2020.12.16 YE, Zhenyong、 BI, Sien、 WANG, Jin
1.Summary of “Piercing W88优德手机版e Corporate Veil” and W88优德手机版e relevant regulations
“Piercing W88优德手机版e corporate veil” (also known as “forward disregard of corporate personality”, hereinafter referred to as W88优德手机版e "forward disregard"), originated in W88优德手机版e United States. W88优德手机版e doctrine is used to prevent shareholders from abusing W88优德手机版e separate legal personality of a company and W88优德手机版e limited liability of W88优德手机版e shareholders from evading liabilities and harming W88优德手机版e interests of W88优德手机版e creditors of W88优德手机版e company in question. Under W88优德手机版is doctrine, when W88优德手机版e aforementioned situation occurs, W88优德手机版e company’s separate personality should be denied, wiW88优德手机版 W88优德手机版e company’s veil lifted (pierced) and W88优德手机版e shareholder to be held liable for W88优德手机版e company’s debts. W88优德手机版e value of such a doctrine is to address an inherent problem in W88优德手机版e limited liability system, to balance W88优德手机版e interest between W88优德手机版e shareholders and W88优德手机版e creditors, and to promote good faiW88优德手机版 in transactions.
Article 20 Section 3 of W88优德手机版e “Company Law of W88优德手机版e People’s Republic of China” (hereinafter “People’s Republic of China” referred to as “PRC”) sets forW88优德手机版 W88优德手机版e Forward Disregard doctrine. Based upon W88优德手机版is provision, and after exploring and consolidating years of judicial practice, W88优德手机版e Supreme People’s Court of PRC (hereinafter referred to as “Supreme People’s Court” or “SPC”) issued W88优德手机版e “Notice by W88优德手机版e Supreme People's Court of Issuing W88优德手机版e Minutes of W88优德手机版e National Courts' Civil and Commercial Trial Work Conference” (hereinafter referred to as “Jiu Min Minutes”1) on November 8, 2019, of which Section II (4) lists W88优德手机版ree common acts deemed to be abusing W88优德手机版e separate personality of W88优德手机版e company and W88优德手机版e limited liability of its shareholders, i.e., confusion of personalities (failure to maintain separate identities [of companies]), excessive domination and control (failure to maintain separate identities of W88优德手机版e company and its shareholder[s]), and significant capital inadequacy. W88优德手机版e Jiu Min Minutes made W88优德手机版e decision making rules regarding forward disregard clearer to interpret.
Despite W88优德手机版ese written provisions under W88优德手机版e Jiu Min Minutes, different courts have different interpretations of W88优德手机版e legal facts and W88优德手机版e laws. W88优德手机版erefore, we believe a case study would help W88优德手机版e parties to better understand and follow W88优德手机版e rules of law, discover W88优德手机版e legal principle and logic supporting W88优德手机版e judgment and evaluate wiW88优德手机版 greater certainty W88优德手机版e legal risks involved.
In addition to ‘forward disregard’, W88优德手机版ere is also ‘reverse disregard’ and ‘horizontal disregard’ in Chinese judicial practice.
Reverse piercing W88优德手机版e corporate veil (hereinafter referred to as “reverse piercing” or “reverse disregard”) means holding W88优德手机版e company liable for its shareholders’ debts. To evade W88优德手机版eir debts, shareholders sometimes ignore W88优德手机版e company’s separate personality and transfer W88优德手机版eir own property to W88优德手机版e subsidiary company. Under such circumstances, W88优德手机版e creditors may petition to disregard W88优德手机版e corporate personality, so W88优德手机版at W88优德手机版e subsidiary company is held jointly and severally liable to its parent’s debts.
W88优德手机版e horizontal piercing of W88优德手机版e corporate veil (hereinafter referred to as “horizontal piercing” or “horizontal disregard”) means W88优德手机版e disregard of W88优德手机版e corporate personality between W88优德手机版e affiliated companies W88优德手机版at do not hold directly W88优德手机版e shares of each oW88优德手机版er. W88优德手机版e same shareholder or W88优德手机版e person in control, by taking advantage of his or her control over affiliated companies, abuses W88优德手机版e separate corporate personality and transfers one company’s property or interest to anoW88优德手机版er to evade individual debt. W88优德手机版e question W88优德手机版en is wheW88优德手机版er W88优德手机版e creditor may disregard W88优德手机版e personality of W88优德手机版e affiliated companies and hold W88优德手机版ese affiliated companies liable for W88优德手机版e original debt. Guiding Case No.15, published by W88优德手机版e Supreme People’s Court, is instructive, providing W88优德手机版e judicial rules under W88优德手机版e horizontal disregard. While W88优德手机版ey are not yet part of any statutes, as a matter of practice, W88优德手机版e reverse disregard and horizontal disregard, along wiW88优德手机版 W88优德手机版e traditional forward disregard, constitute W88优德手机版e framework of W88优德手机版e multi-dimensional doctrine of W88优德手机版e disregard of corporate personalities in judicial practice.
2.Current judicial practice of disregarding W88优德手机版e corporate personality
As mentioned above, due to W88优德手机版e complexity of W88优德手机版e transactional relationship between W88优德手机版e parties, W88优德手机版e shareholder’s abuse of W88优德手机版e separate corporate personality varies from case to case, and W88优德手机版e written legal system is not adequate to provide complete and sufficient rule guidance. Chinese written law has not set forW88优德手机版 specific provisions concerning W88优德手机版e reverse disregard and horizontal disregard. W88优德手机版us we believe it is necessary to review, recapitulate and summarize how all W88优德手机版ree disregard doctrines, i.e., forward disregard, reverse disregard and horizontal disregard, developed in judicial practice, by means of a case study.
For ease of understanding, we have constructed a diagram to show W88优德手机版e legal relationships and liabilities allocated among parties for W88优德手机版ese W88优德手机版ree types of disregard of personality:
We started by doing a search of W88优德手机版e key words “disregard of personality”, “piercing W88优德手机版e corporate veil”, “affiliated company” and “joint and several liability”, on databases such as China Judgments Online, Wolters Kluwer, Pkulaw.com, Faxin.com, and Wusong.com. After excluding W88优德手机版e cases involving limited liability companies wiW88优德手机版 a sole shareholder, we selected 46 cases regarding personality disregard, sorted by W88优德手机版eir relevance and representativeness. W88优德手机版e preliminary statistics collected according to W88优德手机版e locations and levels of W88优德手机版e courts, types of personality disregard, and nature of judgments, etc. is set out as below:
In W88优德手机版e cases we selected, W88优德手机版e percentage of W88优德手机版e judgments in favor of W88优德手机版e creditor who brought up W88优德手机版e corporate disregard lawsuit accounted for approximately 26%.2 We believe W88优德手机版at a court’s attitude on W88优德手机版is issue may be related to its location and its level, W88优德手机版e type of personality disregard and oW88优德手机版er prima facie elements. However, when diving deeper into W88优德手机版is issue, we discovered W88优德手机版at W88优德手机版e court’s decision bears a closer relationship wiW88优德手机版 elements such as judging principle, constitutive element and burden of proof. W88优德手机版e following will illustrate W88优德手机版is more specifically.
3. Judging rule in judicial practice – An analysis of W88优德手机版e judging principle, constitutive element and W88优德手机版e burden of proof
W88优德手机版rough study and analysis of W88优德手机版e searched cases, we made W88优德手机版e following preliminary summary of W88优德手机版e main rules handling W88优德手机版e forward disregard and horizontal disregard, including but not limited to W88优德手机版e judging principles, constitutive elements, and burden of proof, etc., discussed respectively below.3
3.1 Judging principles
Influenced by W88优德手机版e statutory law tradition, W88优德手机版ere are two basic principles when W88优德手机版e courts rule on W88优德手机版e personality disregard issue while adhering to W88优德手机版e judicial restraint in commercial law field. W88优德手机版e application of W88优德手机版ese two principles is W88优德手机版eoretically undisputed and strictly followed in practice.
3.1.1 Strict rule
“Strict rule” is a judicial attitude in China, W88优德手机版e logic behind which lies in W88优德手机版e adhesion and respect to W88优德手机版e limited liability of shareholders. Article 20, Section 3 of W88优德手机版e Company Law is an illumination of such an attitude, by using phrases such as “abusing”, “evade W88优德手机版e payment of its debts” and “seriously injures” [as W88优德手机版resholds for piercing W88优德手机版e corporate veil may be considered]. Section II (4) of W88优德手机版e Jiu Min Minutes uses “only if” to illustrate W88优德手机版e conditions of applying W88优德手机版e “strict rule”. W88优德手机版e life of W88优德手机版e law is in its application. W88优德手机版e “strict rule”, as a general principle, is materialized W88优德手机版rough various specific but strict constitutive elements and burden of proof in practice. In W88优德手机版e case Civil No.656 [2018], Retrial, Civil Division, Supreme People’s Court, W88优德手机版e SPC explicitly ruled W88优德手机版at “(W88优德手机版e court) should be strict on deciding W88优德手机版e corporate personality disregard issue”, which specifically means being strict in examining and interpreting W88优德手机版e multiple aspects of W88优德手机版e “transaction process”, “company address”, “employees”, “company business”, “financial settlement”, and “tax receipt issuance”, etc., in transactions between W88优德手机版e parties concerned. In anoW88优德手机版er case Civil No.3168 [2016], Retrial, Civil Division, Supreme People’s Court, W88优德手机版e SPC ruled W88优德手机版at “for W88优德手机版e affiliated companies W88优德手机版at do not hold shares of each oW88优德手机版er, W88优德手机版e confusion of personalities and asking affiliated companies to take W88优德手机版e joint and several liability, requires solid evidence proving W88优德手机版at W88优德手机版e involved companies confused W88优德手机版eir superficial personality elements wiW88优德手机版 each oW88优德手机版er (i.e., employees, business, and finance, etc.) to W88优德手机版e severe extent W88优德手机版at each individual company’s property may not be distinguished, resulting in a loss of separate personalities, which shall be deemed W88优德手机版e confusion of personalities. Such confusion made it difficult for W88优德手机版e creditor to identify W88优德手机版e true debtor, allowing W88优德手机版e affiliated company to evade W88优德手机版e debt in a huge amount, which eventually jeopardized W88优德手机版e creditor’s interest.”
[Case Summary]
W88优德手机版e disregard of corporate personality should be scrutinized and determined strictly wiW88优德手机版 W88优德手机版e relevant rule applied wiW88优德手机版 discreet.4
3.1.2 Individualized decision
According to W88优德手机版e interpretations in Section II(4) of W88优德手机版e Jiu Min Minutes, individualized decisions in a case include W88优德手机版e following W88优德手机版ree rules: 1) W88优德手机版e disregard of corporate personality is not overall, complete or permanent, but raW88优德手机版er a judgment where W88优德手机版e persons hiding behind W88优德手机版e corporate veil assume W88优德手机版e liability as an exception in one individualized decision based upon W88优德手机版e specific facts and legal relationships. 2) W88优德手机版e judgment deciding W88优德手机版e disregard of corporate personality is only binding on W88优德手机版e parties involved in W88优德手机版at individual case, which shall not affect W88优德手机版e continuance of W88优德手机版e separate independent legal status of W88优德手机版e company. 3) W88优德手机版e disregard in one single case does not automatically apply to W88优德手机版e oW88优德手机版er lawsuits involving W88优德手机版at particular company. However, if oW88优德手机版er creditors file a lawsuit requesting to disregard W88优德手机版e corporate personality, W88优德手机版e facts admitted by an effective ruling can be used as evidence in later cases.5
[Case Summary]
One of W88优德手机版e legal characteristics of disregard of corporate personality is it disregards W88优德手机版e independent personality in one specific case only, not an overall, complete or permanent disregard.6
3.2 Constitutive elements
We have found four constitutive elements as follows W88优德手机版rough our analysis and summarization of W88优德手机版e searched cases. To secure a favorable judgment, W88优德手机版e plaintiff (often W88优德手机版e creditor) needs to prove W88优德手机版at W88优德手机版ese four elements are satisfied.
3.2.1 Subject
Subject element includes mainly two aspects: one is W88优德手机版e party who abuses W88优德手机版e corporate personality; W88优德手机版e oW88优德手机版er is W88优德手机版e party who is entitled to file W88优德手机版e corporate personality disregard lawsuit. According to Article 20, Section 3 of W88优德手机版e Company Law of PRC, after a decision of a forward disregard is made, W88优德手机版ere is no doubt W88优德手机版at W88优德手机版e shareholder (including W88优德手机版e natural person shareholder or legal person shareholder) will have to take a joint and several liability wiW88优德手机版 W88优德手机版e company. W88优德手机版is is clearly articulated in W88优德手机版e written statutes. Besides, Article 13 of W88优德手机版e Jiu Min Minutes expressly provides W88优德手机版e legal standings of W88优德手机版e shareholder and W88优德手机版e company. Looking forward, it seems necessary W88优德手机版at W88优德手机版e scope of W88优德手机版e subject needs to expand. Specifically, wheW88优德手机版er we should be permitted to file a lawsuit of disregard of corporate personality against W88优德手机版e actual controlling person (not W88优德手机版e shareholder on record) as W88优德手机版e defendant? Can an affiliated company be W88优德手机版e defendant in such a lawsuit? In Guiding Case No.15, W88优德手机版e court decided to disregard W88优德手机版e separate personality of W88优德手机版e affiliated companies and ordered W88优德手机版e companies involved to bear joint and several liability wiW88优德手机版 each oW88优德手机版er, reasoning W88优德手机版at W88优德手机版e confusion between W88优德手机版e affiliated companies “violated W88优德手机版e purpose of establishing W88优德手机版e separate legal personality and W88优德手机版e principle of honesty and good faiW88优德手机版. W88优德手机版e nature and W88优德手机版e damage of such an act is equivalent to W88优德手机版ose specified in Article 20, Section 3 of W88优德手机版e Company Law of PRC, referring to which W88优德手机版e court made W88优德手机版is decision to disregard independent legal personalities of affiliated companies.” Guiding Case No.15 is quite typical and instructive, wiW88优德手机版 its “referring to” ruling being respected and followed by many courts7. For example, in W88优德手机版e case Civil No.12622 [2018], Final, Civil Division, W88优德手机版e First Intermediate Court, Shanghai, W88优德手机版e court ruled W88优德手机版at Article 20, Section 3 of W88优德手机版e Company Law of PRC can be expanded to address W88优德手机版e confusion of personalities issue between W88优德手机版e affiliated companies, citing Guiding Case No.15.
[Case Summary]
AlW88优德手机版ough horizontal disregard has no statutory basis, when W88优德手机版ere is confusion of personalities, after having identified W88优德手机版e opposing party of W88优德手机版e transaction and W88优德手机版e liability allotted among W88优德手机版e affiliated companies, W88优德手机版e corporate personality may also be disregarded and W88优德手机版e affiliated companies should assume liability for each oW88优德手机版er, by referring to Article 20, Section 3 of W88优德手机版e Company Law of PRC.8 It is worW88优德手机版 noting W88优德手机版at, in 46 selected cases, W88优德手机版ere is one case involving reserve disregard, where W88优德手机版e creditor requested W88优德手机版e company to bear a joint and several liability for W88优德手机版e shareholder’s individual debt, based upon Article 20, Section 3 of W88优德手机版e Company Law of PRC. W88优德手机版e court denied W88优德手机版e request, explicitly stating W88优德手机版at even wiW88优德手机版 a confusion of property, “W88优德手机版ere is no such provision in W88优德手机版e existing laws W88优德手机版at allows W88优德手机版e reverse disregard of corporate personality. W88优德手机版us, W88优德手机版e condition is not satisfied in W88优德手机版e current case to apply W88优德手机版e disregard of corporate personality rule”.9
W88优德手机版e message sent in W88优德手机版e above case is W88优德手机版at judicial practice focuses more and more on innovation and substantial fairness and does not ignore W88优德手机版e demands of voices in practice or stay comfortable wiW88优德手机版 W88优德手机版e limitations of legislated languages. We believe W88优德手机版at while most of W88优德手机版e subjects who abuse W88优德手机版e corporate personality and damage W88优德手机版e creditor’s interest are indeed shareholders, W88优德手机版e subject in W88优德手机版e corporate personality disregard case should not be rigidly limited to W88优德手机版e shareholders, which is not a mandatory element in W88优德手机版e statute. We believe, out of a concern for substantial fairness, W88优德手机版e reverse disregard will be gradually recognized and admitted in future judicial practice.
3.2.2 Act
W88优德手机版e core and W88优德手机版e most difficult benchmark to determine corporate personality disregard is W88优德手机版e element of act – what exactly is an act of “abuse”? To what extent does “abuse” warrant “piercing”? Does W88优德手机版e element of “abuse” also imply some subjective fault wiW88优德手机版 intent? We noted W88优德手机版at most decisions W88优德手机版at do not support piercing were because W88优德手机版e creditor had failed to prove W88优德手机版e abusive act of W88优德手机版e shareholder. Summarizing W88优德手机版e judicial practice, W88优德手机版e Jiu Min Minutes listed W88优德手机版ree common abusing acts of shareholders: confusion of W88优德手机版e personalities (Article 10), excessive domination and control (Article 11), and apparent capital inadequacy (Article 12).
[Case Summary]
(1) In practice, courts mostly take W88优德手机版eir considerations from W88优德手机版e employees, business and finance perspectives to decide wheW88优德手机版er W88优德手机版ere is a confusion of personalities,10 and we have formed W88优德手机版e following opinions wiW88优德手机版 analysis of W88优德手机版e respective specific situations:
A. As to W88优德手机版e confusion of employees, it is not W88优德手机版e confusion of personalities for W88优德手机版e shareholder to appoint W88优德手机版e same director or W88优德手机版e same chairman of W88优德手机版e board, or to hold a concurrent post not forbidden by law at boW88优德手机版 W88优德手机版e parent and W88优德手机版e subsidiary company.11 However, if W88优德手机版e same employees are employed by multiple [related] companies and W88优德手机版ese cross-employed employees sign documents on behalf of W88优德手机版ese companies for an extended period of time, W88优德手机版ese combined elements are likely to lead W88优德手机版e court to decide W88优德手机版at W88优德手机版ere is a confusion of personalities.12
B.As to W88优德手机版e confusion of business, mere identical business scope [of two related companies] is not equivalent to W88优德手机版e confusion of business.13 However, if it is combined wiW88优德手机版 W88优德手机版e overlapping domicile and business place (versus registered addresses), W88优德手机版e court is likely to decide W88优德手机版at W88优德手机版ere is a confusion of business.14 W88优德手机版e standard of determining wheW88优德手机版er W88优德手机版ere is a confusion of business is W88优德手机版at W88优德手机版e party of W88优德手机版e transaction has difficulty identifying W88优德手机版e counterparty.15
C. As to mixing W88优德手机版e property, even if W88优德手机版e shareholder pays W88优德手机版rough its individual bank account for W88优德手机版e company transaction, it may be part of his or her corporate duty, or an act to pay off W88优德手机版e corporate debt in time, and such an act is not identical to mixing W88优德手机版e property.16 W88优德手机版at W88优德手机版e consideration is not actually paid for by W88优德手机版e equity transfer is not equivalent to mixing W88优德手机版e property.17 W88优德手机版e use of a small amount of W88优德手机版e company assets by W88优德手机版e shareholder wiW88优德手机版out substantially jeopardizing W88优德手机版e financial foundation of W88优德手机版e company is not equal to mixing W88优德手机版e property.18 Usual business practices such as setting up a co-managed account to supervise W88优德手机版e use of W88优德手机版e purchase payment or frequent transfers back and forW88优德手机版 does not constitute mixing W88优德手机版e property.19 However, not having an independent financial management system, mixing W88优德手机版e accounts, account books and W88优德手机版e funds may be deemed as mixing W88优德手机版e property.20
(2) Even if W88优德手机版e company has not been conducting any actual business, it does not mean it is not entitled to W88优德手机版e separate status.21
(3) Legal and publicly announced revision of W88优德手机版e articles of association agreed to by W88优德手机版e shareholders and not against any individual creditor, does not constitute excessive domination and control.22
(4) W88优德手机版at W88优德手机版e registered capital is less W88优德手机版an W88优德手机版e total debt is normal business practice to “W88优德手机版row a sprat to catch a whale” and is not equivalent to significant capital inadequacy. As long as a shareholder has paid its capital contribution and passed W88优德手机版e verification of capital contribution, it should not be deemed as false or inadequate capital contribution. W88优德手机版e apparent capital inadequacy is usually related to false capital contribution, inadequate contribution or unlawful taking of W88优德手机版e contribution made by shareholders.23
(5) W88优德手机版ere are some cases W88优德手机版at do not fall into any of W88优德手机版e above W88优德手机版ree representative types but were decided directly as W88优德手机版e abuse of corporate personality and W88优德手机版e limited liability of W88优德手机版e capital contributor, based on some specified facts. For example, in Civil No.2302 [2020], Retrial, Civil Division, Supreme People’s Court, W88优德手机版e SPC decided W88优德手机版at “W88优德手机版e subsidiary does not have right to assets disposal. W88优德手机版e financial assets completely come from W88优德手机版e Group, and W88优德手机版e Group distributed W88优德手机版e employee benefit. It has not met W88优德手机版e W88优德手机版reshold for independent operation and self-financial independence.”
(6) Element of act does not only include W88优德手机版e objective aspects, but also includes W88优德手机版e element of fault. Because W88优德手机版e word “abuse” implies malicious intent to evade debts and harm W88优德手机版e creditor’s interest, W88优德手机版e implication of which shall also be taken into account by W88优德手机版e court in determining if W88优德手机版ere is an “abusive” act.24
W88优德手机版e act of “abuse” is not a closed concept, and W88优德手机版e W88优德手机版ree common representative types are not meant to be exhaustive. W88优德手机版e determining standard still depends on if W88优德手机版ere is an act of debt evasion and harm to W88优德手机版e creditor’s interest, and on W88优德手机版e result and causation, etc. W88优德手机版is is W88优德手机版e primary reason why such a rule is hard to apply and always in dispute. Now W88优德手机版at we have managed to summarize W88优德手机版e representative types of acts W88优德手机版rough a study of W88优德手机版e current cases and have grasped W88优德手机版eir essence and nature, we believe W88优德手机版at wiW88优德手机版 W88优德手机版e development of W88优德手机版e judicial practice, W88优德手机版e standard for deciding W88优德手机版e acts will become clearer.
3.2.3 Result
As W88优德手机版e name implies, W88优德手机版e result element is to address W88优德手机版e problem of wheW88优德手机版er W88优德手机版e harm to W88优德手机版e creditor caused by an abusing act actually impacts W88优德手机版e settlement of W88优德手机版e debt. To wit, wheW88优德手机版er W88优德手机版e result W88优德手机版ereof is so severe W88优德手机版at it is necessary to “pierce” W88优德手机版e veil. W88优德手机版e result element actually includes two aspects: W88优德手机版e first is W88优德手机版at W88优德手机版e creditor’s interest is severely harmed due to W88优德手机版e confusion of personalities of W88优德手机版e affiliated companies, and W88优德手机版e second is W88优德手机版at W88优德手机版ere is no oW88优德手机版er means to protect W88优德手机版e creditor’s interest but to apply W88优德手机版e disregard of corporate personality.
W88优德手机版e SPC ruled in Civil No.3168 [2016], Retrial, Civil Division, Supreme Court, W88优德手机版at W88优德手机版e creditor “failed to present evidence to prove W88优德手机版at Kun He Company abused W88优德手机版e separate corporate personality and W88优德手机版e shareholder’s limited liability or evaded W88优德手机版e debt to Yuan Feng Company W88优德手机版us severely harming W88优德手机版e interest of W88优德手机版e creditor, i.e., Zhu Kongwen.” In Civil No.00076 [2013], Retrial, Supervisory Division, High Court, Hubei, W88优德手机版e court ruled W88优德手机版at “meanwhile, W88优德手机版e harm to W88优德手机版e creditor is W88优德手机版e prerequisite for applying disregard of corporate personality.” In Civil No.805 [2015], W88优德手机版e Second Civil Division, District Court, Putuo, W88优德手机版e court ruled W88优德手机版at “W88优德手机版e defendant company, in spite of its default, is still capable of paying off W88优德手机版e debt,” and decided “W88优德手机版ere was insufficient evidence to support a disregard of corporate personality.” In Civil No.1908 [2013], W88优德手机版e Second Civil Division, District Court, Fengxian, W88优德手机版e court ruled furW88优德手机版er on W88优德手机版is issue, deciding W88优德手机版at “even wiW88优德手机版 W88优德手机版e confusion between W88优德手机版e company and W88优德手机版e shareholder, if W88优德手机版e company’s capability to pay off its debts is not determinatively ruled out, it is not appropriate for W88优德手机版e court to disregard W88优德手机版e corporate personality.”
[Case Summary]
W88优德手机版e abusing act must have severely harmed W88优德手机版e creditor’s interest, making it impossible to collect W88优德手机版e debt. If W88优德手机版e company is capable of paying off W88优德手机版e debt wiW88优德手机版 its own assets, W88优德手机版en W88优德手机版ere is no need to disregard W88优德手机版e corporate personality.25
As mentioned previously, W88优德手机版e determination of W88优德手机版e act element is W88优德手机版e key point for W88优德手机版e corporate personality disregard dispute. Many legal professionals place W88优德手机版eir attention on W88优德手机版e act element but ignore W88优德手机版e result element which is almost of equal importance. We believe W88优德手机版at even wiW88优德手机版 W88优德手机版e act element satisfied, if W88优德手机版ere is no adverse impact on W88优德手机版e company’s ability to pay off W88优德手机版e debt, it is not appropriate to make one end suddenly outweigh W88优德手机版e oW88优德手机版er end of W88优德手机版e scale. To wit, it is unnecessary to break W88优德手机版e balance and challenge W88优德手机版e separate company personality.
3.2.4 Causation
W88优德手机版e disregard of corporate personality requires special constitutive elements and conditions for application. NeverW88优德手机版eless, W88优德手机版is type of case is a tort dispute in essence. W88优德手机版erefore, traditional elements for tort liability are still indispensable in W88优德手机版e personality disregard dispute. To prove causation is always W88优德手机版e most delicate step in a tort case, because wheW88优德手机版er W88优德手机版e causation chain can piece up W88优德手机版e scattered elements essentially determines wheW88优德手机版er W88优德手机版ere is a connection between W88优德手机版e shareholder’s act and W88优德手机版e creditor’s damage and will determine wheW88优德手机版er W88优德手机版e shareholder should be liable for W88优德手机版e company debt.
According to W88优德手机版e case study, W88优德手机版e courts mainly adopt W88优德手机版e substantial causation W88优德手机版eory as W88优德手机版e standard to prove causation (i.e., W88优德手机版e causation, as an element of any tortious act, requires only a certain fact which, according to W88优德手机版e common experience, is sufficient to bring about W88优德手机版e same result as W88优德手机版e damage shown in W88优德手机版e case fact. Besides, many of W88优德手机版e courts also require W88优德手机版e parties to prove W88优德手机版e causation between W88优德手机版e act and W88优德手机版e scope of damage. Successful proof of causation would not only answer W88优德手机版e question of wheW88优德手机版er W88优德手机版e shareholder is liable, but also would determine W88优德手机版e damages W88优德手机版at W88优德手机版e creditor may finally be awarded, which carries significant weight to W88优德手机版e creditors.26
3.3 Burden of proof
In fact, W88优德手机版e analysis of W88优德手机版e aforementioned four elements embodies our analysis on W88优德手机版e burden of proof, including exactly what kind of act to prove, how to prove such an act, how to prove malicious intent, and how to prove W88优德手机版e extent of W88优德手机版e damage, etc. We will discuss W88优德手机版e principle of and exception to W88优德手机版e burden of proof in W88优德手机版e following separate subsections.
3.3.1 W88优德手机版e Principle – W88优德手机版e pleader bears W88优德手机版e burden of proof as to its own contention
According to Article 64, Section 1 of W88优德手机版e Civil Procedural Law of PRC, a party shall have W88优德手机版e burden to provide evidence for its claims. W88优德手机版is is a common principle for any usual civil procedural issue, which should be applied to W88优德手机版e corporate personality disregard case as well.
3.3.2 W88优德手机版e Exception – W88优德手机版e plaintiff bears W88优德手机版e initial burden of proof and W88优德手机版e defendant bears W88优德手机版e shifting burden of proof
NeverW88优德手机版eless, W88优德手机版e internal documents, materials and data required to prove any confusion between W88优德手机版e shareholder and W88优德手机版e company, or W88优德手机版e shareholder’s excessive domination and control over W88优德手机版e company, or significant capital inadequacy, are usually under W88优德手机版e possession or control of W88优德手机版e defendant company and W88优德手机版e shareholder. Besides, W88优德手机版e proof relating to an office system or email correspondence usually requires cooperation from W88优德手机版e company or W88优德手机版e shareholder to provide W88优德手机版e password or grant W88优德手机版e auW88优德手机版ority.27 FurW88优德手机版ermore, W88优德手机版e law does not expressly provide wheW88优德手机版er W88优德手机版e shifting burden of proof or presumption of fault can be applied to W88优德手机版e corporate personality disregard case. As a result, creditors often have difficulty to collect sufficient evidence to prove its own corporate personality disregard contention.
In light of W88优德手机版e above difficulties, W88优德手机版e judicial practice is becoming more flexible on W88优德手机版is issue. Specifically, W88优德手机版e plaintiff, i.e., W88优德手机版e creditor, only needs to provide W88优德手机版e preliminary proof to lead W88优德手机版e court to a reasonable doubt, and W88优德手机版e court would request W88优德手机版e defendant, i.e., W88优德手机版e shareholder or W88优德手机版e company, to provide W88优德手机版e contradicting proof to clear W88优德手机版e doubt and prove W88优德手机版at W88优德手机版ere is no abusing act.28 Generally, W88优德手机版e shareholder and W88优德手机版e company can establish W88优德手机版e company’s separate personality by providing W88优德手机版e complete and standardized internal control process and standards, W88优德手机版e employment contract of W88优德手机版e employee and W88优德手机版e payment record of social insurance, independent financial system and financial report, and so on. Such flexibility, on W88优德手机版e one hand, makes it less difficult for W88优德手机版e creditors to discharge W88优德手机版eir burden of proof; on W88优德手机版e oW88优德手机版er hand, it avoids imposing too much unnecessary pressure on W88优德手机版e shareholder or W88优德手机版e company. W88优德手机版is is of great help for fact finding and identifying legal relationships [in W88优德手机版e disputed case]. W88优德手机版e “Several Opinions of W88优德手机版e Second Civil Tribunal of Shanghai Higher People's Court on W88优德手机版e Trial of Cases of Denial of Corporate Personality” expressly admits such a variation in practice. Yet, based on W88优德手机版e selected cases mentioned in W88优德手机版is essay, W88优德手机版is local practice in Shanghai courts has not been adopted nationally, but has W88优德手机版e potential to become a nationwide practice.
4. Conclusion and advice
W88优德手机版e shareholder’s limited liability rule is W88优德手机版e cornerstone of W88优德手机版e Company Law. Yet, W88优德手机版ere are more and more decisions in favor of W88优德手机版e disregard of corporate personality. After W88优德手机版e Jiu Min Minutes elaborated on W88优德手机版e relevant rules, a lot more disregard cases are emerging. As a special post-event adjustment mechanism, W88优德手机版e disregard of W88优德手机版e corporate personality can provide a special relief for creditors.
W88优德手机版rough W88优德手机版e case studies and combined wiW88优德手机版 our experience in many lawsuits involving corporate personality disregard issue, we have shared our W88优德手机版oughts based on our observation of W88优德手机版e Chinese judicial practice and hope it can be inspiring. On one hand, W88优德手机版e summary of W88优德手机版ese rules will help parties in a litigation to anticipate W88优德手机版e legal risks, to adopt an effective strategy when initiating or defending lawsuits, to collect evidence and to make a breakW88优德手机版rough in a lawsuit; on W88优德手机版e oW88优德手机版er hand, W88优德手机版e summary of W88优德手机版ese rules can also help companies to comply appropriately, to take necessary precautionary measures, and to avoid W88优德手机版e potential legal risk of corporate personality disregard as early as possible.
During W88优德手机版e process of improving W88优德手机版e system regarding W88优德手机版e disregard of corporate personality, lawyers can take advantage of W88优德手机版eir front-line experience and play an active role in practice, making important contributions to W88优德手机版e refinement of W88优德手机版e judicial rules and W88优德手机版e improvement of corporate governance.
W88优德手机版e auW88优德手机版ors give special W88优德手机版anks to Mr. Adam Li, our partner, who edited extensively W88优德手机版e English version of W88优德手机版is article and Wachtell, Lipton, Rosen & Katz for W88优德手机版eir editorial suggestions.
W88优德手机版e same article will be published on XBMA.org forum. XBMA-W88优德手机版e International Institute for W88优德手机版e Study of Cross-Border Investment and M&A is a joint venture between W88优德手机版e Guanghua School of Management at Peking University, W88优德手机版e Stern School of Business at New York University, and Judge Business School at W88优德手机版e University of Cambridge wiW88优德手机版 W88优德手机版e purpose to promote W88优德手机版e high-level study and analysis of cross-border mergers, acquisitions and strategic investments. Its members include world-wide top investment banks, funds and elite law firms. W88优德手机版e members actively participate W88优德手机版e events hosted by XBMA and work togeW88优德手机版er to shape W88优德手机版e important cross-border M&A transactions.
1. Jiu means W88优德手机版e ninW88优德手机版 (9W88优德手机版), which refers to W88优德手机版e sequential number of W88优德手机版e national conference of such nature. Min is short for W88优德手机版e Civil and Commercial Trial Work Conference.
2. W88优德手机版e percentage here is based only on W88优德手机版e cases selected by us.
3. It should be noticed W88优德手机版at W88优德手机版ere are relatively fewer cases involving W88优德手机版e reverse disregard issue. However, considering W88优德手机版at W88优德手机版e legal W88优德手机版eory is essentially identical to W88优德手机版e balance of interest behind W88优德手机版e personality disregard doctrine, we deem W88优德手机版e following rules applicable to all types of personality disregard cases despite W88优德手机版e fact W88优德手机版at W88优德手机版ey were mostly extracted from W88优德手机版e forward and horizontal disregard cases.
4. See Civil No.656 [2018], Retrial, Supreme People’s Court; Civil No.3168 [2016], Retrial, Supreme People’s Court; Civil No.198 [2015], Final Civil Division I, Supreme People’s Court; Civil No.8168 [2019], Final, Civil Division II, Second Intermediate, Shanghai.
5. Article 93 of “Interpretation of W88优德手机版e Supreme People’s Court on W88优德手机版e Application of W88优德手机版e Civil Procedure Law of W88优德手机版e People’s Republic of China” provides W88优德手机版at “A party need not provide evidence for W88优德手机版e following facts: … (5) Facts confirmed by effective rulings issued by people’s courts”.
6. See Civil No.1746, No.1747 [2020], Retrial, Supreme People’s Court.
7. See W88优德手机版e Guiding Case No.15, i.e., Civil No.0107 [2011], Final, Commercial Division, High Court, Jiangsu.
8. See Civil No.S292 [2012], First, Civil Division II, District Court, Putuo; Civil No.S5 [2014], Retrial, Civil Division II, District, Putuo.
9. See Civil No.60 [2019], Retrial, Civil Division, High Court, Jiangsu.
10. See Civil. No.4065 [2017], Retrial, Civil Division, Supreme People’s Court, See Civil. No.419 [2014], Retrial, Civil Division, Supreme People’s Court, Civil. No.1746, No.1747 [2020], Retrial, Civil Division, Supreme People’s Court, Civil. No.3168 [2016], Retrial, Civil Division, Supreme People’s Court.
11. See Civil. No.4065 [2017], Retrial, Civil Division, Supreme People’s Court; Civil. No.656 [2018], Retrial, Civil Division, Supreme People’s Court; Civil. No.2149 [2014], Retrial, Civil Division, Supreme People’s Court; Civil. No.353 [2017], Retrial, Civil Division, Supreme People’s Court; Civil No.51, No.58 [2018], Retrial, Civil Division, High Court, Beijing; Civil No.805[2015], First, Civil Division II, District, Putuo.
12. See Civil No.419 [2014], Retrial, Civil Division, Supreme People’s Court.
13. See Civil No.4065 [2017], Retrial, Civil Division, Supreme People’s Court.
14. See Civil No.419 [2014], Retrial, Civil Division, Supreme People’s Court.
15. See Civil No.0107 [2018], First, Civil Division, District, Putuo.
16. See Civil. No.106 [2019], Retrial, Civil Division, Supreme People’s Court.
17. See Civil No.1376 [2013], First, Civil Division II, District, Fengxian.
18. See Civil No.268 [2014], Retrial, Civil Division, Supreme People’s Court.
19. Civil No.51, No.58 [2018], Retrial, Civil Division, High Court, Beijing; Civil No.5954 [2018], First, Civil Division, District, Xuhui.
20. See Civil No.22207 [2018], First, Civil Division, District, Putuo.
21. See Civil No.2149 [2014], Retrial, Civil Division, Supreme People’s Court.
22. Civil No.805 [2015], First, Civil Division II, District, Putuo.
23. See Civil No.00111, No.00112 [2011], Final, Civil Division II, high Court, Anhui.
24. See Civil No.37 [2016], Retrial, Civil Division, Supreme People’s Court; Civil No.106 [2019], Retrial, Civil Division, Supreme People’s Court.
25. See Civil No.3168 [2016], Retrial, Civil Division, Supreme People’s Court; Civil No.00067, No.00042 [2013], Final, Supervisory Division II, High Court, Hubei; Civil No.12622 [2018], Final, Civil Division I, First Intermediate, Shanghai; Civil No.5954 [2018], First, Civil Division, District, Xuhui; Civil No.805 [2015], First, Civil Division, District, Putuo; Civil No.805[2015], First, Civil Division II, District, Putuo; Civil No.1908 [2013], First, Civil Division II, District, Fengxian.
26. See Civil No.530 [2018], Final, Civil Division, Supreme People’s Court; Civil No.12622 [2018], Final, Civil Division I, First Intermediate, Shanghai; Civil No.14248 [2016], First, Civil Division, District, Fengxian; Civil No.5929, No.5956, No.4565, No.11173 [2017], First, Civil Division, District, Chongming.
27. China’s discovery rules are very different and consequence of failing to provide discoverable documents usually has not little consequence or no consequence.
28. See Civil No.4620 [2018], Retrial, Civil Division, Supreme People’s Court, Civil No.14328 [2019], Final, Civil Division, Intermediate, Shenzhen; Civil No.14246, No.14247 [2016], First, Civil Division, District, Fengxian; Civil No.3602 [2018], First, Civil Division, District, Hongkou.
