The recent directive case precedents published by the Supreme People's Court of China include one ruling that affiliated companies, if sharing staff, business operation and accounting, will be denied of their respective independent legal personality and in turn be held jointly and severally liable for indebtedness owed to third party creditors.
The underlying claim of the case is on the overdue goods price that one of the three affiliated companies (the co-defendants) owes its supplier (the plaintiff). The major factual findings of the case include, inter alia, that (i) the said three co-defendants are controlled by the same Chinese citizen; and (ii) they have been sharing basically the same staff, business, contacts, bank accounts and even bookkeeping.
As such, the plaintiff argued for the confusion of legal personality of the defendants, namely, the three defendants shall be identified as the same entity without respective separate legal personality. It then turned to be the key issue under debate during the proceeding.
The plaintiff's above argument was eventually bolstered by the court of first instance, and then affirmed by the appellate court. Both courts inferred, from Article 3 and Article 23 of the PRC Company Law, that the mixture of staff, business and accounting among the defendants had virtually negated the independence of their respective property and accountability, and therefore deprived each defendant of its own stand-alone personality. It is therefore ruled that the three defendants in question be jointly and severally liable for satisfying the overdue payment, regardless of only one of them appearing as the contractual obligor.
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