Incorporating in China Doesn't Save You From Debt Incurred in China
This is the sixth in a weekly series of legal advice provided in a short and entertaining story format.
This week's areas of Interest: Company, Corporate Law
This week's keywords: Business and Corporation Law, Promoters’ Joint Liability, Launch Failure
INCORPORATING IN CHINA DOESN'T SAVE YOU FROM DEBT IN CHINA
Alex set up a Joint Stock Company with two of his friends, David and Alan as promoters. Alan rented an office for a year in Shenzhen, one of the major economic zones in China.
However, for various reasons, it did not go as planned. They failed to launch the stock company, and Alan was sent back home to the US as his parents were not pleased.
One day, Alex received a call from the person who rent them the office space, Ken.
Ken: Time to pay up the rent
Alex: Wrong number, I live with my parents.
Ken: No, I’m talking about office rent in Shenzhen for your company.
Alex: Is this a prank call? We closed the company down. What rent is there to pay?
Ken: You still have to pay up, or we will have to face legal actions.
Alex: Go find Alan. He rented the office, not me.
Ken: Alan rented the office under the company name, so you three are responsible as promoters.
Alex: …(Confused Face)
Ken: Three days, Alex, or we shall meet in the court.
Is Alan responsible for the rent despite having rented the office space under the name of the incorporated company?
Prof Simon Says:
YES! Now why do they still have to pay for the rent even though the company shut down?
In the case of a launch failure the shutdown of a company does not mean the three of them do not have to pay the indebted rent.
Firstly, Alan rented the office space under the company name, so that means it is not personal debt, but the company debt. As promoters, all three of them have joint liability in paying the debt, as the company has failed to launch.
Alex and David had to pay the debt first in order to avoid legal problems, as Alan was no longer in China. They could then ask Alan to pay his portion afterwards, but the whole amount has to be paid to the creditor first.
You might be thinking: As promoters, they shouldn’t lose anything more than the initial capital invested, so the court has no right to take any money from their pockets. Not for this case, a launch failure. The Chinese Company law states that any debt incurred from a launch failure must be paid by the partners in full even after a dissolution.
A "Launch Failure" occurs when the stock company fails to provide the minimum of share capital prescribed and paid within a definitive time frame. All expenses incurred prior to the set up of the stock company are to be paid by the promoters and such expenses are personally liable by the promoters if there is a set up failure.
Promoters are partners under the concept of general principles of civil code and their liabilities shall be passed to the stock company once it is set up.
For more about this or to contact Professor Simon Choi at www.acmeardent.com, email@example.com, +86 13823677853 or by WeChat: simonhkchoi.
"This article was originally written in Chinese by Mr Huanyu Li and rewritten into English by Simon Choi."
About the Author: Professor Simon Choi
Prof Simon Choi, solicitor and linguist, is an international lawyer, qualified to practise law in England & Wales and in Hong Kong, China. Simon graduated from law schools of the Peking University, the University of London and the University of Hong Kong respectively, with an in-depth knowledge of Chinese laws and common laws and with more than 20 years experience in China practice and international trade, investment, finance, merger & acquisition. He is an adjunct professor of laws at the Zhongnan University of Economics and Law. Simon is the founding partner of Acme Ardent and can be reached at firstname.lastname@example.org or +86 13823677853.