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Case Introduction:

Where a dispute over a sales contract arose between a creditor and a debtor company, the people's court rendered a judgment ruling that the debtor shall assume the liability for payment. However, as the debtor company was insolvent and unable to perform the obligations specified in the judgment, the creditor filed an application for compulsory execution, but no corresponding property was available for execution after the proceeding was initiated. Upon inquiry, the debtor company has two shareholders in total, neither of whom has made paid-in capital contributions in full. One of the shareholders transferred its equity interest to the other shareholder after receiving the judgment. Accordingly, the creditor filed a lawsuit against the two shareholders under the cause of action of *Dispute over Liability for Shareholders' Harm to the Interests of Company Creditors*, claiming that the maturity of the shareholders' capital contributions be accelerated, and that the two shareholders shall bear supplementary compensation liability for the debts of the debtor company. The people's court at the place of domicile of the two defendants (shareholders) is selected as the competent court with jurisdiction.

However, upon trial, a people's court in Shanghai ruled that pursuant to the latest adjudication standards: where an action is brought solely for the accelerated maturity of shareholders' capital contribution obligations, the cause of action shall be *Disputes over Shareholders' Capital Contribution*. Previously, such claims could be filed under the cause of action of *Disputes over Liability for Shareholders' Damage to Interests of Company Creditors*, but the latest adjudication standards now specify Disputes over Shareholders' Capital Contribution as the applicable cause of action. For the time being, there still exist certain discrepancies in adjudication standards among courts across different regions in China, and the specific requirements of the corresponding local court shall prevail. Therefore, where the cause of action is Disputes over Shareholders' Capital Contribution, the court with jurisdiction shall be the people's court located at the domicile of the debtor company.

< cellpadding="0" cellspacing="0">In light of the aforesaid cases, the author finds that there exist certain disputes in judicial practice over the two causes of action, i.e., Disputes over Shareholders' Capital Contribution and Disputes over Liability for Shareholders' Damage to Creditors' Interests, and the two causes of action are difficult to distinguish under certain circumstances. Accordingly, the author has conducted retrieval and research on a large number of laws, regulations and judicial cases, and sorted out and differentiated the application of the aforesaid two causes of action.

I. Dispute over Liability for Shareholders' Damage to Creditors' Interests

(I) Concept

Dispute over Liability for Shareholders' Infringement of Interests of Company Creditors refers to a civil dispute in which a company shareholder abuses the independent legal person status of the company and the limited liability of shareholders to evade debts, causes severe damage to the interests of the company's creditors, and shall be held liable for the company's debts accordingly.

As can be seen from the above concepts, the basis for the application of disputes over liability for shareholders' damage to creditors' interests is the "system of disregard of corporate personality". On the premise of recognizing that a company has independent legal personality, this system disregards the corporate personality and shareholders' limited liability in specific legal relationships, and orders shareholders who abuse the independent status of the company to bear joint and several liability for the repayment of the company's debts, so as to realize the protection of creditors' interests.

(II) Disregard of Corporate Personality

Disregard of corporate personality, also known as "piercing the corporate veil", is currently subject to the following two prevailing views in judicial practice:

Vertical Disregard of Corporate Personality

Vertical disregard of corporate personality refers to the circumstance where a shareholder abuses the independent status of a legal person and the limited liability of shareholders, thereby seriously harming the interests of creditors, and the shareholder shall bear joint and several liability for the company's debts. It is the most common form of disregard of corporate personality in judicial practice.

2. Horizontal Disregard of Corporate Personality

Horizontal disregard of corporate personality refers to the circumstance where a controlling shareholder controls multiple subsidiaries or affiliated companies, and abuses its controlling power to give rise to unclear property boundaries, commingling of finances and mutual transfer of interests among the aforesaid subsidiaries or affiliated companies, which thus deprives such entities of their independent corporate personality and reduces them to tools for the controlling shareholder to evade debts, conduct illegal business operations, or even commit illegal and criminal offenses. Under the aforesaid circumstance, all relevant companies shall bear joint and several liability, the legal basis for which is as follows:

Article 4 of the *Minutes of the Ninth National Working Conference on Civil and Commercial Adjudication* defines the disregard of corporate legal personality as follows: Disregarding the independent legal personality of a company and holding shareholders who abuse the independent status of the company as a legal person and the limited liability of shareholders jointly and severally liable for the company's debts is an exception to the principle of limited liability of shareholders. However, the application of the rule that shareholders who abuse the independent status of the company as a legal person and the limited liability of shareholders bear joint and several liability for the company's debts is subject to strict requirements, and three application criteria for the disregard of corporate personality are explicitly stipulated therein:

(1) The relevant provisions shall apply only where a shareholder commits acts of abusing the independent legal person status of the company and the limited liability of shareholders, and such acts have seriously harmed the interests of the company's creditors. The aforesaid harm to the interests of creditors mainly refers to the scenario where the shareholder's abuse of rights renders the company's property insufficient to discharge the claims of the company's creditors.

(2) Only shareholders who have committed acts of abusing the independent status of a legal person and the limited liability of shareholders shall bear joint and several liability for the repayment of the company's debts, while other shareholders shall not bear such liability.

(3) The disregard of corporate personality does not negate the legal person status of a company comprehensively, thoroughly and permanently. Instead, it only breaks through the general rule that shareholders bear no liability for the company's debts in specific cases based on specific legal facts and legal relationships, and exceptionally orders them to bear joint and several liability. The res judicata of a judgment denying corporate personality in an individual case only binds all parties to the relevant litigation, does not automatically apply to other litigations involving the company, and does not affect the continued existence of the company's independent legal person status.

(III) Circumstances involving disregard of corporate personality or abuse by a company's shareholders of the company's independent status as a legal person and the limited liability of shareholders

Confusion of Personalities

Pursuant to the Minutes of the Ninth National Conference on Civil and Commercial Trial Work of the People's Courts of China, the most fundamental criterion for determining whether there exists commingling of the corporate personality of a company and the personality of its shareholders is whether the company has independent will and independent property, and the primary manifestation of such commingling is whether the property of the company and that of its shareholders are commingled and indistinguishable.

Where confusion of corporate personality exists, the following forms of commingling generally occur concurrently: commingling of the business operations of the company and its shareholders; commingling of the personnel of the company and its shareholders, especially commingling of financial personnel; commingling of the domiciles of the company and its shareholders. In judicial practice, the following factors shall be considered comprehensively when determining whether confusion of corporate personality is constituted:

(1) Where a shareholder uses the funds or property of the company without compensation, and no record thereof is made in the financial accounts;

(2) Where a shareholder uses the company's funds to repay its own debts, or makes the company's funds available to an affiliated company for gratuitous use, without keeping corresponding financial records thereof;

(3) Where there is no separation between the account books of a company and those of its shareholders, which renders it impossible to distinguish the property of the company from the property of its shareholders;

(4) Where no distinction is drawn between a shareholder's personal income and the company's profits, resulting in ambiguity over the respective interests of the two parties;

(5) Where the property of the company is registered under the name of a shareholder and is possessed and used by the said shareholder;

(6) Other circumstances of confusion of personality.

Except for one-person limited liability companies, the burden of proof for establishing confusion of corporate personality shall be borne by the plaintiff. When filing a lawsuit, the plaintiff shall provide prima facie evidence proving that the company's shareholders have committed acts of abusing the independent legal person status of the company and the limited liability of shareholders.

Other Types of Confusion: The primary manifestation of corporate personality confusion is property confusion. Property confusion is usually accompanied by corporate personality confusion, and there may also exist other forms of confusion including personnel confusion (companies involved in the confusion conduct cross-shareholding, share the same legal representative, directors, supervisors and senior executives, as well as financial staff and business staff, which is presented as "one team, two brands"), business confusion (the principal businesses are identical or similar, the business scopes are inclusive, and there exist circumstances such as cross-invoicing, cross-collection and payment, cross-delivery and receipt of goods, bundled publicity, etc.), and domicile confusion (referring to the same registered address or business address), among others. However, property confusion remains the primary criterion for the determination of corporate personality confusion, and other forms of confusion serve as corroboration for such determination.

2. Excessive Domination and Control

Excessive domination and control refers to the circumstance where the controlling shareholder of a company exercises excessive domination and control over the company, manipulates the company's decision-making process, causes the company to completely lose its independence and be reduced to a tool or shell of the controlling shareholder. Where a shareholder abuses its controlling rights, rendering the company no longer possessed of independent will and independent property and thus seriously harming the interests of the company's creditors, the corporate personality shall be disregarded, and the shareholder abusing such controlling rights shall bear joint and several liability for the debts of the company. Article 11 of the *Minutes of the National Conference on Civil and Commercial Trial Work of the People's Courts* lists common circumstances of shareholders' abuse of controlling rights:

(1) Where a transfer of interests is conducted between a parent company and its subsidiaries, or between subsidiaries;

(2) Where transactions are conducted between parent and subsidiary companies, or between subsidiaries, the proceeds accrue to one party while the losses are borne by another party;

(3) Siphoning off funds from the original company first, and then incorporating a company with the same or similar business purposes to evade the debts of the original company;

(4) Dissolving the company first, and then incorporating a new company with the premises, equipment and personnel of the original company for the same or similar business purposes, so as to evade the debts of the original company;

(5) Other circumstances of excessive domination and control.

The aforesaid shareholders' abuse of controlling rights is generally manifested as horizontal disregard of corporate personality. In judicial practice, it is relatively difficult to prove such horizontal disregard of corporate personality, as controlling shareholders usually do not directly act as registered shareholders of subsidiaries or affiliated companies. Instead, they control other companies through relatives, classmates, comrades-in-arms and other trusted personnel on their behalf. Furthermore, evidence concerning unclear property boundaries, financial commingling and mutual interest transfers between affiliated companies is entirely in the possession of the defendant rather than the creditor. Therefore, it is rather difficult for creditors to adduce evidence to support a claim of horizontal disregard of corporate personality.

3. Significantly Inadequate Capital

Significant Inadequacy of Capital refers to the scenario where, during the operation period after the incorporation of a company, the amount of capital actually contributed by shareholders to the company is obviously incompatible with the potential risks inherent in the company's business operations. Where a shareholder conducts business beyond its capacity with minimal capital, it demonstrates that the shareholder has no bona fide intent to operate the company. In essence, this constitutes a malicious act of abusing the independent corporate personality and the limited liability of shareholders to transfer investment risks to creditors.

4. The shareholder of a one-person limited liability company fails to prove that the property of the company is independent of the shareholder's own property.

Paragraph 3 of Article 23 of the Company Law of China (2023 Amendment) stipulates that: "Where a company has only one shareholder, if the shareholder fails to prove that the property of the company is independent of the shareholder's own property, the shareholder shall bear joint and several liability for the debts of the company." Accordingly, if the debtor company is a one-person company, the reversal of burden of proof shall apply, that is, the shareholder of the debtor company shall provide evidence to prove that its property is independent of that of the company. If the shareholder fails to provide such evidence or the evidence provided is insufficient to prove the aforesaid fact, the shareholder shall bear corresponding liability for the debts of the company.

Note: The standard of proof for the sole shareholder of a one-person company to prove that its property is independent of the company's property is very high in judicial practice. Due to the limited length of this article, the author will write a separate article to elaborate in detail on the burden of proof of shareholders of one-person companies.

5. Failure of Shareholders to Perform Liquidation Obligations Pursuant to the Law

"Negligence in performing obligations" refers to the passive act of a shareholder of a limited liability company who, after the occurrence of statutory grounds for liquidation and when capable of performing liquidation obligations, intentionally delays or refuses to perform such obligations, or leads to the impossibility of liquidation due to his negligence. Where a shareholder adduces evidence to prove that he has taken active measures to perform liquidation obligations, or a minority shareholder adduces evidence to prove that he is neither a member of the company's board of directors or board of supervisors, nor has appointed any person to serve as a member of the aforesaid organs, and has never participated in the operation and management of the company, and claims that he shall not be held jointly and severally liable for the repayment of the company's debts on the ground that his act does not constitute "negligence in performing obligations", the people's court shall uphold such claim in accordance with the law.

IV. Jurisdiction

Disputes over liability for damage to a company's creditors' interests by shareholders are tort disputes. Therefore, the competent court shall be the court at the place where the tort is committed or the domicile of the defendant. The place where a shareholder fails to make due capital contributions (i.e., the domicile of the company) may be recognized as the place where the tortious act is committed.

In Case (2023) Zui Gao Fa Min Xia No. 68, the Supreme People's Court held that: The creditor claims that the former shareholder of the company bears the obligation of making capital contributions to the company, and the shareholder's failure to truthfully fulfill the capital contribution obligation has harmed the interests of the company's creditors. Meanwhile, as the transferee of equity interests, the current shareholder shall bear supplementary compensation liability within the scope of the principal and interest of the former shareholder's unpaid capital contributions. Upon analysis of the aforesaid litigation claims, the creditor essentially asserts that the shareholder's failure to fulfill the due capital contribution obligation has infringed upon its lawful rights and interests. Therefore, the place where the shareholder shall have made the capital contribution but failed to do so, namely the domicile of the company, may be determined as the place of commission of the tort. (Note: It can also be seen from this case that there is no clear distinction between disputes over shareholders' capital contribution and disputes over liability of shareholders for impairing the interests of the company's creditors. In accordance with the views of the Shanghai court stated at the beginning of this article, this case shall be deemed as a dispute over shareholders' capital contribution, rather than a dispute over liability of shareholders for impairing the interests of the company's creditors.)

II. Disputes over Shareholders' Capital Contributions

(I) Concept

Disputes over Shareholders' Capital Contributions refer to disputes arising from the failure of a company's shareholders to perform their capital contribution obligations in accordance with the provisions of laws, the company's articles of association or other agreements either at the stage of the company's establishment or after the company is established.

Capital contribution is the fundamental obligation of shareholders to the company, and also the basis for the formation of corporate property. If a shareholder fails to make capital contributions as required, or commits such acts as false capital contribution, insufficient capital contribution, or unlawful withdrawal of capital contribution, it may trigger capital contribution disputes and litigations between the company and its shareholders, among shareholders, or between shareholders and their creditors. The shareholder may be sued and bear such liabilities for breach of contract as specific performance and compensation for damages in accordance with the law. In view of the significance of the capital contribution system in the entire corporate system, the Company Law of China stipulates the amount, time limit, form and relevant liabilities of shareholders' capital contributions, and also provides for the liability of shareholders or promoters who fail to perform their obligations to make up the difference in capital contributions, as well as the joint and several capital subscription liability of other shareholders or promoters. In addition, where losses are caused to the company or other capital contributors who have performed their obligations due to breach of the capital contribution obligation, the defaulting party shall also bear the liability for compensation for damages.

(II) Common Scenarios of Disputes over Shareholders' Capital Contributions

1. False Capital Contribution False capital contribution refers to the circumstance where a shareholder subscribes for capital contribution but fails to actually make the contribution, and obtains the equity of the company. Examples include: obtaining a capital verification report by fraud via false bank deposit slips and account statements with no actual cash flow; obtaining a capital verification report by fraud via false formalities for in-kind capital contribution; making capital contribution in the form of physical assets, intellectual property rights or land use rights but failing to complete the property right transfer formalities, etc.

2. Insufficient Capital Contribution Insufficient capital contribution refers to the circumstance where a shareholder only performs part of its capital contribution obligations or fails to make up the capital contribution within the agreed time limit. For example, only part of the capital contribution obligation for monetary contribution is performed; the actual value of in-kind contributions, intellectual property rights, or land use rights contributed as capital is significantly lower than the value stipulated in the company's articles of association.

3. Overdue Capital Contribution. Overdue capital contribution refers to the circumstance where a shareholder fails to pay the full amount of its capital contribution within the stipulated time limit.

4. Accelerated Maturity of Capital Contributions. Article 54 of the *Company Law of the People's Republic of China (2023 Revision)* stipulates: "Where a company is unable to pay off its due debts, the company or the creditor whose claim has become due shall have the right to require the shareholder who has subscribed to capital contributions but whose capital contribution term has not expired to pay such capital contributions in advance." In this regard, how should "being unable to pay off due debts" be interpreted?

Article 6 of the *Minutes of the National Conference on Civil and Commercial Trial Work of the People's Courts* specifies the definition of "inability to pay due debts", which mainly covers the following circumstances: in cases where a company is the person subject to enforcement, the people's court has exhausted all enforcement measures and found no property available for enforcement, and the company has met the grounds for bankruptcy but fails to file a bankruptcy application; or after the company's debts are incurred, the shareholders' meeting or the general shareholders' meeting extends the time limit for shareholders' capital contributions via a resolution or other means.

5. Surreptitious Withdrawal of Capital Contributions. Surreptitious withdrawal of capital contributions refers to the act whereby a shareholder unlawfully takes back the capital contributions he or she has paid after the incorporation of the company, the specific circumstances of which include: (1) Distributing profits by preparing false financial and accounting statements to overstate profits; (2) Transferring out his or her capital contributions by fabricating a creditor-debtor relationship; (3) Transferring out the capital contributions via related-party transactions; (4) Other acts of withdrawing capital contributions without complying with statutory procedures.

(III) Jurisdiction

Pursuant to the provisions of Article 3 of the *Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China*, actions initiated for disputes over shareholders' capital contribution shall, in principle, be subject to the jurisdiction of the people's court at the place of the company's domicile.

III. Specific Application of Disputes over Shareholders' Capital Contribution and Disputes over Liability for Shareholders' Damage to Creditors' Interests

Based on the foregoing analysis of the concepts and applicable circumstances of the two different causes of action, the application of laws in respect of the two causes of action can be summarized as follows:

The applicable basis for Disputes over Liability for Shareholders' Damage to Creditors' Interests is the "system of disregard of the legal person's personality", which highlights that shareholders' abuse of the independent status of legal persons and shareholders' limited liability "damages" the interests of creditors. By contrast, Disputes over Shareholders' Capital Contributions focus on the "capital contribution system", which does not emphasize the "damage" to creditors' interests caused by shareholders. Instead, any breach of the shareholders' capital contribution obligation may trigger such disputes.

As a creditor, its legitimate rights and interests can be safeguarded no matter which cause of action is selected. However, the most direct consequence of incorrect application of the cause of action is the erroneous choice of jurisdiction. For example, where the cause of action of a case shall be Disputes over Capital Contributions by Shareholders, only the people's court at the domicile of the company has jurisdiction. If the creditor improperly chooses the cause of action of Disputes over Liability for Shareholders' Impairment of the Interests of the Company's Creditors, both the domicile of the defendant and the domicile of the company have jurisdiction. If the case is filed at the domicile of the defendant, it may be transferred to the people's court at the domicile of the company due to the erroneous choice of jurisdiction caused by the wrong cause of action.

Case: In the Civil Ruling (2024) Hu 0114 Min Chu No. 5865, the plaintiff selected a corresponding cause of action. The Jiading District People's Court held upon examination that, where a shareholder fails to make capital contributions as prescribed, or commits false capital contribution, insufficient capital contribution, withdrawal of capital contribution and other circumstances, capital contribution disputes and litigation may arise between the company and its shareholders, among shareholders, or between shareholders and creditors. The relevant shareholder may be sued and assume liability for breach of contract such as specific performance and compensation for damages in accordance with the law. Common shareholder capital contribution disputes in the trial of company-related cases include disputes over false capital contribution, disputes over insufficient capital contribution, disputes over overdue capital contribution, disputes over accelerated maturity of capital contribution obligations, and disputes over withdrawal of capital contribution. In light of the plaintiff's litigation claims and the facts of the present case, this case falls into the category of disputes over insufficient capital contribution. Therefore, at the jurisdiction examination stage of this case, the cause of action shall be determined as shareholder capital contribution dispute. Pursuant to the provisions of the law, a lawsuit filed for shareholder capital contribution dispute shall be under the jurisdiction of the people's court at the place where the company is domiciled. The registered domicile of XX Company 2 involved in this case is located in Songjiang District, Shanghai, thus this case shall be under the jurisdiction of the Songjiang District People's Court of Shanghai.

IV. Conclusion

Cases involving the Company Law usually involve complex legal relationships, pose great difficulties in evidence production, and are governed by relatively abstract and obscure relevant legal provisions. Parties confronted with issues related to company law are advised to consult a lawyer, and select the cause of action and the competent court after a full analysis of the case facts. Where it is difficult to distinguish between disputes over shareholders' capital contributions and disputes over liability of shareholders for impairing the interests of company creditors, it is recommended to fully consider which of the application bases of the two causes of action is more compatible with the case facts, and then check the matching degree of specific manifestations on the premise of a compatible application basis. Only in this way can the cause of action be correctly selected to ensure the smooth progress of the case.

Special Acknowledgements:

Prior to drafting this article, I held in-depth communication with my good friend, Lawyer Wang Zhengqian, and sorted out my thoughts thoroughly. I later communicated with Lawyer Wu Aijun, which further expanded my line of thinking. The two lawyers have made significant contributions to the presentation of this article, and I hereby extend my special thanks to these two good friends who are also practicing lawyers.