Making a judgment on confusion of corporate personality

By Li Weiming, Tiantai Law Firm
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In the previous provision of legal services, especially in the enforcement of rulings on cases, the author has frequently encountered issues like “an underfunded company with rich shareholders” and “shareholders in a company without corporate personality”.

Although the Company Law introduced the institution of disregarding corporate personality as early as 2005, in practice, except for a one-person limited liability company, it is hard to include the shareholders of a company as parties subject to enforcement, on the ground of the confusion of properties and personality between the company and the shareholders in principle. Therefore, in practice, how to make a judgement on the confusion of corporate personality becomes a significant problem.

corporate
Li Weiming
Partner
Tiantai Law Firm

On 14 November 2019, the Minutes of Working Conference of Courts in China for Civil and Commercial Trials was officially released. Article 10 explicitly specifies the criterion for judging the confusion of corporate personality in detail:

“For determining whether the personality of a company and that of a shareholder are united, the most fundamental test is whether the company has independent will and independent property, and the most important manifestation is whether the property of the company and that of the shareholder are so united as to be indistinguishable from each other.

“When determining whether the confusion of personalities is committed, the following factors should be considered: (1) the shareholder uses the cash or property of the company gratuitously, without keeping financial records; (2) the shareholder pays its debts by using the cash of the company, or permits an affiliate to use the cash of the company gratuitously, without keeping financial records; (3) the books of the company are not separated from the books of the shareholder, rendering the property of the company indistinguishable from that of the shareholder; (4) the property of the company is recorded in the name of the shareholder, and processed and used by the shareholder; (5) the property of the company is recorded in the name of the shareholder, and processed and used by the shareholder; and (6) the personalities are otherwise united.

“The confusion of personalities tends to happen in the following ways: (1) the business of a company and that of any of its shareholders are united; (2) the employees of the company and those of the shareholder are united, especially financial employees; and (3) the domicile of the company and that of the shareholder are united.

When a people’s court tries a case, it is critical to review whether the confusion of personalities is committed, and the confusion in other aspects is not required concurrently, as it often only corroborates the confusion of personalities.”

The minutes serves as a better guide for confirming whether there is a confusion of corporate personality.

Reaffirmation of criteria

The minutes reaffirm and clarify that “confusion of properties” is the main consideration, and distinguish the confusion of personality from confusion in other aspects.

In previous cases, the Supreme People’s Court clearly stated that, “Firstly, the designation of a person by a corporate shareholder to work for a subsidiary of the company is normal and shall not be considered as a confusion of employees; secondly, the same scope of business with independent means of production shall not be considered as a confusion of business; and finally, there is no financial confusion on the ground that companies respectively issue invoices for settlement and are financially independent of each other.”

In case ((2013) ZGYMEZZ No. 43), the Supreme Court also held that, “The same person holding positions in two companies” does not violate relevant laws of China; without the evidence of the confusion of business, financial affairs, etc., between the two companies, the confusion of personality shall not be determined to exist merely on the ground that the same person works as a manager for the two companies.

In addition, the court clearly stated that the issue of “one team working under two different organization names” was not prohibited by law. If there is no confusion of financial affairs, affiliated parties are not required to assume joint and several liabilities. Similarly, the court also held that the mere facts that two companies had the same legal representative and the same registered address, and that their financial statements were controlled by their parent company, and even that two companies had the same actual controller or the same scope of business, neither constituted their loss of the autonomy in management and independent personality, nor proved the confusion of their properties, nor justified the disregarding of their corporate personalities.

Based on summarizing the existing judging criteria of the courts, the minutes reaffirm and clarify that the de facto criterion for determining whether there is a confusion of corporate personality is subject to the confusion of properties. It is inappropriate to take any other forms of confusion as a basis for determining the confusion of personality.

Based on previous cases, the minutes provide more detailed provisions on determining the confusion of personality, and describe the relations between the confusion of personality, employees, business, etc., serving as a guide in practice.

Allocation of the evidential burden

In cases involving determining whether there is a confusion of corporate personality, it is often very difficult for an applicant to produce evidence. In accordance with existing laws, except the application of “reversion of burden of evidence” for a one-person limited liability company, in cases involving the confusion of corporate personality, a more passive mode for allocation of the burden of evidence was frequently adopted in previous judicial practice.

In case ((2015) MEZZ No. 85), the Supreme Court clearly stated that in trying a case involving the disregarding of corporate personality, considering factors including the difficulties of creditors in producing evidence due to their information disadvantages, the people’s courts shall reasonably allocate the burden of evidence, and shall allocate to shareholders who are defendants the burden of disproving the misuse of their independent legal person status and their limited liabilities, if the evidence produced by creditors to prove such misuse raises reasonable doubt.

Meanwhile, the court clearly stated that the above-mentioned adjustment is subject to the premise that creditors as plaintiffs have produced probable evidence of misuse by shareholders that caused the resultant damage, other than the inevitable reversion of burden of evidence.

Based on this judicial practice, the minutes provides detailed provisions on the confusion of personality and a guidance on evidence production, which help reduce the pressure on an applicant in producing evidence.

Li Weiming is a partner at Tiantai Law Firm.

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