Keywords: shareholders, consumption restriction measures, actual controller

Key points for the court’s decision: In the course of enforcement proceedings, unless there is evidence proving that a company shareholder is the actual controller of the company, the enforcing court may not, merely on the basis that the shareholder once served as the legal representative of the company and holds the largest equity stake in the company, presume that the shareholder is the company’s actual controller, principal person in charge, or direct responsible party whose actions affect the fulfillment of the debt, and thus impose coercive measures restricting consumption against such shareholder. If the applicant for enforcement seeks from the enforcing court to impose coercive measures restricting consumption against a company shareholder, the applicant bears the corresponding burden of proof to establish that the shareholder is indeed the company’s actual controller, principal person in charge, or direct responsible party whose actions affect the fulfillment of the debt.

Facts of the Case: On April 13, 2018, during the execution proceedings in case No. (2018) Jing 01 Zhi 77, handled by the First Intermediate People's Court of Beijing, in which the applicant for enforcement was a certain television media joint-stock company and the respondent for enforcement was a certain cultural media company, the court issued a consumption restriction order against the respondent, the Cultural Media Company. At the same time, the order also imposed consumption restrictions on Ci, the former legal representative of the company (who simultaneously held a 50% stake) and now a shareholder, as an outsider to the case. Dissatisfied with this decision, Ci entrusted attorneys Yang Xingquan and Wang Sicong from our firm to file an objection to the enforcement measures, requesting that the consumption restrictions imposed on him be lifted. After review by the Enforcement Adjudication Division of the Beijing First Intermediate Court, Ci’s objection was dismissed. Subsequently, his agent filed a request for reconsideration on his behalf. Following a review by the Beijing Higher People's Court, the court ultimately ruled to revoke the consumption restriction measures imposed on Ci.

Ruling: The court rules to overturn the Beijing No. 1 Intermediate People's Court’s ruling dismissing Ci’s objection application, and also rules to lift the consumption restriction measures imposed on Ci by the Beijing No. 1 Intermediate People's Court.

Reason for the Ruling: During the enforcement proceedings, when the Beijing No. 1 Intermediate People's Court imposed consumption restriction measures on the judgment debtor, a certain cultural media company, Ci was not the legal representative of that cultural media company. The Beijing No. 1 Intermediate People's Court included Ci, whom it designated as a directly responsible person affecting the fulfillment of the debt, within the scope of consumption restrictions without providing sufficient evidence to support such inclusion. Therefore, Ci’s request to lift the consumption restriction measures against him has a legal basis.

Relevant statutory provisions: 
《Supreme People's Court Provisions on Restricting High-Consumption by Persons Subject to Enforcement》: 
Article 1: If the party subject to enforcement fails to perform the payment obligations determined by the effective legal document within the period specified in the notice of enforcement, the people’s court may impose consumption restrictions, limiting their high-end consumption as well as consumption that is not essential for daily life or business operations. 
The people's court shall impose consumption restrictions on the judgment debtor who has been included in the list of discredited persons subject to enforcement. 
Article 3: If the person subject to enforcement is a natural person, after restrictive consumption measures have been imposed, they shall not engage in the following high-end consumption activities or consumption behaviors that are not necessary for daily life and work: 
(1) When traveling by means of transportation, choose air travel, soft-sleeper train compartments, or second-class or higher cabins on ships. 
(2) Engaging in high-end consumption at star-rated hotels, guesthouses, nightclubs, golf courses, and similar venues; 
(3) Purchasing real estate or constructing, expanding, or luxuriously renovating a home; 
(4) Renting high-end office buildings, hotels, apartments, and other such venues for office purposes; 
(5) Purchasing vehicles not essential for business operations; 
(6) Tourism and vacation; 
(7) Children attending high-tuition private schools; 
(8) Paying high premiums to purchase insurance-linked financial products; 
(9) All seat reservations on G-series high-speed trains, as well as first-class or higher seating on other high-speed trains—any consumption behavior that is not essential for daily life or work. 
If the judgment debtor is an entity, after restrictive consumption measures have been imposed, the judgment debtor itself, as well as its legal representative, principal responsible person, directly responsible personnel who influence the fulfillment of the debt, and the actual controller shall not engage in the activities specified in the preceding paragraph. If such activities specified in the preceding paragraph are carried out using personal property for private consumption, an application may be submitted to the executing court. Upon verification by the executing court that the application is substantiated, it shall be approved. 
Civil Procedure Law: 
Article 225: If a party or an interested party believes that an enforcement action violates statutory provisions, it may submit a written objection to the people's court responsible for the enforcement. Upon receipt of the written objection, the people's court shall review it within fifteen days. If the reasons stated in the objection are valid, the court shall issue a ruling to revoke or correct the enforcement action; if the reasons are not valid, the court shall issue a ruling dismissing the objection. If a party or an interested party disagrees with the court’s ruling, it may, within ten days from the date of service of the ruling, apply to the next higher-level people's court for a reconsideration.

Lawyer’s Perspective: 
In this case, the Beijing No. 1 Intermediate People’s Court imposed consumption restriction measures on Ci without providing any supporting evidence. The court’s Execution Ruling (2018) Jing 01 Zhi Yi 237, issued after trial, dismissing Ci’s objection to the enforcement proceedings, found the facts unclear and applied the law incorrectly, as detailed below: 
First, the “Enforcement Ruling” holds that Ci’s direct liability for fulfilling the debt in this case is clearly inappropriate, lacks any legal basis, and does not conform to the facts. 
1. Ci Mou should not bear any responsibility for the fulfillment of the debt in this case. The Enforcement Ruling has already established that a certain cultural media company is a limited liability company duly established under the law, and at the time of its establishment, the registered capital of 10 million yuan had been fully paid in by the original shareholders. Therefore, the company is legally obligated to independently assume its civil liabilities. Given the company’s status as an independent legal entity, the direct party responsible for fulfilling the debt in this case can only be the said cultural media company. Although Ci Mou, as one of the company’s three current shareholders, once served as its legal representative, this fact alone cannot be used to hold him personally directly liable for the fulfillment of the debt in this case. First, according to the relevant provisions of the Company Law, Ci Mou is not obligated to use his personal assets to assume civil liabilities for the company as an independent legal entity. Second, during the enforcement proceedings in this case, Ci Mou did not obstruct or resist the court’s enforcement efforts, nor did the cultural media company itself resist the court’s enforcement; thus, there is no evidence to suggest that Ci Mou influenced the fulfillment of the debt in this case. Oriental Company simply suffered from poor management, and its existing assets are insufficient to fully repay the debt in this case. Under these circumstances, the enforcing court should, in accordance with the law, guide both the applicant and the respondent to transfer the case into bankruptcy proceedings, rather than taking coercive measures against individual shareholders—on the basis of unsubstantiated claims such as “directly responsible for influencing debt fulfillment”—and imposing restrictions on their consumption without any supporting evidence. 
2. Ci was not the primary party responsible for the formation of the debt in this case. As evidenced by the content of the arbitration award—the enforcement basis of this case—although the “Cooperation Agreement” that gave rise to the debt was signed during the period when Ci served as the legal representative, the person who actually signed the agreement on behalf of the company was Yu Zhenzhong, one of the company’s former shareholders. Yu Zhenzhong was solely responsible for the performance of the “Cooperation Agreement” at issue. After a dispute arose with the applicant for enforcement in this case, it was also Yu Zhenzhong who represented Certain Cultural Media Co., Ltd. in handling the dispute and appearing in court. Yu Zhenzhong is the direct party responsible for the dispute between the two sides and for the ultimate emergence of the debt. Although Ci served as the legal representative during the period when the “Cooperation Agreement” was being performed, both the signing and performance of the agreement were entirely controlled by Yu Zhenzhong. Ci was unaware of the specific circumstances surrounding the company’s performance of the contract, and therefore the formation of the debt in question cannot be attributed to Ci. 
3. Ci Mou cannot directly determine the company’s debt repayment situation. Although Ci Mou served as the company’s legal representative at the time the relevant agreement was signed and during its initial implementation, he held only 5% of the company’s equity, with a capital contribution of 500,000 yuan, and was not a major shareholder of the company. He did not participate in either the signing or the performance of the Cooperation Agreement. During the execution of the agreement, Yu Zhenzhong, who was responsible for implementing the agreement, knowingly that the Supreme People’s Procuratorate had revoked the operating license of a certain cultural media company for “Rule of Law China,” failed to inform Ci Mou. As a result, Ci Mou took over—without his knowledge—the equity shares of shareholders who had withdrawn from the company, becoming a major shareholder holding 50% of the company’s equity. Therefore, although Ci Mou is now the company’s largest shareholder, this does not mean that he can actually exercise control over the company. The second-largest shareholder, Taiyanggu Company, holds 40% of the company’s equity, which is only slightly less than Ci Mou’s stake. Simply based on the fact that Ci Mou is the company’s largest shareholder, it is by no means sufficient to conclude that he personally has the ability to directly determine the company’s debt repayment situation.

II. The Media and Culture Co., Ltd. did not change its legal representative from Ci Mou to Dai Moumou until after the arbitration award in this case was issued; the change in the company’s legal representative is unrelated to the enforcement proceedings in this case. 
On October 10, 2017, a certain cultural media company issued a shareholders’ resolution removing Ci Mou from the positions of executive director and manager. At that time, the enforcement basis for this case—the arbitration award involved in the case—had not yet been rendered; the arbitration award was not issued until November 14, 2017, and the company did not receive the award until November 17, 2017. From a chronological perspective, the decision made by the cultural media company to change the executive director (as stipulated in its articles of association, the executive director serves as the legal representative) had absolutely no connection whatsoever with the outcome of the arbitration award in this case or with the subsequent enforcement proceedings. Although the Administration for Industry and Commerce did not complete the registration of the change of legal representative and executive director for the cultural media company until December 4, 2017, nearly two months had already passed since the company’s shareholders’ resolution to change the legal representative and executive director and its submission of the application to the Administration for Industry and Commerce. This delay was attributable to the Administration for Industry and Commerce’s failure to promptly perform its duty of registering the change, and cannot be attributed to the cultural media company or to Ci Mou.

3. The enforcing court shall, in accordance with the spirit of the Supreme People's Court, promptly remove from the list of discredited persons those entities that genuinely lack the ability to fulfill the judgment but have not intentionally evaded enforcement. 
Article 6 of Document No. 1 [2018] issued by the Supreme People's Court, “Notice on Fully Leveraging the Role of Adjudication Functions to Create a Favorable Rule-of-Law Environment for Entrepreneurs’ Innovation and Entrepreneurship,” clearly requires that “where an entrepreneur has already fulfilled the obligations stipulated in an effective judicial document or where the applicant has abused the list of discredited persons subject to enforcement, the entrepreneur’s credit should be promptly restored. Moreover, entrepreneurs who have failed in their business operations and lack the ability to repay debts but have not intentionally evaded enforcement should be promptly removed from the list of discredited persons subject to enforcement.” 
In this case, a certain cultural media company has actively inventoried all of its assets—including photographic equipment, vehicles, and video materials from legal-themed programs produced over the years—and has submitted a detailed written report on the company’s asset status to the enforcing judge. The company has also provided the applicant for enforcement with a complete list of these assets and has repeatedly engaged in negotiations with the enforcing judge and the applicant for enforcement to reach an enforcement settlement agreement. Contrary to what the enforcement ruling suggests—that the company “refused to comply” with the arbitration award—the company’s failure to comply actually stems from its inability to fulfill its obligations. Specifically, the company’s assets are indeed insufficient to fully satisfy the debts involved in this case. Despite being fully aware of the company’s actual financial situation, the applicant for enforcement has been unwilling to accept the company’s existing physical assets. Moreover, given that the company’s bank account is already empty of cash, the applicant continues to demand partial cash payments from the company. As a result, the two parties have yet to reach an agreement on an enforcement settlement. Furthermore, during the enforcement proceedings, the cultural media company has explicitly stated its willingness to cooperate with the court by having the company’s assets appraised and auctioned off to repay its debts. Therefore, it is evident that during the enforcement process, Ci Mou has not engaged in any conduct obstructing the court’s compulsory enforcement against the cultural media company, nor has he interfered with the company’s ability to fulfill its debt obligations. Indeed, the cultural media company was unable to continue performing its contractual obligations precisely because the Supreme People’s Procuratorate suddenly informed it that it would no longer cooperate. This led to the failure to realize the expected returns from earlier expenditures, ultimately resulting in the company’s current assets being insufficient to settle the debts in this case. Thus, the company fully meets the conditions set forth in the aforementioned “Notice”—namely, “enterprises that have failed in business and lack the ability to repay their debts but have not intentionally evaded enforcement.” The enforcing court should earnestly implement the spirit of the Supreme People’s Court’s “Notice,” promptly remove the cultural media company from the list of discredited persons subject to enforcement, and lift the consumption restriction measures previously imposed on Ci Mou due to the company’s discredited status.

In summary, the Enforcement Ruling issued by the No. 1 Intermediate People's Court of Beijing omitted crucial facts in the case, leading to an erroneous finding of fact. The court’s conclusion that Ci was directly liable for the debt involved lacks both factual and legal basis. Therefore, dismissing Ci’s objection to enforcement is inconsistent with the spirit of the Supreme People’s Court’s “Notice” and is clearly improper and should be corrected.