of company assets after the dissolution of a company, causing losses to creditors, or cheat the company registration authority to revoke its registration with a false liquidation report without liquidation according to law, and the creditors claim for the corresponding liability for compensation for the debts of the company against them, the people’s court shall uphold it according to law.
The fourth situation is that the shareholder undertake a guarantee or a promise to pay off the company’s debts. In this case, the shareholder should of course fulfill their liability for compensation according to their guarantee obligation and the promise to pay off the debts.
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Mr. Dong Wang has been in practice for over 20 years, specializing in business law, including employment law, commercial law, company law, and intellectual property law. Mr. Wang has earned respect and trust from his clients due to his professionalism, fidielty, and kindness.
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- 1Cao Jianqiao, Wang Wenyu and Other Labor Providers’ Liability Dispute Civil Judgment of Second Instance Civil Judgment of Zibo Intermediate People’s Court of Shandong Province (2021) Lu 03 Min Zhong No.1668.
- 2The 2019 Summary of the National Court Civil and Commercial Trial Work Conference points out that “the independence of corporate personality and the limited liability of shareholders are the basic principles of the Company Law. In judicial practice, we should accurately grasp the spirit of Article 20, paragraph 3, of the Company Law: First, only when shareholders abuse the independent status of corporate legal person and the limited liability of shareholders and act seriously damages the interests of the creditors of the company can it be applied. Damaging the interests of creditors mainly refers to the abuse of rights by shareholders to make the company’s property insufficient to pay off the creditor’s rights to the company. Secondly, only the shareholders who abuse the independent status of legal person and the limited liability of shareholders bear joint and several liability for the company’s debts, while other shareholders should not bear this liability. Thirdly, the denial of corporate personality is not a comprehensive, thorough, and permanent denial of the company’s legal personality, but a breakthrough in the general rule that shareholders are not liable for the company’s debts only in specific cases according to specific legal facts and legal relations, as exceptional decisions ordering them jointly and severally liable.” 10. Personality commingling. To determine whether there is commingling between corporate personality and shareholder personality, the most fundamental criterion is whether the company has independent will and independent property, and the most important manifestation is whether the company’s property and shareholder’s property are commingled and can not be distinguished. The follow factors should be taken into consideration when determine whether it constitutes a personality commingling: (1) the shareholder uses the company’s fund or property without compensation and no financial records are made; (2) the shareholder uses the company’s funds to repay the shareholder’s debts, or uses the company’s funds for affiliated companies without compensation and no financial records are made; (3) There is no distinction between the account books of the company and the account books of the shareholder, which makes it impossible to distinguish the company’s property from the shareholder’ property; (4) There is no distinction between the shareholder’ own income and the company’s profits, which makes the interests of both parties unclear; (5) The company’s property is recorded under the name of the shareholder and is occupied and used by the shareholder; (6) Other circumstances of personality commingling. In the case of personality commingling, the following commingling often occurs at the same time: commingling of company business and shareholder business; commingling of company employees and shareholder employees, especially financial personnel; commingling of company residence and shareholder residence. When the people’s court hears a case, the key is to examine whether it constitutes a personality commingling, but not to require the commingling of other aspects at the same time, which is often only the reinforcement of the personality commingling.
- 3Article 10 of the Summary of the 2019 National Court Civil and Commercial Trial Work Conference points out that the most fundamental criterion for denying the personality of a legal person is whether the company has independent will and property, and the most important manifestation is whether the property of the company is commingled with that of shareholders and can not be distinguished. We are in the view that this kind of non-independence and commingling actually includes two situations: the shareholders encroache on the company’s property or the company uses the shareholders’ property. In the judicial practice in our country, the court denying legal personality and investigating the shareholder’s responsibility are only the first situation.