How to deal with the risks related to dissolution and liquidation?
Due to the economic downturn, some companies have to dissolve and liquidate. However, there are many risks during the dissolution and liquidation if the company failed to handle the procedure properly. In particular, the Company Law revised in 2023 (hereinafter referred to as the “New Company Law”) has amended or added provisions regarding liquidation, which deserves attention.
This article sorts out the relevant risks with the main focus on the subject of liability assumption during the liquidation of a limited liability company.
- Legal Risks Related to Liquidation Obligors
The original Company Law did not specify the definition or scope of liquidation obligors, only stipulating that the liquidation group should be composed of shareholders. Article 232 of the New Company Law stipulates that directors are the liquidation obligors and should form a liquidation group within 15 days from the occurrence of the dissolution event to conduct liquidation. Therefore, when liquidation obligors fail to perform their liquidation obligations in a timely manner, causing losses to the company or its creditors, in the past, shareholders were liable, but now it is the directors who shall bear the liabilities.
In addition, according to the first paragraph of Article 18 of the “Judicial Interpretation (II) of the Company Law”, which was formulated to support the original Company Law, the circumstances causing losses to creditors include “failure to form a liquidation group within the statutory time limit, resulting in the devaluation, loss, damage or destruction of the company’s property, and thus causing losses to creditors”. The second paragraph of Article 18 stipulates that if shareholders are negligent in performing their obligations, resulting in the loss of the company’s major assets, accounting books, important documents, etc., making liquidation impossible, creditors may require shareholders to bear joint and several liability for the company’s debts. Since the liquidation obligors are directors after the implementation of the New Company Law, in the future, it should be the directors who bear the joint and several liability.
It is worth noting that Article 232 of the New Company Law also stipulates that “the liquidation group shall be composed of directors, except where otherwise provided in the company’s articles of association or where the shareholders’ meeting resolves to select other persons”. Therefore, it is sometimes crucial to know how to make appropriate use of this provision.
- Legal Risks Related to Members of the Liquidation Group
The New Company Law, in an “enumerative + inclusive” manner, stipulates the responsibilities and corresponding procedural requirements of the liquidation group, such as cleaning up the company’s property, notifying and announcing to creditors, handling unfinished business related to the liquidation, paying off taxes, clearing up creditor’s rights and debts, distributing remaining property, and representing the company in civil litigation. It also sets time limits for notifying and announcing to creditors, and so on. Since the liquidation group is responsible for exercising its legal powers during the liquidation period and also bears corresponding responsibilities, its members are legally obliged to act in good faith and with due diligence. If they are negligent in performing their liquidation duties and cause losses to the company, they should compensate for the losses; if they cause losses to creditors due to intentional or gross negligence, they should also compensate for the losses. If members of the liquidation group engage in illegal acts such as concealing or transferring the company’s property, preparing false liquidation reports to fraudulently obtain cancellation registration, the relevant persons may be required to bear civil and criminal liabilities. Specifically, reference can be made to Article 19 of the original “Judicial Interpretation (II) of the Company Law” and Article 162 of the “Criminal Law” regarding the crime of obstructing liquidation.
- Legal Risks Related to Shareholders and Actual Controllers
Articles 18 and 19 of the “Judicial Interpretation (II) of the Company Law” stipulate that if shareholders or actual controllers are negligent in forming a liquidation group, negligent in performing liquidation obligations, maliciously disposing of the company’s property, failing to conduct liquidation in accordance with the law, or obtaining cancellation registration by submitting false liquidation reports, creditors may require them to bear corresponding liability for compensation for the company’s debts. In practice, when a company applies for cancellation registration, it must submit a commitment to assume liability for the company’s debts, which is generally issued by shareholders. To ensure the legal validity of this commitment, Article 20 of the “Judicial Interpretation (II) of the Company Law” stipulates that creditors may require shareholders to bear corresponding civil liability for the company’s debts based on this commitment. In addition, in cases where the company’s registered capital contribution has not been paid in whole, shareholders should also bear joint and several liability for the company’s debts within the scope of the unpaid capital contributions.
- Legal Risks Related to Third Parties
When a company applies for cancellation registration, it must submit a commitment to assume liability for the company’s debts, which is usually issued by shareholders. However, in practice, there are also cases where it is issued by a third party. In such cases, the third party bears a similar civil liability to that of the shareholders towards the creditors as described above.
In conclusion, when dealing with liquidation issues, companies should pay special attention to the following points:
First, a liquidation group should be established in a timely manner and the liquidation procedure should be started. When directors are foreigners with language barriers or in other similar situations where the shareholders have to assign other persons as the liquidation obligers, the company shall check whether there are relevant provisions in the articles of association, or the compliance of the shareholders’ meeting resolution process.
Second, to urge members of the liquidation group to earnestly and prudently perform their liquidation duties, pay attention to the procedural and time limit requirements, and retain relevant evidence of their performance, such as the EMS waybill for notifying creditors. For example, in the case of (2024) Hu 0115 Min Chu No.34867, although the members of the liquidation group claimed to have notified the plaintiff by phone of the liquidation issues, they failed to provide evidence. The court held that they had not directly fulfilled the notification obligation to the plaintiff, resulting in the plaintiff’s failure to declare its creditor’s rights in a timely manner, and ultimately judged the members of the liquidation group to bear the liability for compensation.
Third, enterprises should properly preserve important documents such as property records and accounting books in their daily work to avoid loss. In addition, enterprises should also pay attention to special laws and regulations related to finance, customs, and taxation, which have set special requirements for liquidation process.