China: Minority Shareholder's Obligations In Liquidation Of Companies - Is Losing Your Investment The Worst Case?

Last Updated: 23 May 2014
Article by Catherine Shen

Venture capitalists will invest in lots of portfolio companies to look for the next Apple or Google. In many such investments, venture capital investors will only hold a minority share, which do not give them control over the portfolio companies' daily operation. In such cases, most investors believe that to lose the amount of invested capital will be the worst case if such investments turn out to be a failure given the "limited liability" rule under PRC Company Law. However, some recent cases ruled by the PRC courts have highlighted the risk for the corporate veil to be pierced if the minority shareholders do not properly fulfill their obligations in liquidating their invested companies.

I The Case

In 2005, Shenzhen Guocheng Venture Capital Limited ("Guocheng"), a State-owned venture capital firm in China, invested US$610,000 in Shenzhen Xieya Precision Industry Co., Ltd. ("Shenzhen Xieya"), a wholly foreign-owned company 100% owned by Xieya International Industrial Co., Ltd ("Xieya International"). After closing of the investment, Guocheng became a minority shareholder holding roughly 15% of the equity interest in Shenzhen Xieya and was entitled to appoint one director to the board of Shenzhen Xieya. Unfortunately, Guocheng's investment in Shenzhen Xieya was soon proven to be a disappointment. To make things worse, Shenzhen Xieya was involved in a law suit with Shanghai Dongyang Carbon Materials Co., Ltd. ("Shanghai Dongyang"). According to the settlement agreement reached between Shenzhen Xieya and Shanghai Dongyang in 2006, it was confirmed that Shenzhen Xieya owed RMB1,554,000 (about USD250,000) to Shanghai Dongyang. However, Shenzhen Xieya failed to repay the amounts to Shanghai Dongyang according to the settlement agreement.

The financial crisis in 2008 was the last straw that broke the camel's back. Given that Shenzhen Xieya accumulated heavy debts and that its operation conditions continued to deteriorate, Shenzhen Xieya's management together with its majority shareholder, Xieya International, simply disappeared. As a result, Shenzhen Xieya's operation came to an end in 2008.As Shenzhen Xieya did not go through the annual inspection procedure, the local company registration authority, i.e., the Market Supervision Administration Bureau of Shenzhen Municipality, revoked Shenzhen Xieya's business license in 2009. Shenzhen Xieya was therefore dissolved.

Since Shenzhen Xieya no longer had any assets available to pay off the debts owed to Shanghai Dongyang, Shanghai Dongyang initiated a law suit against Guocheng in May 2012 asking Guocheng to pay the USD250,000 debts. Shanghai Dongyang claimed that since Guocheng failed to fulfill its shareholder's obligation to liquidate Shenzhen Xieya after the latter's dissolution which made the liquidation impossible due to the loss, damage and destruction of Shenzhen Xieya's assets and accounting books, Shanghai Dongyang's interest was severely jeopardized; and therefore, Guocheng should be held jointly and severally liable for the USD250,000 debts owed to it by Shenzhen Xieya. The court of both first and second instances supported Shanghai Dongyang's claim and Guocheng was asked to repay the USD250,000 debts (plus interest) to Shanghai Dongyang for Shenzhen Xieya.

Besides Shanghai Dongyang, Shenzhen Xieya owed various debts to other creditors with a total amount of at least RMB7 million (about USD1.2 million). If these other creditors followed the same route as Shanghai Dongyang, it would be hard to predict how much losses Guocheng would suffer in the end in addition to losing its investment of USD610,000.

II Our Analysis and Comments

Liquidation Obligations of Shareholders

The PRC Company Law provides that where a limited liability company is dissolved as a result of the occurrence of certain situations (e.g., the revocation of its business license), the company's shareholders shall form a liquidation group within 15 days following the company's dissolution. The liquidation group is responsible for taking the required actions to properly liquidate the company, which includes, amongst other things, identifying, calculating and appraising the remaining assets of the company; notifying and registering the company's creditors; recovering creditor's rights and repaying debts and liabilities. If the remaining assets of the company are insufficient to cover its liabilities, the liquidation process will be terminated and the company will enter into bankruptcy proceedings in accordance with the PRC Bankruptcy Law. In such circumstances, given the limited liability principle under PRC Company Law, the shareholders will not be responsible for any liabilities of the company beyond the amount of the registered capital they have contributed.

In practice, some shareholders are reluctant to go through the liquidation process but simply leave it to the local company registration authority to close the company according to the law. In response to that situation and with a view to ensuring that creditors will have a chance to realize their debts owed by the companies to be liquidated, the Supreme People's Court issued the Provisions on Certain Issues in the Application of PRC Company Law (II) on 5 May 2008 reiterating shareholders' obligations to duly liquidate the companies they invest. According to such provisions, the shareholder (regardless of being a majority shareholder or a minority shareholder) will be held liable for the debts of its invested company upon the occurrence of any of the following circumstances:

(i) where the shareholder fails to form a liquidation group to commence the liquidation process within the applicable statutory time limit, which causes the depreciation, loss, damage or destruction of the assets of the company;

(ii) where the shareholder's failure to fulfill its liquidation obligations causes the destruction or loss of the company's primary assets, accounts or books or important documents, which makes the liquidation impossible;

(iii) where the shareholder maliciously disposes of the assets of the company after the occurrence of the dissolution event, thus causing losses to the company's creditors; or

(iv) where the shareholder deregisters the company without going through the liquidation process or with the submission of a false liquidation report.

There is no distinction between a majority shareholder and a minority shareholder for the purpose of the application of above provisions. In the Shenzhen Xieya case, the courts quoted the above provisions and gave their rulings in a consistent way for Guocheng to be liable for the debts of Shenzhen Xieya due to Guocheng's failure to fulfill its liquidation obligations which caused the loss of Shenzhen Xieya's primary assets, accounts or books and thus made the liquidation impossible.

Is Non-participation in the Company's Operation a Legitimate Defense?

Guocheng argued that it was only a minority shareholder which had no participation in the operation and management of Shenzhen Xieya. Furthermore, all the books and accounts, assets and important documents of Shenzhen Xieya had always been in the possession of the majority shareholder, Xieya International, which were out of the reach of Guocheng. Therefore, as a matter of fact Guocheng was unable to commence the liquidation process of Shenzhen Xieya even if it wanted to.

The courts rejected Guocheng's argument and ruled that Guocheng had the obligation to liquidate Shenzhen Xieya even though Guocheng was not the controller of and had not participated in the operation and management of Shenzhen Xieya.

According to the Provisions on Certain Issues in the Application of PRC Company Law (II), a shareholder is entitled to apply to the court for the appointment of liquidation group members to start the liquidation process if the liquidation group is not formed within 15 days upon the occurrence of the dissolution event. This provides the minority shareholder with an effective remedy where it is unable to properly liquidate its invested company due to its non-involvement in the company's operation. If Guocheng had applied to the local court to start the liquidation process after the revocation of Shenzhen Xieya's business license, the result of the judgment concerning the lawsuit brought by Shanghai Dongyang may be different.

III Conclusion and Suggestions

Guocheng's case was not alone. There had been various other cases for which the corporate veil was pierced and the minority shareholder was held liable for the debts of its invested companies due to its failure to properly liquidate the companies upon dissolution. Venture capital investors would typically be a minority shareholder without strong control over the operation of the portfolio companies, and therefore it may be very difficult for venture capital investors to be fully informed about the business situation of the portfolio companies and liquidate such companies alone. However, venture capital investors are commonly deemed as having deeper pockets by creditors and are very likely to become the first target pursued by the creditors if the portfolio companies are not properly liquidated or bankrupted.

In view of the above, venture capital investors and other minority shareholders are strongly advised to pay proper attention to the dissolution of invested companies and fulfill their shareholders' obligations in liquidating such invested companies upon dissolution. Otherwise, they may find them in very difficult situations rather than simply losing their original amounts of investment. If venture capital investors and other minority shareholders are unable to commence the liquidation process due to the disappearance of the majority shareholder, they must apply to the local court for the court to appoint the liquidation group members and start the liquidation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.