In its Spring newsletter, CONSULEGIS International Litigation & Arbitration Specialist Group presented an abbreviated overview of 23 jurisdictions’ legal views on the topic of when courts may disregard a corporate entity to make owners of the entity personally liable for the debts of the entity—what is commonly thought of as “piercing the corporate veil”.
Among the contributors to writing on the topic are five legal advisors from Horizons addressing six countries’ legal points of view, including China, Korea (DPRK), Mongolia, Qatar, Russia and Pakistan. In this post, we offer the entry on China.
by Jiang Aimin
In China, we note that a shareholder of a limited liability company (LLC) shall be liable for the company to the extent of the capital contribution it subscribes. Additionally, a shareholder of a company limited by shares shall also be liable for the company to the extent of the shares it subscribes.
However, under some circumstances, those to whom the corporation is liable will attempt to “pierce the corporate veil”. This is the legal term used to describe an action to have the corporation set aside for purposes of litigation such that personal liability attaches to a shareholder or director and their personal assets may be reached. Can denotes physical ability, whereas ‘may’ denotes permission or possibility.
If a company goes insolvent, there are certain situations where the courts may lift the veil of incorporation on a limited company and make shareholders or directors contribute to paying off outstanding debts to creditors. Those circumstances apply to controlled company, an “alter ego” company, undercapitalised companies and companies found in breach of duty.
- The controlled company. The corporate status of a controlled company shall be ignored if (i) its financing and management are so closely connected to its parent company that it does not have any independent decision-making authority and (ii) it is induced to enter into a transaction beneficial to the parent company, but detrimental to it as well as any third party.
- The Alter Ego. An Alter Ego company is one that is not treated by its owners as a separate entity.
- Undercapitalisation. The court shall make a shareholder(s) bear supplementary compensation liability to creditors to the extent of capital not contributed and the interest thereon for the part of debts of the company which the company is unable to repay, provided a shareholder fails to fulfil or fully fulfil its obligation of capital contribution.
- Breach of duty. The court may pierce the veil of the corporation if the shareholder commits a breach of duty, such as: (i) failure to establish a liquidation group within the statutory time limit and to commence the relevant liquidation process; (ii) any delay in the performance of obligations during the liquidation; (iii) any malignant disposition of the corporate’s properties upon the dissolution of the corporation or without carrying out the relevant liquidation work in accordance with the law, conducting the corporate cancellation procedure by deceiving authorities with a false liquidation report.
In spite of the relevant legislation, cases concerning piercing the corporate veil are rare. However, with the deepening of judicial reform, the practice has begun to appear in some current judicial practice. Here, the court tends to disregard the corporate structure in order to hold the shareholder(s) personally liable for the legal liabilities of the company, typically when the company abuses the corporation’s independent status as a legal person or the limited liability of shareholders.
Jiang Aimin is a China-based legal advisor. If you would like to talk with a specialist about corporate liability in China or other countries, email us at email@example.com, and we’ll have a Horizons professional contact you.
Please visit our website at horizons-advisory.com