February 2025
Serials Research Part Four on the New Systems Under the New Company Law: Discussion on Shareholder Liability and Corporate Veil Piercing in One-Person Companies (Mainland China)
February 2025
Jolene Chen and Teresa Huang
After the revision of the New Company Law, the provisions for piercing the corporate veil in one-person companies have been more widely applied. Article 23 of the New Company Law continues the stipulation in Article 63 of the 2018 Company Law, explicitly stating: In the case of any company with only one shareholder, if the shareholder is unable to prove that the assets of the company are independent of their own assets, they shall be jointly and severally liable for the debts of the company. Before the implementation of the New Company Law, this provision mainly applied to one-person limited companies. However, with the addition of provisions for one-person companies limited by shares under the New Company Law, this rule now applies to all types of one-person companies, whether limited companies or companies limited by shares (“One-Person Companies”). The core of this provision lies in the reversal of the burden of proof, unlike the traditional principle of "the burden of proof lies with the plaintiff," in cases involving one-person companies, the burden of proof shifts to the shareholder to demonstrate the independence of the company's assets. The legal rationale for this is that a single shareholder lacks checks and balances, making it easy to abuse the company's independent legal personality and harm creditors' interests.
Although the provision for one-person companies is relatively straightforward, there are still many special types and disputes in practice. This article will explore several typical scenarios:
I. Shareholder Liability Before and After Equity Transfers
In One-Person Companies, the original shareholder must bear joint and several liability for company debts incurred during their period of ownership if they fail to prove that the company's assets were independent of their own assets prior to the equity transfer. This principle was demonstrated in the case (2019) Supreme People's Court Zhi Min Zhong No. 490, where the original shareholder, as the sole shareholder at the time of the alleged tortious conduct, failed to prove the independence of the company's assets from their own assets and was held jointly and severally liable for the debts arising from the company’s tortious actions.
For current shareholders, even if they were not involved in the company's prior operations, they are still liable for company debts incurred before the equity transfer. The Company Law does not distinguish between original and current shareholders in such cases; all shareholders of One-Person Companies must bear the burden of proof to demonstrate the independence of the company’s assets.
For example, in the case (2023) Zhe Min Zhong No. 137, the court held both the shareholder at the time of the debt’s occurrence (Shuanglin Co.) and the shareholder during the debt’s duration (Chengye Co.) liable. Both failed to prove the independence of the company’s assets from their respective assets and were thus required to bear joint and several liability.
II. Application of Piercing the Corporate Veil in "Husband-Wife Companies"
"Husband-Wife Companies" refer to companies jointly funded and operated by a married couple during their marriage. Given that Chinese law generally assumes a regime of joint marital assets and that spouses often share aligned intentions, Husband-Wife Companies are prone to asset commingling, potentially harming creditors' interests.
In judicial practice, some courts treat Husband-Wife Companies as de facto One-Person Companies and apply the relevant provisions accordingly. For instance:
In 2022, Lu 17 Min Zhong No. 93 and 2019 Supreme People's Court Min Zai No. 372, courts confirmed that since the company was established during the marriage and the equity essentially came from the same assets, with a unity and singularity of interest, which is difficult to have an effective internal supervisory scheme, they treated the husband-wife company as a one-person limited liability company, requiring shareholders to bear joint and several liability.
However, other courts have taken a different view, arguing that merely relying on the marital relationship to classify a company as a de facto One-Person Company lacks a legal basis. In such cases, the creditor should still bear the burden of proof to prove the commingling of company assets.
III. Piercing the Corporate Veil in Multi-Layer One-Person Companies
In cases involving multi-layered One-Person Companies, there remains controversy over whether creditors can "pierce the veil" through multiple layers to hold the ultimate shareholder liable, with varying judicial outcomes.
For example:
In 2021, Yue 2071 Min Chu No. 36246, the court held that none of the parties—Hengrui Co., its parent company Hengda (Shenzhen) Co., or its grandparent company Hengda Co.—could prove that their assets were independent of one another. Consequently, all three companies were held jointly and severally liable for the debts.
Conversely, in (2021) Su 0981 Min Chu No. 6655, while the court recognized that Hengda Nanjing Co., a sole shareholder, failed to prove the independence of its assets from its subsidiary Hengguan Co., it declined to further impose liability on Hengda Nanjing Co.'s sole shareholder, Hengda Co., citing the lack of explicit legal provisions for such multi-layer piercing.
IV. Reverse Piercing of the Corporate Veil
Reverse piercing refers to situations where a shareholder abuses the company’s independent legal personality by transferring personal assets to the company in order to evade personal debts, thereby harming the rights of the shareholder’s creditors. The question arises as to whether creditors can pierce the corporate veil in reverse to access the company’s assets to satisfy the shareholder’s personal debts.
In certain cases, courts have supported reverse piercing. For instance:
In 2020, Supreme People's Court Min Shen No. 2158, the court found that the personality of Zhongsen Investment Co. (a One-Person Company shareholder) was commingled with that of Zhongsen Real Estate Co. The court ruled that the company should bear joint and several liability for the shareholder's debts.
Similarly, in (2017) Jiangsu 01 Min Zhong No. 346, the court explicitly identified three scenarios of piercing the corporate veil: vertical piercing, reverse piercing, and horizontal piercing. Although the Company Law only explicitly provides for vertical piercing, the court, based on the principles of good faith and considering creditor protection and business needs among related companies, extended the application to reverse piercing, holding that the One-Person Company should bear joint liability for its shareholder’s debts.
However, reverse piercing lacks explicit legal provisions and relies more on judicial discretion. Judges must base their decisions on legal principles and the specific circumstances of each case. This results in considerable theoretical and practical debates, with some courts refusing to apply reverse piercing in the absence of clear legal grounds.
Related Articles
The contents of all newsletters of Shanghai Lee, Tsai & Partners (Content) available on the webpage belong to and remain with Shanghai Lee, Tsai & Partners. All rights are reserved by Shanghai Lee, Tsai & Partners, and the Content may not be reproduced, downloaded, disseminated, published, or transferred in any form or by any means, except with the prior permission of Shanghai Lee, Tsai & Partners.
The Content is for informational purposes only and is not offered as legal or professional advice on any particular issue or case. The Content may not reflect the most current legal and regulatory developments. Shanghai Lee, Tsai & Partners and the editors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The contributing authors' opinions do not represent the position of Shanghai Lee, Tsai & Partners. If the reader has any suggestions or questions, please do not hesitate to contact Shanghai Lee, Tsai & Partners.
Jolene Chen and Teresa Huang
After the revision of the New Company Law, the provisions for piercing the corporate veil in one-person companies have been more widely applied. Article 23 of the New Company Law continues the stipulation in Article 63 of the 2018 Company Law, explicitly stating: In the case of any company with only one shareholder, if the shareholder is unable to prove that the assets of the company are independent of their own assets, they shall be jointly and severally liable for the debts of the company. Before the implementation of the New Company Law, this provision mainly applied to one-person limited companies. However, with the addition of provisions for one-person companies limited by shares under the New Company Law, this rule now applies to all types of one-person companies, whether limited companies or companies limited by shares (“One-Person Companies”). The core of this provision lies in the reversal of the burden of proof, unlike the traditional principle of "the burden of proof lies with the plaintiff," in cases involving one-person companies, the burden of proof shifts to the shareholder to demonstrate the independence of the company's assets. The legal rationale for this is that a single shareholder lacks checks and balances, making it easy to abuse the company's independent legal personality and harm creditors' interests.
Although the provision for one-person companies is relatively straightforward, there are still many special types and disputes in practice. This article will explore several typical scenarios:
I. Shareholder Liability Before and After Equity Transfers
In One-Person Companies, the original shareholder must bear joint and several liability for company debts incurred during their period of ownership if they fail to prove that the company's assets were independent of their own assets prior to the equity transfer. This principle was demonstrated in the case (2019) Supreme People's Court Zhi Min Zhong No. 490, where the original shareholder, as the sole shareholder at the time of the alleged tortious conduct, failed to prove the independence of the company's assets from their own assets and was held jointly and severally liable for the debts arising from the company’s tortious actions.
For current shareholders, even if they were not involved in the company's prior operations, they are still liable for company debts incurred before the equity transfer. The Company Law does not distinguish between original and current shareholders in such cases; all shareholders of One-Person Companies must bear the burden of proof to demonstrate the independence of the company’s assets.
For example, in the case (2023) Zhe Min Zhong No. 137, the court held both the shareholder at the time of the debt’s occurrence (Shuanglin Co.) and the shareholder during the debt’s duration (Chengye Co.) liable. Both failed to prove the independence of the company’s assets from their respective assets and were thus required to bear joint and several liability.
II. Application of Piercing the Corporate Veil in "Husband-Wife Companies"
"Husband-Wife Companies" refer to companies jointly funded and operated by a married couple during their marriage. Given that Chinese law generally assumes a regime of joint marital assets and that spouses often share aligned intentions, Husband-Wife Companies are prone to asset commingling, potentially harming creditors' interests.
In judicial practice, some courts treat Husband-Wife Companies as de facto One-Person Companies and apply the relevant provisions accordingly. For instance:
In 2022, Lu 17 Min Zhong No. 93 and 2019 Supreme People's Court Min Zai No. 372, courts confirmed that since the company was established during the marriage and the equity essentially came from the same assets, with a unity and singularity of interest, which is difficult to have an effective internal supervisory scheme, they treated the husband-wife company as a one-person limited liability company, requiring shareholders to bear joint and several liability.
However, other courts have taken a different view, arguing that merely relying on the marital relationship to classify a company as a de facto One-Person Company lacks a legal basis. In such cases, the creditor should still bear the burden of proof to prove the commingling of company assets.
III. Piercing the Corporate Veil in Multi-Layer One-Person Companies
In cases involving multi-layered One-Person Companies, there remains controversy over whether creditors can "pierce the veil" through multiple layers to hold the ultimate shareholder liable, with varying judicial outcomes.
For example:
In 2021, Yue 2071 Min Chu No. 36246, the court held that none of the parties—Hengrui Co., its parent company Hengda (Shenzhen) Co., or its grandparent company Hengda Co.—could prove that their assets were independent of one another. Consequently, all three companies were held jointly and severally liable for the debts.
Conversely, in (2021) Su 0981 Min Chu No. 6655, while the court recognized that Hengda Nanjing Co., a sole shareholder, failed to prove the independence of its assets from its subsidiary Hengguan Co., it declined to further impose liability on Hengda Nanjing Co.'s sole shareholder, Hengda Co., citing the lack of explicit legal provisions for such multi-layer piercing.
IV. Reverse Piercing of the Corporate Veil
Reverse piercing refers to situations where a shareholder abuses the company’s independent legal personality by transferring personal assets to the company in order to evade personal debts, thereby harming the rights of the shareholder’s creditors. The question arises as to whether creditors can pierce the corporate veil in reverse to access the company’s assets to satisfy the shareholder’s personal debts.
In certain cases, courts have supported reverse piercing. For instance:
In 2020, Supreme People's Court Min Shen No. 2158, the court found that the personality of Zhongsen Investment Co. (a One-Person Company shareholder) was commingled with that of Zhongsen Real Estate Co. The court ruled that the company should bear joint and several liability for the shareholder's debts.
Similarly, in (2017) Jiangsu 01 Min Zhong No. 346, the court explicitly identified three scenarios of piercing the corporate veil: vertical piercing, reverse piercing, and horizontal piercing. Although the Company Law only explicitly provides for vertical piercing, the court, based on the principles of good faith and considering creditor protection and business needs among related companies, extended the application to reverse piercing, holding that the One-Person Company should bear joint liability for its shareholder’s debts.
However, reverse piercing lacks explicit legal provisions and relies more on judicial discretion. Judges must base their decisions on legal principles and the specific circumstances of each case. This results in considerable theoretical and practical debates, with some courts refusing to apply reverse piercing in the absence of clear legal grounds.
Related Articles
- Serials Research Part One on the New Systems Under the New Company Law: The Protection System of Creditor's Rights and Interests Under the New Company Law (Mainland China)
- Serials Research Part Two on the New Systems Under the New Company Law: How to Transit from "Registered and Subscribed Capital System" Under the New Company Law? (Mainland China)
- Serials Research Part Three on the New Systems Under the New Company Law: Exploring the Direct Compensation Liability of Directors and Senior Executives to Third Parties Under Article 191 of the New Company Law (Mainland China)
The contents of all newsletters of Shanghai Lee, Tsai & Partners (Content) available on the webpage belong to and remain with Shanghai Lee, Tsai & Partners. All rights are reserved by Shanghai Lee, Tsai & Partners, and the Content may not be reproduced, downloaded, disseminated, published, or transferred in any form or by any means, except with the prior permission of Shanghai Lee, Tsai & Partners.
The Content is for informational purposes only and is not offered as legal or professional advice on any particular issue or case. The Content may not reflect the most current legal and regulatory developments. Shanghai Lee, Tsai & Partners and the editors do not guarantee the accuracy of the Content and expressly disclaim any and all liability to any person in respect of the consequences of anything done or permitted to be done or omitted to be done wholly or partly in reliance upon the whole or any part of the Content. The contributing authors' opinions do not represent the position of Shanghai Lee, Tsai & Partners. If the reader has any suggestions or questions, please do not hesitate to contact Shanghai Lee, Tsai & Partners.
