Brief Introduction to the Case
Z Shoe Materials Co., Ltd. is a company mainly engaged in the production and sales of shoe materials and the production of leather shoes, with the legal representative being Mr. Li.
M Shoes Co., Ltd. is a company mainly engaged in shoe manufacturing, wholesale and retail. Its legal representative and sole natural person shareholder is Mr. Feng.
Between 2012 and 2016, Z Shoe Materials Co., Ltd. (hereinafter referred to as Z Company) and M Shoe Industry Co., Ltd. (hereinafter referred to as M Company) had a long history of transactions. M Shoe Industry Co., Ltd. purchased shoe materials and other materials from Z Shoe Materials Co., Ltd. As of November 28, 2016, M Company still owes Z Shoe Materials Co., Ltd. over 880000 yuan in payment. The aforementioned payment has not been paid by M company for a long time.
In December 2016, Z Company filed a lawsuit in court, requesting the people's court to order the defendant M Company and its legal representative Feng to return the outstanding payment, including principal and interest, to the plaintiff Z Company; The acceptance fees and property preservation fees incurred during the litigation period shall be jointly borne by the two defendants.
During the first instance trial, the defendant Feng refused to appear in court without justifiable reasons and did not provide a defense after being summoned by the people's court.

Court Trial Results and Reasons
The first instance court held that there was a long-standing transaction between Company M and Company Z, and the sales contract relationship between the two parties was established. Z Company supplied shoe materials to M Company according to the agreement, and M Company should pay the payment on time. Z Company claims that M Company still owes 880000 yuan and submitted a statement to prove it. The facts are clear and the evidence is sufficient, and M Company should make the payment. M Company requires that the outstanding payment be used as the base, starting from December 1, 2016, after the last reconciliation between the two parties, According to the interest rate standard for similar overdue loans of the People's Bank of China during the same period, M Company is required to pay the delayed payment interest until the actual repayment date, which complies with legal regulations and is supported. M Company is a limited liability company solely owned by natural persons. As its legal representative and sole shareholder, Feng has not submitted evidence to prove that his personal property is independent of M Company's property. Z Company requires him to bear joint and several liability for M Company's aforementioned debts, which complies with legal provisions and is supported. Defendants M Company and Feng, who were lawfully summoned by the first instance court and refused to appear in court without justifiable reasons, shall be deemed to have voluntarily waived their relevant litigation rights and made a default judgment in accordance with the law. In conclusion, according to Article 144 of the Civil Procedure Law of the China, Article 8, 60, 113, 159 of the

Contract Law of the Company Law of the People's Republic of China, and Article 63 of the Company Law of the Company Law of the People's Republic of China, the judgment is as follows:
1、 Defendant M Company paid the plaintiff Z Company over 880000 yuan in payment and delayed payment interest (based on over 880000 yuan, calculated from December 1, 2016, according to the same overdue loan interest rate standard of the People's Bank of China for the same period until the actual repayment date);
2、 Defendant Feng is jointly and severally liable for the aforementioned debts of Defendant M Company as determined in this judgment.
3、 The acceptance fee and property preservation fee for this case shall be borne by the defendants M Company and Feng.
   

After the judgment of the first instance of the case was pronounced, the defendant M Company and Mr. Feng filed an appeal to the Intermediate people's court of Guangzhou against the judgment of the first instance, saying:
（1） The first instance court's lawsuit of confusing the purchase and sale contract with the lawsuit of denying the legal personality of the company breaks through the relativity of the contract, the trial facts are unclear, and the application of the law is incorrect.
The first instance court only ruled that Feng should bear joint and several liability for the debts of M Company as a sole shareholder based on his failure to appear in court, distorting the legal requirements of Company Law and Contract Law, and mistakenly allocating the burden of proof, resulting in an incorrect judgment. The lawsuit filed by Company Z against Company M is based on the sales contract between the two parties, which is different from the lawsuit of denying legal personality filed based on the property confusion between Company M's shareholders and Company M. The former follows the constraints of contract law and cannot break through its relativity; The latter is a lawsuit related to the company, provided that the debt of a one person limited liability company is first confirmed, and secondly, there may be financial confusion between the shareholders of a one person limited liability company and the company. The principle of Reverse onus can be applied in the latter's company related litigation. This indicates that in the sales contract dispute between Z Company and M Company, if Z Company believes that M Company's shareholder Feng is jointly and severally liable, it should bear the corresponding burden of proof and prove that M Company and its shareholder Feng have financial confusion. Otherwise, Company Z can only file a separate lawsuit against Company M's shareholder Feng after the debt under the sales contract with Company M has been confirmed. In this case, as a shareholder, Feng should bear the burden of proof, which is in accordance with the relevant requirements of Company Law. If the logic of the first instance court's judgment is followed, any contract dispute between companies can directly add the shareholders of the company as the subject of joint and several liability, which is clearly contrary to the legislative intent of the Company Law. Only after the confirmation of the debt and debt relationship between companies, which involves financial confusion between shareholders and the company, can the corresponding provisions of the Company Law be strictly applied. Otherwise, the general rules of proof should be strictly applied so as not to lead to the abuse of litigation rights, and the main responsibility of a limited company is virtually non-existent.
（2） Feng and M Company's finances are independent of each other and there is no confusion.
M Company has an independent business address, operating mechanism, and financial system, and is a limited liability company entity that independently assumes legal responsibility. Feng has submitted audit reports from 2013 to 2016, which is sufficient to prove that M Company's finances are completely independent of Feng, and M Company has an independent business address and operating mechanism, and there is no confusion between Feng and M Company's finances.
（3） The subject of the dispute is M Company. In the dispute over the purchase and sale contract in the lawsuit, the contracting party is M company, and the payment account is also M company's company account. It is completely M company that has transactions with Z company as the contracting party, and there is no confusion between Feng and M company's finance during the contract performance process. The evidence submitted by Company Z in the first instance also indicates that the purchasing unit reflected in the contract is Company M, and the account used is Company M's account in Panyu, Guangzhou. The actual payment transaction is also the corresponding account of Company M. Therefore, even during the performance of the sales contract sued by Company Z, there was no confusion between Mr. Feng and Company M's finance.
In summary, Feng believes that the first instance court's determination of the facts is unclear and the application of the law is incorrect. From the perspective of the specific performance process of the sales contract or the operating mechanism of M company, there is no situation where Feng and M company's finance are confused. M company should assume corresponding legal responsibilities as an independent entity.
The court of second instance held that this case is a dispute over a sales contract, and the factual sales contract relationship between M Company and Z Company is based on the true intentions of both parties. The content does not violate mandatory provisions of laws and administrative regulations, and is legal and valid.

The focus of controversy in the second instance of this case is whether Feng should bear joint and several liability for the debt owed by M company to Z company.
Article 63 of the Company Law of the Company Law of the People's Republic of China stipulates: "If the shareholders of a one person limited liability company cannot prove that the company's property is independent of their own property, they shall bear joint and several liability for the company's debts." The above article clearly stipulates that if the shareholders of a one person limited liability company claim that they do not have to bear joint and several liability for the company's debts, they shall prove the fact that the company's property is independent of their own property. In this case, M company is a one person limited liability company, and Feng is its sole shareholder. Therefore, Feng's appeal claims that Z company should provide evidence to prove that M company and shareholder Feng have financial confusion, which lacks evidence and is not supported.
In the second instance, Feng submitted the audit reports of M Company from 2013 to 2016 to prove that his shareholder's personal property was not mixed with M Company's property. After investigation, it was found that the above audit reports were all issued by M company unilaterally and were not recognized by Z company; Second, according to the provisions of Article 62 of the Company Law of the Company Law of the People's Republic of China, Company M shall entrust an accounting firm to audit the company's financial situation and prepare an audit report at the end of each fiscal year. The three annual audit reports provided by Company M for 2014, 2015, and 2016 were all issued on April 18, 2017, which is the litigation period after the first instance filing of this case and does not comply with the provisions of the Company Law mentioned above; Thirdly, the four audit reports mentioned above are all general annual audit reports and are not special audit reports on whether the assets of a one person limited liability company are mixed with those of its shareholders. They cannot directly prove whether there is any financial confusion between M company and its shareholder Feng. Therefore, the evidence submitted by Feng is not yet sufficient to prove that the property of M company is independent of its personal property, and his claim of exemption from liability is not accepted. Therefore, the first instance court ordered Feng to bear joint and several liability for the payment and interest obligations that M company should bear to Z company. The evidence is sufficient, and the second instance court upheld it.
As for Feng's appeal, he believes that the joint liability of shareholders of a one person limited liability company for the company's debts should not be examined in the basic legal relationship litigation. In this regard, Article 63 of the Company Law of the Company Law of the People's Republic of China stipulates that the shareholders of a one person limited liability company shall be jointly and severally liable for the debts of the company if they cannot prove that their property is independent of the company's property, but it does not stipulate that the company's debts can be claimed from the shareholders only after they have been confirmed in advance by litigation. Therefore, there is a lack of evidence for Feng's claim, and the second instance court will not accept it.
In summary, the first instance judgment clearly identifies the facts and correctly applies the law, which should be upheld. The appellant Feng's appeal requests lacked factual and legal basis, and the second instance court did not accept them and rejected them. In accordance with the provisions of Paragraph 1 (1) of Article 170 and Article 175 of the Civil Procedure Law of the People's Republic of China, the judgment is as follows:
Reject the appeal and uphold the original judgment.

Case Review
1、 On the Applicability of Claims for Sale Contracts and Claims for Denial of Corporate Personality
Denial of corporate personality refers to the legal system in which shareholders abuse the independent status and limited liability of a company to evade debts, seriously damaging the interests of creditors. Creditors can bypass the company's legal personality and directly request shareholders who abuse the company's personality to assume joint liability for the company's debts. Article 20 of the Company Law of the Company Law of the People's Republic of China stipulates that the shareholders of the company shall abide by laws, administrative regulations and the articles of association, exercise their rights according to law, and shall not abuse the independent status of the company as a legal person and the limited liability of shareholders to damage the interests of creditors. If a company's shareholders abuse the independent status of the company's legal person and the limited liability of shareholders, evade debts, and seriously harm the interests of the company's creditors, they shall bear joint and several liability for the company's debts. In layman's terms, the denial of a company's legal personality protects the interests of creditors. Creditors can seek repayment from any shareholder of the company for the claims in the sales contract. Therefore, the author believes that in this case, the lawsuit of denying the corporate personality of the company can be fully applicable to the lawsuit of the sales contract.
2、 On whether Feng has the obligation to pay interest and bear joint and several liability for repayment to Company Z
This is the focus of controversy in the second instance of this case. The author believes that the key to determining whether Feng has joint and several liability for repayment lies in whether there is financial confusion between Feng and M Company. In the second instance, Feng submitted the audit reports of M Company from 2013 to 2016 to prove that his shareholder's personal property was not mixed with M Company's property. As the entrusted agent ad litem of the plaintiff Z Company, the author pointedly pointed out that the audit reports submitted by Mr. Feng were all issued on the same day after the lawsuit was filed, which did not comply with the provisions of Article 62 of the Company Law of the Company Law of the People's Republic of China that "Company M should entrust an accounting firm to audit the company's financial situation and prepare an audit report at the end of each accounting year"; The audit report submitted by Feng is a general annual audit report, not a special audit report, and cannot prove that Feng's personal property is independent of the company. Article 63 of the Company Law of the Company Law of the People's Republic of China stipulates that "if the shareholders of a one person limited company cannot prove that the company's property is independent of the shareholders' own property, they shall bear joint and several liability for the company's debts." This directly puts the plaintiff in an invincible position, which is also sufficient to prove that Mr. Feng must bear joint and several liability for repayment.
Case inspiration
The purchase and sale contract disputes of such companies remind business owners and citizens:
(1) During the daily operation of the company, the audit work should be carried out in accordance with the law and on time, and should be issued by professional institutions and personnel in accordance with the law and regulations; It is not advisable to hastily seek audit institutions to issue past annual audit reports in response to disputes. This not only fails to achieve the expected effect of exemption, but also leads to a waste of financial resources in hastily seeking audit institutions to respond to lawsuits.
(2) As the creditor, fully utilize the natural person sole proprietorship company stipulated by law. If there is no evidence to prove that the company's property is independent of personal property, the natural person sole proprietorship shareholder shall be jointly and severally liable for the company's debts. In this way, the creditor can fully use the provisions of Article 63 of the Company Law of the Company Law of the People's Republic of China to safeguard the legitimate rights and interests of the creditor to the maximum extent.
(3) M Company is currently applying for bankruptcy due to its severe debt of over 20 million yuan owed to the outside world. The dispute over the payment of goods for Company Z, represented by the author, has been resolved by the first and second instance courts, and it has been ruled that Feng, a sole proprietorship shareholder of Company M, shall bear joint and several liability for the payment owed by Company M to Company Z. M Company also has some cases where the plaintiff's agent does not list Feng, a sole proprietorship shareholder of M Company, as a co defendant. According to the principle of "no litigation, no action" in civil cases, there are no cases where Feng, a sole proprietorship shareholder of M Company, is a co defendant. If M Company goes bankrupt, the creditors can only be compensated proportionally through bankruptcy proceedings. The creditor's rights of Company Z, despite the bankruptcy of Company M, are jointly and severally liable for repayment of the company's debts by its sole proprietorship shareholder Feng, which fully demonstrates the importance of litigation strategies and techniques in the litigation process.

Huang Jialin is a student of Law School of Heilongjiang University;
The author Huang Changgan is a partner/lawyer at Guangdong Legal Shengbang Law Firm.