Identification of community debts in family business governance

TThe criteria for “community debt” as negative property of a family has been revised several times by law. Finally, the doctrine according to which “the community debt must be signed jointly by both spouses” was established by article 1064 of the Civil Code, which provides that the debt used for the daily life or common affairs of the two spouses is a community debt. When a business is run by one or both spouses, the criteria of a “joint enterprise” and the debts of a “husband-wife enterprise” become key risks in corporate governance.

Judicial criteria

There are no consistent criteria for “joint affairs of spouses,” but local courts have provided guiding opinions. For example, Article 4 of the Opinion of the Zhejiang Higher People's Court on the Proper Settlement of Debt Disputes of Married Couples emphasizes that the common circumstances of “joint affairs of spouses” include matters jointly decided by spouses and authorized business. by one of the spouses and decided by the other.

Article 48 of the Jiangsu Higher People's Court's Guide to Judgment of Family Disputes (for Married Couples) emphasizes that “joint affairs of spouses” refers to the situation in which spouses jointly decide matters, or one of the spouses authorizes the other. to decide business matters or whether the other spouse benefits from the business.

Article 17 of the Tianjin Upper People's Guide on Trial of Private Loan Cases in Tianjin Courts (Trial) emphasizes that in determining whether the loan given to one of the spouses is used for the joint affairs of the spouses , the exam should focus on the following::

1. the debt of one of the spouses is used for the operation of a sole proprietorship or a rural enterprise under contract;
2. one of the spouses carries out an operating or investment activity, while the other, although not directly participating, shares the income from these activities; Or
3. other circumstances of joint activity of the spouses.

When considering the joint affairs of spouses in relevant cases, the Supreme People's Court would also consider whether one of the spouses owns shares, holds a position, participates in the management of the business, has economic ties with the business, is aware of the consequences of debt and whether the debt arose during the marriage.

It is obvious that in judicial practice, the criteria for “joint enterprise of spouses” focus on:

1. whether the debt is dedicated to the company;
2. whether the business is based on the common will of the spouses, which is manifested by joint decision-making, joint investment and operation, division of tasks and cooperation, as well as other expressions of common intention. The spouse who agrees to have the community property managed by the other is deemed to accept and bear all the consequences of the exploitation of the property; And
3. if the operating income constitutes the main income of the family or is mainly used for common life, that is to say if the debt income is used for the joint life of the spouses.

Joint liability

A limited liability company established by a married couple for a joint business is called a “husband-wife company”. According to article 57 of the Companies Code, a “single-member limited liability company” means a limited liability company which has only one shareholder, natural person or legal entity.

However, based on the provisions of the Civil Code on “community property” and the point of view established in judicial practice according to which “when a married couple creates a company, the capital contributions come from the same property rights, giving rise to to singular shareholdings,” it is It is not uncommon to identify the husband and wife business as a sole proprietorship.

In legal practice, a business between spouses is identified as a sole proprietorship from the following point of view: all shares of a business between spouses originate essentially from joint ownership and are controlled within the framework of joint ownership common. Shareholders demonstrate consistency of interest and singularity of substance, often avoiding the typical mutual constraints among shareholders of a standard limited liability company, easily commingling community assets with corporate assets to the detriment of creditors.

Therefore, the husband-wife business is very similar to a one-person business in terms of adherence and normative application, and is therefore essentially a one-person business. If it cannot be proven that the community assets are independent of the corporate assets, the spouses, as shareholders, will be jointly and severally liable for the corporate debts.

Denial of legal personality

An opposing view holds that a husband and wife business cannot be equated to a one-person business. A one-person company is determined by the number of shareholders rather than the origin of share capital or share ownership, nor can a one-person company be identified simply on the basis of family affiliation, -participation of one of the spouses in the main activities of the company. decisions or operations, and the inclusion of business profits in community property.

There are two shareholders in a marital business, which does not meet the formal criteria for a sole proprietorship. There is therefore no legal basis for treating a marital business as a sole proprietorship.

In determining whether the shareholders of a spousal corporation should be jointly and severally liable for the corporation's debts with their personal assets, it is not appropriate to assess whether the corporation operates essentially as a sole proprietorship.

Instead, under Article 20(3) of the Corporation Code, which states: “If shareholders abuse the independent legal personality and limited liability status of the company to evade debts, thereby harming seriously to the interests of the company's creditors, they must bear joint responsibility for “The debts of the company”, it must be checked whether the business of a husband and wife meets the criteria of non-compliance with the personality morality and thus determine whether the shareholders are responsible for the joint settlement of the company's debts.

In summary, the author believes that a husband and wife business should ensure adequate risk isolation between business and family in its daily operation to avoid the risk of mixing business and family assets in the course of business.

Yuwen Hongyan is a partner at Anli Partners