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Article 232 of China¡¯s new Company Law expressly specifies directors as liquidation group members, while article 238 stipulates their mandatory liquidation duties and associated liabilities. These substantive amendments to the obligations of liquidators have altered the application of liability standards and exemption criteria.

This article explores these legal developments through representative case studies, offering preliminary insights into the evolving regulatory landscape.

Liquidation obligors

Article 232 of the new Company Law mandates that directors, as liquidation obligors, must form a liquidation group within 15 days of a dissolution event. The Changshu People¡¯s Court of Jiangsu province delivered the first ruling applying this provision, clarifying that if a company fails to establish a liquidation group as required, which further results in an inability to liquidate and creditors failing to recover debts, the executive director, as a liquidation obligor, shall be held jointly liable for the debts.

As supervisors are not statutory liquidation obligors, they will not be held jointly liable unless it is proven that their actions directly caused the company¡¯s inability to liquidate.

Under the new Company Law, shareholders are no longer required to organise or initiate the liquidation process. If shareholders are not members of the board, nor qualify as de facto or shadow directors under article 180.3 of the new law, and if there is no evidence of negligence in fulfilling their duties while participating in the liquidation group, they should not be held jointly liable.

Before the new Company Law came into effect, independent directors argued that, since they did not serve in the company nor directly manage its operations, they should not be liable for liquidation responsibilities. However, the courts did not substantively address this argument.

In the case Yue 06 Min Zhong No.8338 (2023), the court held that directors registered in a false name ¨C even if they did not actively participate in the company¡¯s management ¨C remain liquidation obligors with a duty to initiate the liquidation process.

This suggests that, in delineating the scope of liquidation obligors, the court tends to apply the commercial appearance doctrine and considers all registered directors as responsible for commencing the liquidation procedure. Whether independent directors will eventually be deemed liquidation obligors, and if their fiduciary duties extend to the liquidation phase, remains to be seen.

Classification of liabilities

Liquidation liability falls into two categories, namely, failure to timely fulfil liquidation obligations; and neglect in performing liquidation duties.

In accordance with article 232.1 of the new Company Law, if the liquidation obligors do not form a liquidation group within 15 days from the occurrence of a dissolution event, they are deemed to have failed to timely fulfil their liquidation obligations. Any loss incurred to the company or its creditors as a result will warrant compensation.

Under article 238 of the new Company Law, liquidation team members are required to act with fidelity and due diligence. Should their neglect in fulfilling liquidation duties cause losses to the company, or should intentional misconduct or gross negligence result in creditor losses, they shall be liable for compensation.

In accordance with article 14 of the Minutes of the National Courts¡¯ Civil and Commercial Trial Work Conference, neglect in performing liquidation duties manifests as deliberately delaying or refusing to discharge statutory obligations once a dissolution event occurs, or engaging in passive conduct due to negligence that hinders liquidation.

Objectively, such conduct features the devaluation of the company¡¯s key assets or the loss of essential records and documents, which leads to an inability to liquidate. Subjectively, it reflects a breach of the fiduciary duties, either by intentionally undermining the company¡¯s ability to repay, or by failing to diligently advance the liquidation process.

Forms of liquidation liabilities

In a case featured in the People¡¯s Court case database, where a bank¡¯s Shanghai branch sued Li et al over liquidation liabilities, the court pointed out that liquidation group members failing to discharge their legal duties, neglecting their responsibilities or omitting their notification and announcement obligations incur liability for fault-based tort compensation.

If the liquidation group collectively fails to perform its duties, all members are deemed to have jointly committed the infraction and will be held jointly and severally liable.

The case also clarifies that determining the tortious liability of liquidation group members requires a comprehensive assessment of both the objective and subjective factors. Specifically, the objective factors include their roles, capacities and the feasibility of discharging their duties, while the subjective factors may reflect deliberate delay or refusal to perform.

If a member proves that they objectively lack the ability or authority to independently fulfil the liquidation responsibilities, or are effectively constrained by other group members, and that there is no evidence of intentional delay or refusal, it may be concluded that their negligence in performing liquidation duties is not significant, thereby exempting them from tort liability.

There used to be a stricter standard for determining the liquidation liabilities of liquidation group members. For example, in Wang Chunhai et al v Ma Qingmei (2022), a shareholder liability dispute for damaging the interests of a creditor, although a group member submitted a liquidation report via an entrusted agent, an omission of a significant debt claim led the court to conclude that the statutory duties had not been fully discharged, resulting in joint liability.

Under the new regulations, while all directors remain obliged to initiate the liquidation process, they may avoid liability for failing to perform their duties if they do not serve as team members or, if they do, can demonstrate the absence of significant fault.

Recent years have seen a marked increase in liquidation liability cases, with experts warning that amendments to capital contribution rules in the new Company Law may fuel further litigation. This evolving landscape requires judicial clarification regarding the scope and boundaries of directors¡¯ liquidation liabilities across different corporate structures.

Zuo Yuru is a partner and Wang Zhongyu is an associate at Zhong Lun Law Firm.