On the Application of Measures to Restrict High Consumption of Legal Representatives in China ()
1. Introduction
In China’s practice of compulsory enforcement, restrictions on high consumption are frequently imposed on the legal representative of the company, the actual controller, the principal person in charge and those directly responsible for the performance of the company’s debt (although the research object in this thesis is limited to the legal representative, it applies to the other persons above). Restrictions have become a common enforcement tactic used to force the company to perform its debts. This way obviously does not match the limited liability of the shareholders of limited companies. In many cases, the restriction measures not only fail to serve as a deterrent in enforcement, but also cause negative social effects on the “recovery” and “regeneration” of the economic ability of the persons subject to enforcement.
2. Basic Contents of the Restriction of High Consumption
2.1. The Order of Restricting High Consumption
The restriction of high consumption order is a kind of indirect enforcement measure of the people’s court to restrict the high consumption of the person subjected to execution.
In civil enforcement, the people’s court will sign a consumption restriction order to restrict the high consumption of the person subject to enforcement for dishonesty and the relevant consumption that is not necessary for life or business.
When the person subject to enforcement fails to perform the payment obligations determined in the effective legal document within the period specified in the enforcement notice, or is included in the list of persons subject to enforcement for breach of trust, the people’s court may sign a consumption restriction order to restrict his high consumption and the relevant consumption not necessary for life or business.
The purpose of issuing an order to limit high consumption is to prevent the impairment of the victim’s property and effectively protect the legitimate rights and interests of creditors.
2.2. The Implementation Measures
Firstly, sign and issue:
If the court decides to take measures to restrict consumption, it shall issue a consumption restriction order to the person subject to enforcement. The consumption restriction order shall be signed by the president of the people’s court ( Supreme People’s Court of China, 2015 ).
Secondly, Content and time limit:
The consumption restriction order shall specify the period, items and legal consequences of the restriction. In practice, the provisions of Article 246 of the Civil Procedure Law are generally applied, namely: “The period of application for execution is two years.” “If the period of performance is not specified in the legal document, it shall be calculated from the date the legal document comes into force “(Civil Procedure Law of the People’s Republic of China, 2021), and if the person subject to execution still fails to complete the performance after the expiration, the person applying for execution may apply for renewal.
Inform against (an offender):
If the person subject to execution is found to have high consumption behavior, and verified, according to the relevant provisions, the person subject to execution shall be detained or fined, and the circumstances are particularly serious. In addition, the Supreme People’s Court also implemented a reward reporting system, if the execution of the person found to have executable property, will reward the informant, up to 10% of the value of the property ( Yang, 2012 ).
2.3. Scope of Implementation
If the person subject to execution is a natural person, after the consumption restriction measures are taken, he/she shall not have the following high consumption and consumption behaviors that are not necessary for life and work:
1) When taking the means of transportation, choose the aircraft, train soft sleeper, ship class above;
2) High consumption in hotels, hotels, nightclubs, golf courses and other places above the star level;
3) The purchase of immovable property or the construction, expansion or high-end decoration of houses;
4) Renting high-end office buildings, hotels, apartments and other places to work;
5) Purchase of vehicles not necessary for operation;
6) Travel and vacation;
7) Children attending private schools with high fees;
8) Paying high premiums to purchase insurance financial products;
9) Taking all seats on G-unit EMU trains, first-class or above seats on other EMU trains and other consumption behaviors that are not necessary for life and work.
If the person subject to enforcement is a unit, after measures to restrict consumption are taken, the person subject to enforcement, his legal representative, the principal responsible person, the person directly responsible for affecting the performance of the debt, or the person in actual control may not carry out the acts specified in the preceding paragraph. Where an act prescribed in the preceding paragraph is committed with personal property for private consumption, an application may be filed with the enforcement court. If it is verified by the execution court, it shall be permitted.
2.4. Conditions for Lifting Restrictions
1) The person subject to execution has fulfilled his obligations;
2) The parties have reached and completed the execution of the settlement agreement;
3) The person subject to enforcement provides a valid guarantee;
4) The person applying for execution agrees to rescind, and the people’s court has examined and agreed.
3. Practical Review of Measures to Restrict High Consumption of Legal Representatives in China
3.1. Nature and Function of Measures to Restrict High Consumption
Restricting high consumption should not be considered a routine enforcement measure. By studying the newly issued Law of the People’s Republic of China on Compulsory Civil Execution (Draft) and other relevant documents ( Duan, 2022 ), we can understand that, the aim of restricting certain consumption of the enforced person or the legal representative of the enforced company is to compress their living space, forcing them to perform their obligations, which is in nature a deterrent for enforcement. Apparently, it aims to control the consumption behavior of the persons subject to enforcement, while in essence, it limits their right to dispose of property ( Tan, 2011 ).
The strategy of restricting the convenience of consumption behavior in order to indirectly restrict the behavior itself, which results in the loss of partial behavioral rights for the person subject to enforcement, is highly similar to the disempowerment mechanism in personal bankruptcy. First of all, the content of both strategies involve the restriction of high consumption. Secondly, both of them are punitive in nature. Thirdly, the reasons of the two strategies are same that due to the legal representatives unable to satisfy the creditor’s rights, and just in light of this, the restriction is implemented as punishment for the inability to repay the creditor’s rights. The indefinite restriction on high consumption of legal representatives is undoubtedly effective in achieving the purpose of punishment and urging the person subject to enforcement to fulfill their judgment documents. The measures to restrict high consumption can effectively prevent the persons subject to enforcement from excessive and improper consumption of property, which directly protects the enforced property and interests of the applicants, and promotes the implementation and efficiency of enforcement.
3.2. Causes of Restricting Indefinite High Consumption of the Legal Representatives
As China’s managerial market is currently underdeveloped, shareholders have significant influence over corporate governance, and major shareholders frequently exercise direct control over legal persons. Shareholders, as the legal representatives of the company, often have significant control over how the company operates and the governance of the company. This is particularly prevalent in small and medium-sized enterprises. These kinds of enterprises generally have unsound financial systems and instances of financial confusion as well as confusion of personality. In the process of enforcement, legal representative of the enterprises is restricted from high and improper consumption, which aim to force them to fulfill its obligations through pressure transmission, in order to improve the efficiency of implementation and promote the rapid realization of substantive justice. Admittedly, the limited liability of shareholders means that shareholders will not take on greater risks than investment ( Weinstein, 2008 ). Yet, it also happens that the measures of indefinitely restricting high consumption are adopted to force the shareholders as legal representatives or their relatives and friends to fulfil the debts on behalf of the company, so as to lift the measures of restricting high consumption. Additionally, the society of current China doesn’t think that the measure of restricting high consumption is excessively burdensome of the persons or legal representatives who are subject to enforcement. And to some extent this practice may be seen as catering to people’s simple view of justice.
4. Problems and Negative Effect of Measures to Restrict High Consumption of Legal Representatives
4.1. Chaotic Phenomena in the Application of Measures to Restrict High Consumption of Legal Representatives
Since the company is the legal person who subject to enforcement, the restriction measures are taken to its legal representative. This has happened in practice that to remove such measures in time, many legal representatives or their relatives and friends perform the debt on behalf of the company. This is of course helpful to supervise and urge the person subject to enforcement to fulfil the obligations determined by effective legal documents, and can further achieve the purpose of promoting the enforcement. However it is a double-edged sword to the order of economy and finance as well as society. Following cases can provide us some clearer understanding of it.
Case 1: The legal representative uses his personal assets to perform the debts of the executed company.
Li was the shareholder and legal representative of Limited Company A. When Company A was unable to repay the debt due to the failure of company management. For the enforcement, Li as shareholder and the legal representative of the company, was imposed measures to restrict high consumption. In order to relieve the inconvenience caused by the restriction, Li used his personal assets to repay the debt owed by the company.
Different from this case, however, in practice in a large number of similar cases, the result of the restriction measures has failed to achieve the expected effect of the enforcement. On the contrary, it has caused a series of negative effects.
Case 2: In the case of termination of the enforcement procedure, the measure of indefinite consumption restriction on the legal representative of the enforced company not only has no practical significance for the enforcement, but also seriously affects the life quality of the legal representative and is contradicted to the purpose of optimizing the business environment.
Mr. Sun is the manager of Limited Company B, with an annual salary of 400,000 yuan. As the company was unable to repay the money applied for execution and no enforceable property was found, the case entered the termination of the enforcement procedure. The legal representative Sun was indefinitely restricted high consumption, resulting in his inability to engage in business activities.
Case 3: The lack of incentive mechanism is not conducive to the economic recovery of the person subject to enforcement.
Xu, the shareholder and legal representative of Garment Production Company C, was unable to pay hundreds of employees due to a drop in orders. No enforceable property was found during the enforcement procedure. Even in the termination of the enforcement procedure, Xu was still restricted high consumption indefinitely. Thanks to Xu’s efforts, the company’s business gradually improved. After negotiation, most employees agreed to remove Xu’s consumption restriction measures, but some still disagreed, so Xu’s restriction measures could not be removed evenly, which seriously affected his travel and rapid recovery of company’s production.
Latest case: Since 2022, Shenzhen Zhengwei Group Company has had a number of construction contract disputes. In October 2022, the construction contract dispute between the First Construction Company of the eighth Bureau of China Construction and Shenzhen Zhengwei and its subsidiary Zhengwei Huaneng (Shandong) New Materials Co., Ltd. was held. Due to the series construction contract disputes, the Intermediate People’s Court of Zaozhuang City, Shandong province, has restricted the high consumption of Shenzhen Zhengwei (Group) Co., known as the “world copper King”, and its legal representative Wang Wenyin.
Summary: The consumption restriction measures apply to the legal representative are mostly indefinite and unprincipled, it will result in two kinds of effects. On the on hand, the restriction’s ability to compel the subject of enforcement and its legal representative to comply with their obligations is one of the positive aspects of the restriction. This has practical implications for advancing enforcement and defending the applicant’s rights and interests. There are many instances, like in Case 1, where the legal representative must fulfil his duties while being prohibited from consuming. On the other hand, there’s also the unfavorable part, like cases 2 and 3, which could undermine the limited liability of shareholders. In addition, the fictitious use of a legal representative identity will also result in a number of negative effects. The application of consumption restriction measures should take into account the differences between the legal representative and the legal person of the company subject to enforcement, however, this distinction has not been made in practice or norms.
4.2. Negative Effect of the Legal Representative’s Application of Measures to Restrict High Consumption Indefinitely
The first problem is that, unlimited limits on high consumption conflict with limited shareholder liability. In theory and practice, the application of measures of indefinite restriction over high consumption of legal representatives in China raises concerns about the conflict between these measures and the principle of limited liability of shareholders. The “Personality Absorption Theory” holds that the personality of the legal representative is absorbed by the legal person and is no longer an independent subject. The legal representative’s individual identity is absorbed by the legal entity, making them a part of the company ( Cai, 2017 ). When the legal representative engages in the behavior of the legal person, it becomes a part of the legal person ( Cai, 2017 ), the effect of behavior belongs to the company. As an independent legal personality, the company separates the assets of the enterprise from the assets of the investors, which has the entity protection effect on the shareholders ( Bainbridge & Todd, 2019 ). However, the restriction of consumption on legal representative breaks this layer of entity protection, which is in great conflict with the “personality absorption theory” of legal person.
The essential feature of a company is limited liability, which is the central principle of company law and a defining characteristic of modern companies. Therefore, imposing restrictions on the actions of the legal representative of a collective identity can be viewed as punishment for specific shareholders and may conflict with the principle of limited liability.
Secondly, the application of measures to indefinitely restrict high consumption is not in accordance with the principle of proportionality and goes against the spirit of the rule of law. The principle of proportionality lies in “forbidding excesses” and ensuring that the rights and freedoms of relevant subjects are not excessively interfered, in order to defend the value of autonomy in private law. There is a jurisprudential controversy over the legal representative’s application of consumption restriction for restricting personal freedom and consumption rights ( Yang, 2016 ). The legal responsibility is assumed based on the perpetrator’s illegal behavior or breach of contract ( Zhang, 2018: p. 168 ). These measures, although not intended to directly pay off the debts of the legal person, bring significant inconvenience and suggest a failure on the part of the legal representative to fulfill their responsibilities. It is therefore necessary to examine whether there is any breach of obligations in their operation and management. Otherwise, imposing measures to restrict consumption of legal representatives is contrary to the self-responsibility principle of the rule of law and could be considered “modern collective punishment” ( Liu, 2019 ). In practice, the arbitrary use of such measures, without clear examination of potential violations of relevant obligations, is a serious violation of the principle of proportionality in civil law.
In view of the above analysis on the effects and causes of the measures to restrict the high consumption of legal representatives, we can find out the conflicts in theory and problems in practice. Therefore, this paper proposes that it is necessary to construct the system of the application of the measures to restrict high consumption of legal representatives as enforcement.
5. Suggestions of Solution: Constructing a Systematical System of Shrink-Limiting the Application of Measures to Restrict High Consumption of Legal Representatives
At present, although the punishment system for breaking faith in China has achieved certain results, it also exposes a crisis of legitimacy. Generally say it is in conflict with the principles of human rights, proportionality and fairness, and should be taken seriously ( Zhu, 2019 ).
How to minimize the negative impact of the measures restricting high consumption on legal representatives while enhancing its effectiveness? How to better realize the purposes of enforcement? It is of necessity to systematically updating and improving the measures and constructing a rational system of the application. Base on relevant cases study and legal investigation as above, this thesis proposed following ideas which are necessary and practical considerations and suggestions.
5.1. To Balance Two-Pair of Relations in the Application of Measures Restricting High Consumption
First and foremost is to maintain the relationship between the principle of shareholder’s limited liability and the protection of the rights and interests of the applicants. The principle of limited liability of shareholder is the core characteristic for a company as an independent legal person ( Liu, 2015 ). During the enforcement stage, the interests of the applicant should be swiftly pursued and meanwhile the principle of limited liability of shareholder should be respected as well. Besides, the principle of proportionality should also be considered. Under these principles and based on commercial rules to Judge and examine whether the legal representative has gross negligence or fault or management negligence in the company’s operation and the occurrence of its debts, in order to determine the appropriate start and the duration of the application of the measures restricting high consumption of legal representative of the company according to the level of responsibility.
Secondly, the relationship between the rights and interests of the applicant and of the person subject to enforcement should be balanced well. During the enforcement stage, the status of both parties is obviously unequal, the basic rights and interests of the person subject to enforcement should not be ignored while protecting the rights and interests of the applicant for enforcement. Efforts should be made to balance the interests of both sides, to ensure that the intensity of the implementation measures can adapt to the purpose of the implementation of the enforcement measures. Moreover, basic rights such as the right to exist and the right to education of the person subject to enforcement and their family members should be given priority over the creditor’s right ( Li, 2018 ).
5.2. To Narrow the Scope and Limit the Duration of the Measures Restricting High Consumption of Legal Representatives
“Shrink-limiting” the application of the measures restricting high consumption of legal representatives is to narrow the scope of the application and limit the period of application. To achieve this goal, the scope of applicable consumption measures should be reduced. Such as in the cases of termination of the enforcement procedure, restricting measures to the external legal representative who has not acted with gross negligence or fault in accordance with commercial rules should therefore be exempted. However, these external legal representatives are still responsible for providing the proof of any litigant debt occurs, of failed management, or of personal management faults. Because from a judicial perspective, it is common for companies, shareholders, and particularly controlling shareholders and legal representatives to abuse the corporate personality system by using the legal person’s identity to transfer transaction risks that should be borne individually to creditors ( Wang, 2016 ). Furthermore, legal representatives with higher incomes have a greater responsibility to pay attention to the company’s operations. Therefore, the principle of proportionality and responsibility should be taken into account, and the term of application for legal representatives should be clearly defined and shortened.
5.3. To Reasonably Determine the Starting time of Measures to Restrict High Consumption
In 2019, the Supreme People’s Court of China stated in the Opinions on Further Strengthening the Implementation Concept of Goodwill Civilization in the Implementation Work that it should strictly apply the system of “name list of broken promises” and impose strict restrictions on them. Local courts may grant a grace period of one to three months for the person subject to decision to be included in the list of discredit or to take measures to restrict consumption to rectify their situation. Therefore, the earliest starting point for applying consumption restriction measures on the legal representatives cannot be earlier than the date specified in the summons and must be carried out within one to three months. The delay of the start time is to protect the debtor’s right of acknowledgement and to inform them of the potential negative consequences of their failure to fulfill their legal obligations. In addition, the company, as the person subject to enforcement, is required to reach a settlement with the applicant before the end of the filing procedure, and the applicant must agree to remove the measures restricting high consumption. These measures should be promptly terminated once the settlement is reached.
The period of the restriction measures applicable to the legal representatives of a company may refer to the limitations of the period of individual bankruptcy loss system. According to Article 30 of Hong Kong’s bankruptcy law, the first bankruptcy is automatically lifted after four years, and for subsequent bankruptcies, the longest time is five years from the date of bankruptcy ( Hong Kong Bankruptcy Ordinance, 1992 ). Japan’s bankruptcy law states that after a declaration of bankruptcy, if the bankrupt is not convicted of fraud, they may regain their rights after ten years ( Itojing, 1995 ). Although Shenzhen recently released the regulations stating that the period of examination over disclaimer of rights for exemption is three years, due to the imperfections of the current social credit system and other objective reasons, the period of individual bankruptcy loss in China can typically be arranged for five to eight years, with the possibility of an extension for individuals who have had a second bankruptcy ( Mao, 2019 ). This thesis proposed that in order to balance the interests between the creditor and the legal representative of the legal person subject to execution, for those situations of inability to perform, the duration of restricting high consumption of legal representatives could be limited within five years.
5.4. To Provide Institutional Guarantees for the Application of Measures to Restrict High Consumption
In order to fully utilize the institutional function and the deterrent effect of the measures to restrict high consumption, institutional guarantee must be provided. The focus should be on cracking down on illegal changes to legal representatives in enforcement procedures. In practice, the behavior of malicious change of legal representative for evasive enforcement has the following characteristics: most of the legal representatives are changed after losing the first trial, the change has a direct impact on the enforcement, and the purpose of the change was to circumvent the enforcement ( Li, 2016 ). Therefore to regulate and standardize the change behavior of legal representatives is essential for the application of the measures restricting high consumption of legal representatives, because it could play a role of preventing the negative impact of malicious change on the enforcement process. During the enforcement stage, it is necessary and important to investigate whether the procedures for changing the legal representative are legal and have a material impact on the enforcement process. Emphasis should be placed on the act of changing the legal representative after entering the trial stage, and if the legal representative is changed without justifiable reasons or procedures to circumvent the enforcement, the legal representative before the change should still endure the measure of restricting high consumption.
5.5. To Strengthen the Rights Protection and Power Remedy of Legal Representatives
During the enforcement, legal representatives still have the right to engage in high consumption behavior, however the premise of which must be personal property, instead of company property. Relevant law of China grants the person subject to enforcement the single right to terminate the restriction measures, but the standards as well as the procedure of examining ensuring the single right to terminate the restriction measures is not clear enough, which leads to the poor operation of single discharge in the enforcement practice and further seriously affects its institutional function. Thus it is necessary to activate the right to terminate restriction measures, in order to protect the legal representative’s rights to high consumption of personal property while under restriction. Furthermore, those individuals who have been falsely represented as legal representatives have the right to apply for cancellation of the restriction measures, but they bear the burden of proof for their claims. Once it is confirmed that one is to be assumed as the legal representative and taken measures to restrict consumption, the restriction measures should be lifted in a timely manner. Finally, of course restriction measures should be automatically terminated upon expiration.
The process of improving the rule of law in China is continuing, and efforts need to be made from all aspects. The optimization and improvement of measures to limit the high consumption of legal representatives is a small contribution to this process. Compulsory execution is an important judicial measure. The five suggestions put forward in this paper are based on the past practice and problems. With the judicial reform and progress in China, the implementation of measures to limit the high consumption of legal representatives will keep pace with The Times and become more reasonable and efficient.
6. Conclusion
The consumption restriction measure is an enforcement deterrent measure, which is of great significance in promoting enforcement work, quickly realizing the real interests of applicants and building a social credit system. However, the application of these measures on legal representatives conflicts with the theory of limited liability of shareholders and goes against the principle of proportionality and the modernization of the rule of law, which needs to be amended in order to better align with the system’s purpose and function. To address these issues, implementing the concept of civilized implementation in good faith and constructing the system of restricting the application of consumption restriction measures by legal representatives may become the path choice to amend the application of consumption restriction measures by legal representatives.