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 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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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