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I. Obligations of Liquidation Obligors and Composition of the Liquidation Team

Company liquidation refers to the act whereby a company settles its claims and debts in accordance with the law following the occurrence of statutory grounds for dissolution or the grounds for dissolution stipulated in its articles of association.

Liquidation obligor refers to the subject that, by virtue of the specific legal relationship between it and the company, bears the obligation to conduct liquidation for the company in accordance with the law upon the dissolution of the company. Article 70 of the *General Provisions of the Civil Law of the People's Republic of China* defines the concept of "liquidation obligor" for the first time, which stipulates that "Where a legal person is dissolved, except for the circumstances of merger or division, the liquidation obligor shall form a liquidation group in a timely manner to conduct liquidation. Members of the executive body or decision-making body of the legal person, such as directors and council members, are liquidation obligors."

As stipulated in Interpretation (II) of the Supreme People's Court on Issues concerning the Application of the Company Law of the People's Republic of China, a company shall form a liquidation group to conduct liquidation within 15 days from the date when the grounds for dissolution arise. The liquidation group shall notify creditors within 10 days from the date of its establishment, and make a public announcement in newspapers within 60 days. When creditors file their claims in accordance with the law, the liquidation group shall register the claims. The liquidation group shall also perform such liquidation obligations as formulating a liquidation plan, issuing a liquidation report and applying for deregistration in compliance with statutory procedures and time limits. If, after sorting out the company's assets, preparing the balance sheet and the inventory of assets, the liquidation group finds that the company's assets are insufficient to pay off all its debts, it shall file an application with the people's court for a declaration of bankruptcy in accordance with the law.

The composition of the liquidation team varies in light of different liquidation circumstances: Where a company conducts voluntary liquidation by itself, the liquidation team shall consist of its shareholders. Where creditors of the company apply to the court for the appointment of a liquidation team to conduct liquidation, in addition to the company's shareholders, directors, supervisors and senior executives, liquidation personnel may also be selected from legally established social intermediary institutions such as law firms, accounting firms and bankruptcy liquidation firms, or from personnel of the aforesaid institutions who possess relevant professional expertise and have obtained lawful practicing qualifications.

If a shareholder of a company is not a natural person but a legal person organization, the legal person organization may authorize an individual to act as its representative to participate in liquidation. For shareholders, the liquidation obligation is an inevitable obligation accompanying the right to incorporate a company and the right to surplus distribution, and is also an embodiment of the principle of equivalence of rights and obligations. Accordingly, the legal consequences arising from other individuals' participation in liquidation work as entrusted by shareholders shall also be borne by the company's shareholders.

II. Civil Liability of Liquidation Obligors

The legislative purpose of the *Company Law of China* is not only to realize the interests of shareholders, but also to provide legal protection for other subjects, so as to achieve a balance of interests among all stakeholders protected by the Company Law, and prevent company shareholders from evading responsibilities and harming the interests of other subjects such as creditors. Where company shareholders fail to properly handle the company's creditor's rights and debts through the liquidation procedure, the interests of the company's creditors will inevitably be the first to suffer damage. Therefore, the law stipulates that after grounds for dissolution arise for a company, a liquidation group shall be established in accordance with the law, to urge the liquidation group to fulfill its liquidation obligations, ensure the safe and smooth exit of the company from the market, and minimize losses to all subjects involved with the company.

Articles 11, 18, 19 and 20 of the Second Judicial Interpretation stipulate the legal liabilities to be assumed by liquidation obligors under different circumstances, including failure to perform liquidation obligations with due diligence, malicious disposal of company property, obtaining company deregistration by fraud, and deregistering the company without completing liquidation procedures. Such liabilities are specifically divided into two categories: liquidation compensation liability and joint and several repayment liability.

(I) Liquidation Compensation Liability

Three Circumstances Under Which Liquidation Compensation Liability Shall Be Borne:

1. Article 11 of the Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China stipulates that the liquidation group shall bear the obligation to notify and make public announcement of matters related to dissolution and liquidation. Where the liquidation group has intent or gross negligence in the process of liquidation, fails to perform its statutory duties of loyalty and diligence in accordance with the law and causes losses to creditors, such as failing to protect creditors' right to be informed in accordance with the law, failing to send written notification of the company's dissolution and liquidation matters to all creditors, and failing to make public announcement in influential newspapers distributed nationwide or at the place of the company's registration based on the scale of the company and its business geographic scope, which leads to the creditor's failure to file its creditor's right claim and participate in debt repayment, the liquidation group shall bear compensation liability for the losses suffered by the creditor due to its failure to file the creditor's right claim in a timely manner.

2. Paragraph 1 of Article 18 of Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China stipulates that where a liquidation obligor fails to form a liquidation group within the specified or statutory time limit, thus causing depreciation, drain, damage or destruction of the company's property, the obligor shall bear supplementary compensation liability to creditors within the scope of the reduction of the company's property arising from its tortious act (omission).

3. Article 19 of Interpretation II of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China provides that: Where any person maliciously disposes of the company's property after the dissolution of the company, or defrauds the industry and commerce registration authority into processing the cancellation registration of legal person qualification by submitting a false liquidation report without conducting liquidation pursuant to the law, and thus causes losses to creditors, the creditors shall have the right to claim that such person bear corresponding compensation liability for the debts of the company.

It follows that liquidation compensation liability is a type of tort liability, which is the legal consequence arising from the liquidation obligor's failure to perform liquidation acts or improper performance of such acts. Three constitutive elements shall be satisfied for a liquidation obligor to assume liquidation compensation liability:

Where any liquidation obligor fails to perform its notification and public announcement obligations in accordance with the law, or, in violation of legal provisions, is negligent in performing its liquidation obligations, or commits any act of malicious and intentional liquidation in violation of laws and regulations;

The aforesaid acts of the liquidation obligor have caused direct losses to the property of the company or to the creditors.

There exists a legal causal relationship between the tortious act of the liquidation obligor and the direct loss of the company's property or the direct loss sustained by the creditor.

If a liquidation obligor can adduce evidence to prove that it has performed the notification and announcement obligations in accordance with the law, or has made active efforts to fulfill its liquidation obligations, or the failure to perform liquidation obligations arises from objective causes such as intentional delay in or refusal of liquidation by shareholders who actually control the major assets, account books and documents of the company, or there is no causal connection between the destruction or loss of the company's major assets, account books and documents and its remissness in performing liquidation obligations, it shall not be held liable for liquidation compensation.

(II) Joint and Several Liability for Repayment

Pursuant to Interpretation II of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China, the following are three circumstances under which liquidation obligors shall bear joint and several liability for debt repayment.

1. Paragraph 2 of Article 18 of Interpretation II of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China stipulates that where a liquidation obligor neglects to perform its obligations, causing the loss of the company's main properties, account books, important documents and other materials and making liquidation impossible, the creditor may claim that the aforesaid obligor shall bear joint and several liability for paying off the company's debts.

Pursuant to the provisions of this Article, the precondition for a liquidation obligor to bear joint and several liability for repayment is that the liquidation obligor is remiss in performing its liquidation obligations, with the key element that such remissness reaches the extent of "rendering the company incapable of liquidation". That is, under circumstances where the liquidation obligor is remiss in timely initiating the liquidation procedure and properly preserving the company's property, account books, important documents and other materials, resulting in the loss or destruction of the property, account books, important documents and other materials necessary for the company's liquidation thus making liquidation impossible; or where the company's important accounting books, transaction documents and other materials are lost or destroyed, making it impossible to ascertain the company's assets and liabilities; or where the company's main property is lost or destroyed and its whereabouts cannot be reasonably explained; or where liquidation is impossible due to the non-standard company financial system and the resultant failure to confirm the authenticity and integrity of the company's account books, the liquidation obligor bearing relevant obligations shall bear joint and several liability for repayment of the company's debts.

2. Paragraph 1 of Article 20 of Interpretation II of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China stipulates that, where a company goes through deregistration formalities without completing liquidation in accordance with the law, which leads to the impossibility of liquidation of the company, the liquidation obligors shall bear the liability for paying off the debts of the company.

In practice, some companies whose business licenses have been revoked or that shall be dissolved and liquidated for other reasons fail to carry out liquidation, and even illegally go through deregistration formalities without lawful liquidation to evade debts. After the aforesaid illegal deregistration is completed, shareholders shall not be exempted from bearing joint and several liability for paying off the company's debts by raising defenses such as holding a small equity stake, non-participation in the operation and management of the company, or not being the actual controller of the company.

Where a company is unable to undergo liquidation in accordance with the law, as for the scope of compensation to be paid by the liquidation obligor, the author holds that such scope shall cover all losses suffered by creditors, and shall not be limited to the amount of capital contributions not paid by the liquidation obligor or the amount of capital withdrawn by the liquidation obligor. Where the inability to liquidate arises from the commingling of corporate property and the personal property of the liquidation obligor, given that the liquidation obligor violates the principle of independent legal personality of a company as stipulated in the *Company Law of the People's Republic of China*, under such circumstances, shareholders may no longer take the principle of limited liability as the rule for discharging the company's debts, but shall bear unlimited joint and several liability for the repayment of the company's debts pursuant to the principle of disregard of the independent legal personality of the company.

3. As provided in Paragraph 2 of Article 20 of the 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), where a shareholder or a third party undertakes to be liable for the debts of a company when going through deregistration formalities at the company registration authority, the people's court shall uphold the creditor's claim that the aforesaid shareholder or third party shall bear corresponding civil liability for the company's debts in accordance with the law.

In practice, where a liquidation obligor has made a commitment upon the deregistration of the company that the company's claims and debts have been fully settled, and that it shall bear liabilities for any unsettled debts, such commitment shall generally be construed as assumption of settlement liability for the company's debts. Pursuant to the principle of party autonomy, any person may undertake to assume the debts of any other person, and the law does not restrict a third party from voluntarily joining in debt assumption. The declaration of intent made by a liquidation obligor promising to bear all legal consequences arising after the deregistration of the company is of the nature of an erga omnes commitment, based on which the said obligor may be ordered to bear joint and several settlement liability for the company's debts.

(III) Procedural Issues Concerning Disputes over Liquidation Liability

(I) Starting Point for Calculation of Limitation of Action

1. On July 3, 2019, the following opinions on the limitation of action system were put forward in the third part of Item 6 *Issues Concerning Company Liquidation Liability* in the speech delivered by Liu Guixiang, Member of the Judicial Committee of the Supreme People's Court, at the National Working Conference on Civil and Commercial Trial Work of People's Courts of China: "The limitation of action for a creditor to claim that the liquidation obligor shall bear civil compensation liability on the grounds that the company fails to conduct liquidation in a timely manner or is unable to conduct liquidation, shall be calculated from the 16th day after the date when the creditor knows or should have known the occurrence of the statutory grounds for liquidation of the company."

The author holds that the aforesaid viewpoints concerning the limitation of action are open to debate. In cases where a company is unable to be liquidated, and the creditor takes Paragraph 2 of Article 18 of *Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China* as the basis of the right of claim to demand liquidation obligors bear joint and several repayment liability, the limitation of action shall be calculated from the date when the creditor knows or should have known that the company is unable to be liquidated. The commencement of the limitation of action shall be premised on the establishment of the right of claim. The prerequisite for a creditor to demand liquidation obligors to bear joint and several repayment liability is that the company is unable to be liquidated. Shareholders' negligence in performing their liquidation obligations does not necessarily infringe upon the creditor's rights, nor does it necessarily reach the extent that leads to the company's inability to be liquidated. Therefore, the 16th day from the date when the creditor knows or should have known the occurrence of the statutory liquidation grounds of the company shall not be deemed as the commencement point of the limitation of action for the creditor's right of claim to demand liquidation obligors bear joint and several repayment liability. Before the result of the company's inability to be liquidated occurs, the aforesaid right of claim of the creditor has not been established, and the creditor cannot exercise such right of claim, so the aforesaid date cannot be regarded as the commencement date of the limitation of action. Instead, the limitation of action shall commence from the date when the creditor knows or should have known that the company is unable to be liquidated, i.e., the date when the right of claim is established.

(II) Case Jurisdiction

Article 24 of Interpretation (II) of the Supreme People's Court on Several Issues Concerning the Application of the Company Law of the People's Republic of China stipulates that company liquidation cases shall be under the jurisdiction of the people's court at the domicile of the company.

All legal relationships involved in disputes over liquidation liability are fully centered on the company. The trial of all such disputes always takes the company as its core focus: not only during the liquidation period of the company, but even after the deregistration of the company, procedures including asset inventory and loss assessment are inseparable from the company. Therefore, it is more convenient for trial and conducive to ascertaining facts and clarifying liabilities for the people's court at the domicile of the company to exercise jurisdiction over disputes over liquidation liability cases.