Research On Legal Issues Of Defective Equity Transfer

Although the basic capital contribution obligation of shareholders has been specified in the article 28 of Chinese "Company Law", the new "Company Law" further relaxes the capital requirements for the establishment of the company due to the influence that equity transfer gradually becomes the “new favorite” of the capital exchange. As a result, the defective equity caused by violation of capital contribution obligation emerges in endlessly and the relevant disputes of equity transfer becomes an important part of the cases related with the Company Law in the judicial practices in China. The recent two judicial interpretation of the Company Law, article 40 of Company Law Interpretation(four) and article 18 of Company Law Interpretation(three), have determined to legislate two focus problems in the transfer of defective equity, namely the effectiveness of the transfer contract of defective equity, and liability undertaking after transferring the defective equity, which has complied with the practical needs of judicial practices. However, there are different feedback in theory and practice circle and major differences in views and processing of the problems of defective equity transfer. Based on this, this article tries to sort and carry out theoretical analysis on the enforcement recognition of the transfer contract of defective equity and the liability undertaking after transferring. Moreover, in combination with the present disposing situation of judicial practice and the reference of foreign legislation, the paper explains and analyzes article 40 of Company Law Interpretation(four) and article 18 of Company Law Interpretation(three) and puts forward to the corresponding system reference and improvement suggestions, so as to form relatively reasonable, rigorous, feasible theoretical perspectives and system design relevant to the transfer problems of defective equity.The paper is mainly divided into three parts:The first chapter put forwards to the main problems. Based on the analysis of a typical cases in the judicial practice(the case is primarily concerned with whether the bona-fide assignees of defective equity can refuse to pay the rest equity transfer section and should they undertake the liquidation liability for the corporate creditors after they find that the existence of the flaws in equity) and the differences in the treatment suggestions, the paper concludes the focus problems in defective equity transfer: how to recognize the effectiveness of the transfer contract of defective equity? Whether the contract must be abolished because the defective equity shareholder lacks qualification and the have defective equity has no negotiability? if it should not be abolished, then whether it is revocable when the bona-fide assignees are cheated and have gross misunderstanding? if it should be abolished, how to specify the practical performance of the revocation right and the combat effectiveness? at the same time, who should undertake the capital contribution obligation after transferring defective equity and whom should be undertaken for? How to choose the method of undertaking liability? if joint and several liability is recognized, then the right of recourse should be empowered to the assignees? if it should be granted, then whether it is necessary to distinguish the assignee’s subjective status? and how to build the right relief for the assignee?The second chapter is about the recognition of the effectiveness of the transfer contract of defective equity. First of all, the paper expounds the current main theories about the effectiveness of the transfer contract of defective equity, including the invalidity theory, the compromise theory, the cancelability theory, the validity theory.Secondly, based on the above theoretical disputes, the paper concludes that the focuses and key problems of the effectiveness of the transfer contract of defective equity are mainly in the aspects including the stakeholder qualification of the investor of defective equity(the subjective factor), the negotiability of defective equity(the objective), the recognition and effectiveness of the fraud of the transferor(the intention declaration factor), the influence of the capital system and then discusses these several main aspects in detail: first, for the subjective, the flaws of capital contribution do not affect the qualification of shareholders which is more depended on the records of the public information such as register of shareholders, and commercial registration, and the flaws of capital contribution flaw at the same time also does not affect the validity of the contract. Even if the investors of defective equity don’t have the qualification of shareholder, they still are the qualified subjective of the transfer contract of defective equity. Second, for the objective, the defective equity is different from the merchantable things prohibited or restricted by laws because it has the legal negotiability. At the same time, although the shareholders’ rights of the investors of defective equity can be limited through a variety of methods, the equity transfer as an inherent right of shareholders should not necessarily deprived and restricted. Thirdly, as for the declaration of intention, namely the applicable field of article 40 of Company Law Interpretation(four), its core question is that in case of fraud and serious misunderstanding(especially the fraud), should the assignee have the right to cancel the contract? if they should have the right, the how to identify "fraud" and "serious misunderstanding"?how should the assignee perform the cancellation right? For the above problems, there are different views and methods in theory and practice and practice. The focuses of such kind of differences and the article 40 of Company Law Interpretation(four) are: the tendency of the applicable civil laws and commercial laws, the accept or reject of the pursuit of civil law and commercial law, the balance of the benefit protection of the third person, or the assignee, and the understanding and application of the commercial rechtsschein theory. Based on the concrete analysis, in the aspect of law application, the consecutive application of civil law and the commercial law should be properly processed, and in the aspect value orientation, it is necessary to have a comprehensive and dialectical understanding of the value pursuit of the civil law and the commercial law rather than only pursing trading efficiency and security and neglecting fairness and autonomy of will. At the same time, it is also necessary to correctly understand and apply the principles of rechtsschein theory, grasp its legal essence of protecting the the reliance interest, as well as its preferential application in the legal relationship involving in the third party and limiting application in other fields, thus achieving the balance between the interests of the third person and the interests of the assignee. Therefore, in case of the flaws of intention declaration such as fraud and serious misunderstanding, the right of revocation of the bona-fide assignee should be recognized, but its exercise conditions should be strictly limited. Besides, it is also necessary to exclude the “fraud” recognition of simple “non-disclosure of flaws of equity ", grasp the recognition of"double majors"in serious misunderstanding(namely, the misunderstanding of the "significant" events and causing “serious” loss), pay attention to the causal relationship, incline to the choice of maintaining the contract effectiveness between cancellation and modification, and at the same time, the right of the transferee to cancel the contract should not be against the bona-fide third person. Finally, the differences of capital system do not necessarily affect the effectiveness of the transfer contract of defective equity, thus the compromise of distinguishing the contract effectiveness on this basis is not reasonable.The third chapter is the investment liability undertaking after transferring the defective equity, namely the applicable field of the article 18 of Company Law Interpretation(three). First of all, this chapter distinguishes and expounds the investment liability after transferring the defective equity according to different claiming subjects, and it mainly includes the capital maintaining and damage compensation liability for the company, the liability for breach of contract for other observant shareholders in the establishment of the company, the supplementary liability and liability for satisfaction for the company’s creditors. As for the liability for the company’s creditors, this paper argues that the shareholders with flaws in capital contribution shall bear the liability for satisfaction for the company creditors, but the liability they undertake should be the partial supplementary liability that the company can not undertake, and they only need to undertake the liability for satisfaction within the scope of its unpaid capital contribution. This method is conductive to protect the interests of the creditors without bring extra burden to shareholders, and it also is conform to the value judgment of laws.Secondly, the paper summarizes and concludes the legislation at home and abroad and the research status of current liability undertaking problems after transferring the defective equity. There are mainly four views in the theoretical cycle, including the theory that the transferor undertakes full liability, the theory that the assignee undertakes the full liability, the theory that the transferor and assignee undertake joint liability and the theory of distinguishing the subjective status of the assignee. In the legislation and judicial practices, there are various local judicial interpretations, and although the court decisions more recognize that the assignee and the transferor all should undertake the investment liability, there are different specific processing methods.For example, in the loan dispute that China communication products trading center in the Shanghai Bonded Capital Goods Market sued six defendants including the Shanghai Baon Enterprise co., LTD, the court decided that the assignee undertake the primary liability and the transferor undertake the supplementary liability; in the loan contract dispute that the Guangzhou Petroleum enterprise co., LTD. sued the Yilite((jilin) Industrial co., LTD., the court considered that the transferor and assignee should undertake joint liability in principle with the exception of the assignee having canceled the contract; in the loan dispute that the Menaide Import and Export co., LTD. sued Xiamen Jindeda Industrial Development co., LTD., the court decided that the the malicious assignee take the primary liability, and the transferor undertake the supplementary liability.While, in the foreign legislative cases, the civil law countries more stipulate that the the transferor and assignee should undertake joint liability without fault in complementing investment and the common law countries mainly emphasize that only when the assignees are not sincere or bona fide, namely that the assignees know or should have known that the equity have the problem of incomplete investment, they should undertake the liability of capital contribution to the company or the company creditors, otherwise, the transferor should undertake the complementary liability. While, the article 18 of Company Law Interpretation(three) incorporates the advantages of both the civil law stem and the common law system of law, thus it includes both the conditions of the common law that the assignee knows or should have known and the provisions of the civil law system about joint liability.Finally, based on the comparison of the above different theories and solutions, it can concluded that the liability undertaking after transferring the defective equity mainly focuses on the undertaking subject, namely who(transferor, assignee or other subjects) undertakes the liability, and the specific liability allocation, namely how to undertake(completely undertaken by one party, supplementary liability or joint liability) and analyzes respectively. Firstly, for the undertaking subject, both the transferor and the assignee should undertake the investment liability after transferring the defective equity. It is the inevitable requirement of the legality and specific identity of capital adequacy liability and the obligation of the principle of commercial fairness and undertaking the liability by oneself to make the transferor undertake the liability. At the same time, it is also conductive to prevent the malicious acts that the shareholders of the company transfer and evade the liability of defective capital contribution through equity transfer and standardize the company’s capital safety and commercial credit.The assignee’s undertaking liability is mainly based on the prior application of the commercial rechtsschein theory, protecting the interests of the third person who is in reasonable reliance that assignee is a shareholder, the requirement of promoting the trading efficiency and security, and the consideration that the assignee’s transferee equity contains all the rights and obligations under such equity including the investment obligation and capital adequacy liability. And both the bona fide assignee and the malicious assignee all should undertake the liability of defective capital contribution. If the assignee knows or should have known the existence of equity flaws and still accept the transfer, then it should be presumed that he has known and voluntarily undertakes the liability of making supplementary investment under the flaws of the equity; whereas, in the case of fraud or serious misunderstanding, the assignee should have the right to cancel contract according to the relevant analysis in chapter two, but the right should not be against a bona-fide third person, namely that the assignee should not refuse to bear relevant liability by claiming to cancel the contract. In addition, the undertaking subject of the liability of defective capital contribution should not be limited to the transferor and the assignee of defective equity, it also should includes the defective investment shareholders, the other shareholders in the establishment of the company, the company sponsors, the directors and senior managers who have not been loyal and diligent when the company increased capital. Secondly, on the method of liability undertaking, the transferor and the assignee should undertake joint liability rather than supplementary liability, because the right claiming subject is the company, other shareholders and the company creditors most frequently appearing in judicial practice. All of them the third person outside of the legal relationship of the transfer contract of defective equity, thus the responsibility for them belong to belongs to legal relationship involved in the third party which is the typical application field of the commercial rechtsschein theory. This theory focuses on the protection of the interests of the reasonable reliance of the third person and at the same time does not conform to the commercial law value of transaction efficiency and safety as well as the basic principle of using the lowest cost to make up the maximum loss in the economics of law.In addition, it is necessary to distinguish and treat according to the assignee’s subjective state and give the the bona-fide assignee right of recourse for the ultimately responsible person, namely the transferor.Thirdly, as for the specific application and improvement of the article 18 of Company Law Interpretation(three)t, the components of "goodwill" should be made clear. It is mainly considered from the three aspects including paying for reasonable consideration, fulfilling the legal procedure and having no intentional misconduct or serious negligence. At the same time, the burden of persuasion of "goodwill" is inverted, namely that the it is the transferor’s duty to provide proof to prove a malicious assignee. Finally, the right relief of the assignee also should not be ignored. Since there is no relevant provisions in China, it is suggested that the existing system of civil law be taken into consideration, such as the liability of contractual negligence of the cancellation right, and after cancellation, and the claims for the liability of guaranteeing the flaws and the performance of the right of recourse, thus achieving a reasonable balance between the interests of the assignee and the interests of the third person.