Legislation And Application Of "Veil Piercing" In China

In 2006, China undertook a major overhaul of its legal framework governing corporations by implementing a new Company Law. One of the highlights is its formal establishment of the concept of "veil piercing". According to this law, "the shareholders of a company shall comply with the laws, administrative regulations and articles of association, and shall exercise the shareholder's rights according to law. None of them may injure any of the interests of the company or of other shareholders by abusing the shareholder's rights, or injure the interests of any creditor of the company by abusing the independent status of juridical person or the shareholder's limited liabilities"; "where any of the shareholders of a company causes any loss to the company or to other shareholders by abusing the shareholder's rights, it shall be subject to compensation " ; "where any of the shareholders of a company evades the payment of its debts by abusing the independent status of juridical person or the shareholder's limited liabilities, and thus seriously damages the interests of any creditor, it shall bear joint liabilities for the debts of the company". Since then, veil piercing doctrine is introduced into China's legislature in real sense."Veil piercing" comes from the common law system. It is based on the recognition that rigid adherence to shareholder limited liability will sometimes lead to unjust outcomes. This doctrine is widely accepted in US, which boasts highly developed market economy. After hundreds of years of development, this doctrine is relatively mature in US. When being applied, a lot of different standards are being considered by judges. However, beneath this ill-defined and scrappy layer, there are unified decisional structure and fundamental theories helping the judicial hunch carrying through to a right decision. This article evaluates and analyses these patterns, combining them with China's practice, aiming at offering suggestions for China's future legislations and practices.Chapter One provides an overview of veil piercing doctrine, including its creation, development, theoretical foundations and the legislation process that China has been through.Chapter Two describes the empirical results of US court's veil piercing cases. There are differences based on the substantive context in which the claims arise and forms of corporations being involved. When piercing does occur, the courts' reasoning varies with the context, and decisions reflect the differing impact of various statutory policies affecting limited liability. Piercing occurs only in close corporations or within corporate groups; it does not occur in public corporations. The traditional reasons for piercing work best in bargain or contractual settings and less well in torts cases. Because of the big difference between China and U.S. corporations, the above classification does not work well in our legal system. Drawing useful lessons doesn't mean purely and totally relying on that US model. This chapter presents some suggestions with a consideration of China's situations.Chapter Three advocates extending this doctrine to limited partnership, which is introduced into China in 2007. "Veil piercing" should not be limited to creditor situations. China's courts are bound to face demands to pierce the corporate veil in noncreditor situations in the coming years.