After the nominal investor and legal representative of a sole proprietorship pass away, do their heirs need to bear the responsibility for repaying the debts of the enterprise?

Basic case details

Before his death, Wang Mou was the nominal investor and legal representative of a certain sole proprietorship enterprise, while the actual investor and manager of the enterprise was his eldest daughter. After Wang's death, Yu filed a lawsuit against the enterprise and Wang's heirs in court because the enterprise owed him over 800,000 yuan in personal loans that had not been repaid. Yu demanded that the enterprise repay the principal and interest, and that Wang's heirs be jointly responsible for repaying the enterprise's debts within the scope of Wang's inherited property.

Tang Meili of Jinyan Law Firm, as the agent of the defendant in this case, namely the heir of Wang Mou, issued an opinion on behalf of the agency, holding that: First, Wang Mou, merely as the nominal investor of the sole proprietorship enterprise, should not bear the joint and several repayment obligation for the enterprise's debts. Moreover, the heir of Wang Mou should not bear the repayment obligation for the enterprise's debts within the scope of the inherited property. Second, regarding the property under Wang's name that was seized by the plaintiff, it is the property jointly owned by Wang and his spouse during his lifetime. Only half of the property can be recognized as Wang's personal estate.

During the trial, the court retrieved the real estate information query form under Wang's name. This form proved that the real estate under Wang's name was purchased during the marriage and was considered as the joint property of Wang and his wife.

The court ruled that a sole proprietorship enterprise has a very strong personal attribute, and the industrial and commercial registration has the effect of public announcement and credibility. As the plaintiff, there is reason to believe that Wang Mou is the actual investor. Moreover, even if Wang Mou is indeed the nominal investor of the sole proprietorship enterprise, he should still bear unlimited liability for the debts incurred by the enterprise externally. For the real estate under Wang's name, 50% of it belongs to Wang's personal property and is inherited by his heirs. The heirs shall be responsible for repaying the portion of the enterprise's debts that is insufficient to the plaintiff within the actual value of the inherited estate.

Case Analysis

This case, as a dispute over the settlement of debts by the decedent, is special in that the decedent is the nominal investor and legal representative of a sole proprietorship enterprise. Article 2 of the "Law of the People's Republic of China on Sole Proprietorship Enterprises" stipulates: "The term 'sole proprietorship enterprise' as used in this Law refers to an operating entity established within the territory of China in accordance with this Law, invested by a single natural person, with the property owned by the investor personally, and the investor bearing unlimited liability for the debts of the enterprise with his personal property." Article 31 stipulates: "Where the property of a sole proprietorship enterprise is insufficient to settle its debts, the investor shall settle the debts with his other personal property." According to the above regulations, a sole proprietorship does not have an independent legal personality and is an unincorporated enterprise in nature. If the property of a sole proprietorship is insufficient to settle its debts, the investor shall settle the debts with his or her other personal property. Accordingly, sole proprietorships adopt the principle of "the enterprise taking the lead first, and then the investor supplementing" when it comes to the assumption of external debts. According to this principle, a sole proprietorship enterprise should first assume the responsibility of repaying its debts with its own assets. If its assets are insufficient to settle the debts, the investor shall bear the responsibility of repayment. Although the heirs of Wang in this case have evidence to prove that Wang was merely the nominal investor and the nominal legal representative, since this enterprise is a sole proprietorship, and a sole proprietorship has a very strong personal attribute, the industrial and commercial registration has the effect of public announcement and credibility.

Once the relevant matters in commercial registration are registered, they will have a public notice effect. This is the implementation of the appearance-oriented principle in the commercial registration system and a specific institutional effect constructed to achieve the goal of trust protection. The reason why commercial registration can form a reliable registration appearance is that after examination and registration by the registration authority, the registration facts are consistent and in line with the actual situation of the commercial entity in the vast majority of cases, which constitutes the factual basis of a reliable registration appearance. Just imagine, if in most cases, the registered facts are inconsistent with the objective facts, then there would be no stable commercial appearance, and the effect of public notice would inevitably become a tree without roots or water without a spring. At the same time, the doctrine of appearance is an important principle in commercial law. Under the doctrine of appearance, the true subject of intention is not protected, but the counterparty of the act of expression is protected. This is because "due to the appearance facts, the other party's subject acquires trust in it and takes corresponding actions accordingly; Even if the appearance facts are inconsistent with the true facts, the legal effect of the act shall still be determined in accordance with the appearance. The reason why trust should be protected is that in modern society, trust is an important medium for the smooth operation of social and economic activities and the most crucial factor for the normal and orderly operation of the market economy. It is because of trust that people can establish a stable expectation for each other, reduce the cost of communication and contact, and thus build an orderly and stable social order. In this regard, Larenz once pointed out, "Only when essential trust is protected can humanity live in peace under the law that guarantees that everyone gets what they deserve." Total and absolute distrust either leads to total isolation or to the dominance of the strong. In other words, it results in a situation that is in stark contrast to the "state of law". Therefore, promoting trust and protecting legitimate trust is one of the most fundamental requirements that the legal order must meet. Therefore, the protection of trust is an inescapable mission of the legal order, and commercial registration is no exception. Endowing commercial registration with public notice effect is precisely to achieve the aforementioned goal.

Therefore, as the nominal investor of the sole proprietorship enterprise, Wang Mou should be responsible for repaying the enterprise's debts, and Wang Mou's heirs should be obligated to repay the enterprise's debts within the actual value of the inherited estate.

This case tells us that the legal risks for nominal investors and legal representatives are extremely high, especially for the nominal investors of sole proprietorship enterprises, the legal risks are even greater! Business registration has the effect of public announcement and credibility. A third party has the right to demand that an individual who has undergone business registration, as the investor of a sole proprietorship enterprise, assume the obligation to repay the enterprise's debts!

Link to the legal provisions

Law of the People's Republic of China on Sole Proprietorship Enterprises

Article 2 The term "sole proprietorship enterprise" as used in this Law refers to an operating entity established within the territory of China in accordance with this Law, invested by a single natural person, with the property owned by the investor personally, and the investor bearing unlimited liability for the debts of the enterprise with his personal property.

Article 31 Where the property of a sole proprietorship enterprise is insufficient to settle its debts, the investor shall settle the debts with his other personal property.

Civil Code of the People's Republic of China

Article 1153, Paragraph 1: For the property jointly owned by the husband and wife, except as otherwise agreed, when dividing the estate, half of the jointly owned property shall be allocated to the spouse first, and the rest shall be the estate of the decedent.

Article 1159 When dividing the estate, the taxes and debts that the decedent was legally obligated to pay shall be settled. However, necessary estates should be reserved for heirs who lack the ability to work and have no source of income.

Article 1161: The heir shall settle the taxes and debts that the decedent is legally obligated to pay within the limit of the actual value of the inherited estate. The portion exceeding the actual value of the estate that the heir voluntarily repays is not subject to this restriction. Where an heir renounces inheritance, he or she may not be liable for repaying the taxes and debts that the decedent is legally obligated to pay.

Introduction to lawyers

Lawyer Tang Meili, a member of the Communist Party of China, is a practicing lawyer at Jinyan Law Firm. She graduated from North Minzu University and obtained her lawyer's practice certificate in 2015.

Proficient in commercial and economic cases such as disputes over private lending, house purchase and sale contracts, and construction contracts, as well as real estate and corporate affairs.

Contact Information

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Email: 1075433424@qq.com