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Analyzing the Responsibilities of Shareholder in One Person Limited Liability Company

Author of article: attorney of Win & Win Law Firm

If the property of a one person limited liability company, as the person subjected to execution, is insufficient to pay off the debts determined by the effective legal documents, and the shareholders can not prove that the property of the company is independent of their own property, the people’s court shall support the application of the executor to add the shareholder as the person subjected to execution and bear joint and several liabilities for the company’s debts.

Brief introduction to the case:
1. On May 7, 2015, company A was established with a subscribed registered capital of 5 million yuan. The period of subscribed capital contribution is up to April 1, 2020, and the mode of contribution is currency. When the company was established, Mr. Li was the only shareholder of the company and served as the legal representative.
2. From August 12, 2015 to December 23, 2016, company A remitted its business funds to Mr. Li’s personal account, with a total amount of more than 3 million yuan.
3. From June 29, 2015 to March 20, 2017, after Mr. Li remitted funds from his personal account to company a, he paid the company’s wages, social security fund, external rent and payment for goods on behalf of the company, with a total amount of more than 5 million yuan.
4. Company A is in arrears with company B, and company B requests the court to add Mr. Li as the executee.

The court of first instance held that:
According to the accounting books, financial statements, accounting vouchers and other information submitted by Mr. Li since the establishment of company a, the business funds of company a are randomly remitted to the personal account of Mr. Li, the shareholder of company A; after Mr. Li remitted the funds from his personal account to company A, he paid the company’s wages, social security fund, external rent, payment and other accounts payable; company A and Mr. Li, the shareholder of company a, were due to business confusion leads to the confusion of financial accounts, Mr. Li’s arbitrary possession of company A’s funds, and Mr. Li’s arbitrary control of company A’s funds transferred to related companies. At the end of each accounting year, the company has not prepared financial accounting report and has not been audited by an accounting firm.

The court of second instance held that:
1. The legal audit of one person limited liability company is a compulsory legal norm. Therefore, company A violates the law and fails to audit every accounting year, which can not rule out Mr. Li’s reasonable suspicion of abusing the company’s independent personality and limited liability principle.
2. According to the law, the company’s daily operating expenses should be paid and settled with the company’s own property, the company’s accounts should be used for transaction settlement in strict accordance with the requirements of accounting standards in capital transactions between companies, and the shareholders should not withdraw or misappropriate the company’s assets.

According to the Supreme Court:
Mr. Li is the original one-man shareholder of company A. the debt of company a involved in the case is formed during the period of Mr. Li’s operation as one-man shareholder, and his property is confused with that of company A. If Mr. Li can not prove that the company’s property is independent of his personal property during the period of holding shares, company B has the right to require Mr. Li to be added as the executee, and bear joint and several liability for the debts of company A.

Lawyer analysis:
Independence of corporate personality and limited liability of shareholders are the basic principles of company law. In order to strengthen the supervision and restriction of one-man company, protect the interests of the opposite party in the transaction, prevent one-man shareholders from abusing the rights of shareholders, which leads to the confusion between the company’s property and the shareholders’ personal property, and then evade debts on the basis of the company’s independent personality and limited liability. Article 62 of the company law stipulates: “one man limited liability company shall prepare financial accounting reports at the end of each accounting year, And audited by an accounting firm “, which is a compulsory legal norm.

One person limited liability company should use the company account in its daily operation, improve the independent and standardized financial management system, so as to prevent the company’s funds from being arbitrarily occupied and controlled by shareholders. The company shall prepare a financial report at the end of each accounting year, which shall be audited by an accounting firm.

The shareholders of one person limited liability company shall operate and manage the company in accordance with the law. They shall not arbitrarily control the daily operation and management of the company. They shall not illegally collect the company’s business funds from their personal private accounts. They shall not arbitrarily control the capital transactions between the company’s accounts and their personal private accounts. They shall not frequently withdraw the company’s assets on the ground of borrowing. Otherwise, the company will become an independent legal person Loss of status. Shareholders should maintain the independence of the company’s property, assist the company to establish and improve the financial management system, prevent the confusion of shareholders and company property, and avoid joint liability for the company’s debts and being added as the executee.

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