Piercing the corporate veil of Chinese “husband-and-wife” companies or how do a husband and wife become one flesh?

Zhou Congning (周聪宁), STL 4L student

Limited liability in Chinese corporate law helps the shareholders to reduce the risk of running a company because a company will use its assets to reimburse the debt instead of shareholders’ personal property. However, the shield of the company will be pierced when the shareholder abuses his rights. In 2019, the Supreme People’s Court (SPC) issued two different judgments concerning a special rule – reversing the burden of proof in a one-person limited liability company in Chinese Company Law.

The facts of both cases involve a married couple who set up a limited liability company to operate a business and protect their personal and family property from creditors. In the 2019 appeal case, Wuhan Maoren Grments Co., Ltd. v. Xiong Shaoping^[1] , the SPC pierced the corporate veil and ruled that the couple must reimburse the company’s debt because the husband and wife shareholders are “one person”. Half a year later, in Taian Daiyue District Xindilong Well Drilling Service Center v. Jinan Hongnuo Air Conditioning Co., Ltd.^[2] with similar facts, the SPC did not recognize the husband-and-wife shareholders as one person. Why did the SPC “overrule” its holding in the same year in a similar case, and how can the SPC make two different judgments in the same situation? How does the SPC unify its decision and rulings on the same issues, which it calls unifying the application of law?

I: Reverse the Burden of Proof: Article 63

The legal basis for reversing the burden of proof for piercing the corporate veil of husband-and-wife companies is Article 63 of the Company Law. Looking back to the history of Article 63, the official document tells us what China was concerned about at that time.

1. Company Law Articles 63 and 57 

Article 63^[3]  requires the shareholder of a one-person company to separate his personal property from the company’s assets. If a creditor sues him to repay a debt, the creditor does not need to prove the shareholder has mixed his property and the company’s assets. On the contrary, the shareholder bears the burden of proof, and he needs to show that his personal property is separate from the company’s assets. Otherwise, the judge will pierce the company’s veil. The presumption of the provision is that shareholders of a one-person company will use their corporate entity to evade creditors.

Article 57^[4] states that one person means one single person or one legal person. Wang Dan,  a judge of SPC’s #1 Civil Division explained the reason for reversing the burden of proof of a one-person limited liability company in her opinion^[5]: because a one-person limited liability company has only one natural person or one legal person shareholder, the shareholders are more closely connected with the company. Therefore the shareholders have stronger control over the company, and it is more likely that the individual shareholders will mix their assets with the company’s assets.  Therefore, when balancing the interests of creditors and shareholders, shareholders should assume a heavier duty of care.

2. History of Article 63

This provision aims to protect creditors because the shareholder of a one-person limited liability can easily avoid obligations to creditors^[6]. In the process of revising the Company Law, the draft amendment to the Company law once deleted the presumption of a personality mixing system for one-person limited liability companies, but they left this provision in the Company Law. What were the legislators concerned about?

Article 63 first appeared in 2005, when the Chinese Company Law was first amended. The National People’s Congress (NPC)  (the legislature) added the provisions of a one-person limited liability company, which some legislators and the public questioned. Some members of the NPC  Standing Committee^[7] suggested that shareholders of a one-person company could easily mix the company’s property with their own property and harm the interests of the company’s creditors. Some NPC deputies suggested that this provision should be deleted.^[8] At that time, it was common that one shareholder controlled the company while other shareholders were nominal. The legislators, intended to comply with the trend of establishing a one-person company. As for the provision of reversing the burden of proof, the legislator explained^[9] that Article 63 (this provision used to be Article 64 in 2005) in Chinese Company Law was stricter than in other countries because it was necessary to regulate the behavior of shareholders of a one-person company and prevent possible abuses.

3. Applying Article 63 to a “Husband and Wife” Company

Chinese legislators explained the reasoning behind the reversal of the burden of proof for one-person companies, but how can the law treat a “husband and wife” company as a one-person company? Wang Dan, the judge of SPC’s first civil division gave her answer^[10], but the law is vague. Let’s go back to the history of family law. The old English law says: “By marriage, the husband and wife are one person in law … the legal existence of the woman is suspended during the marriage…”^[11] This phenomenon was the same in Chinese legal history–the wife was considered as the husband’s property in the Qing dynasty, as a man and his wife are one flesh. This traditional thinking influenced modern family law and property law, and now it is affecting Company Law. Because the property during the marriage is shared by the husband and wife, from the perspective of property rights, the husband and wife can be recognized as one person.

II: SPC Gives Two Different Answers 

When a couple are shareholders of a company, is the “husband and wife” company a one-person company? In 2019, the SPC ruled on this question in two cases, with contradictory results.

As discussed above, Article 63 of the Company Law reverses the burden of proof for piercing a one-person limited liability company’s veil. In two 2019 cases, the SPC considered whether this rule could be applied to companies with husband and wife shareholders instead of one-person companies. The issue is whether a married couple should be considered a single person. In my view, it is strange that you treat two natural persons as a single person, as our culture respects the independence of individuals. But in Chinese Company Law, the courts tend to regard two married couple shareholders as a single person, as illustrated by the first SPC case.

1. Wuhan Maoren Garments Co., Ltd. v. Xiong Shaoping: SPC recognized Husband and wife as one person

Xiong Shaoping (Mr. X) and Shen Xiaoxia (Mrs. S) are a married couple. They set up a limited liability company in Jiangxi province called Qingmanrui (Q). Maoren (M), a company in Hubei province, sued Q for breach of contract in a district court (case one). The case was settled by mediation, by which Q agreed to repay M the outstanding 2,983,704.65 RMB debt. When the district court issued a civil compulsory enforcement order to Q, the court enforcement team discovered Q only had 13,069.31 RMB in its bank account and had no other assets. The court ended the enforcement proceedings.

Since the shareholders of Q are a couple, M considered that Q should be treated as one-person company. M, citing a provision of adding the party subject to execution^[12] brought an case to oppose the enforcement proceedings to the Intermediate People’s Court (case two). The intermediate people’s court dismissed case two, holding that the couple is not “one person” in the law, basing its ruling on Company Law Article 57. According to Article 57 in Company Law, one person means one single person or one legal person.

M appealed case two to the High People’s Court, and the High People’s Court reversed the case, ruling Mr. X and Mrs. S bore joint and several liability for the corporate debts. Mr. X and Mrs. S applied for a retrial to the SPC.  The SPC reviewed case two and affirmed the high people’s court decision, supporting the plaintiff in case two by piercing Q’s veil.

The judge, Wan Huifeng^[13], wrote in his opinion: Article 57 of Chinese Company Law states a “one person limited liability company means the company has only one natural person shareholder or one legal person shareholder”, in the meantime, Chinese Family Law says “The property acquired by the husband and wife during the marriage shall be jointly owned by the husband and wife.” The registered capital of Q came from the joint property of Mr. X and Mrs. S. Therefore, all the equity interests of Q are essentially derived from the same property right and are jointly enjoyed and disposed of by one ownership, and the equity subject has the consistency of interests and unity of substance.”

2. Taian Daiyue District Xindilong Well Drilling Service Center v. Jinan Hongnuo Air Conditioning Co., Ltd.: SPC refused to recognize Husband and wife as one person

The SPC appeared to have given a definite answer about whether a husband and wife company is a one-person company. However, six months later, a different department of the SPC gave a different answer in a factually similar case.

Jia Juan (Mrs. J) and Liang Ruolin (Mr. L) were a married couple. They set up HongNuo limited liability company (H) after they married. H owed its creditor, Long Dajin (L) 1,120,924 RMB, but had no assets to repay the debt. L filed an action of enforcement objections, reasoning that the husband and wife shareholders should be added as the party subject to enforcement, relying on the former SPC case^[14]. However, SPC did not follow its decision. The judge held that H is not a one-person limited liability company. The judge, Zhang Chun stated in her opinion: “a one-person limited liability company refers to a limited liability company with only one natural person shareholder or one legal person shareholder. To characterize as a one-person limited liability company a company established by two shareholders with capital contributed by the joint property of the husband and wife in this case lacks legal basis.

3. Why does the SPC have conflicting judgments?

Why does the SPC have two answers in the same situation? The facts are similar in these cases: husband and wife set up a company during their marriage, and the couple did not submit the property division agreements to the government. The SPC has been working hard on unifying law applications since 2020. Several documents were published by SPC to promote the unification of law application^[15].

As the judicial reform enters the “deep-water area”, the phenomenon of “different judgments in similar cases” has become a difficult “hard bone” in the reform. The SPC published several policy opinions on unifying the application of law.^[16] In China, more official documents on the same issue mean the problem is more serious and has not been resolved. The courts of China still have trouble unifying how the law is applied.

(1) Location? The judge of the first case, Wan Huifeng, was a member of the Fourth Circuit Court of the SPC at that time. Zhang Chun, the judge of the second case, was a member of the Fifth Circuit Court of the SPC at that time. In other words, these cases were issued by two different circuit courts of the SPC. Since there are so many people in China, and the SPC needs to resolve so many cases every year, it set up six circuit courts. The Fourth Circuit Court is located in Zhengzhou City, Henan Province, and the circuit area is Henan, Shanxi, Hubei, and Anhui provinces. The Fifth Circuit Court is located in Chongqing Municipality, and the circuit area is Chongqing, Sichuan, Guizhou, Yunnan, and Tibet. Although these two cases happened in different circuit areas, the Fourth and Fifth Circuits are not far away from each other, and their local conditions and social customs are similar.

(2) SPC Departments? Wan Huifeng is from the Enforcement Department of SPC while Zhang Chun is from the First Civil Division of SPC. The enforcement department supported piercing the husband and wife company’s veil while the first civil division did not support it. Where there are different judgments on similar cases between different trial divisions within the Supreme People’s Court. For the enforcement department, its working policy is to fix the problem of “difficulty in enforcement”, according to the person in charge of the executive bureau of the SPC,^[17] “difficulty in enforcement” has become a common concern of all sectors of society, and a major and hot issue related to the vital interests of the people, judicial authority, and even social stability. The policy behind the judgment may affect the judge, the enforcement bureau may intend to protect the creditor and try to solve the problem of difficulty in enforcement. As for the first civil division, the judge focuses on protecting the human rights of each party in the marriage, according to the person in charge of the First Civil Division of the SPC^[18]. That the judge will be more prudent when asked to pierce the corporate’s veil and require the couple to reimburse the company’s debt.

The SPC has established a special mechanism for resolving inconsistency between trial divisions, which is by holding a cross-departmental meeting.^[19] We are not sure if and when they hold a meeting about this question.

III: Cases about Piercing Husband and Wife Companies’ Veils

The SPC has expressed its view in multiple documents that lower courts should follow its judgments and rulings.^[20] Although SPC tries to unify the application of the law, the lower courts often have different responses to the same issue.

China’s judicial system is different from other jurisdictions. There are four levels of courts in China: The SPC, the High People’s Court, the Intermediate People’s Court, and the Primary People’s Court. China is not a common law jurisdiction, but it has a Chinese way of case law. SPC focuses on unifying the application of the law, the judges will (re)search and apply analogous “similar” cases to cases under consideration.^[21] The law does not say the court should follow legal precedents, but the judges and their assistants “knew case law is practically useful and even indispensable in adjudication.”^[22] What’s more, the judges are facing the pressure of unifying the application of the law.^[23]

If the lower courts are unsure of the application of the law, they will submit a request for instructions(请示) to a higher court for their guidance. In addition, SPC issues guiding cases, typical cases, and Gazette cases (published in the Gazette of the Supreme People’s Court) to the lower courts and the public. When a similar case appears, the court “shall refer to”^[24] the guiding cases and the judge should cite guiding cases in his or her reasoning. ^[25] Gazette cases and typical cases are “auxiliary materials” for cases, and courts “may refer to them”.

In order to maintain the consistency of the courts’ decisions, SPC intends to give soft power to its own judgments, even though some judgments are not guiding cases, typical cases, or gazette cases. The method is revealed in SPC’s annual report^[26]. In other words, the judges need to consider SPC’s judgments before they make their own decision. The question is when SPC has two answers to the same question, which judgment should the judge follow?

There are two different answers for applying Article 63 to a husband and wife shareholder company. Both are supported by the SPC. I searched “husband and wife company” and “one person company” in China Judgements Online^[27]. I Found 181^[28] judgments from 2022 to Aug. 2023. Two-thirds of cases supported the application while one-third rejected it, according to my empirical study.

I analyzed 149  similar cases from 2022 to Aug. 2023. I found that 92 cases arose from contract disputes (合同纠纷), and 29 cases arose from an objection to execution (执行异议). The rest of the cases are caused by disputes over unjust enrichment or other reasons. For those dispute of contract cases, two-thirds of the judges agreed to apply Article 63 while one-third refused. For those cases of objection to execution, the score is 50 to 50. However, the reasoning of the judgments is not different. The cause of action may not affect the judges’ decision. 

Some provinces showed a clear tendency to favor one position.  In my empirical study, Shandong Province and Guangdong Province were the most supportive of applying Article 63 to husband and wife companies.  According to my findings, 84.62% and 69.81% of the judgments apply Article 63 to husband and wife companies. Anhui Province and Tianjin are the most conservative. Only 33.33% and 40% of their judgments supported the application. I found 100 cases supported applying Article 63 while 49 cases refused. Most of the cases directly copied the language from the SPC cases in their opinion. This is the real impact of non-guiding cases of SPC.

Why does the court apply Article 63 to married couple companies and how?  To protect creditors. It is the same concern as a one-person limited liability company. As the attorney of the appellee of the SPC case said at the trial^[29], whether Article 63 of the Company Law could apply to husband and wife companies is a gap in the law. This gap is waiting for the judge to fill it. If SPC is “creditor friendly”, it will fill the gap by recognizing husband and wife companies as one-person companies.

III: Conclusion

Whether the judge supports applying Article 63 has pros and cons. It is obvious that applying Article 63 to a husband and wife company will extend the scope of the law, possibly beyond what the legislators intended. It also better protects creditors. The SPC gave two answers to this question, but which one is the final answer? For me, I support the plain meaning of the provision that one person only refers to one legal person or one natural person. But the Chinese way to solve problems is by meetings. I believe that one day, the judges of SPC will hold a cross-institutional meeting to discuss the problem and resolve the inconsistency. Before that, this inconsistency is still pending. Based on the statistics I did, I surmise the final answer will be “Yes, a husband and wife company is one person company”  because we already have 67.11% of the judges saying yes.

1. 《熊少平、沈小霞申请执行人执行异议之诉再审民事判决书》﹝（2019）最高法民再372号﹞ ↑
2. 《泰安市岱岳区新地龙打井服务中心、贾娟执行异议之诉再审审查与审判监督民事裁定书》﹝（2020）最高法民申6688号﹞↑
3. Article 63 of Chinese Company Law: If the shareholder of a one-person limited liability company is unable to prove that the property of the one-person limited liability company is independent from his own property, he shall bear joint liabilities for the debts of the company. ↑
4. Article 57 of Chinese Company Law: The term “one-person limited liability company” as mentioned in this Law refers to a limited liability company with only one natural person shareholder or legal person shareholder. ↑
5. 《江苏南通二建集团有限公司、天津国储置业有限公司建设工程施工合同纠纷二审民事判决书》﹝（2019）最高法民终1093号﹞ ↑
6. The Legislative history said: “In reality, some shareholders abuse their rights by transferring the company’s property and mixing the company’s property with their own property, resulting in a significant reduction in the company’s assets that can be used to perform its obligations.” According to the Renmin Ribao and the People’s Daily, 2005.8.24. http://www.npc.gov.cn/npc/c199/200508/d9f0b72d9486409b80bbe7c1e6aec2e3.shtml ↑
7. The National People’s Congress of China. ↑
8. Xinhua News, 27th Aug. 2005. http://www.npc.gov.cn/npc/c199/200508/33a66ee458364f41bf09cf352c537188.shtml ↑
9. The draft amendments to the Company Law retain the “one-person company” clause: “If the shareholders of a one-person company cannot prove that the company’s assets are independent of the shareholders’ own assets, the provisions on joint and several liability for the company’s debts are stricter than the laws of other countries on one-person companies, and are necessary to regulate the behavior of shareholders of one-person companies and prevent possible drawbacks.” http://www.npc.gov.cn/npc/c199/200510/1a2f8a1ea9984830b87eada9045567f0.shtml ↑
10. Footnote 5, Id. ↑
11. William Blackstone. Commentaries on the Laws of England. Vol, I (1765), pages 442­ 445. ↑
12. Provisions of the Supreme People’s Court on Several Issues Concerning the Modification and Addition of Parties in Civil Enforcement, Article 20, “Where the assets of a one-person limited liability company as the subject of enforcement are insufficient to pay off the debts determined in the effective legal documents, and the shareholders cannot prove that the company’s assets are independent of their own assets, the people’s court shall support the application of the executor to change or add the shareholder as the debtor and bear joint and several liability for the company’s debts.” ↑
13. 《熊少平、沈小霞申请执行人执行异议之诉再审民事判决书》﹝（2019）最高法民再372号﹞ ↑
14. Id. ↑
15. 《〈最高人民法院统一法律适用工作实施办法〉理解与适用》， https://www.court.gov.cn/fabu/xiangqing/334151.html ↑
16. 《统一法律适用标准 避免“类案不同判”——最高人民法院发布〈关于完善统一法律适用标准工作机制的意见〉》https://www.court.gov.cn/zixun/xiangqing/258521.html ↑
17. 《最高人民法院执行局负责人就反规避执行活动答记者问》， https://www.court.gov.cn/shenpan/xiangqing/3412.html；《最高法执行局相关负责人就人民法院能动司法（执行）典型案例答记者问》，https://www.court.gov.cn/zixun/xiangqing/400212.html ↑
18. 《妥善审理涉及夫妻债务纠纷案件 依法平等保护各方当事人合法权益——最高人民法院民一庭负责人就〈最高人民法院关于审理涉及夫妻债务纠纷案件适用法律有关问题的解释〉答记者问》，https://www.court.gov.cn/zixun/xiangqing/77362.html ↑
19. 《最高人民法院统一法律适用工作实施办法》第十一条：“最高人民法院建立健全跨部门专业法官会议机制，研究解决跨部门的法律适用分歧或者跨领域的重大法律适用问题。” ↑
20. 《〈关于完善四级法院审级职能定位改革试点的实施办法〉的理解与适用》：“建立最高人民法院裁判直接转化为指导性案例的工作机制，推动相关裁判成为优化司法解释制定方式和内容，以及修改、废止司法解释的重要渊源。” ↑
21. Yuan Ye, How “case law” works in the Chinese courts, Supreme People’s Court Monitor, MAY 29, 2022. ↑
22. Id. ↑
23. According to SPC document, the cases decided from SPC are intending to have guiding power. ↑
24. 《最高人民法院关于案例指导工作的规定》第七条：“最高人民法院发布的指导性案例，各级人民法院审判类似案例时应当参照。” ↑
25. 《〈最高人民法院关于案例指导工作的规定〉实施细则》第十条：“各级人民法院审理类似案件参照指导性案例的，应当将指导性案例作为裁判理由引述，但不作为裁判依据引用。”↑
26. 《〈关于完善四级法院审级职能定位改革试点的实施办法〉的理解与适用》：“建立最高人民法院裁判直接转化为指导性案例的工作机制，推动相关裁判成为优化司法解释制定方式和内容，以及修改、废止司法解释的重要渊源。”Establish working mechanisms for the direct transformation of Supreme People’s Court judgments into guiding cases, promoting relevant judgments as an important source for optimizing the formulation and content of judicial interpretations, as well as revising or abolishing judicial interpretations. ↑
27. China Judgements Online(中国裁判文书网), is the official website of judgments the courts made. https://wenshu.court.gov.cn↑
28. The sum of the judgments is 583, including 2 criminal judgments. I only researched the cases from 2022 to Aug. 2023.
29. You can watch the video of the trial in China Court Trial Online(中国庭审公开网), this is the trial video of the case 
    Wuhan Maoren Garments Co., Ltd. v. Xiong shao ping, http://tingshen.court.gov.cn/live/9561488