28 ALB CHINA INSOLVENCY & RESTRUCTURING GUIDE 2023 [1] Article 18 of Company Law Interpretation II: Shareholders of a limited liability company or the directors or controlling shareholders of a joint stock company fail to establish a liquidation committee within the statutory time limit to initiate liquidation, thus resulting in devaluation, loss, damage or destruction of company assets and any creditor claim for correspondent liability borne by such person(s) to compensate the debts of the company, the people's court shall support the claim according to law. Where shareholders of a limited liability company or directors and controlling shareholder of a joint stock company are negligent in the performance of their obligations, resulting in the destruction of the company’s primary assets, accounts or important documents and rendering the liquidation impossible, the people's court shall support company creditor's claim for holding the responsible personnel jointly and severally liable for the debts of the company in accordance with the law. In the event that any of the foregoing acts is committed by the actual controller of the company, the people's court shall support creditor's claim for the actual controller's civil liability for the debts of the company according to law. [2] Enterprise Bankruptcy Law Article 31: Within 1 year before the people's court accepts an application for bankruptcy, a bankruptcy administrator has the right to plead to the court to revoke any act concerning the debtor's assets: (i) Transferring the assets free of charge; (ii) Trading at an obviously unreasonable price; (iii) Providing asset guaranty to those debts without any asset guaranty; (iv) Paying off the undue debts in advance; or (v) Relinquishing one's right as a creditor. [3] Enterprise Bankruptcy Law Article 32: Within 6 months before the people's court accepts an application for bankruptcy, if a debtor that falls under Article 2(1) hereunder pays off specific creditors, the bankruptcy administrator may plead the people's court to revoke such payment unless it benefits the debtors' assets. [4] Enterprise Bankruptcy Law Article 33: The following acts involving the debtor's assets shall be deemed invalid: (i) Concealing or transferring the assets in order to avoid paying the debts; or (ii) Debt fraud or acknowledging any false debt. by the enterprise director, supervisor or senior manger whom takes advantage of his managerial power. According to Article 24 of the Judicial Interpretation of Enterprise Bankruptcy Law II (hereinafter "Bankruptcy Law Interpretation II", "improper income" refers to the performance bonus, salary (while employees' wages remain largely unpaid) and other income obtained by the directors, supervisors and senior managers of an obviously insolvent enterprise by virtue of their managerial powers. The bankruptcy administrator shall, upon discovery of such "improper income" or enterprise assets misappropriated by the directors, supervisors and senior managers, promptly recover the said property; the directors, supervisors and senior managers involved shall return such improper income and misappropriated assets. 6. Legal Liability for Defective Capital Contribution and Withdrawal of Capital Contribution Article 35 of the Enterprise Bankruptcy Law provides that when an enterprise enters into bankruptcy proceedings, shareholders' obligation to contribute capital becomes due irrespective of preexisting time limit. Furthermore, reading together with Bankruptcy Law Interpretation II Article 22, it can be inferred that, with respect to shareholders' failure to make capital contribution or withdrawal of contributed capital, the administrator may, on behalf of the bankruptcy enterprise, to claim for the unpaid portion or demand a return of the sum withdrawn against its shareholders, corporate promoters, directors and senior managers responsible for overseeing the shareholders' capital contribution, or other shareholders, directors, senior managers and actual controllers who abet the defaulting party, and the amount thus collected will be included as the debtor's property. No statute of limitations applies to such claim. After taking control of a bankrupt enterprise, the administrator shall verify whether capital contributions are paid in full and whether there is any withdrawal thereof, and shall make a claim promptly with any problems identified. Other shareholders, actual controllers, directors and senior managers of the enterprise shall strictly observe their fiduciary duty and are otherwise liable for default payment or unlawful withdrawal of capital contribution. III. Lawyer’s Advice In bankruptcy proceedings, directors, supervisors and senior managers shall fulfill the foregoing legal obligations, and those who fail to do so will bear the risk of being held liable for proportional financial compensation. Accordingly, directors, supervisors and senior managers should continue honoring their fiduciary duty to ensure good faith management and optimal protection of enterprise assets and interests, even in the event of corporate bankruptcy.
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