I. Overview of Judicial Rules on Liquidation Liability of Limited Liability Companies

In recent years, judicial practice has become increasingly cautious in determining liquidation liability for limited liability companies. A review of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference (the “Nine Civil Minutes”) and representative judicial views shows that a systematic framework has emerged. It is based on the elements of tort liability, applies presumed fault as the allocation principle, and places particular emphasis on causation.

(1) Review of the liable subject: first determine whether the defendant is a qualified liquidation obligor

A liquidation obligor is a person or entity required to promote the formation of a liquidation committee and assist the liquidator with the liquidation. Before July 1, 2024, Article 18 of the Provisions of the Supreme People’s Court on Certain Issues Concerning the Application of the Company Law of the People’s Republic of China (II) (the “Company Law Judicial Interpretation II”) provided that all shareholders of a limited liability company were liquidation obligors.

Article 18 of the Company Law Judicial Interpretation II provides: “Where the shareholders of a limited liability company, or the directors and controlling shareholders of a joint stock company, fail to establish a liquidation committee and commence liquidation within the statutory period, resulting in the depreciation, loss, damage, or destruction of company property, and the creditors claim that they should bear liability for compensation for the company’s debts within the scope of the loss caused, the people’s court shall support the claim in accordance with law.

“Where the shareholders of a limited liability company, or the directors and controlling shareholders of a joint stock company, by neglecting to perform their obligations, cause the company’s principal property, account books, important documents, or other materials to be lost, making liquidation impossible, and the creditors claim that they should bear joint and several liability for repayment of the company’s debts, the people’s court shall support the claim in accordance with law.

“Where the circumstances described above were caused by the actual controller, and the creditors claim that the actual controller should bear corresponding civil liability for the company’s debts, the people’s court shall support the claim in accordance with law.”

Following the 2023 revision of the Company Law, the liquidation obligor was changed to the company’s directors.

Article 232 of the Company Law provides: “Where a company is dissolved for any of the circumstances set out in Items 1, 2, 4, or 5 of Paragraph 1 of Article 229 of this Law, liquidation shall be conducted. The directors are the company’s liquidation obligors and shall form a liquidation committee to conduct liquidation within fifteen days from the date on which the cause for dissolution arises.

“The liquidation committee shall consist of the directors, unless the articles of association provide otherwise or the shareholders’ meeting elects other persons.

“Where a liquidation obligor fails to perform its liquidation obligations in a timely manner and causes losses to the company or its creditors, it shall bear liability for compensation.”

(2) Review of conduct: whether the liquidation obligor neglected to perform its liquidation obligations

“Neglecting to perform” refers to a shareholder of a limited liability company, after a statutory cause for liquidation arises—such as the revocation of the company’s business license—deliberately delaying or refusing to perform the liquidation obligation despite being able to do so, or passively failing to act through negligence in a manner that makes liquidation impossible. The principle of presumed fault applies. Once a creditor makes an initial showing that a cause for dissolution existed and the shareholders failed to liquidate, the shareholders bear the burden of proving that they took positive steps to organize the liquidation. In practice, a minority shareholder who never participated in the company’s operations may argue that there was no neglect if the shareholder proves that they were not a member of the board of directors or board of supervisors and did not appoint anyone to serve on either body.

An important practical dispute concerns whether a liquidation proceeding is a prerequisite to finding that liquidation is impossible. Because the law does not impose a closed definition of “impossible to liquidate,” and an application for compulsory liquidation is a right rather than an obligation of creditors and other interested parties, a liquidation proceeding should not be treated as a prerequisite to determining that liquidation is impossible or to filing an action.

(3) Review of result: whether the creditor’s interests were seriously impaired

Courts generally presume that damage has occurred where the company cannot be liquidated and the creditor’s claim remains unpaid.

(4) Review of causation

This is the core and most complex stage of review in these cases and is critical to balancing the interests of all parties. Under the approach reflected in the Nine Civil Minutes, the causal chain contains three links, all of which must be established:

1. Causation between the conduct and the loss of the company’s assets or records: the shareholders’ neglect of their liquidation obligations caused the loss of the company’s principal property, account books, important documents, or other materials.

2. Causation between the loss of the assets or records and the impossibility of liquidation: the loss of the company’s principal property, account books, important documents, or other materials made liquidation impossible.

3. Causation between the impossibility of liquidation and the creditor’s loss: the impossibility of liquidation caused the creditor’s claim to remain unpaid.

If any link is broken, liquidation liability cannot be established. The Nine Civil Minutes expressly recognizes that a shareholder may prove that there was no causal relationship between the shareholder’s passive neglect of the liquidation obligation and the loss of the company’s principal property, account books, or important documents that made liquidation impossible, and may thereby seek exemption. Thus, even if the liquidation obligor neglected to liquidate, the causal chain is broken if the creditor cannot prove that the conduct caused the loss of company property or account books, or if the liquidation obligor proves that the company’s property would have been insufficient to repay its debts even if liquidation had been commenced promptly. The liquidation obligor then need not bear joint and several liability for the company’s debts.

(5) Review of limitation periods

Liquidation liability is a claim for payment and is subject to the rules on limitation periods. Under the Nine Civil Minutes, where a creditor asserts rights under Paragraph 2 of Article 18 of the Company Law Judicial Interpretation II, the limitation period “shall run from the date on which the company creditor knew or should have known that the company could not be liquidated.” In practice, courts make a comprehensive assessment by considering the date on which the company’s business license was revoked, the date on which the compulsory liquidation proceeding was concluded, and the specific time when the creditor learned of the relevant circumstances, so as to avoid imposing liquidation liability indefinitely.

II. Representative Case: A Successful Second-Instance Reversal in a Liquidation Liability Dispute

(1) Case summary (the parties’ names have been anonymized)

In 2001, the Guangzhou Intermediate People’s Court issued a civil judgment confirming that Company A was jointly and severally liable for Company J’s obligation to repay Bank B RMB 20 million in principal and interest. After the judgment became effective, enforcement proceedings were commenced. The court found that Company A had no property available for enforcement and recommended suspending enforcement.

On January 14, 2003, Company A’s business license was revoked because it failed to participate in the annual inspection. Company A’s registered operating period was from July 20, 1997 to June 30, 2003. At the time of revocation, its shareholders were Li and Han, holding 40% and 60%, respectively.

On June 1, 2023, Company B, as the assignee of the creditor’s claim, filed an application for compulsory liquidation of Company A, which it later withdrew on December 8, 2023. On November 30, 2023, Company B sued Li and Han, seeking to hold them jointly and severally liable for Company A’s debts.

The first-instance court held that: (1) the limitation period began when Company B applied for compulsory liquidation in 2023 and learned that Company A could not be liquidated, so the claim was not time-barred; (2) after Company A’s license was revoked, its shareholders had a liquidation obligation but failed to perform it; and (3) the suspension of enforcement did not mean that Company A actually had no property. The shareholders’ neglect caused the account books to be lost and the property position to become impossible to ascertain, which was causally related to Company B’s inability to recover its claim. The court therefore supported Company B’s claims. Li and Han appealed. After losing at first instance, Han retained our team through a friend to represent Han in the second-instance proceedings.

(2) Difficulties in the case

1. The age of the matter made proof difficult

The dispute concerned an old debt dating back to 2001. Company A had ceased operations long ago and its relevant materials had disappeared. As a shareholder, Han could not easily produce the company’s complete financial books from that period to directly prove its financial position when the cause for dissolution arose. Establishing that the company had no property available for repayment without the account books was the principal technical difficulty.

2. The challenge of proving the absence of causation

The creditor argued that Li and Han’s failure to organize liquidation promptly after Company A’s license was revoked in 2003 caused the account books to disappear and consequently made liquidation impossible. Breaking this seemingly direct causal chain and proving that the creditor’s loss was unrelated to the shareholders’ conduct was essential to changing the result.

3. The limitation defense

The case spanned more than twenty years and involved multiple revisions of the Company Law, the issuance of judicial interpretations, and the publication of the Nine Civil Minutes. The creditor argued that the limitation period began when it learned in 2023, upon applying for compulsory liquidation, that Company A could not be liquidated. The appellant argued that it began when the cause for dissolution arose in 2003. Defining the starting point and determining whether the claim was time-barred became a central dispute.

(3) Litigation strategy and the key to victory

Facing these difficulties, the team adopted a dual strategy centered on “breaking the causal chain” and “asserting the twenty-year maximum limitation period.” By investigating the historical facts in depth, the team successfully achieved a reversal on appeal.

1. Effectively breaking the causal chain

By reviewing the original enforcement files and litigation records, the team uncovered key evidence sufficient to establish the facts:

① The objective fact that the company had already ceased operations: when the court served the judgment in 2001, all personnel had left Company A and no one remained on its premises.

② The antecedent fact that enforcement was impossible: in 2002, the court found during enforcement proceedings that Company A had “no property available for enforcement.”

③ The admission of the original creditor: in the 2002 enforcement hearing transcript, the original creditor, Bank B, expressly stated that Company A was “nothing more than a shell company with no fixed address or property.”

On the basis of these facts, we explained clearly to the appellate panel that, before the statutory cause for liquidation arose in 2003, Company A had already become a shell company with no property, personnel, or operations. The fundamental reason the creditor could not recover its claim was that Company A had already lost its solvency before the cause for dissolution arose, not that the shareholders failed to organize liquidation. Even if the shareholders had immediately organized liquidation after the license was revoked in 2003, the result would have been that there was no property available for distribution, and the creditor’s claim would still have gone unpaid. Accordingly, there was no legally sufficient causal relationship between the shareholders’ passive neglect and the damage resulting from the creditor’s inability to recover its claim.

2. Precisely applying the limitation defense

The team conducted an in-depth study of Paragraph 2 of Article 188 of the Civil Code concerning the maximum limitation period. We argued that although the Nine Civil Minutes provides that the period begins when the creditor “knows or should know that the company cannot be liquidated,” this is a rule for calculating the ordinary limitation period and remains subject to the twenty-year maximum limitation period.

In our view, Company A’s operating period expired no later than June 30, 2003, when a statutory cause for dissolution arose. Under the 1999 Company Law then in force, the company was required to establish a liquidation committee within fifteen days after the cause for dissolution arose. By July 2023, Company A had failed to liquidate in accordance with law and the creditor’s rights had been impaired. Company B did not file suit until November 2023, well after the twenty-year maximum limitation period had expired.

(4) Result

The second-instance court ultimately accepted the team’s arguments in full. The judgment expressly found that Company A had already had no property or records before the cause for dissolution arose, that the existing evidence was insufficient to establish a causal relationship between Li and Han’s neglect and the loss of Company A’s principal property, account books, or important documents, and that the creditor’s action was barred by the twenty-year maximum limitation period. The court therefore set aside the first-instance judgment and dismissed all of the creditor’s claims.

Conclusion

In current practice, professional creditors sometimes purchase batches of old debts of “zombie companies” and then pursue shareholders for liquidation liability. The successful result in this case demonstrates the increasingly refined approach taken by courts in liquidation liability disputes. It shows that liquidation obligors facing creditor claims should not remain helpless: they should investigate the facts thoroughly, formulate an active litigation strategy, and use defenses based on the elements of tort liability, limitation periods, and other applicable rules to protect the client’s legitimate interests. Through its deep understanding of legal rules and meticulous evidence work, our team achieved a reversal, recovered substantial value for the client, and upheld fairness and justice.

References

1. Huang Xiangqing, ed., Essentials of Adjudication Methods for Similar Cases, Vol. I, People’s Court Press, 2020.

2. Li Jianwei, Commentary on the Company Law, Law Press China, 2024.

3. Tang Qinglin and Li Shu, eds., A Review of Adjudication in 25 Company Law Causes of Action and a Guide to Case Handling, China Legal Publishing House, 2024.

4. Chen Minsheng, Research on the Liability of a Company’s Liquidation Obligors for Neglecting Their Liquidation Obligations, master’s thesis, Heilongjiang University, 2024.

5. You Yiyu, Research on the Normative Application of Company Liquidation Obligors, master’s thesis, Guangdong University of Foreign Studies, 2025.

6. Chen Yuxin, Research on Legal Issues Concerning Liquidation Obligors of Limited Liability Companies, master’s thesis, Harbin University of Commerce, 2024.