According to the provisions of Interpretation II of the Company Law, if a shareholder of a limited liability company is negligent in performing its liquidation obligations, resulting in the loss of the company's main assets, account books, important documents, etc., and is unable to carry out liquidation, thereby causing losses to the company's creditors, the creditors have the right to petition the shareholders to assume joint and several liabilities. However, neither the law nor the judicial interpretation clearly stipulates the starting point of the limitation of action for disputes over corporate liquidation liability, and there is considerable controversy over this issue in practice. So, when should the limitation of action for disputes over corporate liquidation liability be calculated? This article will clarify the answer to this question through two classic cases.

Referee gist

The creditor's right to pursue the liquidation compensation liability of the shareholder belongs to the creditor's right of claim, and therefore should be subject to the limitation of action system. The limitation of action should be calculated from the date when the creditor knows or should know that the company is unable to conduct liquidation. Generally speaking, it should be calculated from the date when the creditor receives the ruling made by the people's court to terminate the compulsory liquidation procedure.

Brief Introduction to the Case

1、 Jinying Company has three shareholders, of which the major shareholder is Zhang Zhongkang, holding 85.33% of the shares, while the minor shareholders include Keyuan Company and Zhonghao Company, of which Zhonghao Company holds 2.66% of the shares. Jinying Company has not been liquidated for a long time after its business license was revoked in 2002.

2、 On September 14, 2015, CCB Gansu Branch, as a creditor, applied to Lanzhou Intermediate People's Court for compulsory liquidation of Jinying Company. On June 3, 2016, the Lanzhou Intermediate Court ruled to terminate the compulsory liquidation procedure of CCB Gansu Branch against Jinying Company.

3、 On March 23, 2017, CCB Gansu Branch filed a lawsuit with the Lanzhou Intermediate Court requesting that: 1. Zhonghao Company and Zhang Zhongkang jointly pay off the debtor Jinying Company's loan principal and interest of 7.5 million yuan that should be repaid to CCB Gansu Branch.

4、 The Lanzhou Intermediate Court's first instance decision rejected the lawsuit request of CCB Gansu Branch.

5、 CCB Gansu Branch refused to accept the first instance judgment and appealed to the Gansu High Court, requesting that the Lanzhou Intermediate Court's first instance judgment be revoked and revised.

6、 After hearing, the Gansu High Court revoked the judgment of the first instance and adjudged Zhonghao Company and Zhang Zhongkang to assume joint and several liability for the repayment of the loan principal of 3 million yuan owed by the debtor Jinying Company to Gansu Branch of China Construction Bank, but did not support the claim for debt interest during the delayed performance period.

7、 Zhonghao Company and Zhang Zhongkang both refused to accept the judgment of the second instance and applied to the Supreme Court for retrial. After review, the Supreme Court rejected their application for retrial.

Analysis of key points of adjudication

The basic facts of this case are: Jinying Company was revoked its business license as early as 2002, and its creditor, China Construction Bank Gansu Branch, did not apply to the court of first instance for compulsory liquidation until 2015. It has been more than 13 years since Jinying Company should be liquidated. After the court of first instance made a ruling to terminate the compulsory liquidation procedure on June 3, 2016, CCB Gansu Branch only filed a lawsuit in this case on March 30, 2017.

The focus of controversy in this case is: Does CCB Gansu Branch request shareholders Zhonghao Company and Zhang Zhongkang to jointly pay off the external debts of Jinying Company beyond the limitation of action?

In response, the Gansu High Court believes that:

According to Article 18 of the Interpretation (II) of the "Company Law", if a company shareholder who is a liquidation obligor neglects to perform its liquidation obligations, resulting in losses to the company's creditors, the company's creditors have the right to request the company's shareholders to assume compensation liability. The right to claim compensation is in nature a claim for creditor's rights. According to Article 1 of the "Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Limitation of Action System to the Trial of Civil Cases", the creditor's exercise of this right should be subject to the limitation of action system. According to Article 188 of the General Principles of the Civil Law of the People's Republic of China, the litigation time effect of the claim for compensation shall be calculated from the date on which the creditor knows or should know that the right has been damaged and the obligor.

According to Article 18, Paragraph 2, of the Interpretation (II) of the "Company Law", the necessary condition for creditors to claim joint and several liability to liquidate obligors is that the company becomes unable to liquidate, and there is a causal relationship between the result and the default of the liquidating obligor. "The fact that a company has its business license revoked and no property available for execution is different from the fact that the company cannot be liquidated, nor is it equivalent to the fact that creditors are aware of the facts and reasons for the inability to liquidate.". Generally, only through liquidation procedures can it be determined whether the company cannot be liquidated, whether the liquidation obligor has any fault, and whether there is a causal relationship between the omission of the liquidation obligor and the losses of creditors. Only then can creditors claim rights from the liquidation obligor.

In this case, China Construction Bank Gansu Branch applied to the court of first instance for compulsory liquidation of Jinying Company, and the court of first instance made civil rulings (2016) Gan 01 Min Accounting No. 1 and (2016) Gan 01 Min Accounting No. 2, terminating the compulsory liquidation procedure for Jinying Company, and informing China Construction Bank Gansu Branch that it could request the shareholders of Jinying Company to assume the liability for debt repayment. Upon receipt of the ruling, It is only known that the fact that the liquidation obligor is unable to perform the liquidation obligation due to its negligence in performing the liquidation obligation, and the litigation time effect of requesting the liquidation obligor to assume the liquidation compensation liability, starts from this point on. The court of first instance made a ruling to terminate compulsory liquidation on June 3, 2016. Upon receiving the ruling, CCB Gansu Branch filed a lawsuit in this case on March 30, 2017, which did not exceed the statutory limitation of action.

We agree with the above referee ideas and views of the Gansu High Court.

Summary of practical experience

As for creditors, their request for liquidation obligors to assume joint and several liability for the company's debts in accordance with the provisions of Article 18, paragraph 2, of the Interpretation (II) of the "Company Law" shall be subject to the limitation of action system.

In practice, there are mainly different viewpoints on the starting point of the limitation of action for liquidation liability: (1) The calculation shall be started from the 15th day after the occurrence of the cause for dissolution of the company; (2) Calculated from the date when the company's property is devalued, lost, or unable to be liquidated; (3) Calculated from the date of implementation of Interpretation (II) of the Company Law; (4) It shall be calculated from the date on which the creditors know or should know that the shareholders of the company are negligent in performing their liquidation obligations, resulting in the impairment, loss, or inability to liquidate the company's assets.

We believe that the limitation period for litigation in disputes over liquidation liability should be calculated from the date on which creditors know or should know that the company cannot be liquidated. Generally speaking, only when creditors apply to the court for compulsory liquidation of the company, the court makes a decision to terminate the compulsory liquidation, and the creditors receive the decision, can they know the fact that the company cannot be liquidated. Therefore, in practice, the starting point of the limitation of action for creditors to pursue shareholders' liquidation compensation liability is generally the date on which they receive the court's ruling to terminate the compulsory liquidation procedure.

Creditors should promptly apply for compulsory liquidation of the company, otherwise they may bear adverse consequences. As in this case, CCB Gansu Branch did not apply to the court for compulsory liquidation for a long time when the liquidation obligor of Jinying Company failed to carry out liquidation within the time limit. Therefore, the Gansu High Court determined that CCB Gansu Branch should bear part of the responsibility for the consequences caused by Jinying Company's inability to carry out compulsory liquidation, so it did not support the debt interest of 4.5 million yuan claimed by CCB Gansu Branch during the delayed performance period. This is also the specific embodiment of the legal proverb "the law does not protect people who sleep on their rights.". Therefore, we suggest that, under any circumstances, the obligee should exercise its rights in a timely manner to avoid unnecessary losses caused by the failure to exercise its rights in a timely manner.

Relevant laws and regulations

General Principles of the Civil Law of the People's Republic of China

"Article 188 The limitation period for filing a lawsuit to a people's court for the protection of civil rights is three years.". "If the law provides otherwise, such provisions shall prevail.".

The limitation period for litigation shall be calculated from the date on which the obligee knows or should know that the right has been damaged and the obligor. "If the law provides otherwise, such provisions shall prevail.". "However, if more than 20 years have elapsed since the date of the impairment of rights, the people's court shall not protect them. Under special circumstances, the people's court may, on the application of the obligee, decide to extend the period.".

"Article 192 Upon the expiration of the limitation of action period, the obligor may raise a defense of non performance.".

Company Law of the People's Republic of China

Article 180 The company is dissolved due to the following reasons: (1) The business term specified in the company's articles of association expires or other causes for dissolution specified in the company's articles of association occur; （2） The shareholders' meeting or shareholders' meeting resolves to dissolve; （3） Dissolution is required due to merger or division of the company; （4） The business license is revoked, ordered to close down, or revoked according to law; （5） The people's court shall dissolve the company in accordance with the provisions of Article 182 of this Law.

Article 183 If a company is dissolved due to the provisions of Items (1), (2), (4), and (5) of Article 180 of this Law, a liquidation group shall be established within 15 days of the occurrence of the cause of dissolution to begin liquidation. The liquidation group of a limited liability company is composed of shareholders, while the liquidation group of a joint stock limited company is composed of directors or personnel determined by the shareholders' meeting. "If a liquidation group is not established to carry out liquidation within the time limit, creditors may apply to the people's court to designate relevant personnel to form a liquidation group to carry out liquidation.". The people's court shall accept the application and promptly organize a liquidation team to conduct liquidation.

Article 189 The members of the liquidation team shall be loyal to their duties and fulfill their liquidation obligations according to law.

"If a member of the liquidation group causes losses to the company or its creditors due to intentional or gross negligence, he shall be liable for compensation.".

"Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Litigation Limitation System to the Trial of Civil Cases"

Article 1 A party may raise a limitation of action defense against a claim for creditor's rights, but the people's court shall not support a defense against the limitation of action against the following claims for creditor's rights: (1) the right to claim payment of the principal and interest of the deposit; （2） The right to claim the principal and interest of treasury bond, financial bonds and corporate bonds issued to unspecified objects; （3） The right to request payment of capital contributions based on the investment relationship; （4） Other claims that are not subject to the statute of limitations according to law.

Provisions of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China (II)

"Article 18 If a shareholder of a limited liability company, a director or controlling shareholder of a joint stock limited company fails to establish a liquidation group within the statutory time limit to commence liquidation, resulting in the depreciation, loss, damage, or loss of the company's assets, and the creditor claims that it is liable for compensation for the company's debts within the scope of the losses caused, the people's court shall support it in accordance with the law.".

"If a shareholder of a limited liability company, a director or controlling shareholder of a joint stock limited company is unable to liquidate due to their default in performing their obligations, resulting in the loss of the company's main assets, account books, important documents, etc., and the creditor claims that they are jointly and severally liable for the company's debts, the people's court shall support them in accordance with the law.".

"Article 21 If a shareholder of a limited liability company, a director or controlling shareholder of a joint stock limited company, or the actual controller of the company who is liable in accordance with the provisions of Article 18 and Paragraph 1 of Article 20 of these Regulations are two or more persons, and one or more of them, after assuming civil liability in accordance with the law, advocates that other persons share the responsibility according to the magnitude of their fault, the people's court shall support them in accordance with the law.".

Minutes of the Symposium of the Supreme People's Court on Hearing Cases of Compulsory Liquidation of Companies

28. In a case of compulsory liquidation in which the principal property, account books, important documents, etc. of the respondent are lost, or the whereabouts of the respondent's personnel are unknown, after explanation to the shareholders, directors, and other directly responsible personnel of the respondent or civil sanctions such as fines are taken, the liquidation is still impossible or comprehensive liquidation is not possible, and partial liquidation can be made for some of the remaining property based on existing account books, important documents, etc, "We should refer to the provisions of the Enterprise Bankruptcy Law and terminate the compulsory liquidation procedure on the grounds that it is impossible to fully liquidate the existing property after fair liquidation;"; "If there is no property, account books, or important documents, and the whereabouts of the person against whom the application is made are unknown, the compulsory liquidation procedure shall be terminated on the ground that liquidation is impossible.".

29. If a creditor applies for compulsory liquidation and the people's court decides to terminate the compulsory liquidation procedure on the grounds that it is impossible to liquidate or unable to fully liquidate, it shall be stated in the termination ruling that the creditor may, in accordance with Article 18 of the Judicial Interpretation II of the Company Law, require the shareholders, directors, actual controllers, and other liquidation obligors of the respondent to assume the liability for repayment of their debts. If a shareholder applies for compulsory liquidation and the people's court makes a decision to terminate the compulsory liquidation procedure on the grounds that it is impossible to liquidate or unable to fully liquidate, it shall be stated in the closing ruling that the shareholder can claim relevant rights from the controlling shareholder and other entities that actually control the company.

Court decisions

After examination, the Supreme People's Court stated in the "Opinions of the Court" section:

"The focus of controversy in this case is: First, whether this case has exceeded the statute of limitations..."

On the question of whether this case has exceeded the statute of limitations. Zhonghao Company and Zhang Zhongkang argue that the starting point for the limitation of action should be the time when the People's Court of Chengguan District, Lanzhou City decides to suspend the execution, and the limitation of action should be calculated no later than when the second interpretation of the Company Law formally implements the right to pursue shareholders' liquidation and compensation responsibilities. The Court believes that the relevant cases are suspended rather than terminated, and it is unclear whether Jinying Company is unable to liquidate or infringes on the creditor's rights of the CCB Provincial Branch Business Department at this time. The formal implementation of the Company Law Interpretation 2 does not mean that the CCB Provincial Branch Business Department knows or should know that Jinying Company is unable to liquidate. In this case, the CCB Provincial Branch Business Department requested Zhonghao Company and Zhang Zhongkang to assume joint and several liability for the debts of Jinying Company in accordance with the provisions of Article 18, Paragraph 2, of the Interpretation II of the Company Law. The limitation period for litigation shall be calculated from the date when the CCB Provincial Branch Business Department knew or should have known that Jinying Company was unable to carry out liquidation. CCB Provincial Branch Business Department applied to the court of first instance for compulsory liquidation of Jinying Company. The court of first instance made a ruling to terminate the compulsory liquidation on June 3, 2016. Upon receiving the ruling, CCB Provincial Branch Business Department learned the fact that Jinying Company could not be liquidated. It filed a lawsuit in this case on March 30, 2017, which did not exceed the statutory statute of limitations. "Zhonghao Company and Zhang Zhongkang cannot establish the reason for this retrial."

Case Source

Zhonghao North Paint Industry Research and Design Institute Co., Ltd. and Zhang Zhongkang's Civil Ruling on Reexamination, Review, and Trial Supervision [(2019) Supreme Court Minshen No. 3686]

Extended Reading

Similar case: Civil Ruling on Settlement Liability Dispute Appeal and Application of Zhongke Industrial Group (Holdings) Co., Ltd. [(2015) Gao Min (Shang) Shen Zi No. 03351, Beijing Higher People's Court]

In this case, According to the retrial by the Beijing High Court, "According to relevant laws and regulations, the limitation period for litigation begins when one knows or should know that one's rights have been infringed. In this case, Zhongke Hongye Company has not been liquidated, and whether the company can be liquidated is unknown to Wensheng Company as a creditor. On September 20, 2011, the Second Intermediate Court made a decision (2010)." In the civil ruling No. 08935 issued by Erzhong Minte Zi, it was determined that Zhongke Hongye Company could not be liquidated, and the liquidation procedure should be terminated. Only then can it be confirmed that Zhongke Hongye Company could not be liquidated. "Therefore, the court of first instance determined that the lawsuit filed by Wensheng Company on December 23, 2011 did not exceed the statutory limitation period and was not improper."