Keywords: disputes over liability for damaging company interests, litigation by supervisory representatives, misappropriation of company funds by legal representatives, fiduciary and diligent obligations, joint infringement by affiliated companies, joint and several liability for repayment, compensation for demolition and relocation, abuse of shareholder rights
[Core Summary]
The legal representative of the company, taking advantage of his actual control over the company's finances, transferred approximately 19.75 million yuan of the over 28 million yuan in demolition compensation obtained by the company to his personal bank account and his affiliated companies under his control. The shareholder holding 66% of the company's shares has applied to the supervisor to file a lawsuit on behalf of the company against the legal representative and affiliated companies for "liability disputes for damages to the company's interests". The court found that the legal representative had embezzled company property and violated his duty of loyalty, and ordered him to return 19.75 million yuan and interest. The affiliated company shall bear joint and several liability for 2.5 million yuan of this amount.
This case is a typical winning case in which the company successfully recovered misappropriated funds through a "representative lawsuit of supervisors". It has direct reference value for shareholders and supervisors on how to hold the legal representative and related parties responsible for damaging the interests of the company.
1、 Basic case
Company A (Energy Development Co., Ltd.) was established in January 2008, with registered shareholders being shareholders holding 66% of the shares and shareholder Chen holding 34% of the shares, with Chen serving as the legal representative of the company.
In May 2021, Company A received a compensation of 28402577 yuan (approximately 28.4 million yuan) for the environmental remediation project in a hub economic zone. Afterwards, Chen took advantage of his actual control over the company's finances and transferred a total of 17.25 million yuan into his personal bank account in sixteen installments between May 2021 and July 2022; A total of 2.5 million yuan will be transferred to Company B (Rail Vehicle Technology Company, with Chen as the legal representative and shareholder) in nine installments, with a total transfer of 19.75 million yuan. Although the above transfers are marked with summaries such as "repayment", "salary", "demolition payment", "goods payment", "current and current payments", "loan", etc., there is no real basic contractual relationship such as loan, purchase, etc. to support them.
After the 66% shareholder of Company A discovered the above situation, they applied to the company's supervisor. The supervisor then filed a lawsuit on behalf of Company A with the people's court, requesting that Chen be ordered to return the funds of 19.75 million yuan and interest, and claiming that Company B should bear joint and several liability for repayment.
2、 Controversy Focus
1. Whether the supervisor has the subject qualification to file a lawsuit on behalf of the company in this case;
Does Chen's act of transferring company funds into his personal account and the account of Company B constitute damage to the company's interests and misappropriation of company property;
3. Should Company B and Chen jointly bear joint and several liability for the collection of 2.5 million yuan.
3、 Summary of the Judgment
After trial, the court found that:
（1） On the Subject Qualification of Supervisory Representative Litigation
According to Article 151 of the Company Law, if a director or senior management personnel damages the interests of the company, shareholders may request in writing that the supervisory board or the supervisors of a company without a supervisory board file a lawsuit with the people's court. The subject of this lawsuit is the legal relationship in which the company's shareholders (senior management personnel) harm the company's interests. The supervisor filed a lawsuit on behalf of the company based on the application of the shareholder holding 66% of the shares, and the subject is qualified. The defendant argues that the shareholder is a "nominal shareholder", but the shareholder's identity should be determined based on the company's shareholder register and business registration information. The shareholder is the initiator shareholder who originally acquired equity, and the company also recognizes their shareholder identity. Therefore, they have the right to request the supervisor to file a lawsuit in this case.
（2） Regarding whether Chen constitutes embezzlement of company property
Article 20 and Article 147 of the Company Law specify that shareholders of a company shall not abuse their shareholder rights to harm the interests of the company or other shareholders. Directors, supervisors, and senior management personnel have a duty of loyalty and diligence to the company and shall not misappropriate company property. Chen took advantage of his control over the company's finances to transfer 17.25 million yuan to his personal account. Except for 50000 yuan for wages, the transfer of the remaining funds was only for "repayment" or "demolition funds", lacking a legitimate basis and constituting embezzlement of company property, which should be returned; The transfer of 2.5 million yuan to Company B, which Chen failed to provide evidence to prove that there were reasonable reasons for the payment, should also be deemed as an improper transfer of company property.
（3） Regarding the Responsibilities of Company B
Although Company B argued that the 2.5 million yuan it received was an investment from Chen, the statement did not match the facts stated in the written evidence. Chen and Company B did not provide evidence regarding the existence of contractual relationships such as loans, sales, and the reasonableness of the transfer between the two parties. Given the relationship between Chen and Company B, the court has determined that Company B's collection of the 2.5 million yuan constitutes joint infringement with Chen, and should bear joint and several liability with Chen for the 2.5 million yuan and corresponding interest.
Based on this, the court ruled that Chen shall return 19.75 million yuan (17.25 million yuan for personal accounts and 2.5 million yuan for affiliated companies) to Company A and pay corresponding overdue interest (calculated from July 12, 2022 at the same one-year loan market quoted interest rate until the actual payment date); Company B shall bear joint and several liability for the principal and interest of 2.5 million yuan.
4、 Case analysis
（1） 'Lawsuit by Supervisory Representative' - Cracking the Procedural Channel for 'Legal Representative's Self theft'
The core procedural issue in this case is' who will sue on behalf of the company '. The legal representative is the agency responsible for expressing the company's intentions. When an infringement is committed by the legal representative, the company often falls into the dilemma of "suing themselves" - the legal representative will neither initiate legal action on behalf of the company nor assign others to sue. At this point, litigation by the representative of the supervisor becomes a critical channel.
Article 151 of the Company Law stipulates the path for shareholders to request supervisors to sue: when directors or senior management personnel harm the interests of the company, shareholders may request in writing that the supervisory board (or supervisors of companies without a supervisory board) file a lawsuit with the court. In this case, the shareholder holding 66% of the shares applied to the supervisor, who sued on behalf of the company, and the court confirmed their eligibility as the subject. This institutional arrangement provides shareholders with a relief channel to bypass the notion that "infringers control the company's intentions" when internal governance fails. It is worth noting that Article 189 of the new Company Law, which will come into effect on July 1, 2024, further expands the application of shareholder representative litigation on the existing basis, and the rights protection toolbox for shareholders and supervisors is more complete.
（2） The boundary of loyalty obligation - 'controlling company finances' does not mean' being able to dispose of company property at will '
One of the core logics of the defendant's defense is that "although the money was transferred by me, the company has been demolished, closed down, and is waiting for liquidation. The transfer may be considered as a loan or property confusion from the company, and has not actually reduced the company's interests". The court did not accept this defense.
Article 147 of the Company Law stipulates that directors, supervisors, and senior management personnel have a duty of loyalty to the company and shall not embezzle company property. The actual control of the company's finances by the legal representative is a necessary condition for performing their duties, but it is not the basis for them to arbitrarily dispose of the company's assets. On the contrary, precisely because they have control over the finances, they have a higher duty of loyalty and a heavier burden of proof. In this case, relying solely on self annotated transfer summaries such as "repayment" and "demolition funds", without evidence such as loan contracts, repayment agreements, and real debts, cannot resist the determination of embezzlement of company property. This provides a clear response to the common misconception of "who controls the funds": control does not equal ownership, and control does not equal disposal.
（3） Joint infringement and joint liability of affiliated companies - the most practical aspect of this case
In practice, after the company's funds are transferred out, they often flow into affiliated companies controlled by the legal representative, forming a situation of "funds left to right". If only individual responsibility is pursued, the funds may have been safely deposited under the name of the affiliated company, and the winning judgment is still difficult to enforce.
In this case, the court determined that the transfer summary of 2.5 million yuan received by Company B was "payment for goods", "transaction funds", and "loan". However, Company B could not provide evidence of a genuine transaction or loan relationship with Company A, and its statement that "it is Chen's investment funds" contradicted written evidence. Given the relationship between Chen and Company B, the court, based on Article 1168 of the Civil Code, which states that "if two or more persons jointly commit an infringing act and cause harm to others, they shall bear joint and several liability," determines that the two parties constitute joint infringement. This determination includes the "affiliated companies that received the money" in the scope of responsibility, greatly improving the practical enforceability of recovery, and is the most practical highlight of this case.
（4） The allocation of burden of proof - 'Whoever transfers the money, who proves its legality'
In this case, all transfer activities were carried out by Chen, and objective evidence such as bank statements has fully presented the flow of funds. The court assigned the burden of proof for the existence of a legal basis for the transfer to Chen and Company B: Chen failed to provide reasonable reasons for the personal transfer of 17.2 million yuan and the transfer of 2.5 million yuan from related parties, while Company B failed to provide evidence for contractual relationships such as loans and sales. Therefore, they each bear the adverse consequences of their inability to provide evidence. This is a typical application of the "who holds the evidence, who bears the burden of proof" rule - the fund transferor has the obligation to explain and prove the legitimacy of their transfer behavior, rather than the damaged company proving the negative fact that "the other party has no legitimate reason".
（5） Company closure for liquidation does not mean exemption from liability
The defendant raised the defense that "the company has been demolished and closed down, and is in the process of waiting for liquidation", attempting to explain that the transfer behavior "did not actually reduce the company's interests". The reason why this defense cannot be established is that regardless of whether the company is in the normal operation, liquidation, or dissolution stage, the company's property belongs to the company and is independent of individual shareholders. Any unauthorized possession or transfer constitutes an infringement of the company's property rights. The suspension of business for liquidation actually highlights the "distributable nature" of the company's assets - transferring company funds at this time directly damages the distributable interests of all shareholders and creditors, and the nature is more serious.
5、 Reminder to parties involved in similar disputes
1. Timely fix evidence. Once shareholders and supervisors discover that the legal representative or senior executives have made large transfers to personal accounts or related parties, they should immediately retrieve and keep bank statements, transfer vouchers, and financial books. If necessary, they should apply to the court for investigation and evidence collection or evidence preservation.
2. Use sufficient supervisory and shareholder representative litigation. Shareholders may request in writing to the board of supervisors/supervisors to sue on behalf of the company in accordance with the Company Law; Supervisors should perform their duties in a timely manner and, if necessary, file lawsuits on behalf of the company to avoid missing the opportunity to protect their rights due to the company's lack of leadership.
3. Bring the payee into litigation together. For affiliated companies and natural persons receiving funds, the focus should be on examining their relationship with the transferring party, advocating for joint infringement and joint liability, to prevent the funds from "disappearing" and the judgment from being invalidated.
4. Apply for property preservation in a timely manner. Whether such cases can be executed after winning largely depends on whether the property has been transferred in advance. Suggest applying for property preservation while filing a lawsuit, freezing the transferred funds and assets under the defendant's name.
5. Make good use of the "reverse verification" of bank statements and transfer summaries. The annotations such as "payment for goods", "loan", "current and payable" in the transfer summary, if not supported by basic evidence such as contracts, invoices, and reconciliation documents, can become strong evidence of improper transfer of property.