CHINA Trends and Developments Contributed by: Yaxing Zhang, Bing San, Lubin Qiang and Jiahui Zhu, Han Kun Law Offices
have authority to join shareholders in enforcement proceeding, reducing delays and costs. Creditors may also seek asset preservation orders against proposed joined parties earlier in the process, enhancing recov - ery possibilities. Separate litigation for accountability In addition to the provisions on joinder of parties to enforcement, the PRC Civil Code (the “Civil Code”), the new Company Law, and other relevant laws and regulations provide that certain parties may bear joint and several liability for a company’s debts under specified circumstances. However, since applica - tions for joinder during enforcement proceedings must be based strictly on the provisions governing such enforcement, creditors may only seek relief by filing a separate lawsuit in circumstances not explicitly cov - ered by such provisions, such as where the debtor is insolvent. Common scenarios are as follows. • Creditor’s right of revocation – where the debtor transfers assets to third parties without considera - tion, waives claims or claim-related security inter - ests, or transfers assets at patently unreasonable low prices, acquires property at patently unreason - able high prices, or guarantees another’s debt, the creditor may, pursuant to Articles 538 and 539 of the Civil Code, initiate a separate action seeking to revoke such acts of the debtor. The creditor’s right of revocation is subject to dual time limitations: one year from discovery of the act and five years from its occurrence. • Creditor’s right of subrogation – where the debtor neglects to exercise its claims or related ancillary rights (such as mortgage rights), the creditor may, in accordance with Article 535 of the Civil Code, file a separate lawsuit to exercise the debtor’s rights against third parties on its behalf. • Veil piercing – where a shareholder abuses the independent legal personality of multiple compa - nies under its control and the limited liability to evade debts, creditors may invoke Article 23 of the new Company Law to request that such compa - nies be held jointly and severally liable. • Director liability – where directors (i) fail to urge shareholders to fulfil their capital contribution obligations in a timely manner, or assist share - holders in withdrawing capital contributions, are
responsible for the company’s illegal reduction of registered capital, unlawful distribution of profits, or illegal financial assistance (including loans, gifts, or guarantees); or (ii) fail to liquidate the company in a timely manner, or cause harm to others through wilful misconduct or gross negligence in the course of performing their duties, creditors may, pursuant to Articles 51, 53, 163, 211, and 226 of the new Company Law, bring separate actions requesting that relevant directors bear joint and several liability for the company’s debts. Notably, where a controlling shareholder or actual con - troller instructs directors to act against the interests of the company, creditors may also bring a separate action under Article 192 of the new Company Law, seeking joint and several liability from such controlling shareholders, actual controllers and directors. Overall, the new Company Law strengthens the obli - gations and responsibilities of shareholders and direc - tors. When a debtor determined by an effective legal instrument is a company, and the company is unable to satisfy its debts, creditors should actively consider investigating whether the company’s shareholders or directors have engaged in conduct detrimental to the company or the creditors’ interests and seek remedies through separate litigation, as legally appropriate. Transfer from enforcement to bankruptcy proceedings Where a company debtor is unable to satisfy all of its debts and faces claims from multiple creditors, or where it is evidently insolvent, a creditor who has not obtained a prior preservation of assets (hereinafter referred to as a “Subordinated Creditor”) may find itself unable to recover from the remaining assets, as other creditors with preservation orders will enjoy pri - ority satisfaction through enforcement. In such cases, the Subordinated Creditor may, pursuant to the Notice of the Supreme People’s Court on Promulgation of the Guiding Opinions on Several Issues concerning the Transfer from Judgment Enforcement to Bankruptcy Examination and other relevant regulations, apply to the enforcement court to transfer the enforcement proceeding to bankruptcy review.
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