The one-person limited liability company, as a unique corporate form, plays a significant role in today’s complex, globalised commercial sector. With commercial arbitration increasingly important in resolving business disputes, extending arbitration agreements with one-person limited liability companies to sole proprietors is becoming a pressing issue.
Legal basis
Article 23.3 of the Company Law stipulates that for a company with only one shareholder, sole shareholders shall bear joint liability for the company’s debts if they fail to prove the company’s assets are independent of their own. This provision forms the legal basis for examining whether the arbitration agreement signed by a one-person limited liability company can extend to the sole shareholder.
Judicial viewpoints
Courts are split over the issue of whether an arbitration agreement signed by a one-person limited liability company can extend to the sole shareholder.
Director of the Operations Division
Langfang Arbitration Commission
Tel: +86 316 233 0096
Email: lifei@lfac.org.cn
The pros. In a 2017 case — Yu 03 Min Te No. 51 — Li Shian, Zhang Linlin and Baoyisheng Company sought to annul the Luoyang Arbitration Commission’s Luo Zhong Zi No. 41 (2017) arbitration award.
The arbitration tribunal noted that when the loan contract was signed, Baoyisheng — as the borrower — was solely owned by Li Shian. There was no evidence to suggest a separation between the company’s assets and Li’s personal assets, and the contract also bore Li’s signature.
Consequently, Li was held jointly liable for Baoyisheng’s loan, and his application for annulling the arbitration award was rejected by the Luoyang Intermediate People’s Court of Henan.
While the civil ruling substantively upheld Li’s joint liability for Baoyisheng’s debt, it implicitly affirmed the binding force of the arbitration clause on the sole shareholder of the one-person company, suggesting no jurisdictional flaws in the arbitration.
The cons. In a 2021 case, Jing 04 Min Te No. 14, China Telecom’s Cloud Computing branch and Qu Junqing sought confirmation of the validity of an arbitration agreement.
In the civil ruling, Beijing No. 4 Intermediate People’s Court held that although Qu Junqing was the sole shareholder of Yijian Technology Company before its deregistration, evidence did not demonstrate confusion of the company’s property and Qu’s personal assets. Therefore, Qu was not bound by the arbitration agreement in question.
Likewise, in a 2023 case, Liao 02 Min Te No. 102, Li Tao and Ping Yueqin sought confirmation of the validity of an arbitration agreement.
Dalian Intermediate People’s Court of Liaoning held in the civil ruling that the law did not explicitly stipulate whether the sole shareholder of a one-person limited liability company was bound by the arbitration clauses signed by the company.
Due to the uniqueness of arbitration clauses, the court ruled that their scope should not be unjustifiably expanded. It was essential to carefully investigate whether the parties genuinely intended to resolve disputes through arbitration.
The joint liability of shareholders, as specified in the prevailing laws and judicial interpretations at the time, was a substantive legal obligation rather than a substitute for arbitration clauses. Therefore, Li Tao was not bound by the arbitration clause.
Main arguments
Debate over whether the sole shareholder of a one-person company is bound by the company’s arbitration agreement centres on three key aspects:
- Relationship between shareholder and company. If the corporate personality of a one-person company is no longer independent and company property is confused with the sole shareholder’s personal property, the shareholder should bear joint liability for the company’s debts. Dominant perspective defines this joint liability as a substantive legal obligation, separate from duty under the company’s arbitration clause.
- Privity of arbitration agreement. Arbitration agreements are bound by the privity principle, formally applying only to the signatories. Yet rulings have indicated that if both signatories and non-signatories demonstrate acceptance of the arbitration clause, the agreement’s enforceability may also extend to non-signatories. Nonetheless, arbitral tribunals have taken inconsistent approaches in determining the existence of such non-signatory consent.
- Absence of statutory guidance. Current laws and judicial interpretations do not provide explicit provisions on whether the arbitration agreement of a one-person limited liability company can be extended to the sole shareholder. This legal void has led to varied and inconsistent practices among arbitral tribunals and courts.
Some suggestions
Extension of the arbitration agreement for a one-person limited liability company is a complex legal issue.
The author suggests that, first, the Supreme People’s Court should issue judicial interpretations and precedential cases to clarify specific circumstances under which the arbitration agreement for a one-person company can be extended. This would establish a distinct analytical framework for differentiating cases of property confusion from those of disregarding the corporate personality when determining the reach of the arbitration agreement.
Such measures would help unify judicial standards and provide clear guidelines for courts at all levels.
Second, arbitral tribunals should exercise prudence in determining the applicable scenarios for extending the reach of an arbitration agreement. Factors should be carefully weighed, such as specifics of the contract, financial relationship between sole shareholder and the company, and whether the sole shareholder was aware of the arbitration agreement.
Additionally, parties entering arbitration agreements with a one-person limited liability company should include the sole shareholder as a signatory, ensuring both the company and its actual controller are bound by the terms, enhancing enforceability of the agreement and protecting everyone’s legal rights.
It is also important to clearly define the rights and obligations of the sole shareholder as a signatory.
Takeaway
In summary, extension of an arbitration agreement for a one-person limited liability company to its sole shareholder remains a pressing issue in judicial practice. The Supreme People’s Court should expedite the release of relevant judicial interpretations and precedential cases.
Courts and arbitration tribunals at all levels should judiciously apply these principles in specific cases, while parties should prepare appropriate strategies before entering into arbitration agreements.
Such continuous efforts in improving the legal framework and enhancing judicial practice would strengthen the predictability of legal outcomes and credibility of the arbitration mechanism.
Li Fei is the director of the Operations Division at Langfang Arbitration Commission. She can be contacted by phone at +86 316 233 0096 and by e-mail at lifei@lfac.org.cn
