When a company's business license is revoked, whether shareholders are jointly and severally liable for the company's debts?

Mr. Wong invested in his friend’s company many years ago. The company has not made any profit for those years. Wong did not care, because he only subscribed for 5% of the company’s registered capital, which is not a real loss. Last year, the company’s business license was revoked, but the rest shareholders remained silent. Wong held the opinion that the company’s business license was revoked, which has the same consequence as a person’s death, the shareholders would only bear the limited liability equal to their subscribed capital contribution, for him, the maximum loss would be CYN 50,000. Unexpectedly, Wong received a summons recently, and he was claimed to bear joint and several liability for the company’s debt of over CYN 1,000,000.

Like Mr. Wong, many people may hold the opinion that if a company’s business license is revoked, its legal personality will be extinguished. This opinion is a cognitive misconception. In fact, “Revoking the business license of an enterprise is an administrative penalty imposed by the industrial and commercial administrative authorities in accordance with national industrial and commercial administrative regulations. After the revocation of the business license, the enterprise shall be liquidated in accordance with the law. After the liquidation process is completed and the industrial and commercial deregistration is completed, the enterprise as a legal person shall be eliminated.” (Quoted from [2021] Zui Gao Fa Min Shen No. 2470). Therefore, the revocation of the business license is one of the reasons for the dissolution of a company as stipulated in Article 180 of the “Company Law”, and the company has to go through liquidation and cancellation procedures before the legal personality can be extinguished.

According to Article 183 of the “Company Law”, in such cases, a liquidation team shall be established within 15 days from the date of the occurrence of the cause of dissolution, and starts the liquidation procedure; and the liquidation team of a limited liability company shall be composed of shareholders, while the liquidation team of a joint stock limited company shall be composed of directors or members determined by the shareholders’ meeting. In addition, the “Company Law” also specifies the process of organizing liquidation, the content and time limit of liquidation work. If shareholders fail to fulfill the aforementioned liquidation obligations in accordance with the law, there is a risk of joint and several liability for the company’s debts, and this joint and several liability is not limited to the amount of their subscribed capital contribution.

According to Articles 11, 15, and 18 of the “Judicial Interpretation of the Company Law (II)”, shareholders may bear the joint and several liability under the following circumstances:

Firstly, shareholders are negligent in fulfilling their liquidation obligations, resulting in the loss of the company’s main assets, accounting books, important documents, etc., making it impossible to carry out liquidation. If creditors claim that they are jointly and severally liable for the company’s debts, the court shall support such claim in accordance with the law.

Regarding the judgment of being negligent in fulfilling liquidation obligations, the viewpoint of the “Minutes of the National Courts’ Civil and Commercial Trial Work Conference” (Fa [2019] No.254) could be taken for reference. It states that, “Shareholders intentionally delay or refuse to fulfill liquidation obligations after the occurrence of statutory liquidation reasons, or engage in liquidation behavior that cannot be carried out due to negligence. If a shareholder provides evidence to prove that it has taken positive measures to fulfill its liquidation obligations, or if a minority shareholder provides evidence to prove that he/she is neither a the board of director or supervisor of the company, nor has selected personnel to serve as members of the board or as a supervisor, and has never participated in the company’s operation and management, based on which claiming that it should not bear joint and several liability for the company’s debts on the grounds that it does not constitute “negligence in fulfilling obligations”, the people’s court shall support such shareholder in accordance with the law.”

In the case in the beginning, if Mr. Wong could provide evidence to prove that he does not constitute “negligence in fulfilling obligations”, he may not have to bear the joint and several liability.

Secondly, shareholders fail to establish a liquidation team within the time limit, which leads to the depreciation, loss, damage or loss of the company’s assets, and the creditor claims that shareholders are liable for compensation for the company’s debts within the scope of the losses caused, the court shall support such claim in accordance with the law. Under such circumstance, creditors have a certain burden of proof for the depreciation, loss, damage or loss of the company’s assets. Otherwise, it may be difficult to demand compensation from shareholders.

Thirdly, if the liquidation and cancellation process is not compliant, including failure to fulfill notification and announcement obligations in accordance with law, or executing unconfirmed liquidation plans, which may cause losses to creditors, then shareholders who serve as members of the liquidation team shall be liable for compensation.

Fourthly, there is a special circumstance, that is, shareholders receive company assets without consideration. According to Article 22 of the “Regulations of the Supreme People’s Court on Several Issues Concerning the Alteration and Addition of Parties during Enforcement of Civil Cases”, after a company, as a party subject to enforcement, is revoked, if its property is received by its shareholders without any consideration, if the party subject to enforcement has no property left, or the property left is inadequate to pay off its debts, shareholders who have received its property could be added as the subject to enforcement, and shareholders shall be liable within the scope of their received property.

Therefore, regardless of the amount of capital invested, shareholders should keep an eye on the operational status of the invested company. If the invested company’s business license is revoked, shareholders should promptly fulfill their liquidation obligations in accordance with the law and complete the company’s cancellation procedure to avoid unexpected legal risks in the future. If it is difficult to proceed smoothly due to the lack of cooperation from other shareholders or person in charge of the company, it is recommended to retain evidence about shareholders’ positive measures to fulfill their liquidation obligations.