[Summary of the Judgment]

Article 58, Paragraph 2 of the Company Law stipulates: “For the purposes of this Law, a single‑member limited liability company refers to a limited liability company with only one natural person shareholder or one corporate shareholder.” A company established with contributions from both spouses, The registered capital is derived from the couple’s joint property, and all of the company’s equity is held in common ownership by both spouses. In other words, the entire equity of the company originates from a single property right and is jointly owned and controlled by one single owner; the equity holders thus share identical interests and constitute a unified, indivisible entity. In this case, the company and… Single-member limited liability company They exhibit a high degree of similarity in terms of their corporate structure and the application of legal norms, effectively constituting a one-person limited liability company. Accordingly, in line with Article 63 of the Company Law, the burden of proof that the company’s assets are separate from the personal assets of the shareholders should be allocated to the spouses as shareholders.

Supreme People’s Court of the People’s Republic of China
 

Civil Judgment

(2019) Supreme People’s Court Min Re No. 372

Applicant for retrial (defendant in the first instance, respondent in the second instance): Xiong Shaoping, male

Applicant for retrial (defendant in the first instance, respondent in the second instance): Shen Xiaoxia, female

Respondent (Plaintiff in the first instance, Appellant in the second instance): Wuhan Metersbonwe Garment Co., Ltd.

Respondent (defendant in the first instance, respondent in the second instance): Jiangxi Qingmanrui Apparel Co., Ltd.

Xiong Shaoping and Shen Xiaoxia’s application for retrial: 1. Set aside the civil judgment (2018) E Min Zhong No. 1270 rendered by the Hubei Provincial Higher People’s Court; 2. Render a new judgment in accordance with the law, dismissing Miao Ren Company’s claims in the first instance or remanding the case for retrial; 3. Order Miao Ren Company to bear the litigation costs of the first instance, the second instance, and the retrial proceedings.

Facts and Grounds: (1) The second-instance court erred in characterizing Qingmanrui Company as a single‑member limited liability company.
 

1. The two shareholders, Xiong Shaoping and Shen Xiaoxia, are married to each other; this fact cannot serve as the basis for characterizing Qingmanrui Company as a single‑member limited liability company. Article 57 of the Company Law of the People’s Republic of China (hereinafter “the Company Law”) provides that a single‑member limited liability company refers to a limited liability company with only one natural person shareholder or one legal person shareholder. Accordingly, whether a company qualifies as a single‑member limited liability company is determined by the number of its natural person or legal person shareholders. Since Qingmanrui Company has two natural person shareholders—Xiong Shaoping and Shen Xiaoxia—it cannot be deemed a single‑member limited liability company. Neither current laws nor judicial interpretations treat shareholders who are spouses as a single natural person shareholder, nor do they stipulate that a limited liability company established jointly by a married couple should be regarded as a single‑member limited liability company. Therefore, the second instance court’s determination that Qingmanrui Company is a single‑member limited liability company lacks legal basis. 2. At the time of registering Qingmanrui Company, Xiong Shaoping and Shen Xiaoxia did not file any certificate or agreement regarding the division of their property; this circumstance cannot be used as grounds to deem Qingmanrui Company a single‑member limited liability company, nor can it serve as a basis for holding Xiong Shaoping and Shen Xiaoxia jointly and severally liable. The criterion for determining a single‑member limited liability company is the number of its shareholders, not the source of its registered capital or the allocation of equity interests. Regardless of whether the equity in Qingmanrui Company is held in joint ownership by the two parties, Xiong Shaoping and Shen Xiaoxia remain independent shareholders, exercising their shareholder rights independently. They have no obligation to file a certificate or agreement on the division of property, nor is such filing a prerequisite for the registration of a limited liability company by a married couple. Moreover, the law does not prescribe any consequences for failing to file such documentation. Consequently, the second instance court’s conclusion that Qingmanrui Company is a single‑member limited liability company lacks legal foundation.

(2) The second-instance court erred in treating “whether Xiong Shaoping and Shen Xiaoxia should bear joint and several liability for the debts of Qingmanrui Company” as the central issue in this case.

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Findings of fact as determined by the court of first instance: On August 3, 2011, Xiong Shaoping and Shen Xiaoxia registered their marriage. In November 2011, Xiong Shaoping and Shen Xiaoxia contributed capital to establish Qingmanrui Company. Qingmanrui is a limited liability company with a registered capital of RMB 2 million and paid-up capital of RMB 2 million, with Xiong Shaoping and Shen Xiaoxia each holding a 50% equity stake.

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The second-instance court held that the central issue in this case is whether Qingmanrui Company, established with capital contributions from Xiong Shaoping and Shen Xiaoxia, qualifies as a single‑member limited liability company, and whether Xiong Shaoping and Shen Xiaoxia should bear joint and several liability for Qingmanrui Company’s debts.
 

First, Article 58, Paragraph 2 of the Company Law provides: “For the purposes of this Law, a single‑member limited liability company refers to a limited liability company with only one natural person shareholder or one legal person shareholder.” Article 63 stipulates: “If the shareholder of a single‑member limited liability company fails to prove that the company’s assets are separate from the shareholder’s personal assets, the shareholder shall bear joint and several liability for the company’s debts.” The shareholder register of Qingmanrui Company has consistently listed Xiong Shaoping and Shen Xiaoxia as shareholders, indicating a plurality of shareholders. However, Xiong Shaoping and Shen Xiaoxia are married, and Qingmanrui Company was established during the duration of their marriage. Pursuant to Article 17 of the Marriage Law of the People’s Republic of China, except for property specified in Article 18 and property subject to an agreed‑upon regime under Article 19, all property acquired by the spouses during the marriage is jointly owned by both spouses. Despite being ordered by the second‑instance court to produce evidence within a prescribed time limit, Xiong Shaoping and Shen Xiaoxia have failed to submit any proof demonstrating that they had made arrangements regarding the ownership of their premarital property or postmarital earnings. Moreover, Qingmanrui Company was established after the couple’s marriage. Accordingly, it should be determined that Qingman Ruisi’s registered capital derives from the joint marital property of Xiong Shaoping and Shen Xiaoxia. Although the requirement to compulsorily submit proof of property division or a corresponding agreement when family members establish a limited liability company has been repealed, the law does not prohibit spouses from voluntarily filing such proof or agreement when they jointly establish a limited liability company. The business registration records of Qingmanrui Company obtained by the court of first instance contain no agreement or evidence regarding the division of property between Xiong Shaoping and Shen Xiaoxia, nor did they submit any such documentation during the second-instance proceedings. Consequently, the fact that Xiong Shaoping and Shen Xiaoxia each registered their respective equity interests in their own names using jointly acquired assets does not constitute an agreement to divide the couple’s common property. Therefore, all of Qingmanrui Company’s equity should be deemed to have been acquired by Xiong Shaoping and Shen Xiaoxia after marriage and thus held as their joint common property. Although the evidence adduced by Maoren Company in the second instance fails to demonstrate that Xiong Shaoping and Shen Xiaoxia’s personal assets were commingled with those of Qingmanrui Company, it does, to a certain extent, corroborate that both spouses actively participated in the management and operation of Qingmanrui Company, indicating that the company was, in practice, under the joint control of the couple. Taken together, these facts demonstrate that all of Qingmanrui Company’s equity is, in substance, derived from a single property right and is jointly owned and controlled by a single entity; accordingly, this equity exhibits consistency of interest and substantive unity. On this basis, Qingmanrui Company should be recognized as a “one-person company” in the substantive sense.

Secondly, from the perspective of commingling of corporate assets, the rationale for permitting a single individual to establish a limited liability company lies in reducing entrepreneurial costs and fostering a thriving market economy. However, this convenience also entails inherent risks. The rule of reversed burden of proof regarding the independence of assets in “single‑member companies” as stipulated in the Company Law is one of the measures designed to address such risks. Under the circumstances where Qingmanrui Company is effectively controlled by a single owner, it is difficult to avoid the commingling of the company’s assets with the couple’s other jointly owned property. In this context, it is necessary, by analogy with the Company Law’s reversed‑burden‑of‑proof regime for single‑member companies, to assign the burden of proving the separation of the company’s assets from the shareholders’ personal assets to Xiong Shaoping and Shen Xiaoxia. When the appellate court required Xiong Shaoping and Shen Xiaoxia to submit evidence within a specified time limit, they failed to demonstrate that their personal assets were distinct from those of Qingmanrui Company and thus must bear the legal consequences of failing to meet this evidentiary obligation. Accordingly, Xiong Shaoping and Shen Xiaoxia shall be jointly and severally liable for the debts at issue in the Qingmanrui Company case. Mao Ren Company’s application to add Xiong Shaoping and Shen Xiaoxia as parties subject to enforcement is supported by both factual and legal grounds.

Finally, from the perspectives of legal and social effects, “spousal companies” exhibit inherent deficiencies in safeguarding creditors’ interests, such that when disputes arise between creditors and such companies, the latter often fail to receive robust legal protection. This situation remains in need of refinement through legislative improvements and more consistent judicial application. However, in accordance with the principle of joint common ownership of marital property established under China’s Marriage Law, all equity interests held by the spouses‑shareholders should constitute an indivisible whole, with the company effectively serving as the agent through which the spouses‑shareholders engage in civil transactions. If, under the corporate limited‑liability regime, a company founded by the spouses‑shareholders is held liable only to the extent of its assets, while other obligations of the spouses‑shareholders are neither strengthened nor adequately regulated, this would contravene the principle of fairness enshrined in civil law and undermine the equal protection of the interests of the counterparty to the transaction.

The second-instance court ruled as follows: (1) Revoke the Civil Judgment No. 4309 of 2017 rendered by the Wuhan Intermediate People’s Court; (2) Add Xiong Shaoping and Shen Xiaoxia as additional judgment debtors in Enforcement Case No. 00707 of 2015 of the Wuhan Intermediate People’s Court, and hold them jointly and severally liable for the debts owed by Qingmanrui Company in Civil Case No. 00494 of 2015 of the Wuhan Intermediate People’s Court.

During the retrial, Mao Ren Company submitted the following evidence: 1. An expert opinion, intended to demonstrate that a limited liability company established and held by both spouses using jointly owned marital property shares a high degree of similarity and consistency with a single‑member company in terms of constituent elements and legislative purposes, thereby allowing for the analogous application of the presumption of liability set forth in Article 63 of the Company Law.

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This Court, upon retrial, holds that ，

In this case, Catman Company, relying on Article 20 of the Provisions on the Amendment and Addition of Parties to Enforcement Proceedings, which provides that “where a single‑member limited liability company, as the party subject to enforcement, lacks sufficient assets to satisfy the debt determined by an effective legal document, and the shareholder fails to prove that the company’s assets are separate from their personal assets, the people’s court shall support the applicant’s request to amend or add such shareholder as a party subject to enforcement, thereby imposing joint and several liability for the company’s debts,” has applied to have Xiong Shaoping and Shen Xiaoxia, shareholders of Qingmanrui Company, designated as parties subject to enforcement. Therefore The central issue in this case is whether Qingmanrui Company qualifies as a single‑member limited liability company, and whether Catman Company’s application to add Xiong Shaoping and Shen Xiaoxia as additional judgment debtors should be granted.
 

With regard to whether Qingmanrui Company qualifies as a single-member limited liability company.

Article 58, Paragraph 2 of the Company Law provides: “For the purposes of this Law, a single‑member limited liability company refers to a limited liability company with only one natural person shareholder or one legal person shareholder.” In the present case, although Qingmanrui Company was established with contributions from Xiong Shaoping and Shen Xiaoxia, Xiong Shaoping and Shen Xiaoxia are married. Qingmanrui Company was incorporated during the subsistence of their marriage, and the company’s business registration records contain no written proof or agreement regarding the division of their property; nor have Xiong Shaoping and Shen Xiaoxia subsequently submitted such documentation. Article 17 of the Marriage Law of the People’s Republic of China stipulates that, except for the property specified in Article 18 and the property regime agreed upon pursuant to Article 19, any property acquired by the spouses during the marriage shall be jointly owned by both spouses. Accordingly, it may be determined that the registered capital of Qingmanrui Company originated from the joint marital property of Xiong Shaoping and Shen Xiaoxia, and that all equity interests in Qingmanrui Company constitute property acquired by the couple after marriage, thus falling under their joint ownership. All of the equity interests of Qingmanrui Company are, in substance, derived from a single property right and are jointly owned and controlled by a single owner; accordingly, the equity holder exhibits unity of interest and substantive singularity. Furthermore, the special provision distinguishing a single‑member limited liability company from an ordinary limited liability company is set forth in Article 63 of the Company Law, which stipulates: “If a shareholder of a single‑member limited liability company fails to prove that the company’s assets are separate from the shareholder’s personal assets, the shareholder shall bear joint and several liability for the company’s debts.” In other words, the doctrine of disregarding the corporate personality applicable to single‑member limited liability companies operates under a rule of reversed burden of proof. The reason for this provision is that a single‑member limited liability company has only one shareholder, lacks the collective character and corresponding corporate organs of a traditional corporation, does not possess an internal governance structure based on checks and balances, and suffers from inadequate internal oversight. The shareholder simultaneously serves as both owner and manager, making it all too easy for personal and corporate assets to become commingled, thereby readily jeopardizing the interests of the company’s creditors. Accordingly, by reversing the burden of proof, the law seeks to strengthen the financial independence of such companies and, in turn, enhance creditor protection. In the present case, Qingmanrui Company was established by spouses Xiong Shaoping and Shen Xiaoxia during the subsistence of their marriage; the company’s assets are held in joint common ownership by the two, resulting in a high degree of alignment of their interests and rendering effective internal oversight difficult to achieve. Both Xiong Shaoping and Shen Xiaoxia actively participate in the company’s management and operations, and their other marital property is likewise easily conflated with Qingmanrui Company’s assets, thus undermining creditors’ interests. Under these circumstances, in accordance with Article 63 of the Company Law, the burden of proving the separation of the company’s assets from the shareholders’ personal assets should be allocated to the shareholders, Xiong Shaoping and Shen Xiaoxia. In sum, Qingmanrui Company exhibits a high degree of similarity to a single‑member limited liability company in terms of its legal structure and applicable regulatory framework; therefore, the second‑instance court’s determination that Qingmanrui Company is, in substance, a single‑member limited liability company is well founded.
 

With regard to whether the application by Catman Company to add Xiong Shaoping and Shen Xiaoxia as parties subject to enforcement should be granted. As analyzed above, Qingmanrui Company is, in substance, a single‑member limited liability company and thus falls within the scope of Article 63 of the Company Law. Moreover, the substantive legal basis for Article 20 of the Provisions on Altering or Adding Parties to Enforcement Proceedings likewise derives from Article 63 of the Company Law. Accordingly, Xiong Shaoping and Shen Xiaoxia bear the burden of proving that Qingmanrui Company’s assets are separate from their other jointly owned property. When the second‑instance court required them to submit evidence within a specified time limit on this point, they failed to demonstrate that their personal assets are distinct from those of Qingmanrui Company and must therefore bear the legal consequences of failing to meet their evidentiary burden. The second-instance court’s decision to uphold Mao Ren Company’s application to add Xiong Shaoping and Shen Xiaoxia as persons subject to enforcement was proper.

In summary, the grounds for the application for retrial submitted by Xiong Shaoping and Shen Xiaoxia are not established. In accordance with Article 207, Paragraph 1, and Article 170, Paragraph 1, Item 1, of the Civil Procedure Law of the People’s Republic of China, the court rules as follows:
 

The civil judgment No. 1270 of 2018 rendered by the Hubei Provincial Higher People’s Court is hereby upheld.

This judgment is final.
 

Presiding Judge: Wan Huifeng

Judge Li Xiangbo

Judge Guan Xiaohai

June 28, 2020

Clerk: He Quan