If a company owes money, can its creditors pursue the company’s shareholders personally?
As a general rule under Chinese law, the answer is no.
A company is an independent legal person and is liable for its debts with its own assets. Shareholders of a limited liability company are generally liable only to the extent of their subscribed capital contributions.
However, this protection is not absolute.
Where a shareholder treats the company as his or her personal wallet, fails to maintain a meaningful separation between corporate and personal assets, or abuses the company’s separate legal personality to evade debts, a Chinese court may pierce the corporate veil and hold the shareholder jointly and severally liable for the company’s debts.
This is generally referred to under PRC law as the disregard or denial of corporate personality (公司法人人格否认).
Article 23 of the PRC Company Law, effective from 1 July 2024, provides that where a shareholder abuses the company’s independent legal-person status and the shareholder’s limited liability in order to evade debts, thereby seriously prejudicing the interests of the company’s creditors, the shareholder shall bear joint and several liability for the company’s debts.
The current Company Law also expressly addresses what is sometimes called horizontal piercing of the corporate veil.
Where a shareholder uses two or more companies under its control to evade debts and seriously harms the interests of creditors, those controlled companies may be held jointly and severally liable for the debts of any one of them.
A stricter rule applies to a company with only one shareholder. If the shareholder cannot prove that the company’s assets are independent from the shareholder’s own assets, the shareholder may be held jointly and severally liable for the company’s debts.
Accordingly, one of the central questions in corporate veil-piercing cases in China is: Is there still a genuine and identifiable boundary between the company’s assets and those of its shareholder?
Chinese courts generally do not find commingling merely because of one isolated fact. Instead, they examine the overall operation of the company, including its bank accounts, accounting records, business activities, flow of funds and actual control.
The following circumstances tend to attract particular scrutiny.
This is one of the most common issues seen in practice.
Examples include:
customers regularly paying company invoices into the personal account of a shareholder or legal representative;
suppliers or employees being paid from that personal account; and
the same account also being used for the shareholder’s personal expenses, such as household spending, property purchases or other private transactions.
If it ultimately becomes impossible to distinguish corporate funds from personal funds, a court may find that the company’s assets and the shareholder’s assets have been commingled.
Chinese Supreme People’s Court decisions have recognized that the long-term use of a personal bank account for corporate business, particularly where the same account is also used for personal purposes, may be an important indication of asset commingling.
That said: The mere fact that a personal account was used on one or a limited number of occasions does not automatically amount to commingling.
A court will usually also consider whether the transaction was properly recorded in the company’s accounts, whether the source and use of the funds can be traced, and whether supporting agreements and accounting records exist.
Another common warning sign is where a shareholder is able to use company funds freely for personal purposes.
Examples may include:
withdrawing company funds at will;
using company funds to pay for the shareholder’s home, vehicle or credit card expenses;
using company assets to repay the shareholder’s personal debts;
occupying substantial company funds for extended periods without proper documentation; or
taking business income directly from the company without following lawful profit-distribution procedures.
Where these transactions have no clear contractual basis, are not properly recorded and cannot be satisfactorily explained, they may become important evidence of commingling.
Other examples include:
the company having no complete accounting books;
material inconsistencies between bank statements and accounting records;
substantial transactions that were never properly booked;
the company and shareholder effectively operating through the same accounting system; or
assets purchased with company funds being registered in the shareholder’s personal name without a clear commercial explanation.
The Minutes of the National Courts’ Civil and Commercial Trial Work Conference, commonly known in China as the Ninth Civil and Commercial Trial Minutes (九民纪要), emphasize that the fundamental question is whether the company retains an independent will and independent assets.
In practice, one of the most important indicators is whether the company’s assets and the shareholder’s assets can still be clearly distinguished from each other.
This is why, in veil-piercing litigation, some of the most important evidence is often not the corporate registration documents but rather: bank statements, accounting books, vouchers and evidence showing the ultimate destination of the funds.
Not necessarily.
Related companies often have overlapping features, such as:
the same legal representative;
common shareholders;
the same finance personnel;
employees working for more than one group company;
the same registered or business address;
common telephone numbers or email addresses; or
similar or overlapping business activities.
These factors may support a finding of commingling, but they are generally not sufficient on their own.
For example, several related companies may share office premises and certain administrative staff while still maintaining:
separate bank accounts;
separate accounting books;
independent financial records; and
properly documented related-party transactions.
In such circumstances, the mere fact that the companies share an office or personnel will generally not be enough to disregard their separate legal personalities.
In other words: Overlapping personnel and business activities may be relevant evidence, but the key question usually remains whether the assets of the relevant entities can be separately identified.
Guiding Case No. 15 of the Supreme People’s Court, involving XCMG and several related companies, is one of the best-known Chinese cases concerning the commingling of related corporate entities.
The case involved three affiliated companies.
The court found substantial overlap in their personnel, business operations and financial management. Their funds and certain transactions could not be clearly attributed to any particular company.
The court ultimately concluded that the companies had reached the point where their assets could no longer be distinguished and their independent corporate personalities had effectively been lost.
The related companies were therefore held jointly and severally liable for the relevant external debt.
The Supreme People’s Court summarized the relevant principle broadly as follows:
Where affiliated companies are intertwined in terms of personnel, business and finance to such an extent that their respective assets cannot be distinguished, resulting in the loss of their independent personalities and serious prejudice to creditors, the affiliated companies may be held jointly and severally liable.
This judicial approach was subsequently reflected more expressly in Article 23 of the revised PRC Company Law.
No.
Financial dealings between shareholders and their companies are extremely common and can be entirely legitimate.
Examples include:
shareholder loans to the company;
a shareholder paying company expenses on the company’s behalf;
legitimate loans between affiliated companies;
properly structured intra-group treasury arrangements; and
temporary receipt of company funds by a legal representative.
Such transactions do not automatically result in personal liability.
The key questions include:
Was there a genuine commercial basis for the transaction?
Was there an agreement or other supporting documentation?
Was the transaction properly recorded in the company’s accounts?
Can the funds ultimately be traced and clearly allocated between the company and the shareholder?
Accordingly:
Financial dealings do not necessarily mean asset commingling.
A corporate affiliation does not necessarily mean personality commingling.
A shareholder’s control over a company does not, by itself, justify piercing the corporate veil.
Limited liability remains the general rule under Chinese company law. Veil piercing is an exception.
A company with only one shareholder is subject to a particularly important rule under PRC law.
Article 23 of the Company Law provides that where a company has only one shareholder, the shareholder bears the burden of proving that the company’s property is independent of the shareholder’s own property.
If the shareholder fails to do so, he or she may be held jointly and severally liable for the company’s debts.
In practice, a sole shareholder may need to produce evidence such as:
complete accounting books;
bank statements;
financial statements;
accounting vouchers;
tax filings;
agreements documenting transactions between the shareholder and the company; and
where appropriate, an independent or special-purpose audit.
For this reason, single-shareholder companies should be particularly careful about routinely operating company business through the shareholder’s personal bank account.
Where a creditor suspects that a company and its shareholder have commingled their assets, the following evidence may be particularly relevant:
company revenue being paid into a shareholder’s personal bank account;
the shareholder’s personal account regularly being used to pay company expenses;
company funds being used for substantial personal expenditure;
large and frequent transfers between the shareholder and the company without contracts or proper accounting records;
missing or incomplete company accounting books;
repeated inconsistencies among the contracting party, the payee and the invoice issuer;
company assets being registered in a shareholder’s personal name;
substantial transfers of assets after the company incurs significant debts; and
a new affiliated company continuing the old company’s business using the same employees, customers, equipment or premises after the original company ceases operating.
In many cases, the most valuable evidence remains: bank records and accounting records.
A creditor’s case becomes significantly stronger if the evidence establishes a coherent chain such as: company revenue paid into a personal account → shareholder freely disposes of the funds → company assets are transferred or depleted → company is left unable to satisfy its debts.
In practice, the court’s analysis can often be understood in three stages.
First, has the shareholder abused the company’s separate legal personality or limited liability?
Second, has the company substantially lost its independent assets or independent decision-making capacity?
Third, has that abuse been used to evade debts and seriously prejudice the interests of creditors?
Only where the circumstances reach a sufficiently serious level will a Chinese court generally disregard the company’s separate legal personality.
Accordingly, the fact that a company is unable to pay its debts does not, by itself, make its shareholders personally liable.
Likewise, business failure or insolvency does not automatically mean that shareholders must repay all corporate debts.
The real risk arises where: the boundary between the company’s property and the shareholder’s property has effectively disappeared, and that lack of separation is used to transfer assets or avoid liabilities.
Limited liability is a fundamental protection available to shareholders under PRC company law, but it is not intended to serve as a mechanism for evading legitimate debts.
Where a company genuinely operates and accounts for its business independently, and transactions between the company and its shareholder are supported by contracts, vouchers and proper accounting records, the shareholder should generally continue to benefit from limited liability even where he or she exercises substantial control over the company.
By contrast, where a shareholder routinely operates the company through personal bank accounts, freely uses corporate funds for personal purposes, fails to maintain meaningful accounting separation, or transfers assets to himself, herself or other affiliated entities after liabilities arise, a Chinese court may pierce the corporate veil and impose joint and several liability on the shareholder or, in appropriate cases, other affiliated companies.
The core principle may therefore be summarized as follows: The key question is not how close the relationship is between the shareholder and the company, but whether a genuine and identifiable boundary between their assets still exists.
Disclaimer:
This article provides a general overview of PRC law and judicial practice and does not constitute legal advice for any particular transaction or dispute.
By David Gao, an international lawyer in Beijing, China.
With 20+ year's practice, David Gao is highly proficient in Chinese company law and contract law, possesses extensive experience, and has been selected for the Ministry of Justice’s national talent pool of foreign-related lawyers in China.
For more information, please contact:
Email: gaohexin@163.com
Tel: 86-13611158067
