[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. The Yinan County Labor Dispute Arbitration Committee ruled that the engineering company should pay Chen 7,020 yuan and Li 11,750 yuan in overdue wages, as well as 35,745 yuan and 27,380 yuan in economic compensation for terminating their labor contracts, respectively. In July 2023, Chen and Li applied to the court for enforcement. During enforcement, because the engineering company failed to pay off its debts, Chen and Li applied to the court to add Ji, a shareholder of the engineering company, as a person subject to enforcement, requesting that shareholder Ji bear joint and several liability for the company’s debts.
Upon investigation, it was ascertained that the type of the judgment debtor, a certain engineering company, is a limited liability company solely owned by a natural person (referred to as a “one-person company”), and Ji is the legal representative and shareholder of the company. During the enforcement proceedings of this case, the assets under the name of the engineering company were insufficient to satisfy the debts determined by the effective legal instrument, and the case could not be fully enforced. Consequently, Chen and Li applied to add Ji, the shareholder of the engineering company, as a judgment debtor. During the court’s review, Ji failed to submit evidence proving that the company’s assets were independent of his own assets.
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 an independent legal personality and enjoys rights capacity and capacity for conduct independent of its investor. If the shareholder of a one-person company cannot prove that the company's property is independent of the shareholder's own property (i.e., “commingling of property”), the corporate legal personality will be disregarded, and the shareholder will be jointly and severally liable for the company's debts. Moreover, with respect to the burden of proof regarding “commingling of property,” the principle of reversed burden of proof is adopted, meaning that the shareholder bears the burden of proof. If the shareholder fails to prove that the company's property is independent of the shareholder's own property, that is, “commingling of property” has occurred between the one-person company and the shareholder, the corporate legal personality will be disregarded, resulting in the shareholder being jointly and severally liable for the company's debts and being added as a person subject to enforcement. Therefore, a one-person company should regulate its daily business 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 property and shareholder property, which would otherwise result in the loss of the company's independent legal personality.
