The Confusion of Affiliated Companies shall Assume Joint Liability for Their Debts

(By Luo Yanjie) Abstract: Company’s independent status as a legal person is a prerequisite for bearing liabilities independently incurred to the company. If a company loses its independent status as a legal person, shareholders shall bear several and joint liability for the debts of the company or the affiliated company, similarly for debts incurred in affiliated companies.

    In recent years, there are many disputes regarding abuse of company’s independent status as a legal person that many intelligent merchants attempted to evade the payments of debts by abusing the company’s independent status as a legal person or the limited liability of shareholders. In today’s post, we would like to introduce a typical case regarding the confusion of company’s independent status as a legal person on the Cases Guidance of the Supreme People’s Court in China as follows.

Introduction to the Case:

The Plaintiff, Xugong Construction Machinery Group Ltd (the “XCMG”) claimed that, under the fact that Chengdu Chuangong Trade Company defaults on loans about RMB 10 million to XCMG, where three companies, i.e, Chengdu Chuangong Trade Company, Sichuan Ruilu Construction and Chengdu Jiaogong Machinery, are confused with their companies’ independent status as a legal person, actual controllers Wang Yongli and shareholders of Chengdu Chuangong Trade Company shall bear joint liabilities for debts by abusing their confusion between the individual property and company’s assets.

The final court, Jiangsu Higher People’s Court, held that the afore-mentioned three companies are constituted confusion of company’s independent status as a legal person for the following reasons: First, three companies’ manager, financial administrator, cashier accountant and agents for industrial and commercial procedures are the same, and other officers in charge are existing the overlapping jobs; second, there are confusion of company’s business which all involve businesses related to construction and machinery; third, there are financial confusion on the ground of a general bank account and the only allocation standard from Wang Yongli’s signature. Therefore, Jiangsu Higher People’s Court ordered Sichuan Ruilu Construction and Chengdu Jiaogong Machinery to assume joint liability for such debt as RMB 10 million.  

Lawyers’ Comment:

I.  Legal basis for the confusion of company’s independent status as a legal person

The company’s independent status as a legal person is a prerequisite for bearing liabilities independently incurred to the company. If a company loses its independent status as a legal person which is considered as an excuse or a tool for evading debts of shareholders and other companies, pursuant to laws and regulations, one shall deny its dependent status as a legal person and shall order its shareholders to bear joint liability for debts of the company or affiliated companies.

The legal basis for the confusion of the company’s independent status as a legal person is Article 20 of the Company Law stipulating that the shareholders of a company shall not damage the interests of the company or other shareholders by abusing shareholders’ rights, or damage the interests of any creditor of the company by abusing the company’s independent status as a legal person or the limited liability of shareholders, and, where any of the shareholders of a company evades the payment of debts and seriously damages the interests of any creditor of the company by abusing the company’s independent status as a legal person or the limited liability of shareholders, it shall bear several and joint liability for the debts of the company.

II. The scope of confusion of the company’s independent status as a legal basis

As afore-said provision stipulated, we could likely find that the responsible subject of confusion of the company’s independent status as a legal basis is the shareholder of a company strictly in accordance with the literal interpretation. There is controversial in practice whether the confusion of affiliated companies shall apply Article 20 of the Company Law.

From the judgment contained in this case, the answer appears to be yes. Furthermore, the significance of this case is to provide a legal basis for confusion of the company’s independent status as a legal basis. The chief judge proved Chengdu Chuangong Trade Company, Sichuan Ruilu Construction and Chengdu Jiaogong Machinery to be confused with company’s independent status as a legal basis through the aspects of staff confusion, businesses confusion and financial confusion, resulting in difficult to distinguish the exact trading objects and then made a decision of joint liabilities. The establishment of the decision from the representation to practical consequence sets up a guiding significance to similarly cases and merits our reference.

Lawyer Contacts

You Yunting86-21-52134918  youyunting@debund.com/yytbest@gmail.com

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