A Study On The Civil Liabilities By Shareholders Of Defective Incorporations Towards Creditors Of The Incorporations

The incorporation is also taken as the corporation, which has the proprietary right of its property. Meanwhile, with its total assets, it shoulders external liabilities. Its shareholders take the sole responsibility of providing funds or capital, which means they are not obliged to pay off the corporation's liabilities. All this proves the independent character of the corporation and the limited responsibilities of its shareholders, which also constitutes the fundamental principle of the corporation's legal system. Limited responsibilities are just like a magical power, promoting the increase in investment and the accumulation of capital. However, the limited responsibilities can be compared to a double-edged sword, which can supply the corporation and its shareholders with a sharp weapon to obtain benefits beyond laws through illegal means. Thus, it will in turn damage the rights of the corporation's creditors. Consequently, one of the important aims of the establishment of the Corporation Law is to protect the legal rights of the creditors'from the infringement by the corporation and its shareholders. In the Corporation Law, there have been many detailed legal systems, which ask the corporation and its shareholders to abide by. However, in the current corporation practice, due to the fact that there is a lack of honesty and self-discipline in the present market and also a lack of appropriate supervision on the corporation practice, there have been many shareholders who abuse their limited responsibilities, infringing the stipulations in the Corporation Law and damaging the creditors'rights. The author has often come across similar problems. On one hand, the creditors'rights cannot be paid off. On the other hand, shareholders actually obtain benefits beyond laws through abusing their rights. The truth is that there is a lack of corresponding stipulations towards those problems in the Corporation Law, which leads to the inefficiency in protecting the creditors'rights. The author believes that shareholders of the defective incorporations should shoulder the responsibility of compensating the corporation creditors'losses.The article can be divided into four parts. The first part is about the relation between the limited responsibilities of the shareholders and the independent character of the corporation. The corporation is established dependent upon the law, which means that the corporation has got the independent character entrusted by the law. Here, the independent character can be understood as having independent property. With its independent character, according to the civil laws, the corporation should independently shoulder the civil obligations from its own behaviors. Meanwhile, its shareholders don't have the obligation to pay off the corporation's liabilities, which can be considered as the limited responsibilities of the shareholders. To be specific, with its legal conditions and independent character through legal procedures, the corporation gains independent obligations. Thus, it is further promoted that shareholders don't shoulder direct responsibility for the corporation's liabilities. But since shareholders are both the owners and the holders of the corporation, they are likely to abuse this holding relation to pursue their own profits, interfere with the will of the corporation, infringe the corporation's assets, exert unhealthy influences on the corporation, be engaged in various illegal activities and finally damage the creditors'rights.The second part makes an analysis on the forms of expression of the defective incorporations. One is called corporations with defects and the other is corporation practices with defects. The former includes defective funds providing, evidently insufficient capitals and the obscure relation between the corporation and its shareholders. By contrast, the latter refers to the corporations where there is no real or complete financial statements or accounts, public funds for private savings, excessive distribution of profits among shareholders of the corporation, profit transmission between the corporation and its shareholders with their mutual connections or there is no liquidation dependent on the law after the corporation is dismissed. The forms of expressions of the corporation aforementioned, no matter whether they are directly shown as the shareholders'behaviors or the corporation's behaviors, they are all the behaviors of the corporation shareholders especially those of the holding shareholders or the real managers of the corporation. In essence, they are an index of illegal behaviors of the corporation managers, especially the shareholders. The third part focuses on the interpretation of the civil obligations by shareholders towards the corporation's creditors. In the defective incorporations, the behaviors of shareholders are not appropriate by law. Quite often, those illegal behaviors have been committed for the sake of shareholders'profits. However, in the same process, the corporation's assets will be inappropriately decreased and damaged. It is known that assets are the foundation for the corporation to shoulder external civil obligations. Accordingly, those illegal behaviors of shareholders will make the corporation unable to pay off its creditors'rights or to sufficiently pay off them. As a result, shareholders should have to shoulder their civil liabilities. At present, there are two mainstream opinions towards this. One is to deny the corporation character, that is to say, the corporation together with its shareholders should shoulder the related liabilities. The other is to allow the creditors to exercise the right to replace the position, which means shareholders will substitute the corporation in paying off the liabilities. However, the author suggests that flaws can be found in the two theories and their practices. As for the opinion to deny the corporation character, there is a logical controversy between the language form and its connotation and it is lack of evidence from legal principles. Moreover, it would be very easy to be confused with the system of nullifying the corporation establishment and the system of annulling the corporation registration. The opinion concerning position replacement demands shareholders directly pay off the corporation's liabilities but it is difficult to expound it in theory, not to mention to put it into practice. Thus, it is hard to authentically protect the creditors'rights and standardize the behaviors the shareholders.The last part tends to explain that shareholders in the defective incorporations should shoulder corresponding compensation liabilities for damaging the creditors'rights. Although the relation between shareholders and the corporation's creditors isn't direct for the sake of the corporation, it cannot be said that between them there is no relationship concerning rights and obligations. The author thinks that shareholders have the obligation not to infringe the creditors'rights by any active or negative means. Sometimes, the illegal behaviors committed by the shareholders in the defective incorporations are just to evade liabilities, or to cheat on the liabilities. Sometimes, even though they haven't directly violated the liabilities, their behaviors have objectively decreased the corporation's assets of liabilities and further damaged the corporation's capability in paying off liabilities. So judging from the quality, those shareholders'behaviors should be considered as infringement on liabilities and thus should shoulder the obligation to compensate the losses in the creditors'rights. The compensating obligation of shareholders in defective incorporations analyzes the situation when shareholders have abused their rights to damage the corporation creditors'rights, the holding shareholders who have abused their rights should be responsible for the compensation. As for other non-holding shareholders, depending on the profits they have gained in the whole process, they should shoulder corresponding compensation obligations for the creditors'losses. According to the traditional stipulations in the civil laws about infringement, shareholders'compensation obligation should be restricted to the damages on the corporation's liability assets or to the profits obtained by the shareholders through their illegal behaviors. However, due to the fact that the corporation is under the control of its shareholders, it is unrealistic for the creditors to raise evidences. On the other hand, for those shareholders who abuse their rights to commit illegal behaviors are usually for profits beyond the law. Thus, it can be assumed that the profits gained through illegal behaviors by the shareholders are far more than those obtained legally with their limited responsibilities. Consequently, shareholders should shoulder the obligation to compensate the total losses in the creditors'rights.