Parent-subsidiary Piercing The Corporate Legal Issues

The emergence of the parent and subsidiary company is the product of the social and economic development. While a large number of enterprises keep exploring a road with intensive management and appropriate scale of operation, numerous subsidiary companies emerge as the times require. This not only enhances the competitiveness of enterprise, but also helps realize the resources optimization. The business model of the parent and subsidiary company plays an important role in our economy. In the meanwhile, it also raises the challenges to the law of corporation. To face the complicate company relationship especially investment holding company, the corporate cross holdings of stocks, etc., and increase the influence of Chinese company in the world, we must regulate the market system especially to give order to normal operation of parent and subsidiary company.To protect the rights of operating independently and holding the qualification as a legal subject, China's current law of corporation has confirmed the independent qualification of a legal person for both the parent and the subsidiary companies. However, under the control of the parent company, the independent qualification of a legal person of subsidiary company is imperfect. This results in that the controlling parent company keeps violating the rights of creditor. Based on China's current situation and by referring the advanced laws and regulations of other countries, the analysis on how to protect the interest of creditors from subsidiary under China's current situation is raised up. That is to regulate the parent and subsidiary behavior from both substantive and procedural laws with the introduction of the system of disregard of corporate entity for a corporation. The article adopts the methodologies of comparison, deduction and generalization. Except for the foreword and conclusion, the article includes three chapters. The first chapter gives the audience an overview of law relationship of the parent and subsidiary company. In the chapter, the author analyzes the demarcation situation of the parent and subsidiary in Chinese legislation. After the comparison to the other countries and regions, the author summarizes the understanding on the connotation of the parent and subsidiary. Based on above analysis, the law relationship of the parent and subsidiary is explained briefly in the chapter. With the introduction of legal features of the parent and subsidiary, we can get deep understanding on the parent and subsidiary company. That is to say, both the parent company and subsidiary company have the independent qualification of a legal person. The parent company holds certain share of subsidiary company or reaches agreement with subsidiary company. The parent company enjoys the rights to control the subsidiary company. By summarizing the general relationship between the parent and subsidiary company, namely investment relationship, controlling relationship, financial relationship and management relationship, the charter discusses the necessity of protecting the creditors from subsidiary company.The second chapter is an analysis on the system of disregard of corporate entity for a corporation. The chapter begins with the discussion on the definition of the concept and the characteristic of the system. It also identifies that the system is developed to protect the interest of creditor. In character, it belongs to civil responsibility. After that, the practices of foreign countries are introduced. These practices include UK's piercing the Corporate Veil, USA's lifting the corporation veil, Germany's straight responsibility and Japan's disregard of corporate personality. The following goes into details about the legal basis of disregard of corporate entity for a corporation. That is to say, the system reflects the principles of fairness. It's the results of social responsibility and making constant improvement on legal person system. Finally, the basic principles of applying the disregard of corporate entity are discussed. These principles include:the disregard refers to specific case; corporate personality should not be abused, the system should be applied in the legal proceedings. That means the system is the needs for the development of China's corporate legal system, for the opening to the outside world, for the standardization of behavior of the parent and subsidiary company.The third chapter analyzes the substantive essentials when the system of disregard of corporate entity applied to subsidiary company. Firstly, let's discuss principle part. Plaintiff refers to company creditors and the representatives of public interest. Defendant includes the holding company which has substantial control ability to the company, the parent company which has substantial control ability to the company through the way of enterprise contract, organization which set up the company, high management, dormant shareholders, member of the board, manager and other senior staff which have both the shareholder identity. Secondly, it's a discussion on the action condition. It includes undercapitalized, utilizing corporate personality to evade a contract and debts, utilizing corporate personality to evade general legal obligation, formalization of company personality. Thirdly, essential elements of consequences are raised up for discussion. The behavior must have injurious to the creditors and it causes severe damage to creditors'interest. Finally, the article analyzes the conditions of effect relationship. In additional, the chapter also illustrates the procedure rules and analyzes the burden of proof rests on which side. The effectiveness of the judgment is that it's the disregard of corporate personality for specific case. The disregard of corporate personality only limits to specific legal relation for specific litigant. The judgment only has meanings in essence to the shareholders which abuse corporate personality. That is to say, the involved shareholders are to bear the civil liability, not other shareholders.