The ideals and reality of a legal transplant - the veil-piercing doctrine in China.

AuthorWen, Shuangge

In 2005, China's Company Law underwent a significant change in adopting the veil-piercing doctrine. This Article critically examines the implementation of this common-law-originated doctrine in China's unique socio-economic environment. It was discovered that so far the practice of veil-piercing has largely derogated from its intended legislative goals. Factors beyond the realm of law, including the structure of the national economy, related policies, and mainstream jurisprudential theories, constrain the uniform applicability of this doctrine. Meanwhile, the congruence of this legal transplant has also been pragmatically compromised by various institutional factors. In view of the policy imperatives of encouraging investment and ensuring the continuing preponderance of the State-owned economy, this Article foresees an even more restricted role for the veil-piercing doctrine in China's future commercial practice.

INTRODUCTION I. THE CONNOTATION OF THE VEIL-PIERCING METAPHOR II. LEGISLATIVE AGENDAS UNDERPINNING VEIL-PIERCING IN CHINA A. The Origin of the Veil-Piercing Doctrine in China: Balancing Shareholders' and Creditors' Interests B. Accessibility and the Uniform Application of Law III. CONTRAST BETWEEN RHETORIC AND REALITY A. Applicability of the Veil-Piercing Doctrine in the State-Owned Economic Sector 1. The Supremacy of the State-Owned Economy in China 2. State-Owned Economy in Law 3. Incompatibility Between the State-Owned Economy and Veil Piercing--Ideological and Structural Aspects 4. Incompatibility between the State-Owned Economy and Veil Piercing--The Practical Aspect B. Veil-Piercing Practices in Private Company Contexts 1. Over-application of the Principle 2. Loose Drafting and Inconsistencies in Lawmaking 3. Abundant Judicial Discretion and Inconsistencies in Application 4. Related Areas of Law and Spillover Effects CONCLUDING REMARKS INTRODUCTION

There are few corporate law principles more intricate, and less settled, than that of when it is permissible to pierce the corporate veil. (1) That there is room for debate about the precise meaning of this metaphor, however, has not affected the overall consensus about its core function in qualifying limited liability. (2) Echoing the powerful rhetoric of aligning Chinese corporate law more closely with that of other developed economies, (3) this doctrine of common law origin has recently been enshrined in China in the form of a brief provision, Article 20(3) of the 2005 Company Law, which reads as follows:

Where the shareholder of a company abuses the independent status of the company as a legal person or the limited liability of shareholders, evades debts and thus seriously damages the interests of the creditors of the company, he shall assume joint and several liability for the debts of the company. (4) This statutory change came about as the result of a long-lasting debate about corporate law reform, and Chinese academics and legal practitioners welcomed the provision with a chorus of praise as a "revolutionary development." (5) Indeed, compared to the rigid 1993 Company Law regime, which focused on state-owned enterprise rather than entrepreneurial business, (6) adding this doctrine into the 2005 Company Law framework and altering the conventionally rigid capital rules evidence China's current policy imperatives: encouraging more diversified forms of investment and business development; building up a regulatory environment with more clarity and consistency in order to safeguard market players' interests; and steering the country towards a more liberal market regime. (7)

Laudable legislative goals notwithstanding, until the present time many Chinese scholars have taken the applicability of the veil-piercing doctrine in China as a given, rather than as an assumption. (8) Its alleged civil law affiliation (9) and the fledging state of its legal system (10) have led to an emphasis on lawmaking in China, with less focus on enforcing laws. (11) As succinctly noted by Potter, "the effectiveness of [a piece of law in China] ... is asserted [or assumed] on the basis of the enactment of legislation rather than being based on empirical reality." (12) As such, while much ink has been spilled to unravel the intricacies of piercing from an ideological perspective, relatively few writers have examined whether its practical implementation has achieved its intended effects, or how well this transplanted doctrine has blossomed in the unique and distinctive soil of China's corporate environment.

While one might not go as far as some realists, who attack scholarly attention to legal conception and ideology as being "arbitrarily ... practical politics," (13) it is nevertheless sensible to appreciate that the life of the law lies in its implementation. (14) The effectiveness of particular statutes and regulations is almost invariably shaped and compromised by the institutional environments in which they operate. (15) China's legal system, while heavily influenced by Western legal norms, (16) is embedded in a complex economic, political, and ideological system that is unique and distinct from its Western counterparts. (17) Drawing on the text of relevant laws concerning veil-piercing and the modest body of case judgements which have emerged to date, this Article seeks to correct the current scholarly imbalance. With an analysis of the pressing issues pertaining to veil-piercing practices in China, this Article highlights a disparity between the desired legislative goals and the actual implementation, and, in a chain of causation, pinpoints institutional factors specific to the Chinese socio-economic setting that bear on current judicial practice. Part II sets the stage by briefly reviewing the connotation of the metaphor in the corporate law context. Part III then takes up the major legislative imperatives underpinning the new piercing provision in China's 2005 Company Law. In contrast with these laudable legislative agendas, Part IV points out a number of thorny issues that have surfaced in application, the most prominent of which is the doubtful applicability of veil-piercing in the state-owned enterprise sector. Other problems in application include that legal consistency has been compromised by a wide array of conflicting judgments, and that there has been a worrisome trend for unwarranted applications: Regardless of the legislative emphasis on the limited use of piercing, this doctrine has been overstretched in many instances.

In searching for the potential roots of these practical deficiencies, many have pointed to the highly factual nature of veil-piercing cases and the defective drafting of the statutory provision in the 2005 Company Law, arguing that while the level of generality of this principle allows for flexibility in real life applications, it also risks vagueness and inconsistency in implementation. (18) While legislative vagueness might be a convenient scapegoat, one should not overlook the influence of legal institutions that impinge on practice, as well as the macro socio-economic environment in which the law operates. After all, legal regulation is not a mere jurisprudence of concepts and logic orders; there is a need for a more contextual, less ideological approach to assessing the effectiveness of transplanted legal principles. (19) As will be discussed in Part IV, the overriding socio-economic feature of China's economy--the dominant role of the State in the national economy--has consolidated the instrumental view of law among mainstream Chinese jurists, (20) which has led to an uneven application of piercing between the State-owned and private economic sectors. Despite the Chinese government's vows to implement a consistent and uniform application of law, practice has shown that the veil-piercing doctrine has been least effective in cases in which it is likely needed the most, namely those involving State-owned enterprises (hereinafter SOEs) and large listed enterprises.

As for its applications in private corporate sectors, there are a number of legal institutional deficiencies specific to the Chinese national context, including the lack of supplementary interpretations, excessive judicial discretion, and loopholes in connected areas of law, all of which contribute to the doctrine's suboptimal results in practice. Isolated denunciations of the lack of a clearly-worded provision fail to capture the contextualised legal reality as well as the holistic nature of legal institutions. In view of the policy imperatives of encouraging investment and ensuring the continuing preponderance of the State-owned economy, this Article foresees an even more restricted role for the veil-piercing doctrine in China's future commercial practice.

  1. THE CONNOTATION OF THE VEIL-PIERCING METAPHOR

    An attribute fundamental to the modern corporate form is its separate legal status, (21) though intriguingly this feature has been considered more extensively in relation to its exceptions. (22) The veil conferred by incorporation denotes that acts done in the name of and on behalf of a company are treated in law as the acts of the company, not of the individuals who are involved. (23) In simple terms, a distinction is maintained "between an incorporated company's legal entity and its actions, assets, rights and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand." (24)

    Notwithstanding nearly universal support for this corporate entity concept and its corollary, limited liability, (25) it is generally agreed that concessions to businessmen should not be without limitations. (26) Originating in the United States, (27) the metaphor of veil-piercing has thus far been employed to define exceptions to the well-received separate entity principle. (28) At its most basic, penetrating the corporate veil prevents shareholders from being insulated from personal responsibility for liabilities...

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