A Study On The System Of Reverse Disregard Of Corporate Personality

Albeit generally regarded as an extension and a breakthrough to traditional ways of piercing the corporate veil, reverse piercing of the corporate veil(RPCV), in terms of the theory of disregarding corporate entity, is of essential theoretical and practical value, in that it is an integral part of the entire company personality denying system. That is, RPVC, which serves as a means to the duty separation between companies and their shareholders, actually protects the oblige or public interest under certain circumstances, remedying and consummating the possible imbalanced interests caused by system of legal entity.The first part of the thesis raises the point under discussion, that is, due to the frequent abuse of shareholder rights, RPCV appears to be of significant practical value with respect to company judicial practice. In company groups, asset transformation from one company to its related another occurs when avoiding shareholders debt. Similarly, in nonstandard one-person limited corporation, natural person shareholders are in favor of transferring most of their fortune to company account so as to avoid personal debts generated by financial activities such as borrowing and financing by exploiting advantage of the independent status enjoyed by the company legal person. However, the existing judicial system proved to be insufficient regards of these problems.Some scholars suggest that, various existing laws fail to provide evidence for the application of RPCV, noted that, according to article 20 of the Company Law the subject of litigation is company’s creditors and the responsibility undertaker is company’s shareholders. While RPVC holds opposite view, it considers the conditions of prosecution as shareholders or their creditors and the responsibility undertaker is company, thus reaching the conclusion that there is a gap between existing laws and relative RPCV regulations. Still some argue that existing laws can be deemed as apply basis of the RPCV, for the section 1,article 20 of the Company Law should be viewed as a general rule due to its underlying implication. Then, all sorts of abuses related to limited liability or independent status enjoyed by the company legal person come down to its regulations, whether they fall under the context of section 3, article20 or not. The author contends that relative legal principles of the Company Law in china can fully support RPCV, such as a the section 1,article 20 and article 3 of the Company Law, fidelity principle regulated by article 4 of the general rule of Civil Law and the qualification of a legal person regulated in article 37.The second part and the third part give presentation to outside reverse piercing and inside reverse piercing respectively from the prospective of the application of the Case Law in the U.S. and judicial practice in China. RPCV consists of outside reverse piercing and Inside reverse piercing. The former contends that the conditions of prosecution should be creditors of the company’s controlling shareholders, there should be fact of corporate personality abuses, such as property and personality confusion between shareholders and companies, over control, shareholders’ fraudulent behaviors of using company to achieve contractual obligations avoidance or law circumvention, there should be practical damage to shareholders’ creditors and society as a whole caused by above-mentioned fraudulent means, and there should be causality between abuses of company personality and resulting damage. The latter serves to fulfill the need of achieving, maintaining and enhancing a more valuable public interests, especially in the case where creditors’ interests are sacrificed for special legislative intent, immunity execution for example. Therefore, the valuation of public interests is given the most priority in insider reverse pierce.The fourth part of the thesis adopts empirical analysis when considering the applicable condition of RPCV. The author found that RPCV account for less than 40% of total personality denial cases, and in all RPCV cases, pros overweigh cons. Among pros, their reason is that in those cases confusion of personality is well-established, while among cons, their reasons are varied as following: denied personality confusion, baseless RPCV per se, insufficient evidence for shareholders’ interests transfer to their companies, or recognized financial cross between parent company firm and its subsidiary. While Inside reverse piercing cases normally fail to gain support because of their subjective malicious intents of evading debt.After careful scan of judicatory grounds of above-mentioned cases’ judgment documents, the author concluded the sentence thoughts towards RPCV by sorting out key words of high frequency and judges’ reasoning tendency. Firstly, there should be abuses of corporate personality, such as personality confusion, over control and company human-skeletonization. From frequent occurrence, the author summarized general rules of personality confusion, which could be used in later trial. Secondly, since the RPCV holds a subversive property against the company legal person system, it should be used with prudence, only in cases where practical damage is done to the interests of shareholders’ creditors. Lastly, there should be a causal relationship between shareholders’ abuse behaviors and the damage of shareholders’ creditors, to put it in other words, outsiders who proposed the requirement for RPVC should prove that in specific legal relationship, their benefits of creditor rights are harmed by shareholders’ sabotage towards independent personality of corporation.Though in-depth theoretical analysis and comprehensive empirical study, the author reached following conclusions: RPVC holds its independent value, which stands for a reason that it can not be replaced by systems like execution of share ownership, and it should be noted that it has internal relation with traditional deny, for they both are exceptions of system of legal entity. The section 1,article 20 and article 3 of the Company Law, article 4 and 37 of the general rule of Civil Law provide sufficient evidence for its applicable value, leaving no further requirements for specific judicial interpretation. The supreme judicial court has already set us good examples in this regard. However, courts should nevertheless use it with prudence, be it a break to general rule and a overturn to corporate system.