Special Declaration: This article is an original work by Attorney Shao Shiwei. It represents only the personal views of the author and does not constitute legal consultation or legal advice on specific matters. For article reprints, legal consultations, or business exchanges, please add: sswls66
Introduction
After a company is deregistered, if it has not fully performed the relevant contracts previously signed with creditors, who shall bear the liability?
Case Summary
[Case No.: (2021) Su 02 Min Zhong 1702]
The defendant company had established a liquidation committee in early April but still signed a brand cooperation agreement (franchise) with the plaintiff in late April. The defendant was deregistered in July. The plaintiff’s store opened in July and closed in December.
The plaintiff claimed damages from the defendant for brand usage fees, attorney fees, etc., on the following grounds:
1. Signing the agreement with the plaintiff after establishing the liquidation committee and deregistering the company during the contract performance period constitutes anticipatory breach (supported by the court of second instance, which held that it constituted express repudiation within the scope of anticipatory breach).
2. The defendant’s breach caused losses to the plaintiff.
3. As the defendant company had been liquidated, the members of the liquidation committee should bear joint and several liability.
First Instance
2
Defendant’s Defense
1. The contract is valid (according to the view of the court of first instance: although the Company Law provides that no business activities unrelated to liquidation shall be conducted during the liquidation period, this provision is not a mandatory provision affecting validity);
2. The liquidation committee had fulfilled the procedural obligations required for liquidation, so no compensation was needed. 3. Regarding the items listed, some were not collected by the defendant company; for certain items such as equipment costs, the plaintiff had resold them. Regarding attorney fees: the opposing party needs to prove that the plaintiff committed a breach.
3
The court of first instance held:
1. The contract is valid.
2. Although there were layered sub-licenses of trademark rights, this did not affect the defendant’s legitimate use, and the defendant could achieve the purpose of the contract.
3. The plaintiff was not a creditor of the defendant company.
Therefore, the court of first instance dismissed the plaintiff’s claims.
Second Instance
4
Facts Ascertained by the Court of Second Instance:
Court: For what reason did the plaintiff cease operations? (The purpose was to induce the plaintiff to admit that it ceased operations due to its own reasons, unrelated to the defendant.)
Court: How did the defendant intend to cooperate with the plaintiff after deciding to deregister? Defendant: It informed the plaintiff to sign a contract with a third party (the third party shared two shareholders with the defendant company).
Court: Who is currently operating the brand? Defendant: The third party.
Court: How was the plaintiff informed to re-sign the contract? Defendant: By telephone. Plaintiff: Never informed. Moreover, upon learning of the plaintiff’s lawsuit, the defendant unilaterally stopped updating products and providing training (i.e., brand support) to the plaintiff’s store.
Court: Was the contract in this case terminated? Defendant: The plaintiff proposed termination due to its own reasons (insufficient store staff and lack of interest in operations).
Plaintiff: Never used this reason. Termination was proposed because the defendant was deregistered and the entity no longer existed. The third-party company lacked qualifications, so the plaintiff was unwilling to sign.
Court: After the defendant was deregistered in July, who was performing the contractual obligations? Plaintiff: A store manager had made contact, but it was unclear which company they represented.
Court: When both parties signed the contract, the defendant had already decided to liquidate. How was the contract to be handled, and what arrangements did the defendant company make at that time? Defendant: Answered from the perspective of not affecting the achievement of the contract’s purpose (the transfer to the third party was due to strategic adjustments by the company; site selection for opening stores was guided by the third-party company; the third-party company comprehensively assumed the contract, so there was no absence of a subject to provide corresponding services).
(Note: The judge’s questions were posed from the viewpoint that after signing the contract, the defendant underwent liquidation and could not perform subsequent obligations, corresponding to the first focal point of dispute. This actually indicated a predisposition, namely: the defendant committed express repudiation. The viewpoint that the third party took over lacks legal basis.)
5
Focal Points of Dispute in the Second Instance:
I. Whether the defendant committed a breach of contract
Signing the contract after establishing the liquidation committee constitutes clearly indicating through conduct that contractual obligations would no longer be performed, i.e., express repudiation.
II. Whether the defendant’s breach caused losses to the plaintiff
The defendant merely emphasized repeatedly that there was no breach regarding the brand usage fees.
(**However, a second layer of agency opinion could have been added (subject to the defendant client’s consent): assuming the court finds a breach, the usage fees should be correspondingly reduced on a pro-rata basis.)
Regarding brand usage fees. The judge applied a mathematical formula: Fees to be refunded by the defendant = Trademark usage fees paid - (Number of months used ÷ Total number of months in the contract term) * Trademark usage fees paid.
III. Whether the members of the liquidation committee bear joint and several liability
The creditor’s rights under the contract in this case belonged to the known claims of the defendant company. During the liquidation of the company, the liquidation committee failed to notify the plaintiff to declare its claims. Nor did it liquidate the rights and obligations under the contract in this case. By illegally deregistering the company, it harmed the plaintiff’s creditor’s rights under the contract. The members of the liquidation committee shall jointly and severally compensate the plaintiff for liability.
6
Commentary
It may be because the plaintiff’s claims alleged that the other party committed fraud regarding trademark rights.
The termination of a contract due to breach does not affect the bearing of liability for breach. If a contract is not formed, is invalid, or is revoked, issues of liability for breach do not arise; instead, they fall within the scope of liability for culpa in contrahendo, tort liability, and liability for restitution of unjust enrichment.
If fraud is claimed, liquidated damages cannot be claimed. If liquidated damages are claimed, fraud cannot be claimed; one must choose either option. The claims included a series of fees such as brand usage fees; however, if the claim of fraud were successfully established, it would certainly be beneficial for recovering these series of fees.
Regarding trademark usage rights, the court held that although there were a series of sub-licenses, this did not affect the plaintiff’s lawful use of the trademark. The trademark rights holder also subsequently granted additional authorization to the defendant company for use. Therefore, the plaintiff’s defense alleging trademark infringement was untenable.
? The plaintiff was a creditor of the defendant company. It is incomprehensible that the judge of the first instance failed to recognize this.
