Countermeasures for Debt Collection In Case of Illegal Cancellation of Company

Chen Jie

In current market transactions, due to fierce competitions, the lack of information between buyers and sellers, and the appetite for convenient transactions, commercial credit sales are becoming more and more common. In recent follow-up cases, many companies abuse liquidation and cancellation to terminate their legal personality so as to evade their legal debts. In the management of accounts receivable, when the debtor company is justified to evade debts on the ground that it has been cancelled, many unbreakable problems will appear in the actual following-up practice, making it quite difficult for creditor to collect debts.

In the process of debt collection, claiming rights from the debtor company is one thing while whether the basis for claiming rights is sufficient and documented is another. If the basis for claiming rights is not sufficient or documented, the process of debt collection will be easily affected by the intentional pretext of the debtor company. Therefore, to clarify the basis on which creditor claims rights is the first prerequisite for debt collection.

As a corporate legal person, a company is entitled to independent personality and property and shall be liable for external debts independently. There are two normal circumstances for a company's loss of legal personality, i.e., statutory liquidation & statutory cancellation and self-liquidation & self-cancellation. Statutory liquidation and statutory cancellation is beyond the scope we talk about in this article and is also seldom seen in actual commercial accounts business. Thus, we only discuss self-liquidation and self-cancellation here. From the perspective of procedural legality, self-liquidation and self-cancellation can be divided into two types: one is legal liquidation and legal cancellation and the other is illegal liquidation and illegal cancellation. In the case of legal liquidation and legal cancellation, the debtor company will lose its legal personality and no longer exists. Accordingly, the object against which the creditor claims rights disappears. Therefore, it makes little sense to discuss debt collection matters under this situation. On the contrary, illegal liquidation and illegal cancellation is quite a common phenomenon in current accounts receivable issues as many debtor companies may choose illegal liquidation and illegal cancellation to evade debts. Faced with many a subterfuge taken by debtor company, countermeasures for debt collection are recommended to focus on "illegal", grasping each key point in the process from liquidation to cancellation and probing into them one by one so as to find a breakthrough point in the whole cancellation process of debtor company.

(1) In accordance with provisions of the Company Law, when there is any reason for dissolution, the debtor company shall immediately set up a liquidation team which shall make a notification and announcement to the creditor.

Therefore, in the process of debt collection, the first and most important breakthrough point lies with "whether the liquidation team has fulfilled the obligation of notification and announcement", i.e., "Whether the debtor company has published the announcement within 60 days after the establishment of the liquidation team? Whether the announcement has been published on the provincially influential newspaper in the country or the place where the debtor company is registered? Whether relevant written notice has been given to known creditors within 10 days after the establishment of the liquidation team?". It is worth noting that the Company Law now has removed the requirement on how many times shall the liquidation of company be announced in the newspaper, but provisions of the Liquidation Measures are still applicable in some regions, requiring the announcement to be published on the newspaper at least three times. If it is found that the liquidation team has not fulfilled or is slack in performing the above-mentioned obligations, in accordance with the Company Law and relevant judicial interpretations, creditors shall have the right to assert claims against the debtor company even after the debtor company has been cancelled. It should be noted that, in this case, the object from whom the debts shall be collected (hereinafter referred to as "object of debt collection") shall be the member of the liquidation team, but in some cases the object may also be the shareholder. Relevant records and information about liquidation team members can be found in the Industrial and Commercial Credit Platform or the authority with which the debtor company has been registered. Interpretation 2 of the Company Law contains such a statement: "company that is undergoing cancellation procedures shall notify all known creditors in writing of the dissolution and liquidation matters, and make announcement in the provincially influential newspaper in the country or the place where it is registered according to its corporate size, place of business and scope of business." According to this provision, the debtor company shall simultaneously perform these two obligations of publishing announcement and actively notifying the creditor for assertion of claims when the liquidation is being conducted. Such two obligations are absolutely necessary and must be performed at the same time when a company is undergoing liquidation procedures. Therefore, in the case where the debtor company has only published the announcement, creditors can launch an offensive against the debtor company to assert their claims, since known creditors can be found through the debtor company's previous payment record and be confirmed whether they have received relevant notification. For instance, based on the said provision, a judgment (2013 Zhong Min Er Chu Zi No.1090) was stated as follows: "the defendant has made a public announcement, but in the course of liquidation, it has not notified the plaintiff in writing of its dissolution and liquidation and later its shareholders distributed residual properties, which is in violation of provisions related to legal obligations and has infringed rights and interests of creditors." Seen in this light, when doing debt collection work on behalf of a creditor, we shall take the initiative to ask the debtor company for any proof that can certify its performance of the obligation of notifying the creditor to declare claims. When being asked like this, many debtor companies will fail to present the proof, which will undermine the legitimacy of their liquidation practice and create a very favorable breakthrough point for pressure warning other than a vain or useless warning.

(2) After making a notification and an announcement to the creditor, the liquidation team shall perform the liquidation obligation in accordance with laws and submit the final liquidation report to the registration authority of the debtor company for the record.

Therefore, in the process of debt collection, the breakthrough point of this link lies with “whether the debtor company has complete account books”. Whether the liquidation team members have hidden properties, falsified records or practiced private distribution? If the debtor company's account books are not complete, there will inevitably be claims or liabilities left out after the liquidation according to laws. Under such circumstance, the shareholders of the debtor company shall be jointly and severally liable for the debts. In the case where the debtor company's account books are complete, the claims or liabilities left out after the liquidation might be a result of the intentional or negligent practice of the liquidation team. In this situation, it shall be the liquidation team to bear the joint and several liability for compensation as stipulated by the laws.

(3) When clearing up properties of the debtor company, according to provisions of the Company Law, the liquidation team shall adopt corresponding liquidation process in view of the actual assets condition of the debtor company.

In the process of debt collection, the breakthrough point of this link lies with "whether the debtor company's assets are enough to pay off its debts." If the liquidation report that has been put on record shows that there is no residual property or the residual property of the debtor company is not sufficient to pay for the Client's claims, the debtor company can be construed as insolvent. According to laws, an insolvent company shall apply to the court for declaration of bankruptcy and carry out relevant bankruptcy liquidation. Under this circumstance, if the liquidation team on behalf of the debtor company fails to do what mentioned above even after having been fully aware of the debtor company's insolvent status, its acts shall be deemed as intentional acts and it shall be liable for compensation in accordance with laws. In such case, the object of debt collection shall be the liquidation team. If the liquidation team does not know about the debtor company's insolvent status and continues the liquidation work, it shall be deemed that the account books of the debtor company are not complete and shareholders of the original debtor company shall bear joint and several responsibilities for clearing debts. In this situation, the object of debt collection shall be shareholders of the original debtor company. In the case where the debtor company's assets are sufficient to pay off debts but the creditor gets no payment for its claims even after the debtor company has been liquidated and cancelled, the object of debt collection shall be also determined based on whether liquidation team members are aware of the debtor company's assets situation. If liquidation team members are aware of the debtor company's assets situation, they shall bear the liability for compensation. And if they are not aware, it shall be presumed that the cause for creditor's failure to receive payment for claims is attributed to incomplete account books of the debtor company and shareholders of the original debtor company shall be liable for the debts.

(4) Upon completion of the liquidation of debtor company, the liquidation team shall apply to the registration authority of the original debtor company for deregistration and make an announcement stating the cancellation of debtor company.

What should be noticed in debt collection work is that, in practice, some companies may use false liquidation report to defraud the registration authority for the purpose of deregistering their legal personality. In cases like this, the debtor company actually has not undergone liquidation procedures yet, thus there is no need to probe into every detail of the liquidation mentioned above. And the infringed creditor may require shareholders of the original debtor company to bear the compensation liability in accordance with laws. Therefore, shareholders of the original debtor company shall be the object from which the debts shall be collected.

In the course of debt collection or negotiation, collectors might fight against the person representing the debtor company by putting forward questions based on the above-mentioned four aspects as this will enhance the dominant position for the negotiation. However, actual verification steps necessary in the countermeasures mentioned above will be more and more difficult. For the party representing the creditor who gets no payment for claims, it is also difficult to define whether the cause is due to the intentional or negligent practices of shareholders of the original debtor company or the liquidation team. Therefore, the debt collection work can be carried out according to the actual situation of specific case. If it is easier to recover debts from shareholders of the debtor company, then collect debts from shareholders of the original debtor company; and if it is easier to recover debts from the liquidation team, then collect debts from the team by holding the ground that liquidation team members have committed improper acts intentionally or negligently. As for the final duty bearer, it is recommended to let shareholders of the original debtor company and the liquidation team to resolve the matter on their own according to relevant laws and regulations.