Professional Interpretation

Abstract：In the course of business, some companies contract the right of management to other shareholders or the third parties (including natural persons and legal persons ). In such a case, what is the effectiveness of the contracted management contract? During the contracted management period, how shall the two contracting parties bear liabilities? Based on cases analyses of trial practice, Disputes Resolution Team of Beijing Docvit Law firm concludes relevant judicial rules of the above situation for reference.
1.The validity of enterprise contracted management contract 
In practice, as an optional business model for companies, contracted management is more chosen by small and medium companies. Company autonomy is the soul of modern corporate law, and contracted management is the embodiment and application of autonomy of will in the field of corporate law. In principle, any contracted management contract is valid if it does not violate mandatory law, public interests or the nature of company. But the issue of company contracting is a blank in the company law of our country. The academic community has different views on the effectiveness of such contracts. 
One view is that the validity of contracted management contract can not be generalized. As an important aspect of company’s legal principles, the internal organizations of a company is fully reflected in our country’s company law. When a company is established, the organizational structure of the board of shareholders, the board of directors and the board of supervisors must conform to the company law. Otherwise, the legal consequence of the establishment is invalid. Thus, it does not violate the company’s legal principles necessarily for shareholder(s) to contract the company to third parties. In the process of operation and management, if the contractor or operator does not refuse to apply the mandatory legal provisions of the company law, the contracted management contract shall be deemed to be valid, otherwise it can be considered invalid.
The opposite view is that contracted management contract shall be deemed to be invalid. Administration authority of the board of directors is empowered from the company law, articles of association and the board of shareholders’ special authorization for individual management matters. If the board of directors’ administration authority is replaced by contracted management, such an act shall be treated as a violation of the company law and the provisions concerning the establishment of corporate governance institutions and their powers.    
Therefore, how does China's judicial practice determine the effectiveness of   contracted management contract? 
Case 1: Zhong Hen Electronics Corporation vs. Xia Hua Electronics Corporation [ (2005) Min Er Zhong Zi No. 90 ]
Viewpoint of the Supreme People’s Court: In this case, the main bodies of the legal relationship of the contracted management contract shall be Zhong Hen Electronics Corporation and Xia Hua Electronics Corporation. Xia Hua Electronics Corporation, as the developer, contracted its assets, including plant and equipment, to others to operate and charged rental. The contractor, Zhong Hen Electronics Corporation, occupied those assets and manufactured, operated, managed independently, and also had the rights to enjoy and dominate profits.   
Case 2: Construction Machinery Corporation and Mr. Feng vs. Mr. Zhang and Mr. Wu [ (2012) Zhe Qu Shang Zhong Zi No. 393 ]
Viewpoint of the Court: Autonomy of the will is the basic principle of contract law. The internal contracting was decided by Construction Machinery Corporation’s shareholders’ meeting according to the law and agreed by shareholders unanimously. The contents of Internal Contracted Management Contract showed real meaning of all parties and did not violate mandatory provisions of laws and administrative regulations. So that the Internal Contracted Management Contract should be deemed as legally valid. Firstly, contracted management was a result of autonomy of the will and a business model chosen by all parties independently. As absence of legal prohibition means freedom, the effectiveness of contracted management contract should be affirmed. Secondly, conducting contracted management for the company did not necessarily exclude application of the company law’s mandatory provisions. Part of rights were given to the contracting shareholders by the board of shareholders and the board of directors could be seen as generalized authorization. Moreover, Mr. Feng and Mr. Wu still held the post of executive director and supervisor, the company's legal governance structure had not been breached. Thirdly, based on the contract, it was voluntary for contracting shareholders to pay a certain amount of contract fee to developing shareholders. The claim which argued such agreement breached the company law was unfounded and whether the agreement was legal or not did not affect the overall effectiveness of the contract. Finally, all parties expressly agreed in the contract that contractor should obey laws, administrative regulations and financial accounting system, thus the claim which argued the contract breached relevant system of safety production laws and accounting laws was also lack of facts and legal bases. 
Case 3: Mr. Tu vs. Mr. Hu [ (2014) Shao Sheng Shang Chu Zi No. 460 ]
Viewpoint of the Court:　An internal agreement, signed between shareholders, which transfers company’s operation and management to one of the shareholders, is a contracted management contract. Based on autonomy of the will, the internal contracted management contract is a kind of company’s business model which is chosen by all parties and not prohibited by laws and administrative regulations. The rights exercised by contracting shareholders shall be seen as generalized authorization from the board of shareholders and the board of directors, and are not contrary to the company law. Therefore, according to law, the contracted management contract shall be identified as a valid contract and all parties shall perform their respective rights and obligations in accordance with the contract. 
Obviously, by interpreting the judicial viewpoint of the above cases, the Supreme People’s Court and local courts all support the effectiveness of contracted management contract between developer and contractor.  
2.The bearing subjects of credit and debt in the contracted course of business 
On the premise of contracted management contract is valid, does the company's debt shall be borne by company or contractor?  
Under the condition of contracted management, the contractor is always conducting business activities in the name of the company and establishing the relationship of creditor's rights and debts. For the issues of debts bearing, most of the contracted management contracts agree that the contractor shall be liable to pay off all the company's debts during the contracted period with its own assets. Does that mean creditors can only hold the contractor's liability for repayment of the debts, but not the liability of the company?
Case 1: Jin Yuan Compnay vs. Chong Gang Company etc. [ (2014) Yue Gao Fa Min Er Chu Zi No.1 ]
Viewpoint of Guangdong Provincial Higher People’s Court: It is not in accordance with the terms of Contract that Jin Yuan Company requested Chong Gang Company and Wu Gang Company to be liable for paying debts. During the contracted management period, Jin Yuan Company traded outside in its own name. According to the relativity principle of contract, Chong Gang Company and Wu Gang Company were not parties to these transactions, so that they needed not bear liabilities for the debts settlement to transactions’ counter-party. The contracted management responsibilities for Chong Gang Company and Wu Gang Company should be confirmed by Contract. 
Case 2: Mr. Fan vs. Xin Yuan Glass Company [ (2016) Lu 17 Min Zai No. 57 ]
Viewpoint of He Ze Intermediate People's Court: According to Article 2 of Company Law of the People's Republic of China, “A company is an enterprise legal person, which has independent legal person property and enjoys the right to legal person property. It shall bear the liabilities for its debts with all its property.” As an independent enterprise legal person, Xin Yuan Glass Company should bear the liabilities for its debts which were generated from the contracted management period with all its property. And the relationship between developer and contractor was internal relationship. 
Case 3: Corporation is contracted to operate, who bears the liabilities for debts? (http://bjgy.chinacourt.org/index.shtml)
Viewpoint of the Court: In this case, the Decoration Company ordered materials from the Commercial Trading Company, and the Commercial Trading Company delivered goods according to the order. Sales contract relationship was formed between these two parties. Hereafter, the Decoration Company and the Commercial Trading Company did not sign contract in writing, but these two parties were continuing trading. Even if it was true that the Environmental Protection Company contracted the Decoration Company and the Commercial Trading Company was not informed, the Commercial Trading Company had reason to believe that it was keeping a buying and selling relationship with the Decoration Company all the time. Thus the Decoration Company should bear liabilities for the debts of the enterprise during the contracted period.
In practice, although controversies exist, China's judicial authorities tend to conclude that the contracted management contract is valid. What’s more, during the contracted management period, it is the company itself to bear liabilities for the debts caused by signed contracts in principle. The internal accountability mechanism of the developer and the contractor shall be determined in accordance with the contracted management contract which is signed between the two parties.