I don’t know anything about eggshell apartments. Just one general truth: the “pass-through” problem with LLCs.
It’s a legal term. The shareholders or controllers of a limited liability company usually have limited liability only to the extent of their own capital contribution. It is equivalent to having a shield that protects the personal interests of the shareholders and controllers. However, this shield can be “pierced” under certain circumstances. The shareholder or controller is liable beyond the “limited liability”.
In common law, the “piercing” of a limited company is often encountered in judicial practice. It is very useful to prevent the hollowing out of the company by the shareholders or controllers of the company and the transfer of benefits.
Suppose there is an egg yolk company that establishes a limited liability company (LLC) with a capital of 10,000, takes over the property from a landlord at a high price (e.g., 40,000 a year), and rents it to a tenant at a low price (35,000 a year). This business model obviously loses money and is not sustainable. But it pays the landlord only one quarter up front, which is 10,000 (using 10,000 of its own equity); it collects 35,000 a year in rent from the tenant at once. In the short run, then, the landlord seems to have made $25,000 on his books. So he gives himself or his associates a bonus of 20,000. 。。。。 After six months, the company becomes insolvent and declares bankruptcy. Both the landlord and the tenant lose money, while the beneficial owner of the yolk company makes 10,000 for nothing (loses 10,000 in equity but makes back the 20,000 bonus).
In this case, the so-called pass-through principle applies. Although Egg Yolk is a limited liability company, the business model created by its shareholders from the beginning is clearly unprofitable and clearly aimed at profit transfer. The liability of the company’s shareholders and controllers, then, cannot be limited to their contributions of 10,000. In other words, “penetration” must occur. (Usually, the penetration is limited to the amount of the capital contribution + all other income that the shareholders and beneficial owners receive from the corporation. In the yolk company example, this limit is 30,000 (10,000 equity plus 20,000 revenue). (In other words, in addition to the original 10,000 shares of capital stock, the victim can ask the shareholders and controllers of the yolk company for an additional 20,000 to cover the company’s debts.
In layman’s terms, it means “spit out everything you ate”. The amount of money taken from the company must be returned in full.
This concept of “penetration” seems to be missing in the Chinese legal system. When I first introduced this concept in China more than a decade ago, I was ridiculed by a famous lawyer: “Do you know the law? What kind of limited liability is it if you can penetrate it?”
I really don’t know much about domestic corporate law, but after looking it up, there are roughly only two situations that can invalidate the shield of “limited liability” in China. The first is when the company account is not separated from the personal account and the funds are managed in a chaotic manner. This is actually a financial issue, not a legal liability issue. In the second case, the company has made false contributions, or insufficient contributions. In this case, however, the so-called liability of the shareholder is simply a requirement to make up the amount of the contribution. In other words, there is actually no penetration at all.
In the Chinese legal system, if shareholders and controllers are to be held liable for anything beyond “limited liability,” it seems to me that, based on my rough understanding, they can only be held liable if they are proven to have committed a crime, such as fraud or illegal fundraising. Their income then becomes what is called “illegally earned” and can be seized.
However, the threshold for recovery of this “illegal income” is much higher and more difficult than that of “pass-through limited liability”. Because a criminal act, such as fraud, is a criminal offense, it must go through a long process of investigation, arrest, and trial by the public security department before the financial compensation to the victim can be realized. The threshold for conviction is also relatively high. For example, it may be necessary to prove subjective malice on the part of the other party.
For example, in the case of the yolk company above, it may not be easy to convict him of fraud. He can argue: I’m just selling at a loss. In a few years, the rent will go up and I’ll be profitable – who would have thought I wouldn’t last a year? Is it against the law to promote at a loss? Is it fraud? If you can’t convict him of fraud, then it’s legal for him to take the 20,000 bonus, in accordance with the company’s articles of association.
However, the concept of “limited liability for penetration” is an economic dispute and, in the Chinese legal system, a civil concept. You can directly go through civil procedures to judge the yolk company personnel to refund the damages. Since it is civil, it is generally not necessary to prove that the other party has subjective malice.
In legislative and judicial practice, once the concept of “limited liability for penetration” is established as a civil economic compensation, then many fraudsters who take advantage of legal loopholes to commit fraud will never be able to get any money again.
So here’s a suggestion to domestic jurists and deputies to the National People’s Congress to study the concept of “pierce the corporate veil” and to consider relevant legislation.
Forgot to mention – this concept does not apply to shareholders of listed companies.
Read more: @KuzakaHagi
After a few seconds of skimming, the lawyers had already made the eggshell thing clearer.
I wonder if 5% of the tenants evicted were yelling at the lawyers and the media, alas.
Quoting someone else’s text —-
Eggshell Condominiums and Landlord Sign Property Entrustment Service Agreement
(i) Party A (the landlord) agrees to exclusively delegate the management of the premises to Party B (the eggshell) and to act as sole agent for the rental.
(2) Party B (Eggshell) has the exclusive authority to act as agent for Party A (Landlord) in leasing the premises and in negotiating and liaising with the Tenant; to act as agent for Party A in signing any agreements, contracts and other documents related to the lease of the premises (including agreements on the termination or modification of the lease contract, supplementary agreements, etc.); and to act as agent for Party A in collecting rent, deposits, deposits and other relevant fees from the Tenant.
End of quote from ——
All right, see, here’s the gist…
When a tenant signs a lease with an egg shell and pays the money, the legal relationship is the same as signing a lease with a tenant and a landlord…!
The term of the lease, based on the tenant’s and eggshell’s lease, rent paid!
That signed eggshell, instead of representing himself as some baffling company, or triple-graduated part-time agent, has the authority to represent the landlord! Sign there!
It’s the landlord’s agent who signs for the money, and that’s the landlord to the outside world!
Eggshells take the money and sign the papers → To the tenant, the court, others, etc., that means the landlord took the money and signed the papers.
I’m sure most tenants would have taken a glance or heard an egg shell person say something before they signed the contract that they had this contract and got the authority to rent the house! Why else would many people sign up for eggshells?
Then, eggshell, to the landlord defaulted, then, it is only the relationship between the agent and the principal two, the landlord can claim for the loss of their rights and interests, recovery suits, etc., but the contradiction between the agent and the principal two, must not affect other people!
A very simple thing!
If there’s any doubt, the principal-agent relationship doesn’t exist in this world!
A lawyer is appointed and loses the case, and the plaintiff says, that’s the lawyer’s case, not mine, and I’ll sue! Will it work?
Entrusted, that is, in layman’s terms, the courtroom lawyer is where the personality of the plaintiff and defendant is!
It was the landlord’s people who were there when the eggshells signed the lease!
Well, the agent doesn’t pay anymore, doesn’t show up to court late and leaves early, so the principal can go after the client! Landlord v. Eggshell can be!
So it’s very simple, the eggshell case is really a case of low law enforcement capacity in third world countries, police failing to protect tenants, and locals bullying outsiders, it’s as simple as that.
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