A Study On The Defection Of Company's Establishment

Defective incorporation means a corporation has registered and obtained the business license to engage in business activities. However, there are some defects in complying with statutory mandates, including both substantial requirements and procedure requirements, which will lead to the instable status of the corporation.Defective incorporation distinguishes with invalid incorporation, but also has some connections with it. Establishing a defective corporation, after certain legal procedures, may result in invalid incorporation.In accordance with the various classifications, the defective incorporation can be divided into the following types:subjective defect and objective defect. Subjective defect is the inner reason of objective defect; objective defect is the outer representation of subjective defect. Substantial defect and procedure defect. Substantial defect includes the defect of shareholder's members, contributions and the articles of a corporation; while the procedure defect includes the defect of review procedure and management procedure. Corrective defect and absolutely invalid defect. Corrective defect includes lacking certain unnecessary items in articles of a corporation, the defect of corrective contributions, and the defect of the shareholders'member, which does not comply with statutory requirements; absolutely invalid defect includes the defect of incorporated purpose, registered capital, initiators and procedure.Studying on the issue of defective incorporation, and establishing the litigation system that goes with it, has the following significance:it will benefit for the protection of interested parties'rights. Also, it will add the value of a corporation. Moreover, it will stabilize social economy.In the common law system, defective incorporation adopts the theory of admitted principle. This theory holds that the certificate of incorporation has the absolute trust in the public. In the civil law system, the principle of invalidity of defective incorporation has been applied. This principle means that, the invalidity lawsuit of incorporation requires that all the companies which have the legal personality can be declared null or void, so long as the legal defects exist in those companies. Some countries, for instance, Japan adopts double legal pattern. Namely, the Company Law or Business Law stipulates both invalid incorporation principle and revocable incorporation principle. Unlike the revocable incorporation applied by Japan, the Company Law of China uses administrative revocation.The legal liabilities of defective incorporation stated in the Company Law of China are:the administrative liabilities of making of false statements; the administrative liabilities of feigning capital contribution or removing capital contribution made by shareholders and initiators; the administrative liabilities of abusing power exercised by the registration authorities; the administrative liabilities of agencies; and tort liability of investment verification authorities.In the light of dealing with defective incorporation by administrative authorities, there are some drawbacks as followed:firstly, the registration authority should solely take responsibility to examine the form of registration materials, instead of examining the substance. Secondly, for the trust in the public, the administrative authority which is in charge of the company's registration, should not be responsible for revoking the registration. Thirdly, it is not benefiting for the protection of interested parties'rights if the administrative authority intervene in the company's incorporation. Finally, in the judicial practice, the different stipulation brought many troubles in law application.From my view, China should apply invalidity lawsuit of incorporation. The legitimate purpose of Company Law tried to protect interested parties' rights in various aspects, these granular stipulations cannot resolve the essential problems if there is no a complete stipulation dealing with the defective incorporation. The remedies of invalidity lawsuit of incorporation exist mainly in civil law system. China as a country in civil law system, has ability to apply invalidity lawsuit of incorporation. China is enacting written law, the statute stipulates strictly in the incorporative requirements and procedures. This legislative pattern provides an effective way to resolve the problems of litigation in defective incorporation.Invalidity lawsuit of incorporation should be regulated as followed:first of all, the scope of plaintiffs cannot be too broad. The interested parties should be limited to the internal of the corporation. Only shareholders, directors, commissioners and supervisors have the rights to initiate it. In the second place, the statute should state the cause of initiating this lawsuit. Namely, to stipulate the types of defective incorporation in details in Company Law, and draw a line in the scope of corrective defect and absolutely invalidity defect. Thirdly, the statute should stipulate prescription of action. According to the provisions of the Supreme People's Court on Some Issues about the Application of the Company Law of China (â…¢), the intention of the legislation of Company Law is not to include prescription of action. In my opinion, Company Law should add prescription to the provisions, which is benefit for facilitating the parties to enforce their rights. Last but not least, legal consequence should be detailed. The judgment of this lawsuit shall not have retroactive effects; only have effects for the future case. In the meantime, I recommend that the plaintiffs shall take legal liabilities if they bring the lawsuit with malice or faults.