Earth Research | Judicial Criteria for the Confusion of Legal Personality

1. Relevant Provisions of the Company Law

Article 23: Where a company's shareholders abuse the independent corporate personality and limited liability to evade debts, seriously harming the interests of corporate creditors, they shall bear joint and several liability for the company's debts. Where shareholders use two or more companies under their control to engage in the acts specified in the preceding paragraph, each company shall bear joint and several liability for the debts of any of the companies. In a company with only one shareholder, if the shareholder cannot prove that the company's property is independent of their own property, they shall bear joint and several liability for the company's debts.

2. Relevant Provisions of the Civil Code

Article 83 stipulates: The investors of a for-profit legal person shall not abuse the independent legal personality and limited liability of investors to harm the interests of the legal person's creditors. Where the independent legal personality and limited liability of investors are abused to evade debts and seriously harm the interests of the legal person's creditors, they shall bear joint and several liability for the legal person's debts.

3、 Provisions of the 'Minutes of the National Courts' Civil and Commercial Trial Work Conference'

10. [Commingling of Personalities] In determining whether there is a commingling of corporate personality and shareholder personality, the most fundamental criterion is whether the company has independent will and independent property, and the most prominent manifestation is whether the company's property and the shareholder's property are commingled and indistinguishable. When determining whether commingling of personalities exists, the following factors should be comprehensively considered:

(1) Shareholders use company funds or property without compensation and without making financial records;

(2) Shareholders use company funds to repay shareholder debts, or provide company funds for use by affiliated companies without compensation and without making financial records;

(3) Company accounts and shareholder accounts are not separated, making company property and shareholder property indistinguishable;

(4) Shareholder's own income and company profits are not distinguished, leading to unclear interests between the parties;

(5) Company property is registered under the shareholder's name and is occupied and used by the shareholder;

(6) Other circumstances of commingling of personalities.

In cases where commingling of personalities occurs, the following commingling often appears concurrently: Commingling of company business and shareholder business; commingling of company employees and shareholder employees, especially financial personnel; commingling of company domicile and shareholder domicile. When hearing cases, people's courts primarily examine whether commingling of personalities exists, and do not require the simultaneous presence of other types of commingling, which often serve merely as reinforcement for the commingling of personalities.

11.  [Excessive Dominance and Control] When a controlling shareholder excessively dominates and controls a company, manipulates its decision-making process, causing the company to completely lose its independence and become merely a tool or shell for the controlling shareholder, thereby seriously harming the interests of corporate creditors, the corporate personality should be disregarded, and the shareholder who abused control shall bear joint and several liability for the company's debts. Common situations in practice include: (1) Transfer of benefits between parent and subsidiary companies or between subsidiaries; (2) Transactions between parent and subsidiary companies or between subsidiaries where profits accrue to one party but losses are borne by another; (3) Withdrawing funds from the original company first, then establishing a new company with the same or similar business purpose to evade the original company's debts; (4) Dissolving the company first, then establishing another company using the original company's premises, equipment, personnel, and the same or similar business purpose to evade the original company's debts; (5) Other circumstances of excessive dominance and control.

Where a controlling shareholder or actual controller controls multiple subsidiaries or affiliated companies and abuses their control, causing the property boundaries of multiple subsidiaries or affiliated companies to be unclear, their finances to be commingled, benefits to be transferred among them, and their independent corporate personality to be lost, thus becoming a tool for the controlling shareholder to evade debts, operate illegally, or even commit crimes, the corporate personality of the subsidiaries or affiliated companies may be disregarded, and they may be ordered to bear joint and several liability, based on the comprehensive facts of the case.

It is worth noting that during the process of soliciting opinions on the Minutes, many suggested deleting the phrase 'without making financial records.' Their view was that as long as shareholders use company funds or property without compensation, it constitutes commingling of personalities, regardless of whether financial records are made. However, the Minutes ultimately did not adopt this view. The reason is that if the company makes financial records, it proves that the legal relationship between the shareholder and the company is one of lending or borrowing, and the law does not prohibit lending or borrowing activities between shareholders and the company. In the presence of financial records, it precisely demonstrates that the shareholder and the company are two independent civil liability subjects. From this perspective, judicial practice adopts a cautious attitude in determining the commingling of corporate personalities.

1. Personnel Commingling

Personnel commingling is one of the important manifestations of corporate personality commingling. When legal representatives, directors, and other senior executives hold concurrent positions in different companies, the company's decision-making mechanism becomes blurred. The overlap of financial personnel directly affects the independence of the company's financial management. If the financial personnel of two companies are the same, irregular situations may arise in financial processing, making it impossible to accurately distinguish financial boundaries between companies. A large overlap of ordinary employees can also lead to personnel commingling, with the most typical situation being 'one team, multiple brands.' For example, if employees of one company also work for another affiliated company, it can be difficult to determine which company their actions represent during business execution, which not only leads to chaotic business processes but also blurs the personality boundaries between companies.

2. Business Commingling

Business commingling is manifested in the overlapping of business scope, and commingling in the subject of contract performance and business operations. When the business scopes of two companies highly overlap, business commingling is likely to occur. For example, if two companies operate in the same industry, providing similar products or services, while competing in the market, it is difficult to clearly distinguish their business boundaries. In terms of business operations, if two companies show high consistency in price determination and market promotion, it will also be considered as business commingling. For instance, if two companies adopt the same pricing strategy for the same product in the same market area and conduct similar promotional activities, it makes it difficult for the outside world to distinguish their independent business operations.

3. Property Commingling

The independent personality of a company requires it to possess independent property and be able to independently control and manage its property. Property commingling destroys this independence, making the company a tool manipulated by shareholders or related companies. Property commingling is the most essential manifestation of personality commingling, not only reflected in the commingling of property itself, but also in the commingling of financial accounting management. In some cases, the financial accounts between companies are unclear, making it impossible to accurately distinguish between the company's property and the shareholders' property, or different companies' accounts are mixed, with improper offsetting of accounts. This situation will cause the company's property to lose its clear ownership, making it impossible to determine the company's actual property status. As a result, the company cannot independently assume debts, and the interests of creditors are seriously damaged. Because in the case of property commingling, the company's property may be illegally transferred or embezzled by shareholders, affecting the material basis for the company's external liability.

In addition to the above three points ， There are also some comminglings that can be used to strengthen personality commingling, such as commingling of externally publicized contact information, commingling of business locations, etc. Commingling of business locations is also a manifestation of property commingling to some extent. When companies share the same office space, use the same office facilities, and warehouses overlap, this commingling of business locations makes it difficult to distinguish the company's property in actual use and management, further exacerbating the degree of property commingling.