case ：
Company A was declared bankrupt by a Shanghai court due to poor management. During the bankruptcy proceedings, the trustee discovered that shareholder A had withdrawn his 1 million yuan capital contribution shortly after the companys establishment under the pretext of "repaying investment loans." Based on this bank transaction record, the trustee initiated a bankruptcy derivative lawsuit demanding the return of the withdrawn capital, compensation for interest losses, and t liability from the legal representative and senior executives for the capital withdrawal. During trial, the shareholder argued that he had fulfilled his capital contribution obligations through paid-in capital verification, and that the 1 million yuan withdrawal was not an act of capital withdrawal but rather repayment of a loan from the companys initial investment, asserting no capital withdrawal had occurred.
This paper intends to describe the concept of withdrawal of capital, the identification criteria of withdrawal of capital and the responsibility for withdrawal of capital through the above cases.
I. The concept and scope of bankruptcy derivative proceedings
(I) Definition and scope of bankruptcy derivative proceedings
Bankruptcy derivative litigation refers to legal proceedings arising from various legal relationships during bankruptcy proceedings. This category encompasses a broad spectrum of issues, including contractual disputes such as sales contract disputes with suppliers and labor contract disputes with employees; tort disputes intellectual property infringement and environmental pollution violations; as well as shareholder liability-related matters such as recovery of unpaid capital contributions and enforcement of withdrawn capital contributions.
(2) the relationship between bankruptcy derivative proceedings and bankruptcy proceedings
Bankruptcy derivative litigation and bankruptcy proceedings are closely intertwined and mutually influential. On one hand, bankruptcy proceedings provide the specific context and framework for derivative litigation. During bankruptcy proceedings, corporate assets are centrally managed and creditors rights are uniformly protected, laying the foundation for resolving asset distribution and liability issues in derivative litigation. On the other hand, the outcome of derivative litigation directly impacts the progress of bankruptcy proceedings. For instance, successfully recovering shareholders withdrawn capital can increase the bankruptcy estate, thereby ing creditors repayment ratios and the lihood of restructuring the bankrupt company.
II. The concept of shareholders withdrawal of capital and its common methods
According to the Company Law of the Peoples Republic of China and relevant judicial interpretations, shareholder withdrawal refers to acts such as: after shareholders have invested capital, they distribute profits by fabricating false financial statements; transfer their capital out through fictitious creditor-debtor relationships; transfer capital out via related-party transactions; or withdraw capital through other illegal procedures.
(1) fabricating creditor-debtor relationships
This fraudulent practice typically involves shareholders meticulously fabricating debt instruments such as forged IOUs and contracts, then diverting corporate funds under the guise of debt repayment. The scheme often employs covert operational methods requiring multi-party collusion and intricate financial arrangements. To detect and prevent such activities, companies must conduct thorough audits of their financial transactions, closely monitoring suspicious fund movements and unreasonable debt obligations.
(2) Use of related transactions
Common types of related-party transactions include transferring high-quality assets to affiliated parties at discounted prices, or purchasing inferior goods or services from them at inflated costs. To assess the reasonableness and legality of such transactions, a comprehensive evaluation should consider factors whether transaction prices are fair, whether they align with market norms, and whether necessary approval procedures have been followed. If a related-party transaction significantly harms the companys interests without legitimate business purposes, it may be deemed as a means to evade capital contributions.
(3) preparing false financial statements
There are various methods to fabricate financial statements, such as inflating costs to suppress profits or concealing income to reduce a companys net assets. Financial audits play a crucial role in preventing such practices. Professional auditors can detect irregularities and falsifications in financial reports by analyzing data, reviewing supporting documents, and communicating with relevant personnel.
(4) other ways of withdrawing capital
Beyond the aforementioned common practices, there are instances of direct embezzlement of corporate assets, such as shareholders misappropriating company cash and fixed assets. Another tactic involves improper profit distribution – violating corporate bylaws and regulations to allocate profits beyond statutory thresholds or in excess of distribu limits, thereby indirectly achieving capital withdrawal. These methods typically cause more direct and visible damage to a companys property rights.
III. Four requirements for recovery of shareholders withdrawal of capital
(I) Subject matter
The primary subjects of capital withdrawal are typically company shareholders. However, in certain circumstances, indirect shareholders or actual controllers who played a leading or assisting role in the capital withdrawal may also be identified as responsible parties. The determination hinges on whether they possessed actual control and influence over corporate capital contributions, and whether they implemented withdrawal actions through specific means.
(2) Subjective elements
Subjective intent is a crucial factor in determining whether shareholders have withdrawn capital. This requires a comprehensive evaluation of the shareholders motives, objectives, and awareness of the withdrawals consequences. If a shareholder knowingly violates corporate law and company bylaws by deliberately transferring capital without legitimate business purposes or justifications, it can be concluded that they acted with deliberate intent to withdraw capital.
(3) Elements of conduct
Capital withdrawal manifests in various forms, including fabricated creditor-debtor relationships, manipulation of related-party transactions, and manipulation of financial statements. Additionally, transferring corporate funds through covert channels to personal or affiliated accounts, or reducing company assets via illegal capital reductions and disguised profit distributions may also constitute capital withdrawal. These practices share a common characteristic: they diminish corporate capital reserves and compromise the companys property rights.
(4) Result requirements
The act of capital withdrawal must have caused harm to the interests of the company, other shareholders, or creditors. Such harm may manifest as reduced corporate assets, diminished debt repayment capacity, impaired equity value for other shareholders, or failure to fully satisfy creditors claims. Determining the extent of such damage requires a comprehensive evaluation based on specific case facts and financial data.
IV. Characteristics of recovery of shareholders withdrawal of capital in bankruptcy derivative litigation
(1) Complex legal relationship
Such disputes typically involve the interplay of multiple legal relationships. First, shareholders are obligated to fulfill capital contribution duties in accordance with corporate bylaws and statutory requirements. Second, shareholders may establish contractual agreements regarding specific terms contribution methods, ratios, and timelines. Third, a creditor-debtor relationship exists between the company and its creditors, who have the right to demand debt repayment through the companys assets. Furthermore, capital withdrawal processes often involve transactions with related parties and financial institutions. These interconnected legal elements significantly complicate case resolution by creating complex legal dynamics that require coordinated handling.
(2) difficulty in collecting evidence
When a company goes bankrupt, its financial status often becomes disorganized with unclear accounts and potentially missing, damaged, or tampered financial records. This makes evidence collection extremely challenging. For instance, proving shareholder capital withdrawal requires obtaining complete transaction chain evidence such as contracts, invoices, and bank statements, but these materials may be incomplete or difficult to obtain. Moreover, the authenticity and integrity of electronic evidence are hard to guarantee, while witness testimonies may lack credibility due to various influencing factors.
(3) Intense conflict of interest
In bankruptcy derivative proceedings, significant conflicts of interest exist among stakeholders including shareholders, bankruptcy trustees, and creditors. Shareholders typically seek to evade liabilities and minimize losses, while trustees must represent the interests of all creditors and recover withdrawn capital. Creditors aim to maximize the bankruptcy estate to enhance their repayment ratios. These intense conflicts of interest lead to adversarial litigation parties engage in fierce confrontations, significantly increasing the complexity and confrontational nature of such cases.
(4) the case has a significant impact
The resolution of such disputes significantly impacts the advancement of bankruptcy proceedings, distribution of assets, and corporate restructuring or liquidation. Successfully recovering shareholders withdrawn capital not only increases bankruptcy assets and improves creditors repayment ratios, but also creates opportunities for corporate reorganization. Conversely, failure to recover such capital may lead to difficulties in bankruptcy proceedings, compromise creditors interests, and potentially disrupt social stability and economic order.
V. Identification criteria and difficulties in judicial practice
(I) Criteria for identification
1. Review of the flow of funds
When reviewing fund flows, courts will examine whether the withdrawal routes demonstrate clear logic and relevance to the companys normal operations. If the fund movements lack transparency or show no connection to business activities, they may be deemed abnormal. Additionally, courts will scrutinize the ultimate destinations of withdrawn funds and whether there are any instances of capital flowing back to shareholders or related parties.
2. Determination of authenticity of transactions
To verify the authenticity of transactions between shareholders and related parties or third parties, it is necessary to examine relevant evidence such as contracts, invoices, and delivery certificates. If a transaction lacks a reasonable commercial purpose, exhibits obviously unreasonable pricing, or involves excessively favorable terms, it may be deemed as fraudulent transactions, thereby constituting capital withdrawal.
3. Inference of shareholders subjective intention
Courts typically assess shareholders subjective intent through a comprehensive analysis of their actions and conduct. This includes evaluating their statements and behaviors before and after fund transfers, participation in decision-making processes, and any concealment or misleading of the companys financial status. If a shareholder fails to provide reasonable explanations and evidence regarding the fund transfer, they may be deemed to have acted with the deliberate intent to withdraw capital contributions.
(ii) Difficulties
1. Acquisition and probative value of evidence
(1) Incomplete financial information
The incomplete financial documentation of bankrupt companies remains a major obstacle in evidence collection. Due to chaotic corporate management and inadequate financial systems, crucial financial records may be missing or account books in disarray, making it difficult to accurately trace the flow and purpose of funds. To address this issue, native evidence sources may be required—such as obtaining materials from relevant financial institutions and tax authorities, or gathering indirect evidence through investigations with company employees and partners.
(2) Identification of electronic evidence
In the digital age, electronic evidence such as emails, e-contracts, and financial software data is playing an increasingly vital role in proving capital withdrawal. However, the authenticity, integrity, and reliability of electronic evidence are often subject to scrutiny due to potential tampering, deletion, or forgery. Therefore, when evaluating electronic evidence, it is essential to employ professional technical methods for authentication and analysis, while cross-verifying with other forms of evidence to ensure consistency.
2. The interplay of legal relationships
(1) Intersection with other civil disputes
Such disputes may overlap with other civil issues contractual disputes, tort disputes, and guarantee disputes. For example, shareholders withdrawal of capital contributions could simultaneously constitute tortious acts against the company, or transactions with related parties might be invalidated due to violations of laws and regulations. When handling such cases, its crucial to accurately distinguish the nature of different legal relationships and apply appropriate laws to avoid confusion in legal application.
(2) The competition of criminal and civil liability
In certain circumstances, shareholders withdrawal of capital may simultaneously constitute criminal offenses such as capital withdrawal crimes and civil torts. In such cases, it is crucial to properly coordinate criminal and civil procedures, ensuring both the smooth progress of criminal proceedings and the protection of legitimate rights and interests of civil parties. Generally, if criminal proceedings have commenced, civil cases may be suspended until the criminal judgment takes effect before resuming trial. However, if the civil cases adjudication does not depend on the outcome of the criminal judgment, the civil proceedings may continue without interruption.
VI. Burden of proof
(1) The preliminary burden of proof of the bankruptcy administrator
1. The role of financial audit reports
Bankruptcy administrators typically engage professional auditing firms to examine the financial status of bankrupt companies. The audit report serves as crucial evidence for identifying clues and preliminary proof of capital withdrawal. It reveals the companys fund flows, verifies the authenticity of financial statements, and detects any unusual transactions. If abnormal capital transfers cannot be reasonably explained, this may constitute preliminary evidence of capital withdrawal.
2. Collection of internal company documentation
Bankruptcy administrators must collect internal documents such as shareholders resolutions, board resolutions, financial statements, and accounting vouchers from the company. These materials typically contain critical information regarding shareholder contributions, fund utilization, and profit distribution. When shareholders decisions or actions are found to violate the companys articles of association and applicable laws and regulations, such evidence can be used to substantiate the withdrawal of capital contributions.
(2) The burden of proof for the shareholders rebuttal
1. A reasonable explanation of the use of funds
Shareholders must provide reasonable explanations for fund transfers, such as demonstrating that the funds were used for legitimate purposes including regular business operations, investment projects, or debt repayments. To substantiate their claims, shareholders may need to submit supporting evidence including relevant contracts, invoices, bank statements, and project reports to prove the funds were used lawfully and appropriately.
2. Certificate of legality of transaction
If shareholders assert that the capital transfer was based on legitimate transactions, they must demonstrate the authenticity, legality, and rationality of these transactions. This requires providing evidence such as original transaction contracts, qualification certificates of counterparties, and valuation reports on transaction prices to prove that the transactions were conducted on a fair and equi basis without harming the companys interests.
(3) Examination and judgment of the burden of proof by the court
1. Sufficiency of evidence
The court will conduct a thorough and meticulous review of evidence submitted by both parties, assessing its sufficiency and reliability. Evidence must demonstrate relevance, legality, and authenticity, forming a complete chain of proof to support respective claims. If evidence contains flaws or contradictions, the court may require additional supplementary evidence or explanations from both sides.
2. Shift of burden of proof
During litigation proceedings, the burden of proof may shift when one party provides sufficient evidence to establish a prima facie case for the facts in question. For instance, if a bankruptcy trustee presents preliminary evidence demonstrating reasonable suspicion of a shareholders suspected capital withdrawal, the shareholder must then provide counter-evidence. Should the shareholder fail to present compelling proof, the court may rule against them based on the available evidence.
VII. Influence on bankrupt enterprises and creditors
(1) Increase of bankruptcy property
1. Effects on insolvency proceedings
In bankruptcy liquidation proceedings, recovered capital withdrawals will directly increase the total amount of bankruptcy assets. This means more assets become available for distribution to creditors, and the repayment ratio for ordinary creditors will correspondingly rise. For instance, if the original bankruptcy assets could only cover 30% of creditor debts, the repayment ratio could increase to 50% or even higher after successfully recovering capital withdrawals, thereby more effectively protecting creditors interests.
2. The significance of bankruptcy reorganization
In bankruptcy reorganization proceedings, sufficient capital serves as the cornerstone for business revival. Recovered capital from capital withdrawal can provide essential funding for technological upgrades, equipment modernization, and market expansion, helping companies regain profitability and competitiveness. Furthermore, this process sends a positive signal to potential strategic investors, significantly boosting the lihood of successful corporate restructuring.
(2) Safeguarding fairness and justice
1. Regulation of market order
The proper handling of such disputes can regulate and warn the behavior of shareholders in the market. The legal bottom line that shareholders are not allowed to withdraw their capital is clarified, which curbs the illegal behavior of shareholders, maintains the market order of fair competition, and promotes the healthy development of the market economy.
2. Building a social integrity system
By recovering the capital withdrawn by shareholders, the law demonstrates its adherence to the principle of good faith and strengthens the credit awareness of market entities. This helps to create a social atmosphere of honesty and trustworthiness, promote the construction of a social credit system, and fundamentally reduce the occurrence of similar illegal acts.
