Forestalling Chinese Corporate Fraud: Having Shareholders Guarantee the Company?
Shareholders who have actual control over the company should not be under the shield of the company’s limited liability.
The biggest hurdle we have had when helping clients resolve trade disputes or collect debts is that the debtors have no assets available for compensation.
For many traders and distributors, although the financial flow of their bank accounts is significant, it is all their customers’ money, which will not stay in the accounts for long.
These companies also have almost no fixed assets. They may have undelivered goods from their customers that are still under their control. However, it is difficult to find these goods.
In this case, one would hope that shareholders take responsibility for their companies.
However, like the laws of most other countries, Chinese law does not request shareholders to repay the debts of their companies based on the principle of the company’s limited liability.
And of course, there are statutory exceptions. However, the exceptions are so rare that they can hardly be applicable.
Therefore, when you enter into a contract with a Chinese company, you may consider asking the company’s shareholders to guarantee the company debt and sign the pertinent documents, which, when needed, entitle you to ask the shareholders to repay debts for their company.
In fact, this is the most common practice that Chinese banks would use to protect their loans. When a Chinese company borrows from a Chinese bank, the bank will identify the shareholder who has actual control over the company and then ask him to guarantee the debt, which greatly improves the bank’s chances of acquiring repayment and compensation.
If you are dealing with a Chinese company for a relatively large amount, or you are in a dominant position, you may consider requiring the Chinese company’s shareholders to undertake guarantee liability as well.
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