The Shenyang Office of a Certain City Asset Management Company in China v. Shenyang Certain Switchgear Co., Ltd., Certain North Electric Development Co., Ltd., and Xin Certain North Electric (Shenyang) High-Voltage Isolating Switch Co., Ltd., among others. 
Disputes over the recovery of non-performing financial debts 
[Keywords] Civil/Financial Non-Performing Loan Recovery Disputes/Related Companies/Unveiling the Corporate Veil/Shareholder Liability After Company Deregistration 
【Key Points of the Ruling】The underlying legal relationship in this case is a loan relationship, and it also involves several other legal relationships, including shareholder contributions, denial of corporate personality, confusion of corporate personalities, and tort liability. 
The key points of contention are as follows: First, whether Shenyang Certain Pressure Switching Co., Ltd. (hereinafter referred to as “Certain Pressure Switching Company”) should bear the obligation to repay the debt of 351.75 million yuan; second, whether Certain North Electrical Development Co., Ltd. (hereinafter referred to as “Certain North Electrical Company”) should bear joint and several liability for the 68.11 million yuan debt owed by Shenyang Certain Pressure Switching Factory; third, whether Certain North Electrical Company fulfilled its full capital contribution obligations when it established Certain Pressure Switching Company; fourth, whether Certain North Electrical Company, by virtue of its actual control over Certain Pressure Switching Company and other affiliated companies, abused the independent legal personality of Certain Pressure Switching Company, seriously harming the legitimate interests of Certain Pressure Switching Company’s creditors, and whether the corporate veil of Certain Pressure Switching Company should be pierced, thereby ordering Certain North Electrical Company to assume joint and several liability for Certain Pressure Switching Company’s debts; fifth, whether Certain North Electrical Company, Isolation Switch Company, Certain Fu Machinery Manufacturing Company, Certain Tai Warehousing and Logistics Company, and Zhaoli Electrical Equipment Company constitute a confusion of legal personalities; sixth, whether Isolation Switch Company, Certain Fu Machinery Manufacturing Company, Certain Tai Warehousing and Logistics Company, and Zhaoli Electrical Equipment Company participated in Certain North Electrical Company’s fraudulent evasion of debts committed against Certain Pressure Switching Company, whether their actions constitute joint torts, and whether they should bear joint and several liability for the debts in this case; seventh, whether Certain Jia Company, having been deregistered during the litigation proceedings, should, according to the contents of the liquidation report and in accordance with their original capital contribution ratios, bear joint and several liability for repaying the company’s debts. 
[Basic Facts of the Case] In a dispute over the recovery of non-performing financial debts, the Shenyang Office of a certain urban asset management company in China (hereinafter referred to as “the Urban Company”) sued Shenyang Certain Switchgear Co., Ltd. (hereinafter referred to as “Certain Switchgear Company”), Certain Northern Electric Development Co., Ltd. (hereinafter referred to as “Certain Northern Electric Company”), New Certain Northern Electric (Shenyang) High-Voltage Isolator Co., Ltd. (hereinafter referred to as “Isolator Company”), Shenyang Certain Rich Machinery Manufacturing Co., Ltd. (hereinafter referred to as “Certain Rich Machinery Manufacturing Company”), Shenyang Certain Tai Warehousing and Logistics Co., Ltd. (hereinafter referred to as “Certain Tai Warehousing and Logistics Company”), Shenyang Certain Li High-Voltage Electrical Equipment Co., Ltd. (hereinafter referred to as “Zhao Li Electrical Equipment Company”), and Shenyang Certain Jia Economic and Trade Co., Ltd. (hereinafter referred to as “Certain Jia Company”). The Urban Company seeks from each of the aforementioned defendants the obligation to repay the principal amount of RMB 351.75 million together with interest. Our firm’s lawyers are representing the defendants in court. 
Between 1986 and 2003, a certain switchgear factory and a certain switchgear company in Shenyang obtained a total of 40 loans from the Industrial and Commercial Bank of China, with a combined principal amount of 351.75 million yuan. In August 1995, the switchgear company issued a letter of name change to the Industrial and Commercial Bank of China, stating that the switchgear factory had been renamed the switchgear company and that the new official seal had been officially put into use. The switchgear company assumed responsibility for any outstanding matters arising from the economic transactions between the switchgear factory and the Industrial and Commercial Bank of China, and subsequently affixed its official seal to the bank’s subsequent collection notices to confirm the relevant debts. Upon maturity of the loans, the switchgear company failed to repay them. In 2005, the Industrial and Commercial Bank of China transferred its claims against the switchgear company to the Shenyang Office of a certain urban asset management company in China (hereinafter referred to as “the Urban Company”). 
A certain pressure switch company was established in May 1995 with investment from a certain North Electric Company. On May 15, 2002, the pressure switch company, together with other investors, established Zhao Li Electrical Equipment Company. On February 26, 2004, the pressure switch company, along with other investors, established an Isolator Switch Company. On March 18, 2004, the pressure switch company, together with other investors, established a certain Fu Machinery Manufacturing Company. On March 24, 2004, the pressure switch company, together with other investors, established a certain Tai Warehousing and Logistics Company. In March 2004, the pressure switch company successively entered into several equity transfer agreements with the North Electric Company, transferring to the North Electric Company its 74.4% stake in the Isolator Switch Company, its 95% stake in the Fu Machinery Manufacturing Company, and its 95% stake in the Tai Warehousing and Logistics Company. In return, the North Electric Company transferred its equity holdings in other companies as consideration for these transfers. However, the aforementioned equity swaps were subsequently overturned by a separate court judgment, which also ordered the North Electric Company and the pressure switch company to mutually return the transferred equity interests. After the returned equity interests were reinstated, in September 2008, the pressure switch company and a certain Jia Company reached several equity transfer agreements, under which the pressure switch company agreed to transfer the aforementioned equity interests to Jia Company. Nevertheless, Jia Company failed to pay the full purchase price for the equity transfer, and during the litigation proceedings, Jia Company was dissolved. According to the company’s liquidation report, the shareholders are liable for the company’s debts in proportion to their original capital contributions. 
During the litigation proceedings, a certain city-based company argued that the aforementioned companies exhibited overlapping of assets, personnel, and business premises—situations constituting the “perversion of corporate personality” as defined by corporate law. Specifically, Beidian Electric Company allegedly abused its status as an independent legal entity, transferred assets, and infringed upon the legitimate rights and interests of the company’s creditors. Therefore, the corporate veil should be pierced, and all defendant companies should jointly and severally bear liability for the debts of Ya Ya Switchgear Company. 
After being initially tried by the Liaoning Provincial Higher People’s Court, the case was remanded for retrial by the Supreme People’s Court in the second instance. Following retrial procedures at both the first and second instances, the Supreme People’s Court, in its final adjudication, held that North Electric Company had fulfilled its capital contribution obligations. The actions of the defendants claimed by Cheng Company were found to be normal business operations of the companies concerned. Furthermore, Cheng Company’s assertion of a commingling of corporate personalities lacked both factual and legal basis. As Jia Company has been dissolved, its former shareholders shall, in accordance with the contents of the liquidation report, bear joint and several liability for the company’s debts according to their respective capital contribution ratios. 
【Judgment Result】1. Within ten days after the judgment becomes effective, a certain switchgear company shall repay to a certain city company the principal amount of the loan totaling 351.75 million yuan. 2. Within ten days after the judgment becomes effective, the same switchgear company shall also pay to a certain city asset company the interest on the principal amount of the loan totaling 351.75 million yuan (calculated based on the principal amount of each individual loan, starting from three months after the due date, at the rate applicable to overdue loans as prescribed by the People's Bank of China for the corresponding period, and continuing until the date payment is determined by the judgment). If the switchgear company fails to perform its monetary obligation within the period specified in the judgment, it shall, in accordance with Article 229 of the former Civil Procedure Law of the People's Republic of China, pay double the interest on the debt for the period of delay. 3. The original shareholders of a certain Jia company shall, within the scope of the value of the equity interests they acquired—namely, 74.4% of the shares in the isolating switch company, 95% of the shares in a certain Fu Machinery Manufacturing Company, and 82.8% of the shares in a certain Tai Warehousing and Logistics Company—bear joint and several liability for the aforementioned debts of the switchgear company. The other claims of the city company are dismissed. 
【Reasoning of the Court】The establishment of a company by a certain pressure switch company through investment alongside other legal entities is a normal shareholder investment activity. The property form of the certain pressure switch company has shifted from physical assets to equity interests; however, the company’s liability assets have not thereby diminished, and its capacity to bear liabilities has not been impaired. After the equity swap between the certain pressure switch company and the certain North Electric Company was rescinded, the certain pressure switch company further transferred the equity in the aforementioned company to the certain Jia Company, which subsequently re-transferred it again. Although these companies participated in the process of changing the certain pressure switch company’s physical and equity assets, in the absence of sufficient evidence demonstrating that they were legally indistinguishable from the certain pressure switch company and the certain North Electric Company, or that the certain North Electric Company manipulated the situation to evade the certain pressure switch company’s debts, it cannot be concluded that these companies participated in any act of debt evasion. Therefore, the claim made by the certain City Asset Company that the other companies should jointly and severally bear responsibility for the certain pressure switch company’s debts lacks both factual and legal basis, and was ultimately rejected by the court in its final judgment. 
[Relevant Statutes] Article 8, Article 205, and Article 207 of the Contract Law of the People's Republic of China; Article 52 and Article 128 of the Civil Procedure Law of the People's Republic of China (as amended in 2007); Article 170, Paragraph 1, Item (1), and Article 175 of the Civil Procedure Law of the People's Republic of China. 
[Lawyer’s Perspective] An affiliated subsidiary is not necessarily jointly and severally liable for the debts of its parent company or other affiliated companies. Written documents issued by a company—especially written commitments regarding liability—are legally binding on the company. When a company invests in establishing another company, it merely transforms the form of its assets from physical assets into equity interests; this does not constitute a reduction in the company’s overall assets. The company’s normal business operations should be protected by law. Senior executives of a group company, its business premises, and its corporate assets should avoid any confusion or overlap. The transfer of company equity must be lawful, compliant with the company’s articles of association, and properly compensated. The company’s dissolution procedures must be strictly carried out in accordance with applicable laws and regulations; bankruptcy liquidation is also an acceptable option to spare the company’s shareholders from unnecessary litigation burdens.