On The Application Of The Disregard Of Corporate Personality

There is an inherent conflict between the limited liability of shareholders and the interest of the creditors of the company, which is the problems of company and caused by company. The creditors of company will face great risks, when shareholders abuse the independent legal personality and limited liability. As the equity of the system, Disregard of Corporate Personality plays an important role in order to restore the balance of interest and ease social contradictions. We introduced the Disregard of Corporate Personality when the Company Law was amendment in 2005, which is the progress on legislation in the field of company law. However, the applicable standard of the system is not widely agreed so far from the legislative, and there is little typical or instructive case in judicial practice. This article seeks to reveal the value of the system, and explain the foundations of this theory, which is for the application of this theory proposed by some degree of standards. There are four chapters in this article:Chapter I noted the different appellations of the theory of Disregard of Corporate Personality in different legal system imply the different emphases of their respective. But all countries have reached a consensus of the theory which means the court will disregard the limited liability of shareholders in the case who will be directly responsible to the creditors of the company in certain circumstances. This chapter also noted that this theory is more suitable for private companies and is not exclude for public companies. Although none of the personality of listed companies has been disregarded in U.S, as the situation in China is so different, the theory should be practiced even if the story takes place in listed company. In addition, the theory is more applicable to the contract dispute and also available for infringement disputes, labor disputes and tax disputes.Chapter II discussed the theoretical basis of Disregard of Corporate Personality. The legitimacy of the limited liability is confirmed from three aspects which embrace limiting the investment risk from the shareholders, stimulating and encouraging investment, facilitating the separation the rights of ownership and management. Meanwhile, limited liability has also brought out the problem of company system, which means the conflicts of interest between shareholders and creditors of the company. Shareholders are more inclined to risk-taking behavior, and controlling shareholder is easy misconduct, adding debt to company and improper distribution of company dividends will transfer more investment risk from shareholders to creditors of the company for the help of limited liability system. The creditor of the company has assumed more risk under normal operating circumstances. The situation will be worse if the shareholders engaged in unlawful. The theory is equity law in common law countries. Common law can not choose the right from wrong during the conflict of two kinds of interest, but equity law can provide reasonable assistance. Disregard of Corporation Personality means to restore the interest of both parts. Independent personality of corporation and limited liability shareholders are not interdependent. Disregard of corporation Personality is a particular case treatment of limited liability of shareholders, which is not the destruction of the company's independent personality.Chapter III deals with the applicable standards of the relevant countries on Disregard of Corporation Personality, for example the United States, Australia, Germany, Japan and South Korea. The application in China can be directed from the participant, behavior elements and consequences of behavior. The subjective criterion during the application process is referred in this chapter and the illegal acts of shareholders are separated into two types which embrace abusing the independent personality by shareholders and personality confusion. The first type contains undercapitalization, fraud on the creditors of the company and over-control by shareholders. The second type contains lack of corporate formalities, and fraud on the company which means financial confused, occupation of company assets to depleting the company. In addition, I believe that over-control is the behavior of a location for cross. The controlling from the shareholders can not constitute the reasons for Disregard of Corporate Personality itself, unless the shareholder control the company to implement other illegal acts or the controlling act is more than the necessary limits which will satisfy the condition of second type. This theory can only be applied in the trial process. It is not allowed to add the properties of shareholder to the object properties without the trial process. Single-person limited liability companies and parent company are analyzed for the particularity part. The burden of proof in Single-person Company and the personality confusion in parent company are common problems here and two case studies were set here to illustrate the problems.Chapter IV describes the difficulties at present stage for the application of Disregard of Corporation Personality. Equity structure reform has completed, but it does not mean that market-oriented economic system is fully followed in China. There is still administrative intervention in the equity structure. The other one is the lack of experience in theory and practice compared to the U.S. and other countries. On this basis, I point out the misunderstanding parts during the application of the theory. Disregard of Corporation Personality means to be an equity law which could not set the standard of applies when facing the variety of shareholder's illegal acts under the development of economic. Looking forward to the judicial interpretation to show the standard of application is not that comprehensive. But for the condition of rule of law in China and the social contradictions to be resolved, judicial interpretation is necessary and suitable for now. Maybe it will be more useful to stress the equitable of the theory, but I still believe the full play to its own advantages can only reflect the value of the theory.In short, the import of the theory is a great progress in performance of the rule of law in China. However, lots of work should be continued in the field of law. Theory research and practice operations will need to be improved, in order to play its role in our country.