[1] If a one-person company fails to pay its debts, shareholders with commingled assets bear joint liability.
Compiled from: Yinan Court
Case review
Chen and Li had a labor dispute with an engineering company. According to the arbitration ruling by the Yinan County Labor Dispute Arbitration Committee, the engineering company was ordered to pay Chen 7,020 yuan and Li 11,750 yuan in overdue wages, as well as 35,745 yuan and 27,380 yuan respectively as economic compensation for termination of labor contracts. In July 2023, Chen and Li applied to the court for enforcement. During the enforcement process, as the engineering company failed to settle its debts, Chen and Li applied to the court to add the company's shareholder, Ji, as the enforcement target, requesting that shareholder Ji bear joint liability for the company's debts.
It was found that the executing company, a certain engineering firm, was a limited liability company with a single natural person shareholder (referred to as a "one-person company"), and Ji was the company's legal representative and shareholder. During the execution process, the assets under the name of the engineering company were insufficient to satisfy the debt determined by the effective legal document, and the case could not be fully executed. Therefore, Chen and Li applied to add Ji, the shareholder of the engineering company, as the person subject to execution. During the court's review, Ji failed to submit evidence proving that the company's property was independent from his own property.
The court held that the focus of the dispute in this case was whether the shareholder Ji could be added as the person subject to execution when the engineering company, as a one-person company, was unable to pay off its debts. According to Article 63 of the Company Law and Article 20 of the Supreme People's Court's Provisions on Changes and Additions of Parties in Civil Enforcement, Ji, as the shareholder of a one-person company, failed to provide evidence proving that the company's property was independent from his own property, meaning there was a commingling of company and shareholder assets. Ji should bear the legal consequences of failing to provide evidence and assume joint liability for the company's debts. The court ruled to add Ji as the person subject to execution in this case.
Company Law of the People's Republic of China
Article 62
The shareholder of a one-person limited liability company shall prepare a financial accounting report at the end of each fiscal year, which shall be audited by an accounting firm.
Article 63
If the shareholder of a one-person limited liability company cannot prove that the company's property is independent from the shareholder's own property, the shareholder shall bear joint liability for the company's debts.
Provisions of the Supreme People's Court on Several Issues Concerning the Change or Addition of Parties in Civil Enforcement
Article 20
If a one-person limited liability company that is the person subject to enforcement has insufficient property to satisfy the debts confirmed by an effective legal instrument, and the shareholder cannot prove that the company's property is independent from his or her own property, and the applicant for enforcement applies to change or add the shareholder as the person subject to enforcement to bear joint liability for the company's debts, the people's court shall support such application.
Civil Procedure Law of the People's Republic of China
Article 67, Paragraph 1
A party has the responsibility to provide evidence for the claims it asserts.
[1] The author's perspective
A one-person company refers to a limited liability company with only one natural person shareholder or one legal person shareholder. A one-person company has independent legal personality and enjoys rights and capacities separate from its investors. If the shareholder of a one-person company cannot prove that the company's property is independent from their own property (i.e., "property commingling"), the corporate veil will be pierced, and the shareholder will bear joint liability for the company's debts. At the same time, the burden of proof for "property commingling" is reversed, meaning the shareholder bears the burden of proof. If the shareholder fails to prove that the company's property is independent from their own property, i.e., "property commingling" occurs between the one-person company and the shareholder, the corporate personality will be denied, leading to the shareholder being jointly liable for the company's debts and being added as an enforcement target. Therefore, a one-person company should regulate its daily operations in accordance with the law, prepare financial accounting reports at the end of each fiscal year, strictly distinguish between company property and shareholder property, and avoid commingling of company and shareholder property, as failure to do so will result in the loss of the company's independent personality.
