How to protect the plaintiff’s interests when the defendant changes its shareholder or legal representative during the litigation?
Company Y failed to repay its debts, Company T had to sue Y. Chen was a shareholder of Y, and he subscribed capital of Y amount to CNY300, 000, which had not yet been paid. During the litigation, Chen transferred his equity to Company H. After the judgment came into effect, Y refused to perform the judgment, T applied for the compulsory execution, and found that Y had no property available for execution, in addition, Y’s shareholder H had a lot of debts and was listed as a dishonest party to be executed. How to protect T, the winning party’s interests? In fact, T still has a chance.
Article 19 of the “Regulations of the Supreme People’s Court on Several Issues Concerning Changing and Adding Parties during Enforcement of Civil Cases” stipulates that, “when a company, as a party subject to enforcement, cannot pay off with its property the debts specified in effective legal documents, and one of its shareholder transfers his shares without performing contribution obligations according to law, if the petitioner applies to change the party subject to enforcement, or add such original shareholder or the promoter which is jointly and severally liable for such contribution according to the company law as a party subject to enforcement to be liable within the scope of failed payment, the court shall uphold the application.” Therefore, literally speaking, the shareholder Chen transferred the equity without fulfilling the obligation of capital contribution, then T could apply for adding Chen as the person subject to execution.
However the practical rules are not as clear as the above provision. Take two typical cases for example. In the case (2021) Jing 02 Min Zhong No. 10256, the Beijing No. 2 Intermediate People’s Court held that, “the shareholders could make an agreement on the subscription period for capital contribution, and such period is the expectation interests of shareholders which shall be protected by law, so if the original shareholder transferred the equity before the expiration of such period, it shall not be deemed as the original shareholder failed to fulfill the obligation of capital contribution, which means the original shareholder should not be added as the person subject to execution.” In the case (2022) Su 02 Zhi Yi No. 1, the Wuxi Intermediate People’s Court pointed out that, “adding a third person as the person to be executed during the execution of the case is an expansion of the res judicata of the effective legal document, and is related to the substantive rights of the person to be added, which shall meet the corresponding statutory conditions as prescribed in relevant laws and judicial interpretations strictly. The original shareholder transferred the equity before the expiration of the subscription period for capital contribution, and the debt involved has not yet occurred, so adding him as the person subject to execution is inconsistent with the law.” In view of the two cases, directly adding the original shareholder as the person subject to execution would be difficult to obtain the approval of the court under two circumstances, which are the subscription period for capital contribution has not yet been due, and the debt involved has not yet occurred. Because for those circumstances, the court would held that the debt has nothing to do with the original shareholder.
However, in the case in the beginning, the court supported T for applying to add the original shareholder as the person subject to execution. (See (2021) Yue 01 Min Zhong No. 27553) The reason is that the involved debt had occurred and T had sued Y before Chen transferred his equity, which means Chen knew or should have known that Y might have debts that had not been paid off and had been applied for execution in a case, but Chen still transferred his equity without paid off his capital contribution, and the transferee H was unable to pay off those capital contribution, which made Y could not pay off the debt, so the court determined that Chen’s obligation to make his capital contribution should be accelerated, and Chen shall be liable for the debts of Y within the scope of his capital contribution. It can be seen that when an executor can prove that the original shareholder has maliciously colluded with the transfer, deliberately concealed important facts, abused the shareholder’s capital contribution period, made untrue capital contributions, and so on, the obligation of capital contribution can be accelerated, and the original shareholder shall bear the corresponding liabilities
In practice, it is very common that in order to avoid being listed as a restricted high consumption person, in some cases, if the defendant predicted that it would lose the lawsuit and could not pay off the debt or compensation, it may change its legal reprehensive during the litigation.
Regarding this, there is a relatively unified practical opinion in judicial practice. In the case (2017) Zui Gao Fa Zhi Fu No.73, the Supreme People’s Court pointed out that, “if the defendant changes its legal representative after the enforcement basis is made and before the case is filed for enforcement, in order to ensure the enforcement and protect the legitimate rights and interests of creditors, the original legal representative can be determined as the main responsible person who shall be undertake relevant responsibilities, such as being listed as a restricted high consumption person.” Several local courts have released rules regarding such circumstance. Such as, the “Notice on Strengthening Property Investigations in Cases where the Company is the Person Subject to Execution” issued by the Jiangsu High People’s Court in 2018 clearly stated that, “the legal representative when the debt occurred must be present in the court and accept property investigation”. Therefore, normally the court would strictly review the situation of the legal representative at the time of the occurrence of the debt involved, and identify whether such change is justified. In other words, from the perspective of the defendant, to change its legal representative during litigation may not eliminate the liabilities of the original legal representative. From the perspective of the plaintiff, it could take another preventive measure based on the facts of individual cases, according to paragraph 1 of Article 103 of the “Civil Procedure Law” stipulates that, “for cases in which the action of a party to the lawsuit or any other reason causes difficulty in enforcement of a judgment or causes other harm to the litigants, a People’s Court may, pursuant to an application by a counterparty litigant, rule on preservation of its property or order the counterparty to undertake certain acts or prohibit the counterparty to undertake certain acts; ……”Therefore, when it is necessary, the plaintiff can apply for conduct preservation during the litigation, and apply for prohibiting the defendant from changing its legal representative. However, the plaintiff should provide necessary and sufficient evidence in this regard.