Academic journal article Asia Pacific Law Review

The High Frequency of Piercing the Corporate Veil in China

Academic journal article Asia Pacific Law Review

The High Frequency of Piercing the Corporate Veil in China

Article excerpt

I. Introduction

The principle of the corporate veil - that a company's shareholders are separate from the company they own and its debts and obligations - has endured well since its origins more than four centuries ago. Remarkably, the principle fundamental to the success of the corporate form as the primary mechanism for accumulation of capital and the development of modern economies is not set out in the company laws that create companies as the separate legal persons. Rather, since the time of Salomon v Salomon1 the principle has been a creature of judicial doctrines, a logical extension of the consequences of separate legal personality endowed by company legislation.

In the century since the doctrine was first articulated, the courts have largely upheld the sanctity of the corporate veil, rarely intervening to impose liability on a company's owners for actions or liabilities of the company, particularly its debts to creditors. The principle is not entirely sacrosanct, however. While the statutes may not provide authority for piercing the veil, the common law does, primarily through judicial doctrines that can push aside the veil in a limited number of cases.2 Scholars have classified the exceptions using a range of different labels - agency, fraud, sham, and so forth3 - but they share a common theme as cases where a shareholder has acted unconscionably or it would otherwise be grossly unfair to a company's creditors to allow a shareholder to hide behind an interposed entity that had been deliberately used to avoid liability. At the same time, in some, but not all, common law jurisdictions, courts are more willing to look at the economic reality of a group of companies being a single economic entity and weaken the veil in respect of liabilities resulting from intra-group transactions.4

At first glance, the company law underpinning China's path to economic modernisation largely resembles company laws in more advanced economies. In two respects, however, it deviates from Western company laws. The first notable difference is the source of authority for piercing the corporate veil. In common law jurisdictions, as noted, instances of creditors successfully piercing the corporate veil are based on judicial doctrines setting out exceptions to the sanctity of the corporate form. In contrast, in China authority for piercing the corporate veil is found in the company legislation and quasi-legislative rulings by the Supreme People's Court. The second key difference is a rule that applies in the case of single shareholder companies, and in stark contrast to the law of common law jurisdictions, reverses the presumption of liability from the norm adopted in the common law world, shifting the onus of proof from plaintiff (the creditors) to defendant (the company owner).

Data gathered to date suggests that litigants seeking redress for company obligations from the company's shareholders are far more likely to succeed in China than in other jurisdictions. This raises the question whether the different success rates are due to different law or different attitudes towards the sanctity of the corporate veil in a former socialist country which knew no private companies for its first three decades, leading to judicial interpretations in favour of creditors that are much broader than the text of the law and its intended scope.

II. Judicial and Legislative Rifts in the Corporate Veil

A. The development of company law

The nationalisation of the economy following the establishment of the People's Republic of China along with the replacement of all former law with socialist legislation left China without the need for companies or company law.5 That need arose again in late 1978 when the Central Committee of the Communist Party of China adopted Deng Xiaoping's 'open door' policy and China began its shift to a 'socialist market economy'.6 The following year, private enterprise was allowed once more in China and the market economy began its revival. …

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