1、 Basic case

The company is a limited liability company, and the registered shareholder information is: the major shareholder holds 80.00% of the shares; The minority shareholder holds 20.00% of the shares, but the major shareholder does not actually operate or control Company A. Company A is actually operated and controlled by the minority shareholder, who serves as the manager of Company A. The company's assets, accounts, materials, etc. are all controlled by them. The minority shareholders ignored the lawsuit and liabilities of Company A, which resulted in the company's inability to operate normally. Additionally, the minority shareholders evaded communication and inquiries from the major shareholders and never responded to their audit requests.

      When communicating the case, the person in charge of the major shareholder stated that since Company A is no longer able to operate normally, their initial demand is to use Company A's existing assets to repay its liabilities, in order to prevent further expansion of liabilities and ultimately cancel Company A. However, they are currently unable to effectively communicate with minority shareholders and have reached a deadlock. The handling lawyer inquired with the major shareholder about the operating conditions of Company A, and the person in charge stated that as far as he knew, Company A had been profitable in previous years. In recent years, due to his long-term residence abroad, although he is also the legal representative of Company A, he does not know the specific operating situation of Company A, nor does he know about the news of Company A's litigation and liabilities. It was not until he, as the legal representative of Company A, was restricted by the court that he found out that there were problems with Company A's operations. Previously, he had a friendly relationship with minority shareholders and trusted them more, but he did not expect them to betray their trust now. The person in charge of the major shareholder believes that based on the past business performance of Company A, it should not have reached the current level of insolvency. They also suspect that the minority shareholder has embezzled Company A's assets, but they suffer from a lack of evidence and do not know how to make a claim.

2、 Clarify the litigation plan

      After accepting the commission, based on the introduction of the responsible person of the major shareholder and the preliminary materials provided, in order to break the deadlock and safeguard the interests of the client, the handling lawyer proposes the following litigation plan: firstly, to file a compulsory liquidation application against Company A in the name of the major shareholder, so that the court and liquidation team can intervene, thereby prompting the actual operator of Company A, namely the minority shareholder, to respond. The major shareholder can also further understand the actual business situation and relevant written materials of Company A through the compulsory liquidation process. Then, in the process of compulsory liquidation, efforts should be made to uncover evidence that minority shareholders have harmed the interests of the company. Based on this, a lawsuit for liability disputes for damaging the interests of the company should be filed against them, ultimately achieving the goal of safeguarding the interests of major shareholders, Company A, and its creditors. 

3、   Apply for compulsory liquidation

      According to the Company Law, the shareholders' meeting may decide to dissolve the company. Although Company A is actually controlled by minority shareholders, the major shareholders still have certain initiative in terms of shareholding ratio and voting rights. Under the guidance of the handling lawyer, the major shareholder convened a shareholders' meeting in accordance with the provisions of the Company Law and passed a resolution agreeing to dissolve Company A.

When we visited the business premises of Company A, the minority shareholder still avoided us, but there were still employees working and machinery and equipment running on site. We also discovered goods belonging to the minority shareholder's affiliated company, Company D. During the online search process, we also found that the minority shareholder recently registered a new company in the operating location of Company A, which has the same business scope as Company A.

Based on the above situation, the handling lawyer drafted a compulsory liquidation application and prepared evidence materials, and represented the major shareholder to file a compulsory liquidation application against Company A with the local court.

4、 Mastering key evidence, filing a shareholder representative lawsuit by the major shareholder is equivalent to a lawsuit for damages to the company's interests

      After the court accepts the application for compulsory liquidation, it designates a local law firm as the liquidation team. We fully cooperate with the investigation of the liquidation team, but the minority shareholders still refuse to cooperate, claiming that Company A has no assets, only liabilities, and that he is not managing the company. He even strongly obstructed the liquidation team when they went to the company's operating location.

According to the materials held by the major shareholder at that time, such as electronic balance sheets and partial equipment lists, as of the first quarter of 2022, Company A still has a large amount of assets. Although there is no written confirmation from the minority shareholder, this evidence can serve as preliminary proof. Based on our on-site visits and the investigation of the liquidation team, the handling lawyer believes that it is now possible to file a lawsuit for liability for damages to the interests of the minority shareholders. The liquidation team did not initiate legal proceedings as they did not effectively take over the property. In order to prevent further loss of company assets, the handling lawyer communicated with the major shareholder and liquidation team, and suggested that the major shareholder file a shareholder representative lawsuit. Due to the need to exhaust internal remedies in shareholder representative litigation, the major shareholder shall submit an application to the liquidation team and receive written feedback from the liquidation team to obtain the qualification of the litigation subject. After the court accepted the case, the minority shareholder discovered that they had become the defendant and their assets had been seized. They took the initiative to contact the liquidation team and expressed their willingness to cooperate with the liquidation process, but still insisted that Company A had no assets and was not actually operating Company A.

In the lawsuit, we provided two important pieces of evidence: firstly, a certain company provided two purchase contracts during the process of declaring its debt to the liquidation team, showing that Company A had purchased machinery and equipment worth nearly 3 million yuan from the company around 2020; Secondly, in order to prove that Company A has no assets, the minority shareholders provided the liquidation team with an asset purchase agreement. The machinery and equipment of Company A listed in the attached equipment list were valued at 1 million yuan in 2021 to offset the debt owed by Company A to Company D. The handling lawyer found that the so-called debt offsetting equipment list includes machinery and equipment with a purchase price of nearly 3 million yuan, and after investigation, D company is an affiliated company of a minority shareholder. These materials can serve as evidence that minority shareholders have harmed the interests of the company. 

5、 Apply for asset appraisal and seize the initiative

        The first instance of this case was organized by the court for three court hearings and two on-site inspections. The main focus of the dispute is: 1. Does the plaintiff, who is the major shareholder, have the subject qualification to file a lawsuit in this case? 2. Does the defendant, who is a minority shareholder, sell some of the machinery and equipment to Company D to offset Company A's debt, constitute an act of using related party transactions to harm the company's interests? 3. Should minority shareholders bear compensation liability and the amount of compensation liability?

      During the trial process, regarding the so-called debt offsetting equipment claimed by the minority shareholders, the minority shareholders and their agents firmly believed that the equipment was no longer valuable, and there was no unfair situation in debt offsetting. The minority shareholders also did not engage in any behavior that harmed the interests of the company and did not need to make any compensation. The handling lawyer believes that the value of the so-called debt offsetting equipment at the time of transaction, which is the benchmark date for evaluation, is very important and related to the court's determination of important case facts. After communicating with the major shareholder and consulting relevant asset evaluation experts, we have decisively submitted an asset evaluation application. Finally, after being evaluated by a professional asset appraisal agency commissioned by the court, the value of the equipment used by the minority shareholder to offset the debt with a price of 1 million yuan on the benchmark date was over 3 million yuan. Based on the focus of the dispute and the evidence in the case, the handling lawyer has issued the following main opinions:

1. According to the Company Law and judicial interpretations, during the liquidation period of a company, eligible shareholders may still initiate shareholder representative litigation in accordance with the law, but it should still be based on exhausting internal remedies. During the period of compulsory liquidation or bankruptcy liquidation of the company, the functions of the directors/board of directors and supervisors/board of supervisors have actually been lost, and the liquidation team or manager shall exercise internal and external powers on behalf of the company. Therefore, the liquidation team or manager shall be regarded as an internal relief agency. In this case, the major shareholder, as a shareholder of Company A, has exhausted all internal remedies and therefore has the right to file a lawsuit in their own name.

2. The handling lawyer believes that whether the defendant, namely the minority shareholder, has engaged in acts that harm the interests of the company is manifested as infringement, which can be analyzed from the constituent elements of the infringement:

(1) The defendant is a shareholder and manager of Company A, who actually operates and controls Company A, and is a subject that harms the interests of the company in accordance with the provisions of the Company Law;

(2) The defendant actually controls and dominates the company, holds great power, and has the opportunity to harm the interests of the company, and has committed acts that harm the interests of the company, including but not limited to abusing shareholder rights to harm the interests of the company, using related relationships and related transactions to harm the interests of the company, misappropriating company funds, and violating the duty of loyalty to the company;

(3) The defendant's infringement directly resulted in the damage of Company A's interests;

(4) The defendant concealed the truth and distorted the facts, with obvious subjective malice and low credibility.

3. Regarding the issue of compensation liability for minority shareholders, based on the evidence and facts in the case, the major shareholder's claim is well founded and reasonable, and the minority shareholder should fully compensate.

In the end, the court made a judgment on the shareholder representative lawsuit filed by the major shareholder, namely the liability dispute for damaging the interests of the company: the minor shareholder paid compensation of more than 1.25 million yuan to Company A. 

6、 Experience in handling cases

      The phenomenon of small shareholders oppressing large shareholders in this case can be traced back to the fact that large shareholders had previously transferred their control and actual management rights to small shareholders based on trust. Unexpectedly, small shareholders betrayed their trust and transferred assets, resulting in the company being heavily indebted and facing operational difficulties. Large shareholders have become a "vulnerable group" and "victim", with no way to protect their rights. During the process of handling this case, the handling lawyer communicated with the client's demands, sorted out the facts of the case, analyzed legal relationships, and designed a litigation plan to "recover the argument" for the major shareholder and safeguard the legitimate rights and interests of the company and its creditors. Based on this case, the handling lawyer has the following experience:

1. When handling cases, one must dare to think and act. Faced with complex cases and serious missing materials, the parties may be at a loss. At this time, lawyers need to use their professional skills to dissect, analyze, determine their ideas and demands, and make corresponding adjustments as the case progresses. They should take advantage of the situation and strive to fight for the legitimate rights and interests of the parties as much as possible. In this case, initially the major shareholder only sought to prevent the company from bearing more debts, repay as many debts as there were assets, and "shut down" as soon as possible. Although they were dissatisfied with the bad behavior of the minority shareholder, they suffered from extreme information asymmetry and lack of concrete evidence. In fact, the deregistration of a company is not that simple, and as the case progresses, we have uncovered important evidence of the other party's infringement of the company's interests. In the process of promoting the deregistration of the company, we were able to recover losses for the company through litigation, exceeding the expected goals of major shareholders.

2. Be good at using a combination of punches when handling cases. Many cases cannot be resolved through a single litigation process, which requires lawyers to be familiar with the various procedures and different types and processes of litigation, fully and reasonably utilize them, and make them effective. In this case, I conveniently utilized compulsory liquidation procedures and shareholder representative litigation, and initiated crucial evaluation procedures.

3. Lawyers should be willing to communicate and be hands-on. During the case handling process, it is necessary to liaise with different parties such as the court, other parties, liquidation team/administrator, and evaluation agency, which requires lawyers to have sufficient communication. Company A is registered in another city, and the litigation is also conducted in another city. The court organized three court hearings and two on-site inspections, as well as other on-site visits, investigations, evidence collection, and participation in creditor meetings. The handling lawyer has traveled multiple times and participated in various aspects. Lawyers can participate on-site to gain more information and express their opinions, thereby better handling relevant cases.