Whether legal representatives could shake off the restriction of high-level consumption?
Company B sued Company A regarding a contract dispute, and won the lawsuit. A failed to perform the effective judgment, so B applied for enforcement. As W is the legal representative of A, B applied the court for adopting measures on restriction of high-level consumption on W. In 2019, A changed its legal representative from W to Z, and then W applied to the court for lifting the order of such restriction. (See (2020) Yue 01 Zhifu No. 349)
It can be seen from the above case that in some cities, a legal representative adopted with such restriction could replace himself via the system of commercial registration. However, after the replacement, whether the new legal representative would be adopted with such restriction, or whether the original legal representative could shake off such restriction?
Paragraph 2 of Article 3 of the “Several Provisions of the Supreme People’s Court on Restriction of High-level Consumption of Enforcees” stipulates that where an enforcee is an organization and subject to restriction of high-level consumption, the enforcee and its legal representative, key person-in-charge, direct accountable personnel who have an influence over debt performance, and actual controlling person shall be prohibited from committing any of the acts stipulated in the preceding paragraph of this Article. (Note: Those acts refer to the 9 categories of acts which are high-level consumption and consumption not essential for living and working necessities.) Therefore, it is undoubtedly to adopt such restriction to the new legal representative, but it does not mean that the original legal representative could shake off such restriction directly.
Article 17 of the “Opinions of the Supreme People’s Court on Further Strengthening the Concept of Bona Fide and Civilized Enforcement in Enforcement Practices” stipulates that, “after an entity subject to enforcement is subject to consumption restriction, if its legal representative or key person in charge indeed needs to be changed due to operation and management needs, and the original legal representative or key person in charge applies for lifting the consumption restriction measures against him/herself, evidence shall be provided to prove that he/she is not the actual controller of the entity or a person directly liable for affecting the performance of the debts. If the change is confirmed to be true after examination, the people’s court shall grant permission, and take consumption restriction measures against the changed legal representative or key person in charge in accordance with the law. “According to the above provision, the original legal representative shall bear the burden of proof if he applies for lifting such restriction.
In judicial practice, there is a large gap in the application of the above provision by different courts. We take the cases in Beijing, Shanghai and Guangzhou for example.
Generally speaking, the courts in Beijing are relatively “friendly” to the original legal representative. For example, the Beijing High People’s Court held that S who no longer serves as the legal representative of Company LS, so he is no longer the object of such restriction, so relevant restriction measures could be lifted. (See (2019) Jing Zhi Fu No. 210, (2019) Jing Zhi Fu No. 129, etc.). The Beijing Intermediate People’s Court holds the same view that the restriction measures applied to the original legal representative could be lifted after the replacement of the legal representative. (Typical cases such as: (2020) Jing 01 Zhi Yi No. 32, (2020) Jing 02 Zhi Yi No. 206, (2020) Jing 03 Zhi Fu No. 107, etc.).
The courts in Shanghai are relatively stricter. The main opinion is that the original legal representative shall prove that he has not participated in daily operation and is not the actual controller. The key reason could be found in the statement of the court in a typical case. The Shanghai Intermediate People’s Court points out that it is reasonable to adopt restriction measures to the original legal representative during the formation of the debt and the litigation process, if he hopes to shake off such restriction, he shall provide evidence to prove that such replacement is the needs for normal business activities (See (2021) Hu 01 Zhi Fu No. 348).
The courts in Guangdong are slightly different. The main opinion is that due to the replacement, normally the restriction measures adopted to the original legal representative shall be lifted, however, the original legal representative who directly liable for affecting the performance of the debts, or the actual controller of the entity, shall be the exception. (See (2019) Yue Zhi Fu No. 946).
Therefore, if a creditor encounters such situation, it is recommended to search the local judicial opinion and requirements, based on which it could take corresponding actions.
Finally, it should be noted that different courts may have different opinions on the determination of the original legal representative. Some courts held that the original legal representative refers to the person who is the legal representative when the involved contract is executed (such as, (2019) Hu 01 Zhi Fu No. 136, (2019) Yue Zhi Fu No. 152), while some courts held that the original legal representative refers to the person who is the legal representative when the dispute is brought to trial ((2019) Su Zhi Fu No. 61).