Perspective | Do the investors of a wholly state-owned company bear joint liability for the company's debts?
Published:
2024-12-31
A wholly state-owned company refers to a limited liability company or a joint-stock company that is solely funded by the state, with an institution fulfilling the responsibilities of the investor. Whether the investor of a wholly state-owned company is subject to the provisions of Article 23, Paragraph 3 of the new Company Law, which states that "in a company with only one shareholder, if the shareholder cannot prove that the company's assets are independent from the shareholder's own assets, they shall bear joint liability for the company's debts," there are currently two viewpoints in judicial practice regarding the joint liability for the debts of wholly state-owned companies.
A wholly state-owned company refers to a limited liability company or a joint-stock company that is solely funded by the state, with an institution performing the duties of the investor. Whether the investor of a wholly state-owned company is subject to the provisions of the new Company Law, Article 23, Paragraph 3, which states "In a company with only one shareholder, if the shareholder cannot prove that the company's assets are independent of the shareholder's own assets, they shall bear joint liability for the company's debts," there are currently two viewpoints in judicial practice regarding the joint liability for the debts of wholly state-owned companies.
The first viewpoint: The provisions of the new Company Law, Article 23, Paragraph 3 (formerly Article 63 of the Company Law) do not apply, and the investor of a wholly state-owned company does not bear joint liability.
Supreme People's Court ruling viewpoint:
Judicial gist:
The Supreme People's Court (2015) Min Ti Zi No. 197 ruling on the civil judgment regarding the dispute over the transfer of creditor's rights between Changchun Commercial State-owned Assets Management Co., Ltd. and Changchun Vegetable Center Wholesale Market Group Co., Ltd. states:
State-owned enterprises are not limited liability companies or joint-stock companies established according to the Company Law, nor are they one-person limited liability companies as defined by the Company Law. Although the commercial operating company is the sole investor of the vegetable group, its identity is not that of a shareholder of a one-person limited liability company as defined by the Company Law, but rather as an investor of a state-owned enterprise. Applying the provisions of the former Company Law, Article 63, to order the sole investor to bear joint liability for the debts of a state-owned enterprise is a misapplication of the law and should be corrected.
Hunan Provincial High People's Court ruling viewpoint:
The Hunan Provincial High People's Court (2019) Xiang Min Zhong No. 274 civil judgment on the execution objection lawsuit between the Finance Bureau of Zhijiang Dong Autonomous County and Hunan Grandis Investment Co., Ltd. states:
The former Company Law of the People's Republic of China, Article 63, states that "If the shareholder of a one-person limited liability company cannot prove that the company's assets are independent of the shareholder's own assets, they shall bear joint liability for the company's debts," and Article 20 of the Supreme People's Court's regulations on changing and adding parties in civil execution states that "If the one-person limited liability company being executed has insufficient assets to pay the debts determined by effective legal documents, and the shareholder cannot prove that the company's assets are independent of their own assets, the applicant for execution may apply to change and add that shareholder as a party being executed, and the people's court shall support the request for joint liability for the company's debts." These are special provisions for one-person limited liability companies and cannot be applied to wholly state-owned companies. Therefore, adding the Zhijiang Finance Bureau as a party being executed and holding it jointly liable for the debts of Zhijiang Investment Company has no legal basis.
The second viewpoint: The provisions of the new Company Law, Article 23, Paragraph 3 (formerly Article 63 of the Company Law) should apply, and the investor of a wholly state-owned company should bear joint liability.
The viewpoint of the Third Intermediate People's Court of Tianjin:
The Third Intermediate People's Court of Tianjin (2020) Jin 03 Min Zhong No. 4487 civil judgment on the equity transfer dispute between Jinwan Evening News and Cheng Moumei states: The former Company Law, Article 63, states that if the shareholder of a one-person limited liability company cannot prove that the company's assets are independent of the shareholder's own finances, they shall bear joint liability for the company's debts.
The viewpoint of the Intermediate People's Court of Wuxi City, Jiangsu Province:
The Intermediate People's Court of Wuxi City, Jiangsu Province published one of the top ten typical cases of company litigation (2021-2022):
The typical significance of the dispute case between Ding Company and Company A and its wholly-owned subsidiary points out that although the wholly-owned subsidiary established by a wholly state-owned enterprise is registered as a wholly state-owned enterprise, it is not directly funded solely by the state, nor is it funded by the state-owned asset supervision and administration agency authorized by the local people's government, and is not a legally defined wholly state-owned enterprise. Therefore, it should apply the relevant provisions of one-person limited liability companies. Accordingly, as a wholly state-owned enterprise, Company A should bear the burden of proof regarding the independence of assets between it and its wholly-owned subsidiary Company B. If it fails to provide evidence proving the independence of assets, Company A should bear joint liability for the debts of Company B.
Lawyer's viewpoint
This lawyer believes that the provisions of the new Company Law, Article 20, Paragraph 3 should not apply, and that the sole investor of a wholly state-owned company should not be held jointly liable.
The new Company Law, Article 169, adds a clause stating, "For state-funded companies, the State Council or local people's governments shall represent the state in performing the duties of the investor according to law and enjoy the benefits of the investor. The State Council or local people's governments may authorize state-owned asset supervision and administration agencies or other departments to represent the local people's government at the same level in performing the duties of the investor for state-funded companies. The institutions and departments that represent the local people's government in performing the duties of the investor are collectively referred to as the institutions performing the duties of the investor."
This clause further clarifies that the actual shareholder of a state-funded company is the state, which represents the public. The State Council, local governments, and other institutions represent the state in performing the duties of the investor, and although formally a wholly state-owned company also has a shareholder, it is not a one-person company, distinguishing it from the shareholders of one-person limited liability companies. Therefore, the provisions of the Company Law, Article 23, Paragraph 3, which states that "In a company with only one shareholder, if the shareholder cannot prove that the company's assets are independent of the shareholder's own assets, they shall bear joint liability for the company's debts," cannot be applied, and the investor does not need to bear joint liability for a wholly state-owned company.
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