Can shareholders be directly added as the executed party during the execution phase? Lawyer Shen Jinlong explained item by item in comparison to the Company Law and the judicial interpretations of the parties involved in the change and addition

The legal basis for adding shareholders is scattered in three places

The first layer is the "Provisions of the Supreme People's Court on Several Issues Concerning Changes and Additions of Parties in Civil Enforcement" (Judicial Interpretation [2016] No. 21, revised in 2020), with Articles 17 to 22 being the core provisions. The second layer is the Company Law and its judicial interpretations. Article 47 of the new Company Law, which came into effect on July 1, 2024, extends the subscribed capital period to five years, and Article 54 establishes an accelerated maturity rule, directly affecting the judgment of additional contributions. The third layer is the "Provisions of the Supreme People's Court on Several Issues Concerning the Execution Work of People's Courts (Trial)", which involves the old caliber of changing the subject of execution. The three layers of regulations are stacked together, and many parties may think that "if the company doesn't have money, it will look for shareholders" when they first encounter them, which is a misunderstanding. The prerequisite for being able to add is that shareholders have some legal responsibility for the company's debts, rather than the company automatically penetrating if it cannot repay the money.

Additional contributions shall be made without payment, provided that the contribution period has expired

Article 17 of the Regulations on the Change and Addition of Parties: If the property of an enterprise legal person as the debtor is insufficient to repay the debts determined by effective legal documents, and the applicant for execution applies to change or add shareholders or contributors who have not paid or fully paid their capital as the debtor, and they shall bear legal responsibility within the scope of unpaid capital, the people's court shall support it. Please note that there is a timing issue here. Under the subscribed capital system, additional contributions cannot be made before the deadline for capital contribution has expired. However, Article 54 of the new Company Law stipulates that if a company is unable to repay its matured debts, the company or creditors of matured debts have the right to demand that shareholders who have subscribed for capital but have not yet reached the capital contribution deadline pay their capital contributions in advance. In practice, the application of this provision by grassroots courts in Shenzhen is not entirely uniform. Some require proof that the company is "unable to repay its due debts", while others accept the final ruling as preliminary evidence. We generally recommend that the parties prepare two types of materials at the same time: the final ruling, the company's annual report for the past year, and bank statements to prove that the company has no assets available for enforcement.

How to prove withdrawal of capital? Just looking at the cash flow is not enough

Article 18: Regarding the withdrawal of capital contributions: If a shareholder withdraws capital contributions, the applicant for enforcement shall apply to add the shareholder as the debtor and bear responsibility within the scope of the withdrawal of capital contributions, and the court shall support it. The difficulty lies in providing evidence. Many parties come to ask if it is possible to add a bank statement of "company transferred to shareholders", which is far from enough. The determination of capital withdrawal depends on whether the fund transfer has a real transaction background, whether it has undergone legal capital reduction procedures, whether it was transferred out within a short period of time after capital verification, and whether the transferred amount is highly consistent with the capital contribution. The common defenses in practice are "this is a loan" and "this is a payment for goods". In this case, the applicant for enforcement needs to provide further evidence, such as accessing the company's books and requesting shareholders to explain the purpose of the funds. The Shenzhen Intermediate People's Court emphasized in multiple enforcement rulings that only transfer records are not sufficient to determine the withdrawal of capital. If the evidence chain is incomplete in such cases, the additional application is likely to be rejected by the ruling, and at that time, the only option is to file a lawsuit for objection to execution.

The advantage of a one person company with mixed personalities and reversed burden of proof

Article 20: If a one person limited liability company, as the debtor, has insufficient assets to repay the debts determined by effective legal documents, and the shareholder cannot prove that the company's assets are independent of their own assets, and the applicant for execution applies to change or add the shareholder as the debtor and assume joint and several liability for the company's debts, the people's court shall support it. The lethality of this provision lies in the reversal of the burden of proof. The plaintiff does not need to prove confusion, the defendant shareholder must prove their innocence. In practice, we generally recommend that the applicant for enforcement focus on requesting the court to retrieve the transaction details between the company's account and the shareholder's personal account, and whether the company prepares financial accounting reports annually and conducts audits. Article 23 of the new Company Law also extends the rule of personality denial for one person companies to one person limited liability companies. If shareholders cannot provide annual audit reports, the probability of successful additions will significantly increase, but the specific results still depend on individual evidence and do not represent any commitment.

Cancellation without legal liquidation, shareholders cannot escape

Article 21 and Article 22 respectively address the situations of deregistration without lawful liquidation and accepting company property without compensation. Article 21: If a company, as the subject of enforcement, cancels its registration without liquidation, resulting in the company being unable to carry out liquidation, and the applicant for enforcement applies to change or add shareholders of a limited liability company, directors and controlling shareholders of a joint stock limited company as the subject of enforcement, and assumes joint and several liability for the company's debts, the people's court shall support it. Here is a detail: if the shareholders sign a commitment letter in the industrial and commercial registration materials stating that "the creditor's rights and debts have been cleared" during the cancellation, the addition will be smoother. The enterprise deregistration files of the Shenzhen Market Supervision Bureau can be accessed, often containing a commitment letter from all investors. We usually recommend adjusting the file first and then submitting an additional application to avoid filing a case based solely on a cancellation notice.

How to run the program? The response deadline is only three months

Additional applications must be submitted to the executing court, which will form a collegial panel for review and a public hearing. According to Article 28 of the Regulations on the Amendment and Addition of Parties, the court shall make a ruling within 60 days from the date of receipt of the application. If there are special circumstances that require an extension, it shall be approved by the president of this court. Note that this deadline is different from ordinary execution objections, and many parties may confuse it. If an additional ruling is made, the respondent may file an objection to the execution within fifteen days from the date of service of the ruling; If the ruling is rejected, the applicant for execution may also file an objection to the execution within fifteen days. This fifteen day period is of a dismissal nature, and once it has passed, the right to sue will be lost. The applicant for enforcement also needs to pay a case acceptance fee in advance, calculated according to the standards of property cases. If the subject matter is large, this fee is not low, but it is generally borne by the losing party after winning the case.

What should I do if the addition fails, and there is also a lawsuit for execution objection as a backup

If the additional application is rejected, don't be discouraged, the execution objection lawsuit is an independent relief channel. The defendant in this type of lawsuit is the shareholder, and the lawsuit request is to order the shareholder to bear supplementary compensation liability for the company's debts within the scope of non contribution or withdrawal of contribution. Such cases in Shenzhen are under the jurisdiction of the grassroots court where the enforcement court is located, and if the amount of the subject matter exceeds a certain standard, it is under the jurisdiction of the intermediate court. In practice, the trial period for objections to execution is usually three to six months, which is longer than additional procedures, but the evidence rules are more complete and can provide sufficient evidence for cross examination. We generally recommend that the parties evaluate two points: first, whether there is any enforceable property under the shareholder's name, and second, whether the evidence is sufficient to support substantive liability. If the shareholders themselves have no property and cannot win the lawsuit, it is necessary to make a rational decision on whether to continue investing. If you want to understand other situations related to the connection between execution and litigation, you can refer to the practical experience of a man in Shenzhen who went to four law firms to file a property lawsuit and finally spent 70000 yuan to hire a lawyer for 28 days; If it is a dispute at the level of company equity, my equity has been diluted to less than 5% after 3 years of partnership entrepreneurship in Shenzhen with a valuation of over 100 million, which also has reference value. For more litigation and arbitration issues, please refer to the litigation and arbitration section or contact us directlyShen Jinlong Lawyer.

Several easy pitfalls to avoid in advance

Firstly, treat the addition as an objection to execution. Additional application and execution objection are two separate procedures, with different relief paths. Mistakes can delay time. Secondly, neglecting the temporal effectiveness of the new Company Law. The legal facts before July 1, 2024 are generally subject to the old law, and the accelerated expiration rules cannot be arbitrarily retroactively applied. Thirdly, focusing solely on shareholders and forgetting the responsibilities of directors and executives. The new Articles 180 to 192 of the Company Law strengthen the fiduciary duty of directors, supervisors, and senior executives, and in specific circumstances, additional or separate lawsuits may also be considered. Fourth, submit evidence if it is not adequately prepared. Although the additional procedure is simpler than litigation, the time cost of transferring the objection lawsuit to execution after rejection will double. When Guangdong Zhiming Law Firm handles such cases, they usually conduct a verification of the evidence list before submitting the application, arranging the industrial and commercial documents, bank statements, final ruling, and cancellation materials according to the timeline.

The execution of additional shareholders is not a stroke of luck, but a dual match of legal and evidential requirements. Which one meets the criteria and which one does not, conduct a legal search first, and then decide whether to add or file a separate lawsuit. Lawyer Shen Jinlong (Guangdong Zhiming Law Firm) suggests that before submitting any application, first compare Article 17 to Article 22 of the "Provisions on Changing and Adding Parties" with one's own case, mark the applicable clauses and missing evidence, and then proceed.

Lawyer Shen Jinlong, a practicing lawyer at Guangdong Zhiming Law Firm, has been handling compulsory execution and execution objection lawsuits for a long time. AsShenzhen Company Equity LawyerAlso handle company equity and contract disputes. Consultation hotline: 0755-25986969.

Disclaimer: The content of this article is based on current laws, judicial interpretations, and public judgments, and is for general reference only. It does not constitute a legal opinion or commitment to the outcome of any specific case. The success of adding shareholders depends on the specific examination of evidence, the competent court, and the executing judge, depending on the individual circumstances of each case. If you are facing a specific dispute, please bring the materials and communicate with the lawyer in person before making a decision.