Article 20 of the Provisions on Several Issues Concerning the Alteration and Addition of Parties in Civil Enforcement (hereinafter referred to as the "Alteration and Addition Provisions") issued by the Supreme People's Court (hereinafter referred to as the "Supreme Court") on August 29, 2016 stipulates: "If the property of a one-person limited liability company that is the subject of enforcement is insufficient to meet the obligations specified in the effective legal documents, and the shareholder cannot prove that the company's property is independent of his or her own property, the people's court shall support the application by the executor for changing or adding the shareholder as the subject of enforcement, and assuming joint and several liability for the company's debts." According to the above provisions, it is possible for creditors to apply for the addition of shareholders of a one person limited liability company (hereinafter referred to as "one person company") as the person to be executed during the execution process. 

With regard to how to understand and apply this provision in practice, this article, based on our recent experience in handling multiple such enforcement cases, as well as judicial trial cases in some regional courts across the country, makes the following brief analysis and discussion on the practical points and countermeasures for adding a shareholder of a one-person company to be the subject of enforcement. 

1、 Legal and theoretical basis for adding the shareholder of a one-person company as the person to be executed

（1） Legal basis

Article 20 of the "Provisions on Changes and Additions" serves as a judicial interpretation, and its legal basis is traced back to the "Company Law of the People's Republic of China" (hereinafter referred to as the "Company Law"). Articles 57 to 63 of the "Company Law" provide for a one-person company, which refers to a limited liability company with a natural person shareholder or a legal person shareholder, "A one-person company shall prepare financial and accounting reports for each accounting year, which shall be audited by an accounting firm. If the shareholders of a one-person company cannot prove that their property is independent of the shareholders' property, they shall be jointly and severally liable for the company's debts.". 

The "Company Law" imposes stricter regulations on the personality independence of a one-person company compared to other types of companies. This is because compared to other forms of company, the most prominent feature of a one-person company is its uniqueness of shareholders, which cannot form a balanced institutional setting among the shareholders' meeting, the board of directors, and the board of supervisors. It is difficult to distinguish between companies and shareholders in terms of property, business, personnel, and other aspects. In order to restrict the shareholders of a one-person company from evading debts by using methods such as confusion of company property, and to harm the interests of creditors, Article 63 of the Company Law establishes a system of presumption of disregard of legal personality and inversion of the burden of proof for one-person companies. [1] The obligations of the company and shareholders are increased through annual statutory audits and rules such as denial of corporate personality and inversion of the burden of proof, Strengthen the legal regulation of one-person companies. 

Therefore, as a one-person company subject to enforcement, its assets are insufficient to pay off the debts determined by the effective legal documents, and shareholders cannot prove that the company's assets are independent of their own assets. If the applicant for enforcement applies to add the shareholder as the subject of enforcement, it should be supported. [2]

（2） Theoretical basis

1. Denial of corporate personality

Corporate personality denial, also known as corporate personality denial, refers to a legal system in which shareholders of a company abuse the independent status and limited liability of the company as a legal person and commit acts that seriously harm the interests of creditors. Creditors can bypass the company and directly request shareholders who abuse the company's personality to assume joint and several liability for the company's debts. [3] Article 20 of the "Company Law" is the embodiment of this theory in the legal provisions - shareholders should not abuse the independent status of a company as a legal person while enjoying their rights, otherwise they will bear joint and several liabilities. 

Before the promulgation of the "Provisions on Changes and Additions", there has been a dispute whether the system of corporate personality denial can be directly applied in civil enforcement proceedings, whether in theoretical or practical circles. However, in practice, there are frequent cases of evading debts and evading enforcement by abusing corporate limited liability, which are not stipulated in current laws and judicial interpretations. As a result, the actual practices of local courts vary, resulting in illegal changes and additions, or changes that should remain unchanged, or should not be pursued. This is not conducive to effectively combating evasion of enforcement, and fully protecting the interests of creditors, It is also not conducive to the unification of legal application and affects the establishment of judicial authority [4]. In order to solve the above problems in judicial practice, based on the theory of corporate personality denial, Article 20 of the "Regulations on Alteration and Addition" establishes the rule that the shareholders of an additional one-person company are the subject of enforcement. 

2. Constant liability property

The constancy of liability property refers to the fact that effective legal documents not only determine the property liability of the debtor, but also determine the scope of liability property. Liability property is the property that the debtor performs its obligations. Once the liability property is determined, it will not change its nature as a guarantee for the debt without legal procedures and methods, which is the constancy of the liability property. [5] According to legal procedures, when the company assumes debts, the company's responsible property has been fixed. Therefore, when the shareholder's behavior impairs the company's responsible property or encroaches on the company's responsible property, resulting in the failure to fully realize the rights of creditors, it is the inherent meaning of the theory of constant liability property to add the shareholder as the person to be executed in the compulsory execution procedure. The provision in Article 20 of the "Regulations on Changes and Additions" regarding the addition of the shareholder of a one-person company as the person to be executed is precisely the embodiment of this theory. 

2、 Sorting out the main points of judicial review and the gist of adjudication for adding the shareholder of a one-person company as the person to be executed

（1） Overview of judicial decisions

According to the "Regulations on Changes and Additions", the judicial process of applying for the addition of a shareholder of a one-person company as a person to be enforced is divided into two procedures: The first procedure is that the court enforcement tribunal examines the application of the applicant for the addition of a shareholder of a one-person company as a person to be enforced, Make a ruling on approving or disapproving the addition (rejecting/terminating the review) (hereinafter referred to as the "executive review procedure"); In the second procedure, if one party is not satisfied with the ruling on granting (or not granting) an addition made in the enforcement review procedure, a lawsuit of objection to execution is filed with the enforcement court, and the trial court of the enforcement court conducts the trial and makes a judgment (hereinafter referred to as "the appeal procedure of objection to execution"). 

"We have searched the Vico Advanced Legal Information Database for cases in which the shareholder of an additional one-person company is the subject of enforcement. In the two stages of the above proceedings, the relatively representative Supreme People's Court, the Supreme People's Courts of Beijing, Shanghai, Guangdong Province, and the intermediate courts affiliated to Beijing, Shanghai, and Guangzhou have applied Article 20 of the Change and Addition Provisions as the basis for adjudication.", As of March 9, 2022, a total of 355 cases in the execution review process stage have been retrieved, and a total of 80 cases in the final (i.e., second or retrial) execution objection litigation process stage. For the approval/disapproval of additional cases in these cases, the following table is summarized: 

According to the statistics of the above cases, whether it is the implementation of the review process or the implementation of the objection lawsuit (second instance/retrial) process, the court has ruled that the proportion of shareholders of a company granting an additional one person to be executed has reached more than two-thirds. 

（2） Referee gist

Through sorting out the above cases, the court has mainly made the following decisions regarding the decision on whether to grant or not to grant an addition in the case of adding a shareholder of a one-person company as the subject of enforcement. 

1. Additional referee gist granted

(1) The shareholder has not provided evidence to prove that its property is independent of the one-person company. 

There are two types of cases in which such courts grant additional rights: 

(i) "After being summoned by the court, the additional shareholder did not appear in court to defend and did not submit evidence, and when the applicant provided evidence that the property of the person subjected to execution (a one-person company) was insufficient to meet the obligations determined by the effective legal instrument,", Courts in Beijing and Guangzhou usually grant additional applications from the applicant for enforcement on the grounds that the added shareholder has not provided evidence to prove that its property is independent of a one-person company. 

For example, the Beijing Second Intermediate People's Court held in its (2021) Jing 02 Zhi Yi No. 585 enforcement ruling that, "As the executor, Huayi Tongtai Company is a one person limited liability company, and currently has no property available for execution. Wuhan Wanfeng Company applied for the addition of Cui Ruiqian, the sole shareholder of Huayi Tongtai Company, as the executor. Cui Ruiqian did not submit evidence to prove that his property was completely independent of Huayi Tongtai Company's property. In summary, Wuhan Wanfeng Company's additional application was established, and our court supports it." (Note: Huayi Tongtai Company and Cui Ruiqian were summoned by this court according to law, but they did not appear in court to participate in the review without justified reasons, nor did they submit written defense opinions to this court.). 

The Intermediate People's Court of Guangzhou City, Guangdong Province (2021) held in the execution ruling (Yue 01 Zhi Yi No. 149) that, "Due to Sun Chuanzhi's failure to attend the hearing in court and to submit evidence to prove that the property of the person subjected to execution is independent of his own property, the applicant for execution applies for the addition of a third person, Sun Chuanzhi, as the person subjected to execution in the (2020) Yue 01 Zhi 2100 execution case. There is a legal basis for assuming joint and several liability for the debts of the person subjected to execution, which is supported by this court." 

"(ii) A shareholder of a one-person company defends on the ground that he is not the actual controller, or the person being executed at the time of the formation of the debt is not a one-person company, or does not know the debt judgment of the one-person company, but fails to provide evidence to prove that his property is independent of each other from the one-person company,", The court usually grants the additional application of the applicant for enforcement on the grounds that the relevant defense has nothing to do with the case and that the additional shareholder has not provided evidence to prove that his property is independent of the one-person company. 

For example, the Beijing Second Intermediate People's Court (2021) Jing 02 Zhi Yi No. 250 execution ruling holds that, "In this case, Shengshi Jiahe Company, as the subject of enforcement, is a one person limited liability company, and currently has no property to enforce. The SDC First Construction Company applied for the addition of Li Xiaoqiang, the sole shareholder of Shengshi Jiahe Company, as the subject of enforcement. Li Xiaoqiang did not submit evidence to prove that his property was completely independent of the properties of Shengshi Jiahe Company. In summary, the SDC First Construction Company's additional application was established, and the Court supported it." "Hold." (Note: The reason for Li Xiaoqiang's defense in this case is: I am not the actual controller of Shengshi Jiahe Company. I was only borrowed my ID card and registered as the shareholder and legal representative of Shengshi Jiahe Company. I have no money to repay the debt.)

For example, the Intermediate People's Court of Guangzhou City, Guangdong Province (2019) held in the execution ruling No. 288 of Yue 01 Zhi Yi that, "Due to the fact that the subject of this case, Yuzhong Company, is a limited liability company solely owned by natural persons, and its shareholder, Liang Zeqiang, has not submitted evidence to prove that the property of Yuzhong Company is independent of its own property. Therefore, Liang Zeqiang should be jointly and severally liable for the debts of Yuzhong Company in this case. As of now, Liang Zeqiang's defense opinion advocates its implementation basis for this case (2017)." "The issue of ignorance in the civil judgment No. 3328 of the People's Republic of China in Yue 73 essentially negates the effective judgment, and this claim does not fall within the scope of the enforcement objection review." 

(2) The evidence provided by shareholders is insufficient to prove that their property is independent of the one-person company. 

In such cases where the court has ruled to grant an addition, although some evidence has been provided by the shareholders of a one-person company, the court believes that such evidence is still insufficient to prove that their property is independent of the one-person company. The breakdown is mainly divided into the following categories: 

(i) The shareholders only provided some financial statements, bank statements, or industrial and commercial registration materials, but did not provide an audit report. 

For example, the Beijing Third Intermediate People's Court held in its civil judgment (2020) Jing 03 Min Zhong No. 2845 that:, "Although Shen Jiakun submitted the balance sheet and profit statement of Golden Splendor Company in the first instance, the above balance sheet and profit statement can only prove the operation and balance sheet of Golden Splendor Company, and cannot achieve the purpose of proving that the property of Golden Splendor Company is independent of the property of shareholders. Moreover, whether Golden Splendor Company has a loss in its operation status is not legally excluded from shareholders." "It is the case of the person to be executed, so this case complies with the aforementioned provision that shareholders should bear joint and several liability for the company's debts as the person to be executed." 

(ii) Although the shareholder provided the audit report of the one-person company, the audit report was incomplete and inaccurate. 

For example, the Supreme Court held in its ruling No. 3711 (2021), "After the person subjected to execution became a one person limited company, he violated the Company LawArticle 62 stipulates that financial and accounting reports are not prepared and audited by an accounting firm at the end of each fiscal year. Although its shareholders have submitted evidentiary materials such as the audit report of the person subjected to execution issued by an accounting firm to prove the independence of the property of the person subjected to execution, based on the facts identified, the audit report has not included in the balance sheet of the person subjected to execution the debts involved in the case that can be known through public inquiry, and there is an obvious situation of audit failure, "Therefore, the basic fact that Pang Mou, as the sole shareholder of the company, should bear the adverse consequences of mixing up the company's assets does not lack evidence to prove it." 

(iii) Although the shareholder provided the audit report of the one-person company, the audit report was not prepared in accordance with the relevant provisions of the Company Law and the Accounting Law. 

For example, the Beijing Higher People's Court (2021) held in its Civil Judgment No. 255, "According to Article 62 of the Company Law, a one-person limited liability company shall prepare financial and accounting reports at the end of each accounting year, which shall be audited by an accounting firm. In accordance with the Accounting Law of the People's Republic of China," Article 20 (2): The financial and accounting report consists of accounting statements, notes to the accounting statements, and a financial situation statement. The preparation basis of financial accounting reports provided to different users of accounting data should be consistent. If relevant laws and administrative regulations require that accounting statements, notes to accounting statements, and financial statements be audited by certified public accountants, the audit report issued by the certified public accountants and their accounting firms shall be provided together with the financial accounting report. In this case, although Bi submitted the audit report issued by an accounting firm and the bank accounts of Beijing Fulicheng Branch of Shanghai Pudong Development Bank Co., Ltd. from September 27, 2013 to September 21, 2019, the audit report did not cover the entire period of Bi as a shareholder of the company, "From the perspective of the content of the audit report and the bank's current situation, it is not possible to prove that the assets of the BP company and the personal assets of Mr. Bi are independent from each other. Mr. Bi also acknowledges that the BP company has not prepared a financial accounting report in accordance with the relevant provisions of the Company Law and the Accounting Law and has been audited by an accounting firm, so the evidence submitted by Mr. Bi cannot prove its certification purpose.", "Without sufficient proof, the court did not accept Bi's claim that he was independent of the property of the company." 

(iv) Although a shareholder has provided an audit report of a one-person company, the audit report does not cover the entire period during which the shareholder served as a shareholder of the one-person company. 

For example, the above civil judgment of Beijing Higher People's Court (2021), Jingminzhong No. 255. 

(v) Although the shareholder has provided an audit report of a one-person company, the content of the audit report itself indicates that there is a situation of property confusion between the one-person company and the shareholder. 

For example, Jiangsu Province?Level?Civil Court (2019) Su Min Zhong No. 95 Civil Judgment, The court held that "Jingshen Jian Company is a one person limited liability company, and the Audit Report shows that Jingshen Jian Company has multiple large amount transfer records with individual accounts such as Bai Lanping, and there is a phenomenon that the company property is confused with the shareholder's personal family property. According to the Company Law of the People's Republic of China"Article 63 stipulates that in the event that the shareholder Bai Lanping cannot prove that the company's property is independent of the shareholder's own property, Bai Lanping shall be jointly and severally liable for the debts of Jingshen Jian Company." 

(vi) Although the shareholder has provided the audit report of the one-person company, the audit report has qualified opinions. 

For example, in the civil judgment (2020) Jing 03 Min Zhong No. 1413 of the Third Intermediate People's Court of Beijing, The People's Court of Chaoyang District, Beijing, held that: "After Wang Xiaojun applied for judicial audit, the audit agency gave an opinion that Wang Xiaojun's personal property was not found to be confused with the property of Jinjiang Hotel, but included three reservations. Therefore, the focus of the dispute between the two parties is the impact of the reservations in Audit Opinion No. 31 on the judicial audit conclusion and the determination of the case, and whether the opinion is sufficient to prove the relationship between Wang Xiaojun and Jinjiang Hotel." Property is independent of each other. 

From the perspective of certification standards, a one-person company should at least establish financial and accounting systems in accordance with the law and regulations. It should prepare financial and accounting reports every year and be audited by an accounting firm. The financial transactions and uses of funds between shareholders and the company should be clear. In the event that a one-person company fails to prepare annual financial and accounting reports in accordance with the law, a qualified audit institution should provide an unqualified audit conclusion on whether the shareholder's property and the company's property are independent of each other. 

The decoration expenses of Longyuan Tonghui Building, which are covered by the reserved opinions in the audit opinion No. 31, were not mentioned in the account books and annual audit reports submitted by Jinjiang Hotel, and the large amount of rent owed to Longyuan Investment Company was not reflected in the annual audit report. It is impossible to confirm whether the decoration expenses were actually paid or by whom, And the fact that the rent paid to Longyuan Investment Company was advanced by others. "It can be seen that the financial management of Jinjiang Hotel is not standardized, and there are obvious violations of China's accounting standards and systems, which are sufficient to trigger reasonable suspicion that the accounts of Jinjiang Hotel are not standardized and there is a behavior of evading debts." In the second instance, the Beijing Third Intermediate People's Court also recognized the views of the court of first instance, ultimately rejecting the shareholder's appeal and supporting the additional request of the applicant for enforcement. 

2. No additional referee gist allowed

(1) During the execution of the review process, if the subpoena cannot be served on the shareholder who has applied for the addition, the court ends the review on the grounds that it is unable to obtain effective contact with the shareholder who has applied for the addition, cannot deliver relevant materials to the shareholder, and cannot legally summon the shareholder to appear in court to exercise corresponding litigation rights. 

For example, the Beijing Second Intermediate People's Court (2021) held in the execution ruling of Jing 02 Zhi Yi No. 450 that, "The People's Court shall, in accordance with the Provisions of the Supreme People's Court on Several Issues Concerning the Alteration and Addition of Parties in Civil Enforcement," "If an additional person is to be executed in accordance with the provisions of Article 20, the additional person shall be contacted and relevant materials shall be delivered. The additional person shall provide evidence that the company's property is independent of his own.". "In this case, according to the address provided by Wenda Tenglong Company, the court was unable to contact Du Yunhong and deliver relevant materials, so the review of this case should be terminated." 

(2) During the execution review process stage, if the additional shareholder applied for has not appeared in court and has not replied after being summoned by the court, some courts (mainly Shanghai courts) believe that the applicant for enforcement should bear the preliminary burden of proof for the confusion between the shareholder and the property of the one-person company. Otherwise, the court ruled to reject the application for the additional one-person shareholder to be the subject of enforcement. 

For example, the First Intermediate People's Court of Shanghai (2020) held in the execution ruling No. 130 of Hu 01 Zhi Yi, "Zhou Zhujun did not provide preliminary evidence that Xia Xianghua's property was mixed with the property of the painting box company, and the third person, Xia Xianghua, did not appear in court to provide a defense opinion. In order to protect the litigation rights of the third person, Zhou Zhujun's application for adding Xia Xianghua as the subject of execution should be handled through legal proceedings." The final court ruled to reject Zhou Zhujun's application for adding Xia Xiangkui as the subject of enforcement. 

"We have found significant differences in the adjudication of this case in various courts. Basically, in Shanghai courts (in addition to the above (2020) Hu 01 Zhi Yi 130 case, there are also (2021) Hu 02 Zhi Yi 193 cases, (2021) Hu 02 Zhi Yi 124 cases, etc.), when the additional shareholders have not been summoned to appear in court and have not responded,", Both rejected the additional request of the applicant for enforcement based on the above reasons; However, most courts in Beijing (such as the above (2021) Jing 02 Shi Yi No. 585 case) and Guangzhou (such as the above (2021) Yue 01 Shi Yi No. 149 case) generally agree to add additional shareholders as the subject of enforcement on the grounds that the additional shareholders have not provided sufficient evidence to prove that their personal property is not confused with the company's property when they are not summoned to court and have not provided evidence. 

(3) "The property of the one-person company sealed up by the applicant for enforcement has not been realized due to relatively difficult judicial disposal. Even though the court made a ruling to terminate this enforcement procedure, the basis for asserting that the property of the person subjected to enforcement is insufficient to meet the obligations determined by the effective legal documents is insufficient, and the court accordingly rejected the applicant's additional application.". 

For example, the Third Intermediate People's Court of Beijing (2019) Jing 03 Min Zhong No. 4673 Civil Judgment holds that, "According to the valuation report of 13 of the lands provided by Hebei Zhonggang Company, the value of the 13 lands has exceeded the debt amount of Jingang Chemical Company. Although there is a bank mortgage on the land involved, the value of the land seized under the name of Hebei Zhonggang Company has not been determined through judicial auction or other forms. Jingang Chemical Company claims that Hebei Zhonggang Chemical Company has claimed in the above circumstances." "The company's property is insufficient to pay off the debts determined by the effective legal documents, and the appeal request of King Kong Chemical Company (note: the shareholder of the company with one additional person is adjudged as the person to be executed) cannot be established, and should be rejected." 

(4) During the period of occurrence of the creditor's rights and the period of application for enforcement, the company of the person subjected to enforcement is not a one-person company. 

For example, Beijing First Intermediate People's Court held in its civil judgment (2020) Jing 01 Min Zhong No. 7479 that:, "During the first instance, Wang Haiyan requested that Teng Xibin be added as the executor of this case on the grounds that Teng Xibin failed to fulfill his capital contribution obligations and that Teng Xibin, as the sole shareholder of Yilong Tianwang, should bear joint and several liabilities for the company's debts. According to the facts identified, Teng Xibin's subscribed capital contribution date was August 25, 2023, and the subscribed capital contribution date has not yet expired. From November 8, 2016 to now, Yilong Tianwang hasThe shareholders of the company are Teng Xibin and Teng Xijing; During the period when Wang Haiyan's creditor's rights against Yilong Tianwang occurred and during the application for enforcement, Yilong Tianwang was not a one-person limited company. "To sum up, Wang Haiyan's request for the addition of Teng Xibin's request for the person to be executed in the (2018) J0109 No. 2739 execution case lacks factual and legal basis." 

(5) The shareholders of a one person company have provided complete audit reports and other evidence to prove their independence from the property of the one person company. 

For example, Beijing First Intermediate People's Court (2021) held in its civil judgment No. 1791, "Yang Wei has provided the accounting vouchers of Cyber from June 2013 to September 2019, the general ledger, sub ledger, and financial and tax statements of Cyber from January 2014 to September 2019, as well as the audit reports for the years 2015 to 2019, indicating that Cyber has independent account books. The audit report submitted by Yang Wei in the first audit also shows that the accounting firms have audited the financial statements of Cyber, includingThe accounting firm believes that the attached financial statements, including the balance sheet, annual income statement, cash flow statement, statement of changes in shareholders' equity, and related notes to the financial statements, have been prepared in accordance with the Accounting Standards for Business Enterprises in all significant aspects, and fairly reflect the financial situation, annual operating results, and cash flow of the company. "Therefore, our court believes that the financial account books and audit reports provided by Yang Wei are sufficient to prove that his personal property is independent of the company's property, and he should not bear corresponding joint and several liabilities, nor should he be added as the person to be executed in the execution case involved." 

3、 Analysis of controversial issues and countermeasures

Through sorting out the above gist of the judgment, we find that the following issues in trial practice are still controversial. Regarding these issues, we preliminarily analyze and propose countermeasures as follows: 

（1） In the enforcement review process, if the additional shareholder applied for has not appeared in court to participate in the litigation, does the applicant for enforcement bear the burden of providing preliminary evidence to prove that there is property confusion between the shareholder and the one-person company?

1. Problem Analysis

In the "Key Points of the Trial of the Shanghai First Intermediate People's Court", the first point of the review of adding a shareholder of a one-person limited liability company as the person to be executed is the allocation of the burden of proof. It is believed that the applicant for execution needs to provide preliminary evidence that the company property of the person to be executed is insufficient to repay the debt, and that the company of the person to be executed is confused with the property of the shareholder. 

In the above-mentioned (2020) Hu 01 Zhi Yi No. 130, (2021) Hu 02 Zhi Yi No. 193, and (2021) Hu 02 Zhi Yi No. 124 cases, the Shanghai court rejected the additional request of the applicant for enforcement on the ground that the applicant did not provide preliminary evidence of the existence of property confusion between the company and the shareholder. The starting point of the Shanghai court's decision is to protect the litigation rights of shareholders who have not appeared in court. However, after the applicant for enforcement is rejected by the court's ruling during the enforcement review process, he can only add shareholders of a one-person company through subsequent enforcement objection proceedings. 

"We believe that the above gist of the judgment is in violation of Article 20 of the Regulations on Changes and Additions, and increases the litigation burden of the applicant for enforcement, which is not conducive to the realization of the creditor's rights of the applicant for enforcement. Regarding whether there is any confusion between the property of the shareholder and the one-person company,", We believe that the applicant for enforcement has no legal obligation to provide preliminary evidence to prove that there is a mixed burden of proof between the two. 

First of all, Article 20 of the "Regulations on Changes and Additions" stipulates that "shareholders cannot prove that the company's property is independent of their own property." Moreover, based on the previous analysis of the legal and theoretical basis of this provision, this article is issued based on the special provisions of one-person companies. The provisions of the "Company Law" on one-person companies set up rules on the denial of the personality of one-person companies and the inversion of the burden of proof, which is a restriction and balance against the fact that one-person companies have no three meetings and thus become shareholders abusing their independent status as corporate entities to evade the "high incidence" of debt. The court requires that the applicant for enforcement must provide preliminary evidence that the company under enforcement is mixed with the shareholder's property, which violates the legislative intent of Article 20 of the "Alteration and Addition Provisions" and the "Company Law" on one-person companies, and increases the burden of proof of the applicant for enforcement; Moreover, there are no regulations detailing the extent to which such "preliminary evidence" should be adduced, which undoubtedly makes it difficult for the applicant to apply for the addition of one person to the company's shareholders during the implementation review process. 

Secondly, according to Article 147 of the Civil Procedure Law of the People's Republic of China, if the defendant refuses to appear in court without justified reasons after being summoned by summons, or withdraws midway without the permission of the court, a judgment may be made by default. In the enforcement review process in which the shareholder of an additional one-person company is the subject of enforcement, the failure of the additional shareholder to attend the court after being notified shall be deemed to be a waiver of his litigation rights, and he shall bear the adverse legal consequences of not participating in the court hearing without justifiable reasons and not providing evidence. In addition, even if the court decides to add the shareholder of a one-person company as the person to be enforced, he/she also has the right to seek relief by filing an action against enforcement. 

In addition, when the Supreme Court issued the "Change and Enforcement Regulations", it was proposed that this system plays an important role in combating circumvention of enforcement, rapidly realizing creditor's rights, and alleviating the litigation burden of the parties. However, the reason why the applicant for enforcement under the context of Article 20 of the "Change and Supplemental Regulations" applies for additional shareholders to be the executors, One of the preconditions is that the property of the person subjected to enforcement is insufficient to pay off the debts determined by the effective legal documents. Adding a shareholder of a one-person company as the person subjected to enforcement or becoming the applicant for enforcement is the only hope for realizing the creditor's rights. However, the court rejects the additional application on the ground that the applicant has not provided preliminary evidence that the shareholder is confused with the company's property, which clearly violates the changes in the enforcement processThe original intention of adding the party system design. 

In summary, the preliminary burden of proof on whether there is any confusion between shareholders and the property of a one-person company should be borne by the shareholders of the one-person company to which the addition is applied, rather than by the applicant. In the name of protecting the litigation rights of the additional shareholders who do not appear in court, some courts have transferred the preliminary burden of proof to the applicant for enforcement, resulting in increased litigation costs for the applicant. This is clearly unfair to the applicant, and there are also illegal provisions. 

2. Response suggestions

Given the gist of the decisions of some courts (mainly those in Shanghai) on this issue, we suggest that the applicant for enforcement prepare the following countermeasures during the enforcement review process: 

(1) Provide the contact method of the added shareholder as much as possible, and make it possible for the court to contact him/her to notify him/her to attend the litigation; 

(2) Try to collect preliminary evidence that shareholders and one-person companies have mixed assets, such as receiving one-person company funds from shareholders' personal accounts, and transferring funds between one-person companies and shareholders; 

(3) If the above materials cannot be provided and the request to add the shareholder of a one-person company as the person to be executed is rejected, the purpose of adding the shareholder of a one-person company as the person to be executed can be achieved by filing an enforcement objection lawsuit. 

（2） Standard of proof for shareholders to prove their independence from the property of a one-person company

1. Problem Analysis

Regarding the evidentiary standards for shareholders to prove their independence from the company's property, neither the Company Law nor the Regulations on Changes and Additions clearly stipulate the circumstances and constitutive requirements for property confusion. There are also disputes over the above issues in judicial practice. Based on relevant legal provisions and judicial practice, the analysis of this issue is as follows: 

(1) Shareholders shall provide an audit report issued by an accounting firm after auditing the annual financial situation of a one-person company. 

Article 62 of the Company Law stipulates: "A one-person limited liability company shall prepare financial and accounting reports at the end of each accounting year, which shall be audited by an accounting firm." 

In most of the cases we have retrieved, the court held that the annual audit report of a one-person company audited by an accounting firm submitted by the shareholder (or one-person company) of the one-person company to the court is necessary evidence to prove its independence from the property of the one-person company, while in some cases (such as the (2020) Jing 01 Zhi Yi No. 199 case), The court recognized that the shareholder had fulfilled the burden of proof only based on partial statements or bank statements provided by a one-person company. We believe that the ruling in this case ignored the legislative intent of Article 62 of the Company Law and ignored the provisions of Articles 62 and 63 of the Company Law, which would have a bad guiding effect. 

(2) The audit report submitted by shareholders shall be an audit report issued by an accounting firm after auditing the financial and accounting reports prepared by a one-person company in accordance with the Company Law and the Accounting Law. 

According to Article 62 of the Company Law, a one-person company shall prepare an audit report at the end of each accounting year; According to Article 20 (2) of the Accounting Law of the People's Republic of China, the financial accounting report consists of accounting statements, notes to the accounting statements, and a statement of financial situation. The audit report provided by shareholders can fully reflect the financial situation of the company only if it is prepared in accordance with relevant regulations such as the Company Law and Accounting Law. An audit report that meets the above requirements can prove the property independence of a shareholder and a one-person company. Conversely, the court will not recognize the certification effectiveness of the audit report. 

For example, in the above-mentioned case of Beijing Higher People's Court (2021) Jingminzhong No. 255, the court held that although a shareholder of a one-person company submitted an audit report, the financial accounting report was not prepared in accordance with the relevant provisions of the Company Law and the Accounting Law and was audited by an accounting firm. Therefore, the court did not recognize that the evidence submitted by the shareholder could prove the independence of its property between the one-person company. 

(3) The audit report submitted by a shareholder shall cover the entire period during which the shareholder served as a shareholder of a one-person company. 

"To prove the independence of their personal property from the company's property, a shareholder needs to provide an audit report for each year during their tenure as a one-person company. If the audit report provided is only part of the year and does not cover the entire period of their tenure as a shareholder of the one-person company, it is clear that it can only explain the property independence of some years between shareholders and the one-person company,", "It is not possible to fully reflect the clear and unambiguous accounts of the company and individuals during their entire period as shareholders, so it cannot serve as a proof of the independence of property between a shareholder and a one-person company.". 

For example, in the case of Beijing Higher People's Court (2021) Jingminzhong No. 255, the court held that although a shareholder of a one-person company submitted an audit report, the audit report did not cover the entire period during which Bi was a one-person shareholder of the company. Therefore, the court did not recognize the evidence of the audit report submitted by the shareholder as proof of its property independence between the one-person company. 

(4) There are no defects in the audit report submitted by the shareholders; If there are defects, shareholders can provide a reasonable explanation for the defects in the audit report. 

"The defects in the audit report include formal defects, inconsistent financial data, and inconsistencies between the financial and accounting reports submitted by the company itself and those filed by the industry and commerce department. These defects indicate that the audit report may contain fraud, property confusion, and inability to fully reflect the actual operation and financial situation of the company. Therefore, shareholders should provide reasonable explanations for these defects,", Can be deemed to have submitted an audit report that meets the requirements, and can prove its independence from the company's property. If a shareholder is unable to provide a reasonable explanation for the flaws in the audit report, the court does not recognize that the evidence in the audit report submitted by the shareholder can prove its property independence between a one-person company. 

(5) The audit conclusions of a one-person company provided by shareholders cannot contain non unqualified opinions. 

Article 4 of the "Auditing Standards for Chinese Certified Public Accountants No. 1502 - Issuing Qualified Opinions in Audit Reports" issued by the Ministry of Finance stipulates: "Qualified opinions refer to qualified opinions, negative opinions, or legal opinions expressed on financial statements." Article 7 also stipulates: "When one of the following circumstances exists, a certified public accountant shall express a qualified opinion in the audit report:" Based on the obtained audit evidence, it is concluded that there are significant differences in the overall financial statements?Misreported conclusions; （?）?Can't obtain sufficient and appropriate audit evidence to conclude that the financial statements as a whole are not significant?Misreported conclusions. " 

If the audit report contains unqualified opinions, it can be considered as "unqualified"??The company has violated Article 6 of the Company Law??The provisions of Article mean that it is impossible to draw a conclusion about the financial compliance of a one-person company, and therefore, it is impossible to draw a conclusion about the independence of shareholder property and company property. Under such circumstances, it is natural to fail to meet the standard of proof that the property between a shareholder and a one-person company is mutually independent. 

For example, in the above (2020) Jing 03 Min Zhong 1413 case, the court held that "in the event that a one-person company fails to prepare annual financial and accounting reports in accordance with the law, a qualified audit institution should provide an unqualified audit conclusion on whether the shareholder's property and the company's property are independent of each other." The court ultimately held that the audit report of a one-person company gave a qualified opinion, which could not prove that the one-person company was independent of the shareholder's property, and agreed to add the shareholder as the subject of enforcement. 

(6) The content of the audit report of a one-person company provided by the shareholder does not indicate any property confusion between the one-person company and the shareholder. 

In the audit report, if any shareholder occupies the company's capitalDo shareholders and companies have frequent flows?The collection of company funds from current accounts and shareholder accounts proves the confusion of assets between the company and shareholders. 

For example, Jiangsu Province?Level?In the Civil Judgment No. 95 (2019) issued by the People's Court of China, the court held that "the Audit Report shows that Jingshen Jian Company and Bai Lanping and other personal accounts have multiple large amount transfer records, and there is a phenomenon that the company's property is confused with the shareholder's personal family property." 

In summary, we believe that the evidence submitted by the company's shareholders meets the requirements of points (1) to (6) above, which can be considered to meet the evidentiary standards for shareholders to prove their independence from the property of a one-person company. 

2. Response suggestions

First of all, for the added shareholders, in order to fulfill their property and the independent burden of proof of a one-person company, we suggest that: (1) each year, the accounting report of the one-person company should be prepared in accordance with the relevant provisions of the Company Law and the Accounting Law, and audited by an accounting firm in accordance with the law; (2) Provide the court with an unqualified audit report covering the entire period of his tenure as a shareholder of a one-person company that meets the requirements for all years; (3) Be aware of and able to provide reasonable explanations for defects in the audit report. 

Secondly, as for the applicant for execution, we suggest that: (1) if the supporting materials provided by the additional shareholder do not meet the above standards, the above analysis can be used to refute the evidence provided by the shareholder; (2) If the audit report provided by the additional shareholder meets the above standards, on the one hand, it can check whether there are any defects in the report, and at the same time, it can apply to the court for judicial audit (which will increase certain litigation costs). On the other hand, it can retrieve judicial documents, contract documents, etc. related to the one-person company and its shareholders, To see if there is further evidence of property confusion between a one person company and its shareholders. 

4、 Summary and Suggestions

（1） For shareholders of a one person company

Based on the above analysis, the Company Law and the Regulations on Changes and Additions impose obligations on one-person companies and shareholders by setting rules such as annual statutory audit, denial of corporate personality, and inversion of the burden of proof, and strengthen legal regulations on one-person companies. From the perspective of the above case review and analysis, In judicial practice, there are also relatively large cases in which the decision supports the addition of the shareholder of a one-person company as the person to be executed. It can be seen that if the shareholders of a one-person company do not operate the company in accordance with regulations and pay no attention to risk prevention in the daily operation process, and the company is unable to repay its debts, the risk of the shareholders of a one-person company assuming joint liability for the company's debts is relatively high. 

Therefore, for shareholder risk prevention in a one-person company, we suggest the following: 

1. Carefully choose the form of one person company. It is undeniable that one person companies have many advantages, such as a simple internal management structure, complete control of the company by shareholders, and timely and effective decision-making by shareholders to respond to market changes; However, it is precisely this that makes it difficult to distinguish between one-person companies and their shareholders in terms of property, business, personnel, and other aspects. It is more likely for one-person companies' shareholders to evade debts and harm the interests of creditors by using methods such as mixing company property. It is also based on this that the Company Law and the Regulations on Changes and Additions impose heavier obligations on shareholders of one-person companies. Therefore, if the shareholders of a one-person company are slightly careless, such as neglecting the financial independence between the company and itself, or collecting funds for the company in daily operations, they will fall into a legal dilemma where it is difficult to prove their financial independence from the company, and thus need to bear joint and several liability for the company's debts. 

2. If the form of one person company is selected, it is necessary to ensure the independence of shareholders and the company's property in accordance with regulations. Given that one-person companies do have many advantages, the form of one-person companies has become the choice of many shareholders. If shareholders choose to establish a one-person company, they should pay attention to: 

(1) Fulfill statutory audit obligations. According to Article 62 of the Company Law, financial and accounting reports are prepared at the end of each accounting year and audited by an accounting firm. 

(2) Establish an independent financial management system. There is an independent financial department, employing professional accounting personnel, establishing an independent and standardized financial system, retaining all accounts, financial statements, original vouchers, and accounting vouchers of the company. The company and shareholders' account books are regularly printed for backup, and the company's accounts are independently used for external business activities. 

(3) Financial revenue and expenditure are clear and standardized. Try to avoid capital transactions between the company and shareholders, and avoid shareholders collecting company funds through personal accounts; If it is unavoidable, it is important to have clear records in the company's accounts, keep current vouchers, financial books, etc., and ensure that there is no gratuitous and unequal capital exchange between the company's accounts and shareholder accounts. 

(4) Avoid confusion in the company's business premises, organization, production equipment, and other aspects, and ensure that the company and shareholders' business premises, production equipment, and other aspects are independent of each other. 

(5) Maintain the independence of the company's business. Strictly implement relevant legal provisions on non competition, avoid business confusion between the company and shareholders, and prohibit mutual business transfer and benefit transfer. 

3. If the creditor claims joint and several liability for the company's debts in litigation or execution proceedings, arrange and provide audit reports and financial independence certification materials that meet the requirements as soon as possible; If legal audit obligations are ignored in daily operations, you can also attempt to conduct an interim audit or apply for a judicial audit, and provide other financial independent proof materials such as vouchers for fund transactions with the company, account books, bank records, etc. However, these proof materials may not be recognized by the court. 

4. When accepting a one-person company, be sure to conduct due diligence and not blindly accept the offer. When a new shareholder chooses to accept a one-person company, it is necessary to conduct due diligence, such as reviewing the company's previous annual audit reports, and reviewing various aspects of the company's capital contribution, operation, and financial situation. 

（2） For creditors (applying for enforcement)

For creditors, after forming a creditor debt relationship with a one person company, if the one person company is unable to repay the debt, we recommend that the creditors: 

1. Prudently engage in creditor's rights and debt relationships with a one-person company. Before and after forming a creditor's rights and debt relationship with a one-person company, try to understand and follow up on its industrial and commercial changes, shareholder status, and pay attention to whether there are any situations where a one-person company is changed into an ordinary limited liability company, or from an ordinary limited liability company to a one-person company. 

2. When suing a one-person company to repay its debts, the one-person company may file a lawsuit together on the grounds that the financial affairs of the one-person company and the shareholders are confused, requiring the shareholders to assume joint and several liability for the company's debts. According to Article 63 of the Company Law, if a shareholder of a one-person limited liability company cannot prove that the company's property is independent of the shareholder's own property, they shall bear joint and several liability for the company's debts. 

3. In the execution process, when the property of a one-person company is insufficient to fulfill the obligations determined by the effective legal judgment, an application can be made to add its shareholder as the person to be executed through the execution review process. 

4. If a shareholder of a one-person company provides an audit report that meets the requirements during the additional application for enforcement review or enforcement objection litigation process, on the one hand, it can check whether there are defects in the report, and at the same time, it can apply to the court for judicial audit (which will increase certain litigation costs). On the other hand, it can retrieve judicial documents, contract documents, etc. related to the one-person company and its shareholders, To see if there is further evidence of property confusion between a one person company and its shareholders. 

References and Notes: 

[1] Ba Jingyan and Tian Ziyang: "The original shareholder of a one-person company who is confused with the company's property should be added as the executor", published in the People's Justice, Issue 11, 2021. 

[2] Referring to the Civil Judgment No. 604 (2020) of the Third Intermediate People's Court of Beijing, the court held that. 

[3] Qin Youtu: Commercial Law (Third Edition), Higher Education Press, 2012 edition, page 164. 

[4] The Supreme People's Court issued the "Provisions on Several Issues Concerning the Alteration and Addition of Parties in Civil Enforcement", http://dzkjxfy.chinacourt.gov.cn/article/detail/2019/08/id/4294818.shtml

[5] Tan Qiugui: "On the Construction of the Procedure for the Change of Parties in Civil Execution", published in The Jurist, Issue 2, 2011.