Duties Owed to Creditors in China.

Abstract

It is true that the development of business law in China is gradually catching the eyes of international investors, practitioners, and academics and government officials who are China observers. The corporate structure is the “veil” that provides protection and if that veil is pierced, there is no more protection. Thus, one of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances, the corporate entity may be overlooked. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation. The Chinese doctrine emphasizes the intention to prevent the malicious evasion by shareholders of the debts of the company, it is open to debate whether or not there may be any other instances where the shareholders’ breaching of the general principle of good-faith would lead to a Chinese court piercing the corporate veil of a company to hold its shareholders liable. Furthermore, it might be difficult for a creditor to bring sufficient evidence to demonstrate a claim that the shareholders’ liability should extend beyond its capital contribution, as most information relating to a Chinese company is not disclosed to the public. As in common law jurisdictions, the doctrine of piercing the corporate veil in China will be mainly a creature of case law, not legislation, so its achievement will necessarily change over time. It is expected and in our view required that further judicial interpretations will be issued to elucidate the circumstances in which the corporate veil will be pierced so as to perfect the doctrine. The main problem is the absence of clear-cut rules to establish the standard for invoking the veil-piercing doctrine. In particular, it is unclear what factors the court will consider determining whether the corporate personality and shareholders’ limited liability have been harmed. The United States courts have produced a long list of factors that point toward veil piercing in a series of cases. It is far from being clear, what are the significant factors that the court will consider in any veil-piercing case, as the law has almost no mention the factors. Thus, it may be concluded that, in normal circumstances where the company is financially stable, the primary duty of directors under the Chinese Companies law is to promote the success of the company with orientation to the interests of its shareholders as a whole and having regard to various specified factors but, when a company is insolvent or in financial distress, the directors discharge their duties by reference to the best interests of the creditors of the company. It may not always be obviously known as to when a company is in the “zone of insolvency” or “near insolvency” or “on the verge of insolvency”. There are no tests or rules laid down defining these terms. These terms remain indefinable and it may therefore be difficult for directors to know when exactly their duties to creditors start at the Chinese civil law. This has been an issue in all jurisdictions under my study. In the US, England as well as Canada; there are no criteria that could determine that a company is in the zone that these terms represent. In fact, the SCC in a recent decision has in general rejected such terms because in its opinion it is incapable of any definition and of no legal meaning. The Section 214 lays down a test to determine insolvent liquidation but arguably by the time a company is insolvent it has already passed through this “zone of insolvency” for which it seems that there are no tests and this affects creditors directly.