NUS Law Working Paper 2018/025

NUS - EW Barker Centre for Law & Business Working Paper 18/04

Piercing the Corporate Veil: Historical, Theoretical and

Comparative Perspectives

Tan Cheng Han

Wang Jiangyu
Christian Hofmann

lawtanch@nus.edu.sg
lawwjy@nus.edu.sg
lawch@nus.edu.sg

[September 2018]

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 PIERCING THE CORPORATE VEIL: HISTORICAL, THEORETICAL AND
COMPARATIVE PERSPECTIVES

TAN Cheng-Han, WANG Jiangyu, Christian HOFMANN

I. INTRODUCTION

The concept of a company as a separate entity from its shareholders is well known and
recognized in many common law and civil law countries. Generally, it is regarded as a
fundamental aspect of corporate law and for this reason courts are loath to depart from it.
Nevertheless, the principle of separate personality is not absolute and in both common law and
civil law countries the courts have the power to depart from it. Where this occurs, it is often
said that the courts “pierce” or “lift” the corporate veil. This will usually, but not inevitably,
lead to liability being imposed on another person, perhaps in addition to the corporate vehicle.1
This paper aims to compare and critically examine the circumstances under which veil
piercing takes place against the objectives of incorporation. The countries examined are
England, Singapore and the United States (US) which are common law jurisdictions, as well
as the civil law countries of China and Germany. The main purpose of this comparison is to
offer a reasonably comprehensive and thorough examination of how the principle of veil
piercing, which has been formally adopted either through case law or legislation, is doctrinally
applied by the courts in these jurisdictions. The functional method in comparative law is
inevitably employed in this paper, but we also consider other aspects. It will be seen that there
are many parallels between the countries being compared, whether common law or civil law,
in part because the historical circumstances leading to the rise of corporate personality were
very similar, and also because the corporations laws in Asian countries referred to in this paper
are legal transplants. The paper argues that in almost all the jurisdictions examined, some cases
of veil piercing ought not to have been decided as such because doing so gives rise to sub-
optimal outcomes. Instead other legal tools should have been used particularly those in the law
of torts. We believe this paper fills a gap in the literature of comparative corporate law as the
doctrine of veil piercing has been frequently misapplied and there is also a paucity of academic
commentary in this area.2
This paper proceeds as follows. In the next part, the historical context that led to the
rise of the modern corporation will be outlined. After this, the paper sets out the conceptual


National University of Singapore. All errors are ours alone.
1
It does not mean that the corporate entity ceases to exist but simply that corporate personality is not given its
full effect.
2
In writing this paper, we have borne in mind the excellent advice to approaching comparative corporate law
given by David C. Donald, Approaching Comparative Corporate Law, 14 FORDHAM J. CORP. & FIN. L. 83
(2008), in particular to be aware (as much as we can) of the natural distorting tendencies of one's own
perspective.

1
framework behind separate personality and veil piercing. Thereafter, it will discuss the
approaches to veil piercing in the jurisdictions mentioned earlier and critically evaluate these
approaches in light of the rationale behind separate personality and other relevant objectives in
corporate law. The paper then concludes.

II. HISTORICAL CONTEXT

Certain business arrangements, including forms approximating to the modern partnership, can
be traced back to ancient Rome and perhaps beyond. We are today familiar with the limited
partnership as well as the general partnership. Both forms of partnership have roots in Roman
times. The Roman societas (partnership) allowed the socius (partner) to contribute capital or
labour towards any enterprise, commercial or otherwise, so long as the enterprise was not
illegal.3 The relationship between the partners was a contractual one. Typically, the partners
were responsible for the societas’ debts and had rights to the societas’ claims. However, it was
possible to also structure the partnership in a manner where a partner could be exempted from
all losses.4 The agreement between the partners therefore bore some resemblance to what today
is a general partnership or a limited partnership as the case may be. The essential difference
was that in relation to third parties, a partner could not act for the societas or for other partners
so as to bind them to such third parties. In other words, any contract entered into by a particular
socius on behalf of all the partners was the responsibility of that socius only vis-à-vis the other
contracting party.5 The contract between the partners determined the extent to which a partner
could ask other partners to bear losses arising out of business transactions (as well as how gains
were to be shared).
The societas proved to be a convenient and flexible basis for business associations and
influenced the development of business forms throughout Europe. Over time it changed and
some of its more individualistic characteristics were abandoned so as to facilitate management
of the societas. One important development was the idea of agency which brought the societas
closer to the modern conception of partnership. Agency allowed a socius to act in a manner
that was binding on other partners if he acted for the societas and not in his own name.6 This
made the other partners directly liable to creditors. Over time the development of this and other
concepts that formed part of the written, common laws of medieval Europe (the ius commune)
helped give partnership law more of the characteristics that modern lawyers can identify with.

This brief foray into Roman law illustrates that from early times there was a need for

3
Henry Hansmann et al., Law and the Rise of the Firm, 119 Harv. L. Rev. 1335, 1356-57 (2006).
4
ULRIKE MALMENDIER, SOCIETAS, IN THE ENCYCLOPEDIA OF ANCIENT HISTORY 6304–6306 (Roger Bagnall
et al eds., 2013).
5
REINHARD ZIMMERMANN, THE LAW OF OBLIGATIONS: ROMAN FOUNDATIONS OF THE CIVILIAN TRADITION
455 (1996).
6
Id. at 469.

2
business forms that facilitated associations of persons wishing to engage in transactions with a
view to profit. The main disadvantage of the societas (and the modern partnership) was the
absence of limited liability. The societas (and, subject to the terms of the partnership agreement,
the general form of partnership) also did not have perpetual succession and would be
terminated upon the withdrawal or death of one of the partners.7 Notwithstanding this, the
Romans understood the benefits found in the modern company. The societas publicanorum
resembled the modern shareholder company with its ability to issue traded, limited liability
shares and its existence was not affected by the departure of partners. A single person could
contractually bind the firm and assume rights in the name of the firm. Some sources even
describe it as equivalent to a legal person.8 The societas publicanorum was used when public
services were contracted out and public income sources were leased to private entrepreneurs
who were known as “government leaseholders” or publicans.9
It should therefore be unsurprising that in later times there were attempts to create
business organisations that had the same characteristics as the societas publicanorum. It has
been observed in England that the early forms of corporateness were the ecclesiastical and the
lay. Of the latter, there were municipal corporations in the time of William the Conqueror.
These corporations had the right to use a common seal, make by-laws, plead in the courts of
law, and hold property in succession. These privileges were apparently held alike by boroughs
which had, and boroughs which did not have a royal charter.10 The rights that were not held
through a charter eventually appeared not to be safe until they were recognised by the authority
of the Crown. Natural prescriptive right had to be supplemented by the authority of the
Crown.11
The gilda mercatoria was another early form of corporateness. As they were associated
with boroughs there is some controversy over whether the grant of gilda mercatoria to a
borough was a grant of corporateness. The intimate connection between them makes it difficult
to separate the two as distinct organizations.12 Nevertheless, the fact that liber burgus (free
borough) and gilda mercatoria were occasionally granted separately suggests they were
distinct.13

In time, the grant of royal charters extended to commercial enterprises.14 One of the

7
Id. at 455–56; Ulrike Malmendier, Law and Finance “at the Origin” 47 J. ECON. LITERATURE 1076, 1088
(2009).
8
Malmendier, supra note 7, at 1088-1089.
9
Id. at 1085.
10
Cecil Thomas Carr, Early Forms of Corporateness, in 3 SELECT ESSAYS IN ANGLO-AMERICAN LEGAL
HISTORY 162 (1909).
11
Id. at 171.
12
COLIN ARTHUR COOKE, CORPORATION, TRUST AND COMPANY: AN ESSAY IN LEGAL HISTORY 21 (1950).
13
Id. at 177–78.
14
And to other bodies such as universities and professional organizations.

3
most famous was the East India Company and others include Standard Chartered Bank and the
Royal Bank of Scotland. Aside from royal charters, the corporate form could also be attained
through an Act of Parliament. Needless to say, these were not frequently granted and likely
required either political connections or wealth or perhaps even a combination of both.
Accordingly, a substitute developed as by the end of the seventeenth century some idea had
been gleaned of one of the primary functions of the corporate concept, namely the possibility
of combining the capitalist with the entrepreneur.15 This was effected through the formation of
large quasi-partnerships known as joint stock companies.16
The term ‘company’ in this context was of course a misnomer by modern standards as
it simply meant association, and joint stock companies were unincorporated associations,17
many of which were originally formed as partnerships by agreement under seal, providing for
the division of the undertaking into shares which were transferable by the original partners.18
In England they emerged in the 16th century because of the demands of foreign trade which
required capital in large amounts to be tied up for lengthy periods. 19 In essence such
‘companies’ continued to be partnerships and what distinguished them from a typical
partnership was that they generally consisted of many members, and the articles of agreement
between the parties were therefore usually very different.20 This structure was not without its
problems as partnership law was not well suited for a large association. For example, each of
the investors was liable for the joint stock company’s debts; each investor had power to bind
the others to a contract with outsiders; and if the joint stock company wanted to sue a debtor,
all investors had to be joined as plaintiffs.21 The converse was also true if the joint stock
company was to be sued; all investors had to be joined as defendants.22
As a result of the transferability of shares, speculative activity took place which caused
the British Parliament to intervene to curb the gambling mania that ensued. This led to the so-
called ‘Bubble Act’ of 1720.23 It was intended to prevent persons from acting as if they were
corporate bodies, or to have transferable shares without any authority from Parliament.24 It has

15
PAUL L. DAVIES, GOWER’S PRINCIPLES OF MODERN COMPANY LAW 23 (6th ed. 1997).
16
Re. Agriculturist Cattle Ins. Co. (Baird’s Case) (1870) LR 5 Ch. App. 725, 733–34 [hereinafter Baird’s Case].
As a result of this historical fact, the term “joint stock company” is today sometimes used synonymously with
“company” in its modern form. For example, in Europe the term joint stock company is used to refer to a
corporation limited by shares such as the French societe anonyme and the German Aktiengesellschaft.
17
ROBERT P. AUSTIN ET AL., FORD, AUSTIN & RAMSAY’S PRINCIPLES OF CORPORATIONS LAW ¶ 2.110 (16th ed.
2014).
18
DAVIES, supra note 15, at 21.
19
C E Walker, The History of the Joint Stock Company, 6 ACCOUNTING REV. 97, 99 (1931).
20
WILLIAM WATSON, A TREATISE OF THE LAW OF PARTNERSHIP 3 (2d ed. 1807); see also NATHANIEL LINDLEY,
A TREATISE ON THE LAW OF COMPANIES, CONSIDERED AS A BRANCH OF THE LAW OF PARTNERSHIP 608–609
(5th ed. 1889).
21
AUSTIN ET AL., supra note 16, at ¶ 2.110.
22
See also Paul G. Mahoney, Contract or Concession: An Essay on the History of Corporate Law, 34 GA. L.
REV. 873 (2000).
23
Royal Exchange and London Assurance Corporation Act, 1719, 6 Geo. 1, c. 18 (Eng.).
24
COOKE, supra note 12, at 80-82.

4
been said that throughout the eighteenth century (and beyond) the shadow of 1720 retarded the
development of incorporated companies.25
Notwithstanding the Bubble Act, unincorporated joint stock companies continued to
exist. An important provision in the Act was to be found in section 25 that exempted ‘trade in
partnership’ that ‘may be lawfully done’. Given that joint stock companies were in essence
partnerships, there was considerable scope to work around the Bubble Act. This manifested
itself in the ‘deed of settlement company’ which was linked to the two equitable forms of group
association, the partnership and the trust.26 Many such ‘companies’ were established during
the period the Bubble Act was in force.27 In this incarnation, the ‘company’ would be formed
under a deed of settlement (something approximating to a cross between a modern corporate
constitution and a trust deed for debentures or unit trusts) whereby the subscribers would agree
to be associated in an enterprise with a prescribed joint stock divided into a specified number
of shares; the provisions of the deed could be varied with the consent of a specified majority
of the proprietors; management would be delegated to a committee of directors; and the
company’s property would be vested in a separate body of trustees, some of whom would be
directors also.28 The deed of settlement would also provide that the trustees could sue or be
sued on behalf of the company to get around the difficulty of claims by or against an
unincorporated body with a potentially large membership.29
In addition, the deed would provide that each shareholder was to be liable only to the
extent of his share in the capital stock. Although such a provision could only apply to the
shareholders inter se and not be binding on third parties dealing with the company,30 limited
liability could be achieved if contracts between the company and third parties stipulated that
the other party to the contract could only look to the common stock of the company and not the
assets of individual shareholders.31 A number of English cases in the insurance context held
that policyholders were bound by the terms of the deed of settlement of the insurance company
if such terms were incorporated into the insurance contract.32
Holdsworth, writing about the joint stock company of the seventeenth century, said
that this and other advantages which followed from the corporate form meant that the

25
DAVIES, supra note 15, at 28; see also 1 WILLIAM ROBERT SCOTT, THE CONSTITUTION AND FINANCE OF
ENGLISH, SCOTTISH AND IRISH JOINT-STOCK COMPANIES TO 1720 at 438 (1912); 3 THE COLLECTED PAPERS
OF FREDERIC WILLIAM MAITLAND 390 (Herbert Albert Laurens Fisher ed. 1911); cf Ron Harris, The Bubble
Act: Its Passage and Its Effects on Business Organization, 54 J. ECON. HIST. 610, 623–626 (1994).
26
COOKE, supra note 12, at 85.
27
DAVIES, supra note 15, at 30; ROB MCQUEEN, A SOCIAL HISTORY OF COMPANY LAW: GREAT BRITAIN AND
THE AUSTRALIAN COLONIES 1854–1920 at 20 (2009).
28
DAVIES, supra note 15, at 29. See also COOKE, supra note 12, at 86–87.
29
See Baird’s Case, LR 5 Ch. App. at 734–35 (James L.J.).
30
Hallett v. Dowdall (1852) 18 QB 2, 50-51, 118 Eng. Rep. 1, 20 [hereinafter Hallet].
31
AUSTIN ET AL, supra note 16, at ¶ 2.120; Cooke, supra note 12, at 87.
32
Hallett, 118 Eng. Rep. 1, 21-22; Re. Waterloo Life Assurance Co. (Carr’s Case) (1864) 33 Beav. 542, 55 Eng.
Rep. 479, 481-482; Re. Family Endowment Soc’y (1870) L.R. 5 Ch. App. 118, 136-137; Re. European
Assurance Soc’y (Hort’s Case) (1875) 1 Ch. D. 307, 323-325.

5
promoters were able to secure the supreme advantage of attracting capital more easily to
finance their undertakings. 33 It gave capitalists an opportunity for investment and made
available trade capital that would not otherwise have been employed in trade.34 Nevertheless,
there was ambivalence towards the corporate form. Adam Smith for example had reservations
about joint stock companies on the basis that directors of such companies, being the managers
of money from others, could not be expected to watch over it with the same vigilance as
partners would watch over their own. 35 Negligence and profusion must therefore “always
prevail, more or less, in the management of the affairs of such a company.” 36 Joint stock
companies were less efficient than private individuals and could usually succeed only with
monopoly rights.37 Despite such ambivalence, the Joint Stock Companies Act was passed in
1844, marking the beginning of modern company law in England.38 The Act of 1844 came
about because the continued importance of joint stock companies and the concern over
dishonest promoters gave rise to a view that such entities had to be regulated.39
Nonetheless, limited liability was not a feature of the Act of 1844 and it did not arrive
easily. There continued to be strong reservations against any extension of limited liability and
this was why it had not been included in the 1844 Act.40 These reservations can be seen from
the 1854 report of the Royal Commission on Mercantile Laws appointed in 1853 which, by a
majority, opposed extending limited liability to joint stock companies.41 Dissenting views also
came from the commercial community. For example, the Manchester Chamber of Commerce
thought limited liability to be subversive of the high moral responsibility which was the
hallmark of the law of partnership.42 A Manchester manufacturer said that limited liability
“would become the refuge of the trading skulk; and, as a mask cover the degradation and moral
guilt of having recklessly gambled with the interests of traders; and then the stain which now
attaches to bankruptcy would cease to exist”. 43 In this we find the familiar concern over
corporate vehicles being used by unscrupulous promoters as an instrument of fraud or other
sharp practice, and the lessening of incentive for personal responsibility and vigilance. Yet one
wonders if some of the concern might not have been motivated by self-interest on the part of

33
8 WILLIAM SEARLE HOLDSWORTH, A HISTORY OF ENGLISH LAW 205 (3rd ed. 1925).
34
Id. at 213.
35
An early observation of what is today known as the ‘agency’ problem.
36
2 ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 326 (1869).
37
Id.
38
The Act provided inter alia for incorporation by registration thereby paving the way for incorporation to be
available widely, and disclosure of key information relating to the company which continues to be seen as an
important safeguard to third parties dealing with corporate vehicles.
39
MCQUEEN, supra note 27, at 44–46; COOKE, supra note 12, at 123; BISHOP CARLETON HUNT, THE
DEVELOPMENT OF THE BUSINESS CORPORATION IN ENGLAND 1800–1867 at 90-95 (1936); RON HARRIS,
INDUSTRIALIZING ENGLISH LAW: ENTREPRENEURSHIP AND BUSINESS ORGANIZATION, 1720-1844 at 281, 287
(2000).
40
HARRIS, supra note 39, at 282.
41
DAVIES, supra note 15, at 42.
42
COOKE, supra note 12, at 156–57.
43
Quoted in HUNT, supra note 39, at 117-18.

6
those who did not welcome the democratisation of a business vehicle that could lead to more
competition.44
It is of course evident that these concerns did not prevail.45 One reason that will be
familiar today was capital flight as money flowed overseas, particularly into joint stock
companies that offered limited liability.46 Allowing limited liability would potentially raise the
investment opportunities available domestically. This is an early illustration of how in some
areas the power of the marketplace can bring about greater legal convergence. Another was
“social amelioration”.47 Limited liability would allow the middle and working classes not to
be excluded from fair competition through the fear of personal bankruptcy. It would open up
more opportunities for them. It was also thought that the ability to involve a wider segment of
people in business might unleash creative energies and revitalise English industry that was in
danger of losing its edge and being overtaken by overseas capitalists. 48 Accordingly, the
Limited Liability Act of 1855 was passed. It was soon repealed but substantially re-enacted in
the Joint Stock Companies Act 1856.
It will be seen from this that the incorporated form, and limited liability, came about
in England because of the utility of a business organization that could effectively accumulate
capital for more productive use. 49 There is an economic purpose but more broadly the
corporation and limited liability are regarded as beneficial to society as a whole. 50 Their
purposes are as much social and political51 as they are economic. Ultimately, the corporation,
like other institutions, have to continue to justify their existence by demonstrating that whatever
their faults, they bring utility to society that is not easily substitutable. It follows therefore (or
at least is implied) that in principle incorporators, owners and managers of companies ought
not to expect the full benefits of incorporation if their conduct undermines faith in the
institution, and therefore its utility to society. The next part of this paper will discuss this further.
The experience of England is mirrored in other jurisdictions that over time adopted
liberal corporate laws to facilitate development. In the United States, as in England, a number
of alternatives to the corporate form were used from time to time. These included the limited
partnership, the business trust, the joint stock company and it was by no means certain that a
corporation was the best way to raise and manage money for enterprise.52 After the American

44
MCQUEEN, supra note 27, at 81-86.
45
Mahoney, supra note 22.
46
Id. at 99-100.
47
HUNT, supra note 39, at 120.
48
MCQUEEN, supra note 27, at 125.
49
This is not to suggest that other alternative business forms would not have been able to achieve such goals:
see HARRIS, supra note 39, at 291.
50
For example, it has been said that limited liability “clearly encouraged the flow of capital into new enterprise”:
see HERBERT HOVENKAMP, ENTERPRISE AND AMERICAN LAW: 1836-1937 at 54 (1991).
51
JOHN MICKLETHWAIT & ADRIAN WOOLDRIDGE, THE COMPANY: A SHORT HISTORY OF A REVOLUTIONARY
IDEA 53–54 (2003).
52
LAWRENCE M. FRIEDMAN, A HISTORY OF AMERICAN LAW 176–77 (1973).

7
Revolution, the English tradition that corporate powers were to be granted only in rare instances
was opposed by a strong and growing prejudice in favour of equality. This led almost
immediately to the enactment of general incorporation Acts for ecclesiastical, educational, and
literary corporations. It was also easier to obtain corporate charters from the new state
legislatures than it was in England, leading to a considerable extension of corporate enterprise
in the field of business before the end of the eighteenth century.53 The United States was 30
years ahead of English practice as charters were granted fairly frequently between 1800 and
1830, albeit with conditions and restraints placed on the corporate bodies.54 Special chartering,
however, smacked of privilege and set off a reform movement that sought to bring about equal
access to corporate chartering. States also began to compete for corporate charters in order to
increase taxes paid by corporations.55
In 1811, New York State became the first to pass a general incorporation statute for
businesses, although it was originally restricted to companies seeking to manufacture particular
items, such as anchors and linen goods.56 The types of businesses eligible to incorporate soon
included all forms of transportation and nearly all forms of manufacturing and financial
services as well. Other states followed the New York approach. The combined result of a more
liberal approach to charters and general incorporation statutes caused the corporation to
become crucial to the American economy by the last third of the nineteenth century. 57 It
provided an efficient and trouble free device to aggregate capital and manage it in business,
with limited liability and transferable shares. 58 The adoption of limited liability was an
important development which arose as a result of the pressures on the growing corporations of
the first half of the nineteenth century to raise the capital required to take advantage of the
emerging technology of the times, and was itself a matter of protracted political struggle.59
Taking two examples in Continental Europe, Sweden in 1848 issued a governmental
decree that recognised the legal position of the joint stock company. The coming of the railroad
with its necessity for a large accumulation of capital was the initial catalyst.60 In Germany, the
pressure to move towards a system of free incorporation became progressively irresistible in
the 19th century as the country faced the question of how to raise and regulate large capital

53
2 JOSEPH STANCLIFFE DAVIS, ESSAYS IN THE EARLIER HISTORY OF AMERICAN CORPORATIONS 7–8 (1917).
54
COOKE, supra note 12, at 134. See also JOHN STEELE GORDON, AN EMPIRE OF WEALTH – THE EPIC HISTORY
OF AMERICAN ECONOMIC POWER 229 (2004) (observing that between 1800 and 1860, the state of
Pennsylvania alone incorporated more than 2000 companies).
55
WILLIAM A. KLEIN ET AL, BUSINESS ORGANIZATION AND FINANCE: LEGAL AND ECONOMIC PRINCIPLES 114
(2010).
56
Id. at 229. See also FRIEDMAN, supra note 52, at 172.
57
GORDON, supra note 54, at 228-29; FRIEDMAN, supra note 52, at 177 (suggesting that the triumph of the
corporation as a business form over other business forms was due to almost random factors).
58
FRIEDMAN, supra note 52, at 178.
59
Phillip I. Blumberg, Accountability of Multinational Corporations: The Barriers Presented by Concepts of
the Corporate Juridical Entity, 24 HASTINGS INT’L & COMP. L. REV. 297, 301 (2001).
60
CHARLES P. KINDLEBERGER, A FINANCIAL HISTORY OF WESTERN EUROPE 204 (2006).

8
sums needed for major industrial and infrastructure projects. As with many other countries, the
coming of the railways was an important spur for this.61
Moving to Asia, the first company law in China was enacted by the Qing Dynasty in
1904. It established four types of companies, one of which was the company limited by shares.
To qualify as juridical persons with limited liability, all companies had to register with the
Ministry of Commerce with registration fees assessed as a percentage of capitalization.62 Prior
to 1904, there was little formal law associated with business enterprises. In part this was
because engaging in commerce did not attract high social prestige. Farmers and artisans
enjoyed higher social prestige, the former reflecting the importance of agricultural pursuits for
much of Chinese history. Business on the other hand was regarded as parasitic without creating
anything of value.63 Given the lack of formal law, many Chinese businesses were family affairs
and transactions were often entered into on the basis of trust. Private ordering rather than law
played a more important role. 64 The objectives of the 1904 law were to promote China’s
industrial development; to attain perceived Western standards of law so as to justify demands
for the abolition of the system of extraterritoriality that had been imposed on China since the
1840s; and the strengthening of the power of the central government. These broad aims would
inform revisions of Chinese Company Law over the next eight decades.65
After the People’s Republic of China was established in 1949, company law was
abolished. A process of collectivisation and nationalisation took place that only began to be
reversed after the death of Mao Zedong and the era of Deng Xiaoping. This led eventually to
the promulgation of the 1993 Company Law which took effect on 1 July 1994. Article 1 of that
Act stated that it was intended to meet inter alia the needs of establishing a modern enterprise
system, to maintain the socio-economic order, and to promote the development of the socialist
market economy.66 These stated objects illustrate the instrumentalist nature of corporate law
in China.
In fact, the process in Asia of creating a commercial law comparable to that found in
Western countries began earlier in Japan. The impetus was similar to China’s. Japan wanted to
end the legal extraterritoriality granted to foreign residents that had been imposed by the
“unequal treaties” that forced the opening up of the country to foreign trade. In addition, the
Meiji government felt that a modern commercial and corporate law system was necessary for

61
Peter Muchlinski, The Development of German Corporate Law Until 1990: An Historical Appraisal, 14
GERMAN L.J. 339, 345–46 (2013).
62
William C. Kirby, China Unincorporated: Company Law and Business Enterprise in Twentieth-Century
China, 45 J. ASIAN STUD. 43, 48 (1995).
63
FREDERICK W. MOTE, IMPERIAL CHINA: 900–1800 at 390–91 (1999).
64
See generally Kirby, supra note 62, at 44–46; Tan Cheng-Han, Private Ordering and the Chinese in
Nineteenth Century Straits Settlements, 11 ASIAN J. COMP. L. 27, 44-47 (2016).
65
Kirby, supra note 62, at 43–44.
66
WANG JIANGYU, COMPANY LAW IN CHINA – REGULATION OF BUSINESS ORGANIZATIONS IN A SOCIALIST
MARKET ECONOMY 5–7 (2014).

9
the evolution of modern corporations which were regarded as indispensable for nursing strong
economic growth. In turn this would allow the country to create a strong military to assure her
safety and independence.67
It will be clear from the foregoing that the development of corporate law in China (and
Japan) was driven significantly by socio-political objectives. As both countries adopted the
German civil law model, their corporate laws are heavily modelled after German corporate law
though American law has become increasingly influential. In many other parts of Asia that
were colonised such as Singapore, Western corporate law was introduced by colonial
governments and naturally mirrored the law in the colonising country.68

III. CONCEPTUAL FRAMEWORK UNDERLYING VEIL PIERCING

This brief historical outline reminds us that even though today we take separate personality and
limited liability for granted, neither came about naturally or easily. They were accepted
ultimately because of a hard-nosed assessment that their benefits outweighed the risks, the
latter of which was clear to most. Implicit in corporate legislation is a choice to tolerate these
risks for the greater good. Statements such as the following have been made in numerous US
cases69 and is true for many other jurisdictions as well:

The doctrine that a corporation is a legal entity existing separate and apart from the persons
composing it is a legal theory introduced for purposes of convenience and to subserve the ends
of justice…. It is clear that a corporation is in fact a collection of individuals, and that the idea
of a corporation as a legal entity or person apart from its members is a mere fiction of the law
introduced for convenience in conducting the business in this privileged way.

While this is the norm today, corporate legislation will often contain express exceptions to
separate personality or limited liability,70 and it is not unusual for other legislation to do so too
in specific circumstances.71 Such exceptions arise because of a policy choice that the benefits

67
Harald Baum & Eiji Takahashi, Commercial and Corporate Law in Japan: Legal and Economic
Developments After 1868, in HISTORY OF LAW IN JAPAN SINCE 1868 at 336-37 (Wilhelm Röhl ed. 2005).
68
For example, Singapore’s Companies Ordinance, 1940 (Act No. 49/1940) (Sing.) was based on England’s
Companies Act, 1929, 19 & 20 Geo. 5, c.23 (Eng.).
69
See e.g. William H Sanders v. Roselawn Memorial Gardens, Inc., 159 S.E.2d 784, 800 (W. Va. 1968)
[hereinafter Sanders]; TLIG Maintenance Services, Inc. v. Deann Fialkowski, 218 So. 3d 1271, 1282 (Ala.
Civ. App. 2016) [hereinafter TLIG Maintenance Services].
70
See e.g. Companies Act (Cap. 50, Rev. Ed. 2006) (Sing.), § 340(1) (imposing personal liability on a person
who was knowingly a party to a company carrying on business with the intent to defraud creditors of the
company, or of any other person, or for any fraudulent purpose).
71
See e.g. Residential Property Act (Cap. 249, Rev. Ed. 2009) (Sing.), § 2, defining a “Singapore company” is
generally one which is incorporated in Singapore, and additionally all its directors and members must be

10
of incorporation ought not to be available in full in such instances.
Given the existence of specific legislative carve outs, and the otherwise unqualified
nature of limited liability in most jurisdictions,72 it might be thought that any limits to corporate
personality or limited liability should be determined within such (limited) parameters. This has
not been the case. The courts have gone beyond exceptions found in legislation to ignore
corporate personality and impose liability on shareholders or directors of companies. When
this is done, it is often said that the courts are “piercing” or “lifting the corporate veil”, thereby
allowing them to take legal notice of the persons behind the company, usually the shareholders,
to whom personal liability may then be attached for obligations that prima facie ought to be the
company’s only.
What justifies such judicial intervention? In common law countries, the process of
statutory interpretation allows a court to determine the scope of a legislative provision not only
from the express language used, but also from what may fairly be implied from the express
terms of the legislation and the purpose behind it. As an English judge, Willes J, put it, the legal
meaning to be ascribed to a legislative provision is “whatever the language used necessarily or
even naturally implies”.73 In the well-known case of Salomon v. A. Salomon & Co. Ltd., which
established beyond doubt in England that the company was to be treated as a person separate
and distinct from its shareholders, including the principal shareholder and director, Lord
Watson observed:74

In a Court of Law or Equity, what the Legislature intended to be done or not to be done can
only be legitimately ascertained from that which it has chosen to enact, either in express words
or by reasonable and necessary implication.

Accordingly, separate personality cannot be extended to a point beyond its reason and policy,
and will be disregarded when this occurs.75 Separate corporate identity is conferred “to further
important underlying policies, such as the promotion of commerce and industrial growth” and
as such “may not be asserted for a purpose which does not further these objectives in order to
override other significant public interests which the state seeks to protect through legislation

Singapore citizens. Thus for the purpose of this legislation, the nationalities of non-Singaporean directors and
members are attributed to the company. This in turn determines whether the company falls within or outside
the legislative prohibitions.
72
China, which has a more general and open legislative exception that is found in Article 20 of the PRC
Company Law promulgated by the National People’s Congress, is an outlier, as we discuss at Part IV.D infra .
73
Chorlton v. Lings (1868) L.R. 4 C.P. 374 (Ct. Common Pleas) 387. See also Russian and English Bank v.
Baring Brothers, [1936] 1 A.C. 405 (H.L.) 427 (the House of Lords held that it was a necessary implication
of the relevant winding up provisions in the Companies Act that the dissolved foreign company was to be
wound up as if it had not been dissolved but had continued in existence).
74
Salomon v. A. Salomon & Co. Ltd., [1897] A.C. 22 (H.L.) 38.
75
Sanders 159 S.E.2d 784; TLIG Maintenance Services, 218 So. 3d 1271.

11
or regulation.”76 In other words, at common law the courts, in construing corporate legislation
as giving rise to entities with separate personality and shareholders with limited liability, have
arrived at the conclusion that it is implicit in such legislation that there are limits to this
separateness.77 These limits are ascertained by reference to what the court construes as the
legislative intent behind such legislation, namely to bring about positive social and economic
outcomes through an organizational framework that facilitates business transactions.
Using Germany as a civil law comparator, it would appear at first blush that there are
similarities with the common law approach. In Germany, when limited liability is disregarded
this is referred to as “Durchgriffshaftung” and relates to situations not governed expressly by
statutory or other legal rules in which an entity’s existence is disregarded and the owner is held
individually liable for the obligations of the company.78 The modern approach is to deem veil
piercing a problem of proper construction and application of statutes, and thus focus on the
applicable statute's legislative purpose to determine whether the separation between the equity
holders and the corporation prevails.79 However, notwithstanding this and as we shall see later,
the law in Germany relating to veil piercing has developed very differently from the other
jurisdictions discussed in this paper.

Given the importance of legislative policy in determining when piercing of the

corporate veil takes place, it is unsurprising that generally, in the jurisdictions discussed above,
the courts disregard the corporate personality very sparingly and there are few real instances of
piercing taking place.80 This is consistent with the fact that limited liability was eventually
settled upon by legislatures after decades or more of debate that fleshed out its advantages and
disadvantages. The separation of power between judiciaries and legislatures necessitates that
due respect be given to the policy choice made. In addition, the advantages of limited liability
are regarded as crucial to the development of mature market economies. These have been
discussed widely elsewhere and will not be repeated here.81 Courts also tend to be sensitive to
the need for certainty in matters of business. The importance attributed to certainty is certainly

76
Glazer v. Comm’n on Ethics for Public Employees, 431 So. 2d 752, 754 (La. 1983) [hereinafter Glazer].
77
Tan Cheng-Han, Veil Piercing: A Fresh Start, J. BUS. L. 20, 29 (2015).
78
Carsten Alting, Piercing the Corporate Veil in American and German Law – Liability of Individuals and
Entities: A Comparative View, 2 TULSA J. COMP. & INT’L L 187, 190, 197 (1994).
79
Bernd Singhof, Equity Holders’ Liability for Limited Liabilities Companies’ Unrecoverable Debts –
Reflections on Piercing the Corporate Veil under German Law, 22 LOY. L.A. INT’L & COMP. L. REV. 143,
156 (1999). See also Alting, supra note 78, at 198.
80
See e.g. Prest v. Petrodel Resources Ltd [2013] UKSC 34; [2013] 3 WLR 1 (Eng.) [hereinafter Prest]; Alting,
supra note 78, at 191. Although US courts affirm the exceptional nature of veil piercing, the courts there
appear more willing to pierce the corporate veil, courts in China appear even more willing to do so. This is
discussed at Part IV.D infra.
81
See e.g. Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV.
89, 93-107 (1985); Larry E. Ribstein, Limited Liability and Theories of the Corporation, 50 MD. L. REV. 80,
94-107 (1991).

12
part of the explanation why courts do not generally draw a distinction between voluntary
creditors who choose to contract with a company and involuntary creditors such as tort victims.
Considering that veil piercing occurs only in exceptional circumstances where the use
of the corporate vehicle is not consistent with the legislative purpose behind corporate
personality and limited liability, the courts in the jurisdictions surveyed above express a
remarkably similar rationale underlying veil piercing. In the United Kingdom (UK), Lord
Sumption, who delivered the leading judgement in Prest v. Petrodel Resources Ltd, said that
recognition of a limited power to pierce the corporate veil in carefully defined circumstances
is necessary if the law is not to be disarmed in the face of abuse.82 According to his Lordship,
the considerations found in the English cases reflect the broader principle that the corporate
veil may be pierced only to prevent the abuse of corporate legal personality.83 It has been
suggested that this approach by the UK Supreme Court is to be welcomed as it moves the focus
away from metaphors such as “sham” and “façade” to justify veil piercing, and which provide
virtually no guidance to future courts, to an approach that is based on policy.84
A court in Singapore, another common law jurisdiction, has framed the approach in
similar terms:85

Courts will, in exceptional cases, be willing to pierce the corporate veil to impose personal
liability on the company’s controllers. While there is as yet no single test to determine whether
the corporate veil should be pierced in any particular case, there are, in general, two
justifications for doing so at common law — first, where the evidence shows that the company
is not in fact a separate entity; and second, where the corporate form has been abused to further
an improper purpose.

Courts in the US have also invoked the idea of abuse as the underlying principle
justifying disregard of the corporate personality. In Glazer v. Commission on Ethics for Public
Employees it was said that a court may “pierce the corporate veil when the established norm of

82
Prest [2013] 3 WLR 1 [27].
83
Id. at [34]. See also VTB Capital Plc v Nutritek International Corp [2012] EWCA (Civ) 808, [2012] 2 C.L.C.
431, 460 where the Court of Appeal of England and Wales stated that the “relevant wrongdoing [for veil
piercing purposes] must be in the nature of an independent wrong that involves the fraudulent or dishonest
misuse of the corporate personality of the company for the purpose of concealing the true facts”; and Faiza
Ben Hashem v. Abdulhadi Ali Shayif [2008] EWHC 2380 (Fam), [2009] 1 F.L.R. 115 [163] where Munby J
said: “it is necessary to show both control of the company by the wrongdoer(s) and impropriety, that is,
(mis)use of the company by them as a device or façade to conceal their wrongdoing.”
84
Tan, supra note 77. See also Tan Cheng-Han, Piercing the Separate Personality of the Company: A Matter of
Policy?, 1999 SING. J. LEG. STUD. 531, 537-543 (1999) (foreshadowing Prest v Petrodel). Admittedly, Lord
Sumption saw the application of the doctrine in very narrow terms but in this regard he was not in the majority.
While all the Justices on the panel agreed that veil piercing was exceptional, they were not prepared to
foreclose possible situations where veil piercing may take place beyond the category of “evasion” cases that
Lord Sumption felt was the only true category where the corporate veil is lifted.
85
Tjong Very Sumito v. Chan Sing En [2012] SGHC 125 (Sing.) [67]; see also Simgood Pte Ltd v. MLC
Shipbuilding Sdn Bhd [2016] 1 Sing. L. Rep. 1129 [195]-[204].

13
corporateness has been so abused in conducting a business that the venture's status as a separate
entity has not been preserved.” 86 Corporate personality will be respected unless the “legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime”,87
acts that speak to abusive conduct. Although the Federal system means that there is no uniform
position on veil piercing, it is generally recognized that there must be an element of wrongdoing
for corporate personality to be disregarded.88
The importance of wrongdoing, broadly understood, given the association with abuse
of the corporate form, points to another reason why piercing is an exceptional remedy. Many
instances of wrongdoing by the controllers of companies in such capacity will result in potential
liability owed to such companies. While such liabilities may be academic while the entities are
operating under the control of such persons, the issue of veil piercing often arises where the
companies are insolvent and incapable of meeting their obligations or liabilities to third parties.
In such instances, insolvency regimes usually impose a collective framework within which
creditors of companies have their claims adjudicated. Insolvency laws typically frown on
creditors who obtain preferential treatment when the corporation is already insolvent.89 This is
economically efficient as it facilitates an orderly and fair distribution of an insolvent entity’s
assets to all creditors. When piercing takes place there is a danger that it may undermine the
collective insolvency process and place the claimant in a superior position compared to other
creditors of the insolvent corporation. Any successful claim against a corporate controller will
diminish the controller’s assets and increase the probability that the company will not be able
to obtain the full measure of any loss caused to it by the controller’s wrongful act. This in turn
diminishes the pool of assets available for distribution to creditors as a whole and places those
creditors who are able to act more quickly, usually those that are more sophisticated and with
greater financial resources of their own, in a superior position. The more liberal the approach
to veil piercing, the greater is the risk that the insolvency process may be undermined.
Another perspective favoring a narrow approach to veil piercing is its potential overlap
with other legal doctrines. In Prest v. Petrodel, Lord Sumption opined that the veil piercing
principle is a limited one because in almost every case where the test is satisfied, the facts will
in practice disclose a legal relationship between the company and its controller which will make
it unnecessary to pierce the veil. Where this was not necessary, it would not be appropriate to

86
Glazer, 431 So. 2d at 757.
87
United States v Milwaukee Refrigerator Transit Co., 142 F. 247, 255 (E.D.Wis. 1905).
88
This is discussed below.
89
See generally, ROY GOODE, PRINCIPLES OF CORPORATE INSOLVENCY 235-237 (4th Ed. 2011); Secured
creditors are a significant exception to this as security arrangements are generally regarded as falling outside
the general insolvency process. In common law jurisdictions such as England and Singapore, this is because
a secured creditor is regarded as having a proprietary interest in property taken as security, allowing such
secured creditor the right vis-à-vis such security to stand outside the liquidation process. See IAN FLETCHER,
THE LAW OF INSOLVENCY 747- 749 (5th Ed. 2017).

14
do so because there would be no public policy imperative to justify such a course.90 Another
member of the panel, Lord Neuberger, expressed the view that a number of cases that involved
veil piercing could and should have been decided on other grounds.91 Such a view of veil
piercing confines the doctrine to a residual category. Nevertheless, this is consistent with the
doctrine operating in exceptional circumstances. While a set of facts can raise overlapping legal
rules, the exceptional nature of veil piercing justifies its application to situations of abuse that
do not potentially fall within other areas of the law. Where it does, the underlying policies and
principles within such area should set the boundaries for personal liability. Veil piercing in such
circumstances gives rise to a risk that corporate law may overreach. The difficulty lies in
determining whether individual cases fall into gaps that corporate law should fill or if the lack
of any other more obvious remedy is because of the inherent inappropriateness of the claim.

An example of potential overreach may be found in cases where directors (or senior
management) have been found liable for a tort committed by, for instance, an employee of the
company on the basis that the tortious act had been procured, facilitated or directed by the said
directors. In many common law countries, it has been acknowledged that this raises a difficult
question of policy. On the one hand, directors do not act personally in the discharge of their
directorial responsibilities. There are good reasons for this including the need for the benefits
of corporate personality to be extended to corporate officers lest it gives rise to disincentives
to manage companies. Yet, there is also the principle that a person should answer for such
person’s tortious acts.92 In Australia, judicial statements have been made that this “is a complex
and burgeoning field of law” 93 and has led to “a confusing picture on an issue that has
persistently vexed the common law”.94
In Canada and Singapore, there is authority to support the proposition that corporate
personality is disregarded where a director is found liable for procuring a tortious act by another
person. Canadian courts have made it clear that a particular mental state is required before
authorisation, direction or procurement sufficient for secondary tortious liability is made out.
In Mentmore Manufacturing Co v. National Merchandise Manufacturing Co, Le Dain J
expressed the view:95

But in my opinion there must be circumstances from which it is reasonable to conclude that the
purpose of the director or officer was not the direction of the manufacturing and selling activity

90
Prest [2013] 3 WLR 1 [21].
91
Prest [2013] 3 WLR 1 [34].
92
Mentmore Manufacturing Co v. National Merchandise Manufacturing Co (1978) 89 DLR (3d) 195 para. 23
[hereinafter Mentmore Manufacturing].
93
G M (North Melbourne) Holdings Pty Ltd v. Young Kelly Pty Ltd [1986] FCA 164 para. 58 (Austl.).
94
Root Quality Pty Ltd v Root Control Pty Ltd [2000] FCA 980 para. 115 (Austl.).
95
Mentmore Manufacturing, (1978) 89 DLR (3d) 195 para. 28.

15
 of the company in the ordinary course of his relationship to it but the deliberate, wilful and
knowing pursuit of a course of conduct that was likely to constitute infringement or reflected
an indifference to the risk of it.

This approach has been accepted in a number of other Canadian decisions.96 In Halford v. Seed
Hawk Inc 97 Pelletier J said that the principle underlying the approach in Mentmore
Manufacturing was that the courts would not allow a corporation to be used as an instrument
of fraud. Personal liability attaches to a director where such behaviour is tortious, or when the
corporation is used as a cloak for the personal activities of the director.98

This is the language of veil piercing. Under Canadian law, the courts will disregard the
separate legal personality of a company where it is completely dominated and controlled and
being used as a shield for fraudulent or improper conduct. The conduct in question must be
akin to fraud.99 Indeed the similarity between secondary liability for procuring a tort and veil
piercing under Canadian law can be seen from the following statement:100

The question of whether the appellant, as an officer and director of ACPI and ACL, could be
found to be personally responsible for the tort committed by the corporations — had this
question been raised on the pleadings — would require evidence to support a finding that the
appellant exercised clear domination and control over the corporations in directing the wrongful
things to be done, and that the conduct he engaged in was akin to fraud, deceit, dishonesty or
want of authority and constituted a tort in itself.

The above statement was made in the context of piercing the corporate veil but the reference
to “directing” wrongful acts is similar to the imposition of secondary liability as a joint
tortfeasor.
In Singapore, the link between veil piercing and secondary liability in tort has been
more explicit. In TV Media Pte Ltd v. De Cruz Andrea Heidi,101 Singapore’s apex court, the

96
See e.g. Steinhart v. Moledina, (2005) 37 C.P.R. 4th 443 (Can. Ont. Sup. Ct. J.) para. 23; Dimplex North
America Ltd v Globaltec Distributors Ltd, 2005 FC 298 (2005), 137 A.C.W.S. 3d 716 (Can. Fed. Ct.) para.
13; Cinar Corp v. Robinson 2013 SCC 73, [2013] 3 S.C.R. 1168 (Can. Sup. Ct.) para. 60; XY, LLC v.
Canadian Topsires Selection Inc., 2016 BCSC 1095 (Can. B.C. S.C.) para. 231.
97
Halford v. Seed Hawk Inc. 2004 FC 455, (2004) 31 C.P.R. 4th 434 (Can. Fed. Ct.).
98
Id. [330] – [331].
99
See e.g. Transamerica Life Insurance Co. of Canada v. Canada Life Assurance Co. (1996) 28 O.R. 3d 423
(Can. Ont. Gen. Div) [22]–[23]; A-C-H International Inc v. Royal Bank of Canada (2005) 254 D.L.R. 4th 327
(Can. Ont. Sup. Ct. J.) [29]; Burke Estate v Royal Sun Alliance Insurance Co of Canada, 2011 NBCA 98, 381
N.B.R. 2d 81 (Can. N.B. C.A.) para. 60.
100
A-C-H International Inc (2005) 254 D.L.R. 4th 327 para. 29.
101
TV Media Pte Ltd v De Cruz Andrea Heidi, [2004] SGCA 29, [2004] 3 Sing. L. Rep. (R.) 543 [hereinafter TV
Media] [118].

16
Court of Appeal held that a pleading that the defendant had authorised, directed and/or procured
acts that amounted to corporate negligence was essentially a claim asking the court to lift the
corporate veil. The court also agreed with the trial judge that the veil should be pierced as the
defendant director had authorised, directed or procured acts of negligence.102 In particular, the
court said:

After all, a court can only find a director personally liable for authorising, directing or procuring
the company’s tort if it has first lifted the company’s corporate veil which otherwise protects a
director from being found liable.

While such an approach provides a basis to explain why personal liability is imposed,
it can be questioned if this is ideal. It may be better if this issue is resolved within the framework
of tort law so that it can consider the relevant policies that should underpin the imposition of
secondary tortious liability, an issue that goes beyond corporate entities. In English tort law,
where a person “authorises, procures or instigates the commission of a tort” by another, the
former becomes a joint tortfeasor who is equally liable with the primary tortfeasor.103 This is
not to suggest that the understanding of what amounts to authorization or procurement in the
corporate and non-corporate context should necessarily be the same. Rather it is to say that tort
law, which constantly has to assess the appropriate balance to be struck in society before an act
amounts to civil wrongdoing giving rise to damages or other relief, may be more suited to
determining this issue than corporate law. The contours of liability for civil wrongs are the
essence of tort law. Accordingly, the law of torts and not the doctrine of veil piercing may
provide a superior framework to determine the circumstances under which a corporate officer
should be responsible for the tortious act of a subordinate.
Similarly, where a director has caused a company to commit a tort and this leads to
the insolvency of the corporation and therefore inadequate compensation for the tort victims
who are involuntary creditors, there should not be recourse to veil piercing. The real question
is whether the circumstances justify imposing a duty on the director to the tort victims, or if the
director has breached a duty of care to the company that entitles the liquidator to bring a claim
on behalf of the corporation against the director. These are policy issues at the heart of tort law
which corporate law lacks the analytical tools for. Engaging in veil piercing risks creating a
messy and uncertain shortcut.

102
TV Media [2004] 3 Sing. L. Rep. (R.) 543 [132]-[140] The more traditional view is that both are separate
doctrines and the court’s approach in the earlier case of Gabriel Peter & Partners v. Wee Chong Jin, [1997]
SGCA 53, [1997] 3 Sing. L. Rep. (R.) 649 [31]-[35] is consistent with this.
103
DAVID HOWARTH ET AL., HEPPLE AND MATTHEWS’ TORT LAW 1121 (7th ed. 2015).

17
 IV. VEIL PIERCING – A COMPARATIVE ANALYSIS

Having outlined the conceptual framework behind veil piercing, we now analyse from
a comparative perspective the judicial reasoning in veil piercing cases and the specific factors
that courts take into consideration when such issue arises.

A. England and Singapore

Both these jurisdictions have broadly similar approaches and can usefully be discussed
together. It is a positive development in both jurisdictions that the courts are beginning to move
away from the use of metaphors such as “sham” and “façade” as the basis on which to disregard
corporate personality. Increasingly, the courts recognise that the real issue is whether there has
been abuse or misuse of the corporate form.
One significant uncertainty in England relates to the scope of the veil piercing doctrine.
While it is undoubtedly an exceptional doctrine, Lord Sumption would limit it only to a
category of “evasion” cases,104 namely those where a company has been interposed to frustrate
the enforcement of an independent legal right that exists against the controller of the
company. 105 The majority of the judges in Prest v. Petrodel left the matter open, and it is
suggested that in principle it is difficult to see why other instances of veil piercing should be
foreclosed if the underlying basis is abuse of the corporate form,106 subject to the caveat that
no other more appropriate legal principles exist to deal with what is said to amount to abuse.
Human ingenuity is such that we should be wary of bright-line rules.
Although Lord Sumption also spoke of a second category of “concealment” cases, he
did not consider this to involve veil piercing at all. This was because the interposition of a
company to conceal the identity of the real actors will not stop a court from identifying who
the real parties to the transaction or act are if this is relevant. Here there is no lifting of the
corporate veil as all the court is doing is looking behind the corporate structure to see what it
is concealing.107 This is a well-known principle that goes beyond veil piercing. As Diplock LJ
said in Snook v. London and West Riding Investments Ltd when referring to a sham transaction,
it means acts done or documents executed by the parties that are intended to give the appearance
of legal rights and obligations being created that are different from the actual legal position
between the parties.108 So too a company may be used to create the appearance that it is a party

104
Prest [2013] 3 WLR 1 [35].
105
An example of which can be found in Gilford Motor Co Ltd v. Horne, [1933] Ch 935 (Eng. C.A.) [hereinafter
Gilford Motor]. See also Winland Enterprises Group Inc v WEX Pharmaceuticals Inc, CACV 154/2011 (C.A.
Mar. 29, 2012), [2012] HKCA 155, [2012] 5 H.K.C. 494 [50]–[51].
106
Tan, supra note 77, at 31–32.
107
Prest [2013] 3 WLR 1 [28].
108
Snook v. London and West Riding Investments Ltd [1967] 2 QB 786, 802 (Eng. C.A.).

18
to a transaction so as to mask who the real parties are.109 Although this may not involve true
veil piercing, the effect is very similar and it is also unclear to what extent the other judges
agreed with this view. It has traditionally been considered an aspect of veil piercing and there
are jurisdictions that treat it as such.110 This category of cases will therefore be discussed in
this paper.
Although the Singapore High Court has in general endorsed the approach in Prest v.
Petrodel that abuse of corporate personality is what underlies veil piercing,111 the Singapore
Court of Appeal had previously accepted an “alter ego” ground as a distinct basis to lift the
corporate veil. This ground is premised on the company carrying on the business of its
controller. 112 This may arise because the company was the agent or nominee of the
controller.113 The former basis is clearly incorrect. If a company is an agent for another person,
such other person will generally be personally liable because of the law of agency and not
because of any disregard of corporate personality. Indeed for an agent to bind its principal, the
agent must be a distinct person in the agent’s own right.
Leaving aside cases where there is an agency relationship, in the case of Alwie
Handoyo v Tjong Very Sumito114 the Court of Appeal accepted that the appellant, Alwie, was
the alter ego of a company known as OAFL. Accordingly OAFL’s corporate veil should be
pierced. This was because payments made pursuant to a sale and purchase agreement to
OAFL’s Coutts account had in fact been beneficially received by Alwie who admitted that this
account had been used interchangeably for his other personal purposes. He treated the Coutts
account as if it was his personal bank account, an example of commingling. In Alwie’s view,
he was authorized and entitled to receive money paid under the sale and purchase agreement.115
In addition, Alwie also actively procured a payment due to OAFL into his personal bank
account.116
Given the facts, it is suggested that this is what Lord Sumption would have regarded
as a case involving concealment. The real actor was Alwie and OAFL was merely a convenient
vehicle for him to structure a transaction to which he was the true protagonist. Other examples
may be found in the cases. In Re FG Films Ltd,117 the court found that the film in question,

109
As in Adams v. Cape Industries Plc [1990] 2 WLR 657 (HL) in relation to AMC which the court held was a
mere corporate name and had no real role in the transactions.
110
For example, see the discussion below of cases involving commingling.
111
Manuchar Steel Hong Kong Ltd v. Star Pacific Line Pte Ltd [2014] SGHC 181, [2014] 4 Sing. L. Rep. 832
[95]-[96]; Simgood [2016] 1 Sing. L. Rep. 1129 [198]-[199]; Max Master Holdings Ltd v. Taufik Surya
Dharma [2016] SGHC 147 [136]. See also Tjong [2012] SGHC 125 [67], which was decided before Prest v
Petrodel.
112
Alwie Handoyo v. Tjong Very Sumito [2013] SGCA 44, [2013] 4 Sing. L. Rep. 308 [96]; NEC Asia Pte Ltd.
v. Picket & Rail Asia Pacific Pte Ltd. [2010] SGHC 359, [2011] 2 Sing L. Rep. 565 [31].
113
NEC Asia Pte Ltd [2011] 2 Sing L. Rep. 565 [31].
114
Alwie [2013] 4 Sing. L. Rep. 308 [96] – [100].
115
Tjong [2012] SGHC 125 [70]; Alwie [2013] SGCA 44 [98].
116
Alwie [2013] 4 Sing. L. Rep. 308 [99].
117
Re FG Films Ltd [1953] 1 WLR 483 (Eng. Ch. Div.).

19
which was the subject of an application to be classified as a British film, could not be so
classified for the purposes of the Cinematograph Films Act 1938. The applicant company had
a share capital of only £100 and it could not be said that this “insignificant company” undertook
in any real sense the making of the film, which had cost at least £80,000. On this basis it was
held that the applicant company was merely the nominee or agent of the American company
that had financed the making of the film. Although the decision was based on agency, it could
also have been justified on the concealment principle as the learned judge considered that the
applicant company’s involvement was “purely colourable”. 118 Another example is Gencor
ACP v. Dalby 119 where a company had no sales force, technical team or other employees
capable of carrying on any business. Its only function was to make and receive payments. On
this basis the controller of the company was found to be the alter ego of that company.

B. United States

It is said that generally, a plaintiff seeking to pierce the corporate veil must establish
“(a) the ‘unity’ of the shareholder and the corporation and (b) an unjust or inequitable outcome
if the shareholder is not held liable.”120 In establishing the unity part of the test, courts will
look at factors such as “a failure to observe corporate formalities, a commingling of individual
and corporate assets, the absence of separate offices, and treatment of the corporation as a mere
shell without employees or assets.” The unjust outcome aspect is more difficult to specify but
one common example would be a shareholder stripping essential assets from the corporation
by dividends or excessive salaries or other payments for services. An even more uncertain basis
involves companies that were undercapitalized at the outset so that it could not pay its
foreseeable debts.121
Although corporate law in the US is based primarily on state law, virtually all state
jurisdictions in the US subscribe to one of the two traditional formulations of veil piercing
jurisprudence. These are the three factor “instrumentality doctrine” and the “alter ego”
doctrine.122 The instrumentality doctrine was outlined in Lowendahl v Baltimore & O. R. Co.123
First, it requires more than control of the corporate entity. Liability must depend on “complete
domination, not only of finances, but of policy and business practice in respect to the
transaction attacked so that the corporate entity as to this transaction had at the time no separate
mind, will or existence of its own”. Second, such control must have been used by the defendant
“to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty,

118
Id. at 486.
119
Gencor ACP v. Dalby [2000] EWHC 1560 (Ch), [2000] All Eng. Rep. (D) 1067.
120
KLEIN ET AL., supra note 55, at 148.
121
Id.
122
Blumberg, supra note 59, at 304.
123
Lowendahl v. Baltimore & O. R. Co., 287 N.Y.S. 62, 76 (N.Y. App. Div.), aff’d 6 N.E.2d 56 (N.Y. 1936).

20
or a dishonest and unjust act in contravention of the plaintiff’s legal rights”. Finally, the control
and breach of duty must have caused the injury or loss complained of.
In RRX Indus, Inc. v. Lab-Con, Inc, 124 the court stated that the alter ego doctrine
applies where “(1) such a unity of interest and ownership exists that the personalities of the
corporation and individual are no longer separate, and (2) an inequitable result will follow if
the acts are treated as those of the corporation alone.” Although these appear to be separate
tests, it is difficult to see any real difference between them. At their essence, they both require
some form of wrongdoing that has arisen as a result of the control of another person or persons,
the extent of which meant that the corporation was unable to function as an entity in its own
right. The domination was used to support a corporate fiction and the entity was organized for
fraudulent or illegal purposes. 125 Indeed, in Wm. Passalacqua Builders, Inc v. Resnick
Developers South, Inc,126 the court expressed the view that the instrumentality and alter ego
doctrines are “indistinguishable, do not lead to different results, and should be treated as
interchangeable”.
It has been mentioned earlier that of the jurisdictions considered in this paper, the
US(apart from perhaps China) seems to have a more liberal approach in practice to veil piercing.
Although courts often say that the corporate form will be disregarded reluctantly or
exceptionally, the cases in the United States appear to take into consideration a wider range of
matters compared to other common law courts in England, Singapore, Australia, Hong Kong
or New Zealand. One reason for this may be that the approach in the United States is more
explicitly policy-based. Thus in Wm. Passalacqua Builders, Inc v. Resnick Developers South,
Inc, the court remarked that ultimately it had to be decided whether “the policy behind the
presumption of corporate independence and limited shareholder liability—encouragement of
business development—is outweighed by the policy justifying disregarding the corporate
form—the need to protect those who deal with the corporation.”127 US courts appear to place
more emphasis on the need for persons dealing with corporations to be protected while the
emphasis on caveat emptor in many other common law jurisdictions seems to be stronger.
A second reason may be the importance of domination and control in the American
jurisprudence. While many cases say that it is insufficient in itself, it is a central element of veil
piercing in US cases 128 while receiving relatively little weight in the other common law
jurisdictions mentioned previously. Of the two elements of wrongdoing and control/dominance,

124
RRX Indus, Inc. v. Lab-Con, Inc, 772 F.2d 543, 545 (9th Cir. 1985).
125
Sabine Towing & Transportation Co, Inc v. Merit Ventures, Inc, 575 F.Supp. 1442, 1446 (E.D. Tex. 1983).
126
Wm. Passalacqua Builders, Inc v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir. 1991)
[hereinafter Wm. Passalacqua Builders Case].
127
Id. at 139.
128
In Craig v. Lake Asbestos of Quebec, Ltd., 843 F.2d 145, 150 (3d Cir. 1988) the court opined that only after
there has been a finding of dominance does one reach the fraud or injustice issue. In Morris v. New York State
Department of Taxation and Finance, 623 N.E.2d 1157, 1161 (N.Y. 1993), it was said that “complete
domination of the corporation is the key to piercing the corporate veil” though establishing a wrongful or
unjust act towards the plaintiff was also necessary.

21
one could take the view that the presence of wrongdoing is significantly more important from
a practical standpoint; where a corporation has been used to achieve a purpose that is regarded
as abusive, it is hard to see a court finding that this has not been brought about in circumstances
where the corporation has been so dominated as to justify veil piercing. In jurisdictions such
as England and Singapore, the issue of wrongdoing (and therefore what constitutes sufficient
wrongdoing) is the focus. Where the relevant abuse has been established, the inquiry then turns
to the person or persons responsible for bringing about the abusive conduct in order to
determine the party against whom liability should be attributed. The American approach on the
other hand places significant weight on formalistic requirements as indicators of control and
dominance.
In keeping with control and dominance occupying a more central place in the US in
determining whether it is appropriate to ignore corporate personality, the courts have set out a
number of factors that would tend to show that the defendant was a dominated corporation,
such as: 129
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate
existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like,
(2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for
personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and
personnel, (5) common office space, address and telephone numbers of corporate entities, (6)
the amount of business discretion displayed by the allegedly dominated corporation, (7)
whether the related corporations deal with the dominated corporation at arms length, (8)
whether the corporations are treated as independent profit centers, (9) the payment or guarantee
of debts of the dominated corporation by other corporations in the group, and (10) whether the
corporation in question had property that was used by other of the corporations as if it were its
own.
The centrality of dominance and control inclines courts in the United States to see these
as being undesirable in themselves and, it is suggested, predisposes them to have a more
expansive view of wrongdoing compared to courts from other common law jurisdictions.130
There almost seems some inevitability in imposing liability when the initial conclusion is that
a shareholder/parent has utterly dominated the subsidiary. This is demonstrated by the “identity”
doctrine which is discussed in the next paragraph. Taken as a whole, there is a danger of the
doctrine being over and under inclusive. In relation to the latter, as the elements for veil piercing
are conjunctive, scrupulous adherence to formality will go a long way towards reducing the

129
Wm. Passalacqua Builders Case, 933 F.2d at 139. See also PHILLIP I. BLUMBERG, THE LAW OF CORPORATE
GROUPS – TORT, CONTRACT, AND OTHER COMMON LAW PROBLEMS IN THE SUBSTANTIVE LAW OF PARENT
AND SUBSIDIARY CORPORATIONS 137–40 (1987).
130
See also KAREN VANDEKERCKHOVE, PIERCING THE CORPORATE VEIL: A TRANSNATIONAL APPROACH 81
(2007).

22
risk of veil piercing.131 Conversely, relatively unsophisticated shareholders or businesses that
have not been properly advised are at greater risk of being subject to the doctrine.
Third, aside from the “instrumentality” and “alter ego” doctrines, reference is also
sometimes made to “agency”,132 or to a person using “control of the corporation to further his
own rather than the corporation's business”, with the consequence that the corporation was only
a “dummy”133 or “shell”.134 Where piercing takes place in these circumstances, the existence
of wrongdoing does not appear to be crucial as this category seems to be distinct from the two
earlier doctrines, even if at times it is conflated with them.135 It is perhaps best described as the
“identity” doctrine which has been criticised as being “such a diffuse and relatively useless
approach that it does not deserve extended discussion.”136 Certainly agency, properly speaking,
ought to be distinct from veil piercing.137 Where the law finds that an agency relationship has
arisen, it means that the agent is a distinct person from the principal. Although the principal is
bound by the agent’s acts, this is because the principal has authorized the agent to act in a
certain manner and the agent has done so in accordance with the principal’s instructions.138
Aside from agency, where a corporation is merely a “dummy” or “shell”, this could include
situations similar to the “concealment” principle that has been recognised in England where
the real party to a transaction is not the corporation but some other person. 139 The

131
At least in theory. As a practical matter, where a court is of the view that the corporate vehicle has been used
in an abusive manner, it would in all likelihood strive to find the necessary dominance and control, which
begs the question of whether control and dominance should occupy such a central place in the judicial
reasoning. Certainly the conjunctive nature of the elements is unusual by the standards of the other
jurisdictions discussed in this paper as it suggests that control or wrongdoing simpliciter cannot as a matter
of principle ever give rise to piercing.
132
Walkovszky v. Carlton, 223 N.E.2d 6, 7–8 (N.Y. 1966).
133
Id. at 8. The concept of agency has also been invoked in this context, see e.g. Berkey v. Third Ave Ry. Co,
155 N.E. 58, 61 (N.Y. 1926); Port Chester Elec. Constr. Corp. v. Atlas, 40 N.Y.2d 652, 657 (1976); Wm.
Passalacqua Builders Case, 933 F.2d at 139.
134
Wm. Passalacqua Builders Case, 933 F.2d at 138.
135
See e.g, Wm. Passalacqua Builders Case, 933 F.2d 131; Fletcher v Atex, Inc, 68 F.3d 1451 (2d Cir. 1995).
136
Blumberg, supra note 59, at 122.
137
See e.g. Lowendahl, 287 N.Y.S. at 74–5, which also noted that “agency” in this context was not being used
in its technical legal sense.
138
RESTATEMENT OF THE LAW (THIRD) OF AGENCY §1.01 (AM. LAW INST. 2006).
139
Given the vague nature of this doctrine, some cases have regarded it as interchangeable with the other veil
piercing theories, see e.g. Wm. Passalacqua Builders Case, 933 F.2d 131 (disregard of the corporate form
sufficient to pierce the corporate veil); Fletcher, 68 F.3d 1451 (where it was stated that fraud was not
necessary under the “alter ego” doctrine though there must be an overall element of injustice or unfairness
which are somewhat vague concepts; this was not followed in Walton Construction Co, LLC v. Corus Bank,
N.D.Fla., July 21, 2011 stating that “fraud or similar injustice” must be demonstrated); Wausau Business
Insurance Co. v. Turner Construction Co., 141 F.Supp.2d 412 (S.D.N.Y. 2001) (adopting the approach in Wm.
Passalacqua Builders Case, 933 F.2d 131); In re MBM Entertainment, LLC, 531 B.R. 363 (S.D.N.Y. Br.
2015) (also following Wm. Passalacqua Builders Case, 933 F.2d 131). Although some cases that apply the
“instrumentality” and “alter ego” doctrines do so in the absence of proof of inequitable conduct, many cases
do not, see Blumberg, supra note 59, at 117-24. It is suggested that proof of wrongdoing should be a critical
element. In countries such as England and Singapore where small companies predominate, even what is
referred to as “one-man” companies, over-reliance on concepts of dominance and control will likely lead to
corporate personality being potentially ignored in a very large number of companies. English and Singapore

23
understanding in the United States goes beyond this as some courts simply ask if the company
is merely a conduit for the shareholder/parent, or exists simply as a mere tool, front or personal
instrumentality.140
Fourth, some cases of veil piercing have arrived at the right conclusion in terms of
liability, but the reasoning may have been better justified on some basis other than veil piercing.
Where, for example, representations have been made by an appropriate officer of the parent
company that the parent was the proper and responsible party the plaintiff was dealing with,
and the plaintiff reasonably placed reliance on this, either an estoppel against the parent would
arise, or a contract may have come into existence between the parent and the plaintiff on the
objective theory of contract formation. There was no need to resort to veil piercing.141 As
mentioned earlier in a different context, engaging in veil piercing risks creating a messy and
uncertain shortcut. Indeed, an alternative approach was used in McFerren v Universal Coatings,
Inc.142
Where proof of wrongdoing is unnecessary for veil piercing (wrongly, it is submitted),
or where an expansive notion of wrongdoing is applied because the level of control or
identification is regarded as excessive, it is difficult to resist the notion that the doctrines are a
proxy for what is really taking place, namely that the real basis for veil piercing in such cases
is what courts regard as extremely poor corporate governance given the failure to sufficiently
distinguish the company’s activities from its parent/owner. Some examples will illustrate this.
In Gorill v Icelandair/Flugleider143 the corporate veil was pierced on the “instrumentality”
theory. The court was of the view that the element of domination and control was made out. In
relation to the second element, the subsidiary’s wrongful termination of employment was a
sufficient “wrong” for the doctrine to be made out.144 With respect, this seems to go too far.
Wrongful termination of employment is a breach of contract. Unless there is something special
about employment contracts, to find that a breach of contract is a sufficient wrong that can lead
to veil piercing suggests that a wide variety of legal wrongs are in themselves sufficient for
such purpose. Given that a successful claim against a corporate defendant is a pre-requisite for
veil piercing, it is difficult to see how this element will not be made out. On such a liberal view
of “wrong”, any real limit on veil piercing will amount to little more than the element of
domination/control.

courts have therefore reiterated that control and dominance are in themselves unimportant, see e.g. Adams
[1990] 2 WLR 657; Public Prosecutor v. Lew Syn Pau [2006] SGHC 146, [2006] 4 Sing. L. Rep. (R) 210.
140
Harris v. Wagshal, 343 A.2d 283, 287 (D.C. Ct. App. 1975); International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America v. Cardwell Manufacturing Co, Inc, 416 F.Supp
1267, 1286 (D. Kan. 1976); Miles v. American Telephone & Telegraph Co., 703 F.2d 193, 195 (5th Cir. 1983);
Vuitch v. Furr, 482 A.2d 811 (D.C. Ct. App. 1984).
141
As was the case in Morgan Bros, Inc. v Haskell Corp., 604 P.2d. 1294 (Wash. Ct. App. 1979).
142
McFerren v Universal Coatings, Inc., 430 So. 2d 350 (La. 1983).
143
Gorill v Icelandair/Flugleider, 761 F.2d 847 (2d Cir. 1985).
144
Id. at 853.

24
 Carte Blanche (Singapore) Pte Ltd v. Diners Club International, Inc 145 provides
another example of a liberal approach to the understanding of wrongdoing in veil piercing. A
subsidiary entered into a franchise agreement with the plaintiff company. As a result of a
corporate reorganization, the subsidiary transferred its operations to its parent such that by the
end of 1983, it had no separate offices, officers, books, or bank accounts. The plaintiff's
franchise was serviced solely by employees of the parent company. Subsequently, a dispute
arose over certain provisions of the franchise agreement and the chairman of the subsidiary,
who was also chairman of the parent, gave notice of default to the plaintiff. The notice indicated
the chairman’s title as chairman of the parent company and not the subsidiary. The parties
proceeded to arbitration and it was found that the subsidiary was in breach of the franchise
agreement when it withheld services from the plaintiff. As the plaintiff was unable to collect
damages from the subsidiary, it attempted to do so from the parent.
The court held that this was an appropriate case for the corporate veil to be pierced. It
was accepted that the subsidiary acted as a separate corporation from its organization from
1972 until mid-1981. The question was whether it did so in 1984 when the franchise agreement
was breached or whether its actions were then dominated and controlled by its parent. It was
noted that at the time of the breach in 1984: (1) the subsidiary had observed no corporate
formalities for at least two years; (2) it kept no corporate records or minutes and had no officers
or directors elected in accordance with its by-laws; (3) it had no assets, and its initial
capitalization of $10,000 was insignificant when compared to the more than $7,000,000 in
loans that it received from group companies to finance its business activity; (4) it had no
separate offices or letterhead; (5) it had no paid employees or a functioning board of directors;
(6) all of its revenues were put directly into the parent’s bank account, which paid all of its
bills; (7) services provided to the plaintiff from 1983 came from full-time employees of the
parent; (8) it’s revenues and marketing reports were not recorded independently, but were
treated as part of the parent’s revenues and statistics; and (9) the chairman was the only person
who functioned on behalf of the subsidiary and he was also chairman of the parent’s board. He
was paid no salary by the subsidiary and occasionally acted not in the name of the subsidiary
but in the name of the parent.
While the preceding facts indicate a failure to properly segregate the activities of group
companies, it is difficult to see any wrongdoing aside from the breach of the franchise
agreement.146 The risk of breaches of contract are inherent in any contractual relationship and
should be the subject of a specific bargain if a contracting party wishes to extract greater
security from a parent company or other shareholder. In addition, as American law recognizes

145
Carte Blanche (Singapore) Pte Ltd. v. Diners Club International, Inc., 2 F.3d 24 (2d Cir. 1993) [hereinafter
Carte Blanche Case].
146
It is possible that because the court expressed the test for veil piercing using the disjunctive “or” for the
elements of control and wrongdoing, rather than the conjunctive “and” which New York courts have since
endorsed (see Cary Oil Co, Inc v MG Refining & Marketing, Inc, 230 F.Supp.2d 439 (2002)), the court in
Carte Blanche may have arrived at its decision purely on the basis of control.

25
the tort of inducing a breach of contract, it might seem more appropriate for such wrongs to be
determined within this framework which scope is shaped by policies relevant to such liability.
From a policy perspective, the decision is also difficult to justify as providing an optimal
measure of protection for those who deal with corporations. It would seem from the judgment
that if the breach had taken place before mid-1981, no veil piercing should take place. Was the
plaintiff in any way materially prejudiced after such date?147 It is difficult to see how it was. It
does not appear that the subsidiary’s financial position was made any worse after this date.
While its capitalization was low, there is nothing wrong with financing a business from loans
and a substantial sum was advanced to it for its business. Prima facie, it would appear that such
loan was unrecoverable with the consequence that the parent company also made a substantial
loss. The other factors listed by the court are failures relating to proper formalities reflecting
poor governance but are of marginal relevance upon closer scrutiny.148 The business of the
subsidiary was almost moribund given the existence of only one remaining franchisee, the
plaintiff. For the subsidiary to have continued operations on this basis might have led to a
greater drain on its remaining financial resources (if any) that could have led to its winding up
and consequently brought the franchise agreement to an end in any event. Carte Blanche is a
good example of the potentially distorting effects when the element of control/dominance sits
at the heart of the test for veil piercing. It gives rise to the danger that it can be applied in a
formulaic manner without regard to the proper context of the case.149
Having said this, the outcome itself may have been correct insofar as the subsidiary’s
operations and assets had been absorbed into the parent company.150 This meant that when the

147
In Abraham v Lake Forest, Inc, 377 So.2d 465 (La. Ct. App. 1980) the subsidiary was undercapitalized, there
was commingling of funds, and almost all the business of the subsidiary was accomplished by unanimous
consent of the shareholders. Nevertheless, no piercing took place as the plaintiff was a sophisticated real
estate entrepreneur who exercised business judgment when contracting with the subsidiary and was not
relying on the credit of the parent corporation.
148
It would have been possible to structure the relationship between the parent and subsidiary more formally to
minimise the danger of veil piercing. For example, there could have been an agreement between both
companies under which employees of the parent would provide services to the subsidiary in consideration for
which the parent would be allowed to collect the subsidiary’s revenues and apply them towards such costs
with any excess held for the benefit of the subsidiary. This would have addressed some of the criticisms of
the parent’s conduct. Once again, this illustrates the sub-optimal nature of rules that may trip up small and
relatively unsophisticated businesspeople or entities even though in this case the parent was not such a person.
149
On the other hand, in Penick v Frank E. Basil, Inc, 579 F.Supp. 160, 166 (D.C. Cir. 1984) no piercing took
place because inter alia the plaintiff failed to establish “that the employees of either failed to observe proper
corporate formalities.” In any event, the claim was for breach of a contract of employment with the subsidiary
which should generally not be a sufficient act of wrongdoing to justify piercing. In Amsted Industries, Inc v
Pollak Industries, Inc, 382 N.E.2d 393 (Ill. App. Ct. 1978) the court held that while there may have been some
failures to adhere to formalities within the corporations, the veil would not be pierced as against the individual
shareholder as there were other indicators that the separation between the corporations existed. The
companies had separate employees that were paid by the company which employed them; the companies had
separate meetings of directors and kept separate minute books; they had separate bank accounts; they never
advertised together; and they never circulated a joint financial statement. In other words, there was at least a
threshold observance of corporate formalities.
150
Carte Blanche Case, 2 F.3d at 28.

26
parent’s employees and its chairman dealt with the plaintiff, they did so on behalf of the parent
which had stepped into the shoes of the subsidiary. In other words, the conduct of the parties
brought about a novation of the contract from the subsidiary to the parent. No veil piercing
would be necessary in these circumstances. The parent was liable to the plaintiff under the
contract that both became parties to.
Similarly, in Sabine Towing & Transportation Co, Inc v Merit Venture, Inc,151 a breach
of contract appears to have been one aspect of the wrongdoing relied on by the court. However,
given that the wrongdoing included acts that were designed to keep creditors from reaching the
subsidiary’s remaining assets, one wonders if reliance on laws designed to prevent fraudulent
conveyances would have been more appropriate and sufficient.152 And in Vuitch v Furr, the
court opined that insolvency or undercapitalization is often an important factor evidencing
injustice.153
A further example illustrating a broader understanding of wrongdoing in the United
States may be found in Parker v Bell Asbestos Mines, Ltd.154 The issue related to the extent to
which a parent could be insulated by its subsidiary from tort liability for asbestos related harm.
In England, the issue was resolved in favour of the parent with the court taking the view that
the purpose of incorporation was to allow a person to limit potential future liabilities.155 In
Parker v Bell Asbestos Mines, Ltd, the court stated that a distinction may be drawn between:156

(1) carrying out the everyday affairs of corporate business (e.g., the mining and sale of
asbestos)—the sort of activity which traditionally merits the privilege of limitation of liability
bestowed by the protective corporate form; and (2) carrying out legal maneuvers aimed at
maximizing the limitation of liability to a point of near invulnerability to responsibility for
injury to the public. In our view, the latter, which may well be the situation here, constitutes an
abuse of privilege, which in an equitable analysis of competing public policy considerations
must surely fail.

On the face of it such a distinction is difficult to justify. Business activities inevitably give rise
to the possibility of tortious acts, and it is hard to see why a corporate structure that is intended
to maximise the limitation of liability for such acts is an abuse of privilege. It may be if the
activity in question will inevitably give rise to a tort, and in such an instance the directors of
the company may also be personally liable for procuring the company to engage in a tortious

151
Sabine Towing & Transportation Co, 575 F.Supp. at 1448.
152
See Lowell Staats Mining Co, Inc v Pioneer Uravan, Inc., 878 F.2d 1259 (10th Cir. 1989).
153
Vuitch v Furr, 482 A.2d 811 (D.C. 1984).
154
Parker v Bell Asbestos Mines, Ltd, 607 F. Supp. 1397 (E.D. Pa. 1985).
155
Adams [1990] 2 WLR 657. Such an approach is also the position in Singapore, see Simgood [2016] 1 Sing.
L. Rep. 1129 [195].
156
Parker v Bell Asbestos Mines, Ltd, 607 F. Supp. at 1403.

27
act. As a general and unqualified statement of the law, however, Parker with respect probably
goes too far.157
In England, the effect of separate personality in the context of the tort of negligence
can be limited by finding that a parent company has assumed responsibility towards the
employees of a subsidiary so as to give rise to a duty of care towards such employees. Arguably,
this is the real issue, namely what are the circumstances where a parent ought to incur tortious
liability to employees of a subsidiary. For this to arise in England, it is not necessary that the
parent should have absolute control over the subsidiary. Tortious liability was found where “(1)
the businesses of the parent and subsidiary are in a relevant respect the same; (2) the parent has,
or ought to have, superior knowledge on some relevant aspect of health and safety in the
particular industry; (3) the subsidiary’s system of work is unsafe as the parent company knew,
or ought to have known; and (4) the parent knew or ought to have foreseen that the subsidiary
or its employees would rely on its using that superior knowledge for the employees’
protection….A court may find that element (4) is established where the evidence shows that
the parent has a practice of intervening in the trading operations of the subsidiary, for example
production and funding issues.”158
It is worth pausing at this stage to make a broader point. It is arguable that in a tort or
contract case where negotiation is not plausible (for example where contracts are in a standard
form), if a corporation has an amount of capital that is unreasonably low given the nature of its
business and the risks it faces, from an ex ante perspective, veil piercing may be
justifiable. Having a company operate in a way that puts third parties at risk of uncompensated
harm where such risks would reasonably be expected to occur, or that similarly puts the other
contracting party at risk of contract breach because it is clear that the other contracting party
has to deliver the goods or products ordered to another person, would be unjust and an abuse
of corporate personality as required by veil piercing doctrine. Limited liability in such
circumstances provides incentives to misinvest.159
Powerful though such a view may be, even such a situation may not be best solved
through veil piercing. Should veil piercing in such situations take place, the courts are really
holding the shareholders and/or directors of such a corporation accountable for the loss suffered
by the tort victim or unfortunate counterparty to the contract. The broader (and real) policy
issue therefore is whether the circumstances are such as to impose a direct duty of care on the
said shareholders or directors to such persons. Again, tort law may provide a superior
framework for analysis and, depending on the facts, other areas of tort may be applicable.
It is worth noting that many of the US cases discussed above involved parent-subsidiary
relationships. It may be that a more liberal approach to veil piercing in the US is explicable on

157
See also Craig v Lake Asbestos of Quebec, Ltd, 843 F.2d 145.
158
Chandler v. Cape plc [2012] EWCA (Civ) 525, [2012] 1 WLR 3111, 3131.
159
Henry Hansmann and Reinier Kraakman, Toward Unlimited Shareholder Liability for Corporate Torts, 100
Yale Law Journal 1879, 1882-1883 (1991).

28
this basis. It has been argued that in the context of a corporate group the theoretical analysis
behind limited liability largely becomes irrelevant. For instance, any veil lifting within a
corporate group does not affect the ultimate investors of the enterprise as the piercing is
generally not extended beyond the corporate parent.160 Such an approach is a reflection of the
perceived reason and policy behind limited liability and hence its limits. An alternative
approach that is more accommodative of group enterprises may reflect a view that given the
right circumstances large firm size can bring about efficiencies (e.g. through risk spreading,
economies of scale and scope, access to capital markets, more favourable borrowing terms)
which as a whole benefit society. A mix of large and small firms may also provide the most
optimal environment for innovation to take place.161 Part of the reason for this is because some
innovation takes place in start-up companies founded by former employees of large
enterprises. 162 This also applies to large firms that decide to spin off divisions or lines of
businesses into subsidiaries. It is therefore optimal to treat corporate shareholders no differently
from individual investors so that there is no disincentive for enterprises to grow without
endangering the entire enterprise given the greater complexity and therefore risk inherent in
larger enterprises. Such a viewpoint probably underpins the approach in England and Singapore
where arguments relating to group enterprise liability have not met with much success.163
On the whole, the body of cases relating to veil piercing in the US is somewhat confused.
It is difficult to disagree with the following comment:164

In light of the diversity of judicial approaches, the use of expansive rhetoric, and the sheer
volume of legal opinions, veil-piercing jurisprudence in the US lacks the degree of certainty
and predictability that the modern business requires. The veil-piercing common law of torts and
contracts remains highly discretionary and problematic for the business planner.165

160
Blumberg, supra note 59, at 93-97.
161
Ajay K. Agrawal et al., Why Are Some Regions More Innovative than Others? The Role of Firm Size Diversity
(NBER Working Paper No. 17793, 2012), http://www.nber.org/papers/w17793.pdf.
162
Paul Gompers et al., Entrepreneurial Spawning: Public Corporations and the Genesis of New Ventures, 1986
to 1999, 60 J. FIN. 577 (2005); Aaron K. Chatterji, Spawned with a Silver Spoon? Entrepreneurial
Performance and Innovation in the Medical Device Industry, 30 STRATEGIC MGN’T J. 185 (2009).
163
See e.g., Adams [1990] 2 WLR 657; Win Line (UK) Ltd v. Masterpart (Singapore) Pte Ltd [1999] 2 SLR(R)
24; Manuchar Steel [2014] SGHC 181.
164
Sandra K. Miller, Piercing the Corporate Veil among Affiliated Companies in the European Community and
in the US: A Comparative Piercing Approaches Analysis of US, German and U.K. Veil Piercing Approaches,
36 AM. BUS. L.J. 73, 94 (1998).
165
It has been suggested, however, that although many aspects of veil piercing doctrine from judicial decisions
make little sense, if the actual outcomes of cases are analyzed, piercing cases can be explained as judicial
efforts to remedy one of three problems, namely to ensure behavior that conforms to a statutory scheme, to
preserve the objectives of insolvency law, and to remedy what appears to be fraudulent conduct, see Jonathan
Macey & Joshua Mitts, Finding Order in the Morass: The Three Real Justifications for Piercing the
Corporate Veil, 100 CORNELL L. REV. 99 (2014). There is no difficulty with the first two categories but in the
third it is clear that fraudulent conduct is construed broadly so the difficulty of construing what conduct
crosses the line remains.

29
C. Germany (and Japan)

Veil piercing by courts is rare in Germany.166 Only the situation of commingled assets
truly leads to a piercing of the veil because it results in a direct claim of harmed creditors
against shareholders. Shareholders that strip a company of its assets to the disadvantage of
creditors may be liable, but not on the basis of veil piercing. In such instances of shareholder
liability, the principles established and applied by German courts have changed recently.167
The liability is now of a tortious nature. Veil-piercing is not engaged as the liability of the
shareholders is to the company and not its creditors as the latter’s losses are considered of a
reflective nature.
Shareholders are also never personally liable in situations of undercapitalization or for
abuse of the corporate form, and a dominant influence exercised on a company is by itself no
basis for such liability either. Earlier judgements that applied the principles relating to corporate
groups168 to instances where shareholders exercised a dominant influence over a company in
the group to its financial detriment are obsolete. 169 They have been absorbed by newly
established principles that apply where the existence of the company is threatened by
shareholders. The term used in the relevant German rulings (“existenzvernichtender Eingriff”)
translates literally into “existence annihilating interference”. We have chosen to refer to it as
“annihilating interference”.
For a better understanding of the policy reasons underpinning the German position, the
discussion of the principles of veil piercing is preceded by some introductory remarks about
relevant aspects of German company law.

(i) Veil-piercing in the context of the smaller German company type, the GmbH

Whereas English law and jurisdictions deriving their corporate laws from it subject the
private limited company to essentially the same rules and requirements as the public limited
company,170 German law has created two entirely different forms of corporations. One form is

166
For a similar conclusion, but outdated in its analysis, see COMPARATIVE COMPANY LAW – A CASE-BASED
APPROACH 127 (Mathias Siems & David Cabrelli eds. 2013).
167
As such, observations such as those made in Am. Lecithin Co. v. Rebmann, 12-CV-929 (VSB) (S.D.N.Y. Sep.
20, 2017) as to the similarity between the German law on veil piercing and New Jersey or Delaware law are
no longer correct.
168
Aktiengesetz [AktG] [Stock Corporations Act], Sept. 6. 1965, BGBL I at 1089, last amended by Gesetz [G],
July 17, 2017 BGBL I at 2446, art. 9 (Ger.), https://www.gesetze-im-internet.de/aktg/AktG.pdf, §§ 291-318.
169
GÜNTER H. ROTH & PETER KINDLER, THE SPIRIT OF CORPORATE LAW – CORE PRINCIPLES OF CORPORATE
LAW IN CONTINENTAL EUROPE 68 (2013).
170
Even the UK follows this rule although its public limited company is subject to EU legislation and therefore
while there are some differences between the two corporate forms, the overall conceptual approaches are
similar and accordingly substantially different from the German concept. Some US states offer a separate
regime for closely-held corporations, particularly Delaware, that shareholders can opt into. In other states,
the courts apply special principles to closely held corporations that serve the interests of minority shareholders.

30
the Gesellschaft mit beschränkter Haftung (“GmbH”) which is the company of choice of small-
and medium-sized businesses and therefore frequently closely held. 171 Its typical structure
explains why veil-piercing or a functional equivalent is a relevant issue for the GmbH.172 In
closely-held companies, shareholders can exercise a dominant influence and attempt to enrich
themselves to the disadvantage of the company and its creditors. German law also grants the
shareholder meeting a dominant influence over the GmbH. In contrast to other jurisdictions
where directors may generally manage companies independently of directions from
shareholders, 173 the German GmbH requires directors to adhere to shareholder resolutions
decided in meetings.174
The GmbH cannot be regarded as essentially a smaller version of the stock corporation
(Aktiengesellschaft or “AG”) which relies on a detailed regime underpinned by largely
mandatory statutory law. The corporate governance structure of the AG vests the powers in its
two-tier board and not in the shareholders.175 It is therefore generally considered a company
form that is, conceptually speaking, entirely different from the GmbH.176
The GmbH was created by German legislation in 1892, 177 and the GmbH Act
(GmbHG)178 became the model law for similar forms of limited liability companies in civil
law jurisdictions throughout the world. This seems, in particular, interesting and relevant from
an Asian perspective. German law had in the late 19th and early 20th centuries a significant

However, the deviations from the general rules are rather insignificant compared to the existence of
fundamentally different regimes for different types of companies in jurisdictions that follow the German and
French approaches.
171
For these elementary principles of German company law, see Gregor Bachmann, Introductory Editorial:
Renovating the German Private Limited Company - Special Issue on the Reform of the GmbH, 9 GERMAN
L.J. 1064 (2008).
172
As GÖTZ HUECK & CHRISTINE WINDBICHLER, GESELLSCHAFTSRECHT § 24 Rdn 27 (21st ed. 2008) correctly
emphasize, the issues of limited liability and veil piercing are not limited to the GmbH, but factually-speaking
of little relevance for the stock corporation. It could be added that this is so because the particular liability-
triggering scenarios are very rare for larger, widely-held corporations with a strict structure of corporate
governance that reduces the influence of shareholders to a minimum.
173
An example being Singapore where this principle is firmly expressed in §157A of the Singapore Companies
Act, subject to any provisions in the Act itself or the corporate constitution.
174
This principle is derived from section 37(1) GmbHG that provides that the powers of the directors are limited
by the resolutions of the shareholders in meeting.
175
For details about the AG from a comparative corporate governance perspective, see Theodor Baums &
Kenneth Scott, Taking Shareholder Protection Seriously? Corporate Governance in the United States and
Germany, 53 AM J. COMP. L. 31 (2005); Paul Davies & Klaus Hopt, Corporate Boards in Europe:
Accountability and Convergence, 61 AM J. COMP. L. 301 (2013); Klaus Hopt, Comparative Corporate
Governance: The State of the Art and International Regulation, 59 AM J. COMP. L. 1 (2011).
176
See e.g. Michael Beurskens & Ulrich Noack, The Reform of German Private Limited Company: Is the GmbH
Ready for the 21st Century?, 9 GERMAN L. J. 1069, at 1070 (2008).
177
ROTH & KINDLER, supra note 171, at 16.
178
Gesetz betreffend die Gesellschaften mit beschränkter Haftung [GmbHG] [Limited Liability Companies Act],
Apr. 20, 1892, RGBl. at 477, last amended by Gesetz [G], Jul. 17, 2017 BGBl I at 2446, art. 10 (Ger.),
https://www.gesetze-im-internet.de/gmbhg/.

31
impact on East Asian jurisdictions, 179 but as a result of the more recent wave of legal
transplantation from the US in the region, the impact of German law has dramatically declined
in company law though it is still important. This decline in influence is most obvious in Japan
where the legislature in its 2006 company law reform abolished its GmbH-equivalent, the
yūgen kaisha, and reduced Japanese company law to one type of corporation, the kabushiki
kaisha with no minimum capital requirement, and adopted a US-style LLC called the gōdō
kaisha.180

(ii) Cases of undercapitalization and liability for “annihilating interference”

Whether undercapitalization of the GmbH may justify a piercing of the corporate veil
was controversially discussed in German literature until the Supreme Court firmly decided
against it in a 2007 ruling.181 This discussion about a potential liability for undercapitalized
companies is best understood with some insight in the basics of German principles of minimum
capitalization and capital maintenance.182

(iii) Principles of German law of capital maintenance

The minimum initial legal capital of the stock corporation (AG) must amount to EUR
183
50,000, double the amount required by the EU second directive that pursues a minimum
harmonization approach that applies in all EU member states and permits these member states
to implement higher, but excludes lower, minimum capital requirements. 184 The United
Kingdom is another prominent member state of the EU that goes well beyond the minimum
required by EU legislation and sets the minimum capitalization of its public companies at GBP
50,000.185

179
For Japan, see e.g. KONRAD ZWEIGERT & HEIN KÖTZ, AN INTRODUCTION TO COMPARATIVE LAW 298 (Tony
Weir trans., 3d ed. 1998); MATHIAS SIEMS, COMPARATIVE LAW 211–212 (2014); CARL F. GOODMAN, THE
RULE OF LAW IN JAPAN: A COMPARATIVE ANALYSIS 20 (4th ed. 2017).
180
See Beurskens & Noack, supra note 178, at 1071.
181
On the discussion of the literature prior to the ruling see Rüdiger Veil, Gesellschafterhaftung wegen
existenzvernichtenden Eingriffs und materieller Unterkapitalisierung [Liability of Members under
Annihilating Interference and Substantial Undercapitalization], 2008 NEUE JURISTISCHE WOCHENSCHRIFT
[NJW] 3264, 3265.
182
For more detail on the principles of capital maintenance in German company law, see ROTH & KINDLER, supra
note 171, at 54–66.
183
AktG, § 7.
184
Directive 2012/30/EU of the European Parliament and of the Council of 25 October 2012 on coordination of
safeguards which, for the protection of the interests of members and others, are required by Member States
of companies within the meaning of the second paragraph of Article 54 of the Treaty on the Functioning of
the European Union, in respect of the formation of public limited liability companies and the maintenance
and alteration of their capital, with a view to making such safeguards equivalent, 2012 O.J. EU (L 315) 74
[hereinafter Second Company Directive], art. 6.
185
Companies Act 2006 (c. 46) (UK), § 763(1). For further examples of EU countries going beyond the required
minimum, see ROTH & KINDLER, supra note 171, at 33.

32
 The registration of the GmbH requires a minimum legal capital of EUR 25,000. 186
German law therefore requires a substantial amount of initial capital for the incorporation of
any company because even the so-called ‘Entrepreneurial Company’
(Unternehmergesellschaft), created by a 2008 reform of the GmbHG and sometimes referred
to as “GmbH-lite”,187 is ultimately a GmbH with a minimum capital of EUR 25,000. Although
it can be established without any legal capital, it remains an imperfect company with
inconvenient restrictions until capital up to the amount of EUR 25,000 has been contributed at
which time it converts into a GmbH.188
In this respect Germany contrasts with the UK. The minimum capital requirements
stemming from EU legislation189 only apply to the public limited and its civil-law equivalents
(i.e. the German stock corporation AG), rendering the decision whether to require a minimum
capital for smaller company forms a national matter. While the United Kingdom has exercised
its legislative discretion in a way typical of common law-countries and abstained from
minimum capital requirements for its private limited companies, Germany still pursues what
was once the typical fashion of civil law jurisdictions and requires a substantial legal capital as
a precondition for the incorporation of a GmbH.190
In addition, principles of capital maintenance are strict in German company law. The
rules of EU law which have forced the United Kingdom to deviate from general common law
principles that apply to the distribution of profits to shareholders in the case of public
companies191 are strongly influenced by the traditional German approach to capital and its
maintenance for purposes of creditor protection. Profits, and more generally assets necessary
to maintain the legal capital are not to be distributed to shareholders,192 and shareholders who
receive payments contrary to this principle must make repayment. If such repayment falls short
of the amount owed, all other shareholders are jointly and severally liable for the remaining

186
Section 5(1) GmbHG. For a comparative look at different European jurisdictions, see ROTH & KINDLER,
supra note 171, at 33.
187
On the reform see Bachmann, supra note 173, at 1063–1068; Beurskens & Noack, supra note 178, at 1069–
1073.
188
See GmbHG, § 5a, especially paragraph 5 for the transformation into a “proper” GmbH and paragraph 4 for
the restrictions until its legal capital reaches EUR 25,000, especially the requirement that one-fourth of its
annual profit must be allocated to its legal capital. On this aspect, see Beurskens & Noack, supra note 178,
at 1084.
189
Art 45(1) Directive (EU) 2017/1132, OJ EU 2017 L169/46.
190
Many other civil-law jurisdictions have abolished such minimum capital requirements. On the French s.à.r.l.,
see CODE DE COMMERCE [C. COM.] [COMMERCIAL CODE] art. L223-2 (Fr.). On Japan, see Beurskens & Noack,
supra note 176, at 1071, and see also the discussion on the People’s Republic of China at infra Section IV.D.
191
Section 830 of the UK Companies Act 2006 represents the general company law approach to the distribution
of profits to shareholders and applies to the private limited company. In contrast, section 831, in relation to
public companies, implements the principles of capital maintenance stemming from the Second Company
Law Directive, and correspond to the stricter principles that have traditionally been pursued in Germany. For
an analysis of the drastic change in common law principles that took place in the early 20th century, see Basil
S. Yamey, Aspects of the Law Relating to Company Dividends, 4 MOD. L. REV. 273 (1941).
192
GmbHG, §30(1). See CARSTEN JUNGMANN & DAVID SANTORO, German GmbH Law – Das deutsche GmbH-
Recht 39 (2011).

33
sum.193 In addition, a solvency test applies and holds the directors of the GmbH liable for any
asset transfers to shareholders (including those in fulfilment of contractual obligations such as
repayment of loans to a shareholder or payment for goods purchased from a shareholder) if
such transfers have led to the illiquidity or balance-sheet insolvency of the company.194
We emphasize these principles of German law here because we believe that they help
to explain the decisions of the German courts that will be discussed below, especially the
Federal Supreme Court’s reluctance to pierce the corporate veil in instances where
undercapitalization of a GmbH is suggested, i.e. where its legal capital looks inadequate in
light of its business purpose and/or obligations. When requirements for initial capitalization
and maintenance of capital are strict, calls for penalties for undercapitalization in a material
sense are of less appeal.
As emphasized in the German legal literature, minimum capital requirements bear no
indication of the correct or appropriate amounts of capitalization for companies. Their purpose
consists of a test of integrity of the business venture that the founding members commit to, and
seek to prevent insolvencies at an early stage of a company’s life. The underlying theory
provides that shareholders, and more often than not shareholder-directors in small companies,
whose own equity is at stake are prudent decision-makers, rely on sounder business plans and
try to stay clear of exorbitant risk. By contrast, minimum capital requirements do not seek to
provide a guarantee as to whether the amount of legal capital to which the shareholders commit
in the corporate constitution is adequate for the pursuit of the planned business endeavours.
Neither the registration authorities that incorporate a company, nor the shareholders that
commit to the corporate constitution, provide any implicit statement of this kind. Similar to all
the jurisdictions discussed in this paper, creditors need to be aware that German company law
expects them to exercise their own due diligence and business judgment.195

(iv) The Trihotel judgment of the Federal Court of Justice (BGH)

As early as the 1920s, German courts recognised that shareholders could be held
personally liable when companies became insolvent as a result of their conduct. 196 The
requirements for such personal liability have changed over time, and from the 1980s to early
2000s courts tended to look unfavorably at dominant shareholders in GmbHs that went into

193
GmbHG, §§30(1) and (3). For exemptions from this rule see JUNGMANN & SANTORO, at 42.
194
GmbHG, § 64. See also JUNGMANN AND SANTORO, at 44.
195
See further ROTH & KINDLER, supra note 171, at 36 (with references to literature in German); JUNGMANN &
SANTORO, supra note 193, at 27; Detlev Kleindiek, Materielle Unterkapitalisierung, Existenzvernichtung und
Deliktshaftung – GAMMA [Substantial Undercapitalization, Existence-Annihilation and Tort Liability –
GAMMA], 2008 NEUE ZEITSCHRIFT FÜR GESELLSCHAFTSRECHT [NZG] 687.
196
For an overview of the developments, see Holger Altmeppen, Abschied vom “Durchgriff” im
Kapitalgesellschaftsrecht [Farewell to Veil-Piercing in Capital-based Companies], 2007 NEUE JURISTISCHE
WOCHENSCHRIFT [NJW] 2657.

34
insolvency with unpaid creditors. Such tendencies ignited hopes in disgruntled creditors who
demanded that shareholders be held personally liable for the company’s debts on the basis that
they had insufficiently capitalized it. Several recent judgments of the BGH (Bundesgerichtshof,
sometimes also translated as Federal High Court or Supreme Court) have crushed such
expectations and led to important clarifications that have strengthened the principle of limited
liability. This has been received positively by the majority of academic commentators.197
In its 2007 Trihotel judgment,198 the BGH reaffirmed older judgements and held that
shareholders could be found personally liable for wrongful conduct in cases where they
improperly handled assets reserved for the preferential treatment of creditors and thereby
triggered or aggravated the company’s insolvency. 199 However, the court made the
requirements for such liability more onerous. It explicitly reversed its previous holdings that
had created a subgroup of veil-piercing based not on torts, but on abuse of the corporate form
as an exception to the principle of limited liability.200 This had resulted in shareholders being
held directly liable vis-à-vis the company’s creditors201 in situations where recourse under the
statutory provisions protecting the maintenance of the GmbH’s capital202 was insufficient to
fully compensate them.203 Liability was imposed on shareholders where they openly or secretly
depleted the company of assets that were needed to satisfy creditors.204
Based on the civil law understanding that courts do not establish but simply apply the
law, German courts are not held to the principle of stare decisis and therefore not bound by
their previous rulings or those of other courts.205 However, in the interests of legal certainty it
is understood that courts should not arbitrarily change past decisions and ought to explain their
reasons when they do so. The cases regarding veil-piercing form no exception to this rule, and

197
See e.g. Altmeppen, supra note 196, at 2659 onwards; Christian Glöger et al., Die neue Rechtsprechung zur
Existenzvernichtungshaftung mit Ausblick in das englische Recht (Teil I) [The New Jurisprudence on Liability
for Existence-Annihilating Interference, with an English Law Perspective (Part 1)], 2008 DEUTSCHES
STEUERRECHT [DStR] 1141. For a critical view, see Marcus Lutter & Walter Bayer, GMBH-GESETZ §13 Rdn
46 (Marcus Lutter & Peter Hommelhoff eds., 18th ed. 2012).
198
Bundesgerichtshof [BGH] [Federal Court of Justice] II ZR 3/04, Jul. 16, 2007 (Trihotel), 2007 NEUE
JURISTISCHE WOCHENSCHRIFT [NJW] 2689.
199
Id. ¶ 16.
200
Id. ¶ 22. The overruled principles were developed and applied in BGH II ZR 178/99, Sep. 17, 2001 (Bremer
Vulkan), 2002 NEUE ZEITSCHRIFT FÜR GESELLSCHAFTSRECHT [NZG] 38; BGH II ZR 196/00, Feb. 25, 2002,
2002 NZG 520; BGH II ZR 300/00, Jun. 24, 2002 (KBV), 2002 NZG 914; BGH II ZR 206/02, Dec. 13, 2004
(Autovertragshändler), 2005 NZG 177; BGH II ZR 256/02, Dec. 13, 2004 (Handelsvertreter), 2005 NZG
214.
201
BGH Trihotel, 2007 NJW 2689 ¶ 17.
202
GmbHG, §§ 30 & 31.
203
BGH Trihotel, 2007 NJW 2689 ¶ 18.
204
Id. ¶ 21.
205
For an introduction to basic differences between court rulings in common and civil law countries, see Joseph
Dainow, The Civil Law and the Common Law: Some Points of Comparison, 15 AM. J. COMP L. 419, 426–427
(1967); Ewould Hondius, Precedent in East and West, 23 PENN ST. INT’L L. REV. 521, 525 (2005) (with
references to the Kingdom of Prussia, one of the legal predecessors of today’s Germany). The situation has
since changed as courts discuss their and other court’s former rulings, but they are still not legally bound by
them.

35
the BGH explained that it considered its former rulings questionable from a doctrinal
perspective because they had resulted in shareholders being directly liable to creditors although
no duties owed to creditors were breached. The duties that were breached were owed to the
company and resulted in losses to the company. The BGH said that it had been flawed to assume
that any loss of corporate assets immediately affected the creditors.206 Instead, the losses were
of a purely reflective nature, and reflective losses generally do not give creditors any
remedies. 207 The previous decisions created contradictory outcomes because “annihilating
interference” (a concept explained immediately below) resulted in direct external liability of
shareholders, whereas the statutory provisions for the maintenance of capital (§§30 and 31
GmbHG) only led to shareholders’ internal liability.208
The Court went on to emphasize that veil-piercing had to be applied cautiously because
it could undermine the principle of limited liability. It was evidently worried that supporting
widely-worded categories of veil piercing would create a mechanism that could be used too
lightly by courts. It emphasized that the loss of the privilege of limited liability would threaten
the very existence of the GmbH as a popular and useful type of business entity and thereby go
against the intentions of the legislature, and concluded that shareholders could not be held liable
for “abuse of the corporate form” as set out in its previous decisions.209
However, shareholders continue to be personally liable in cases of “annihilating
interference”, but no longer based on the considerations previously applied.210 It was held that
“annihilating interference” was henceforth to be understood as tortious liability for improperly
and self-servingly tampering with corporate assets which in the interest of creditors are subject
to strict rules of capital maintenance thereby causing or aggravating corporate insolvencies.211
Damages are owed to the company alone and not to its creditors because their losses are of a
purely reflective nature.212 In practice this means that administrators in insolvency proceedings
enforce these claims on behalf of the company.213 Outside of insolvency, creditors must obtain

206
BGH Trihotel, 2007 NJW 2689 ¶ 23.
207
Id. ¶ 26.
208
Id. ¶ 32. In addition, the Court stated at paragraph 20 that the previous principles had proved difficult to apply
for practitioners and lower courts alike.
209
Id. ¶ 27.
210
As explained above, “annihilating interference” is the loose translation chosen here for the German expression
existenzvernichtender Eingriff. Other authors speak of “endangering the existence of the company”, see ROTH
& KINDLER, supra note 171, at 68, but the wording chosen here reflects the drastic language used by the
courts in German.
211
BGH Trihotel, 2007 NJW 2689 ¶ 28.
212
Id. ¶ 17. The Court held at paragraphs 19 and 24 that liability for “annihilating interference” was still needed
because a lacuna of legal consequences was left by the statutory provisions in cases where shareholders drain
companies of their assets without crossing the line of set out in sections 30 and 31 GmbHG, i.e. without
touching the subscribed capital of the company. As the Court said at paragraph 25, corporate assets require
protection even beyond the lines drawn by the capital requirements if this was necessary to meet the
obligations owed to creditors. On this need for principles protecting the assets of the company below the
threshold of subscribed capital see also ROTH & KINDLER, supra note 169, at 68.
213
BGH Trihotel, 2007 NJW 2689 ¶ 34.

36
an enforceable title against the company and then request to be assigned the company’s claims
against its shareholders.214
To be held liable for “annihilating interference” under tort law, the shareholders’
conduct must conform to the strict requirements of section 826 of the German Civil Code
(“BGB”) which provides: “A person who, in a manner contrary to public policy, intentionally
inflicts damage on another person is liable to the other person to make compensation for the
damage”.215 What is required is that the shareholder harms the company intentionally and in
bad faith.216 Its premise is that the shareholder is aware that her behaviour is detrimental to the
corporation’s finances and equally aware of all facts that render the act contrary to public policy,
but not necessarily that she understands that the law holds her acts to be contrary to public
policy, nor that she intends to harm the creditors. It suffices to know and accept that the payment
of the company’s obligations is permanently impaired as a result of her actions, a state of mind
referred to as dolus eventualis.217 As a result, a shareholder can, factually speaking, only be
held liable when the risk of insolvency is very real and obvious to the shareholder. 218
Importantly, not only the shareholders of the disadvantaged company, but also shareholders of
a second company that itself holds shares in the company can be liable. The Supreme Court
has confirmed this rule where such shareholders in effect dominate the disadvantaged company.
The supporting argument is that no shareholder should be allowed to hide behind formalities,
i.e. the fact that she is not a shareholder herself is of no defence when effectively the harm done
is the same as if she were.219

(v) The GAMMA judgement of the BGH

The BGH confirmed these new principles shortly afterwards in its GAMMA ruling. It
was preceded by the judgment of a state court of appeal that held the shareholders of a company
personally liable for using the company as a so-called “Cinderella company”, a term commonly
used in German cases and legal writing for companies in which shareholders exercise their

214
Id. ¶ 34 and confirming BGH II ZR 129/04, Oct. 24, 2005, 2006 NZG 64.
215
BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 826, translation at https://www.gesetze-im-
internet.de/englisch_bgb/englisch_bgb.html#p3497 (Ger.).
216
ROTH & KINDLER, supra note 171, at 68.
217
BGH Trihotel, 2007 NJW 2689 ¶ 30; BGH II ZR 292/07, Feb. 9, 2009 (Sanitary), 2009 NZG 545 (547).
218
See the assessment of Lutter & Bayer, supra note 199, at Rdn 40.
219
BGH Trihotel, 2007 NJW 2689 ¶ 44 referring to BGH Autovertragshändler, 2005 NZG 177. From a
comparative perspective there are similarities to some of the common law rules relating to directors to whom
the power of management is usually vested. Where directors are aware or ought reasonably to be aware that
their acts will cause the company to become insolvent, they owe duties to creditors of the company, see
Liquidators of Progen Engineering Pte Ltd v. Progen Holdings Ltd [2010] SGCA 31, [2010] 4 Sing. L. Rep.
1089 [48]; Chip Thye Enterprises Pte Ltd v. Phay Gi Mo [2003] SGHC 307, [2004] 1 Sing. L. Rep.(R.) 434;
Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722 (Court of Appeal)(NSW). In addition, persons who
act as de facto directors are deemed to be directors even if they were never appointed to such office, see
Primlake Ltd v Matthews Associates [2006] EWHC 1227 (Ch), [2007] 1 B.C.L.C. 666.

37
influence in ways that ultimately prove detrimental to creditors.220 These shareholders had
burdened the company that subsequently became insolvent with obligations originally owed
by other companies in the same group although it had been clear, as the court put it, that the
subsequently insolvent company was inadequately capitalized in light of the obligations
transferred to it. They also convinced a number of workers employed by other companies in
the group to move to this subsequently insolvent company, a fact that became relevant for the
BGH’s decision.
The BGH overruled the appellate court’s judgment and reaffirmed its former ruling in
Trihotel that shareholders whose actions endanger the company’s existence cannot be held
directly liable to creditors.221 It went on to clarify further points. It emphasized that instances
of mere undercapitalization in a material sense, i.e. instances that do not involve a breach of
the principles of capital maintenance, do not meet the requirements of an “annihilating
interference”.222 The BGH emphasized that such undercapitalization alone could not lead to
shareholder liability and explicitly rejected academic writing to the contrary.223 It emphasized
that shareholders are responsible for providing the required legal capital of the GmbH, but are
under no obligation to furnish it with the financial means necessary to meet all its legal
obligations as such a duty would be incompatible with the company’s nature as an entity of
limited liability.224 One aspect of the principle of limited liability is that shareholders are under
no obligation to assess and provide adequate financing to the company. All they are required
to do is to abstain from depriving the company of its assets in any manner incompatible with
the rules of capital maintenance. 225 Such acts can take place when corporate assets are
channelled to a sister company, a shareholder or a party related to the shareholder.226 In the
case at hand, the court held that an annihilating interference of the shareholders could not be
based on their failure to adequately finance the company to enable it to pay off its debt. The
company was formally fully capitalized as required by the law and the shareholders did nothing
to deprive the creditors of their right of legal access to all of the company’s assets when it was
a going concern.227 However, in an interesting twist the court ultimately held the shareholders
liable for compensation payable to the company’s employees because they had failed to
disclose the precarious financial situation when these employees agreed to move from their
former employer to this company. The BGH based this liability also on section 826 of the BGB.

220
On the terminology, see BGH II ZR 264/06, Apr. 28, 2008 (GAMMA), 2008 NJW 2437 ¶ 13; Lorenz Fastrich,
GMBHG § 13 Rdn 51 (Adolf Baumbach & Alfred Hueck eds., 20th ed. 2013).
221
BGH GAMMA, 2008 NJW 2437, overruling Oberlandesgericht [OLG] Düsseldorf [Düsseldorf Higher
Regional Court] 6 U 248/05, Oct. 26, 2006, 2007 NZG 388, confirming BGH Trihotel, 2007 NJW 2689.
222
BGH GAMMA, 2008 NJW 2437 ¶ 13.
223
Id. ¶¶ 16–22.
224
Id. ¶ 23. The principle of limited liability follows from section 13(2) GmbHG.
225
BGH GAMMA, 2008 NJW 2437 ¶ 23.
226
Lutter & Bayer, supra note 199, at Rdn 35.
227
BGH GAMMA, 2008 NJW 2437 ¶ 12.

38
It resulted in a direct claim of the employees against the shareholders because of a tortious act
committed against them, not to the company.
A direct claim against shareholders may therefore exist, but only when a tortious wrong
was directly committed to the creditors of the company. This ruling in GAMMA is therefore in
line with Trihotel because it does not contradict the latter’s holding that purely reflective
wrongs and losses cannot be claimed by creditors. Further judgments have since confirmed
these rulings.228 In one of them the BGH held that it could amount to “annihilating interference”
and hence shareholder liability under section 826 of the BGB to the company when such
shareholder prevented the company from pursuing its legitimate claims against him.229

(vi) Veil-piercing for commingling of corporate and private assets

Legal writing almost uniformly supports veil-piercing in cases where shareholders

commingle the company’s assets with their own. By doing so they have disregarded the
company’s separate legal identity in financial matters. In terms of the exact requirements that
justify such an exception to the principle of limited liability, however, academic commentators
have not been able to reach an agreement.
The BGH has repeatedly supported this category of corporate veil-piercing and helped
to shape its contours. In a 2005 ruling, the BGH defined the requirements for personal liability
resulting from comingling of corporate and personal assets in disregard of principles of capital
maintenance. It held that payment transactions among the company, its shareholder(s) and third
parties must lack transparency to the extent that it becomes impossible to attribute them to the
company and that, consequently, the corporate assets become indistinguishable from the
shareholder’s personal assets.230 It thereby confirmed previous judgments that had arrived at
the same conclusions.231
Any personal liability resulting from such conduct may only affect the shareholder(s)
responsible for the situation, and not other shareholders who simply happen to be members of
the company during the time when such commingling occurs. It is therefore most commonly
sole or majority shareholders that such veil piercing will apply to.232
It is the only situation in which the courts rely on the principles of veil-piercing because
all other scenarios are at present resolved by application of general principles of law, be it the
statutory provisions of liability for tortious acts or principles of contract law that will be

228
BGH II ZR 252/10, Apr. 23, 2012 (Wirtschafts-Akademie), 2012 NZG 667.
229
Sanitary, 2009 NZG 545.
230
BGH II ZR 178/03, Nov. 14, 2005, 2006 NZG 350 ¶ 15. On these judgments see also ROTH & KINDLER,
supra note 171, at 67.
231
BGH II ZR 16/93, Apr. 13, 1994, 1994 NJW 1801; BGH II ZR 275/84, Sep. 16, 1985 (Autokran), 1986 NJW
188.
232
BGH Nov. 14, 2005, 2006 NZG 350 ¶ 17.

39
discussed below. In contrast, veil-piercing is, notwithstanding the principle that civil law judges
do not make law, a judge-made legal rule to fill a gap left by statutory law. Its doctrinal basis
is abuse of the corporate form233 that results in the loss of the privilege of limited liability and
instead leads to the application of section 128 of the Commercial Code (Handelsgesetzbuch)
that holds all general partners of commercial partnerships personally liable.234
To distinguish scenarios of veil piercing from other instances that may give rise to the
liability of shareholders vis-à-vis the company for breach of the law, but are not grounds for
their personal liability to the company’s creditors, the BGH emphasized that improper
accounting is not a sufficient basis for veil-piercing. While certainly amounting to a breach of
the law which may therefore give rise to damages by the company against the directors, this
does not justify an exception to the principle of limited liability.235
It should be added that embezzlement of corporate assets results in shareholder liability
under sections 30 and 31 of the GmbHG, and may also amount to “annihilating interference”
but is not a basis for veil-piercing under the commingling exemption.236 As explained above,
shareholders are liable for repayment to the company under sections 30 and 31 of the GmbHG
when they receive payments although the company’s legal capital is not intact. A transfer of
assets outside a formalized distribution process such as distribution of dividends, capital
reduction or share buybacks is subject to an arm’s length test. If a diligent director would not
have agreed to the conditions granted to the shareholder in a transaction with an unaffiliated
third party, then the transaction with the shareholder is deemed a “hidden allotment of corporate
assets” (verdeckte Vermögenszuwendungen) and constitutes a breach of the duty of good faith
generally owed by shareholders to the company under German law. Such a breach can result
in claims by the company for restitution and damages.237 In addition, the shareholders may
also be liable for “annihilating interference” under section 826 of the BGB as discussed earlier.
It is not the element of intent that distinguishes commingling from these other situations
that give rise to claims against shareholders because sections 30 and 31 of the GmbHG and
“hidden allotment of corporate assets” do not require any intentionally committed harm caused
to the company or the creditors. For the remedy of restitution that results in the return of assets
to the company, no subjective mental element is necessary. Only when the company
additionally claims damages do these subjective elements such as knowledge play a role.
Commingling is an exceptional situation where the financial situation of the company is such
a “mess” that applying the principles of depletion of assets and the consequential claims for

233
Called Objektiver Rechtsmissbrauch, see HUECK & WINDBICHLER, supra note 174, at §24 Rdn 30.
234
HANDELSGESETZBUCH [HGB] [COMMERCIAL CODE], § 128. The courts apply this section of the commercial
code ‘by analogy’ when they pierce the corporate veil, see BGH Nov. 14, 2005, 2006 NZG 350 ¶ 10.
235
BGH Nov. 14, 2005, 2006 NZG 350 ¶ 15.
236
Fastrich, supra note 222, § 13 Rdn 45.
237
CHRISTIAN HOFMANN, DER MINDERHEITSSCHUTZ IM GESELLSCHAFTSRECHT 315–317 (2011) (on the
principles of “hidden allotment of corporate assets”); id. at 25–67 (providing a comparative analysis of the
principle of good faith in German company law and the role of fiduciary duty in US company law). On good
faith in German company law see also BGH II ZR 205/94, Mar. 20, 1995 (Girmes), 1995 NJW 1739.

40
their return to the company is of no use. The drastic situation that corporate assets are
indistinguishable from the shareholder’s personal assets justify the harsh consequence that the
shareholders responsible for commingling are personally and directly liable to the company’s
creditors. These principles of commingling have not been rendered obsolete by the (slightly
later) decisions on personal liability to the company resulting from “annihilating interference”.
The BGH emphasized in its judgment of November 14, 2005 that the newly-contoured cases
on liability for “annihilating interference” leave the principles of veil-piercing under the
commingling exception intact,238 though this statement was made at a time when the BGH still
recognized that a shareholder’s direct liability could result from such “annihilating
interference”. Such direct liability has since been ruled out but regardless of this immense
swing in doctrinal analysis, the BGH clarified in Trihotel that the principles applied in
situations of commingling remain applicable.239
A different type of commingling must be distinguished from the one before. Under the
term Sphärenvermischung, academic commentators have discussed whether a shareholder
should be held personally liable when he commingles his own affairs with those of the company,
i.e. commingles the two separate spheres. Such an issue occurs when the shareholder conceals
from third parties that the company and himself are different legal persons, e.g. by using similar
names, the same premises and employees. In an old case where the sole shareholder-director
of a GmbH negotiated with creditors and did so as a director of the company in some instances
and as a private person in others, the BGH held this shareholder personally liable and applied
the principle of good faith in section 242 of the BGB on the basis that the shareholder had acted
as one and the same person in all instances which justified not distinguishing between his
position as a legal representative of the company on the one hand and an independent sole
proprietor on the other so as to hold him personally liable for all obligations under the legal
relationship with the third party.240
The case has remained an outlier, and the BGH had abstained from using any
terminology that is commonly related to veil piercing. Instead, it relied on the principle of good
faith which supports the argument that it was not a case of veil-piercing but one where the BGH
disapproved in more general terms of the shareholder’s conduct and relied on the general
principle of good faith to reach a result that seemed fair in the circumstances.241 These findings
blend in with some of the earlier suggestions made in the discussion of the US position. At
common law, it may on occasion be more fruitful to rely on concepts such as estoppel or
misrepresentation rather than veil piercing.

238
BGH Nov. 14, 2005, 2006 NZG 350 ¶ 14.
239
BGH Trihotel, 2007 NJW 2689 ¶ 27.
240
BGH VII ZR 9/57, Jan. 8, 1958, 1958 WERTPAPIER-MITTEILUNGEN: ZEITSCHRIFT FÜR WIRTSCHAFTS- UND
BANKRECHT [WM] 463 ¶ 22.
241
Commentators that are generally supportive of veil-piercing categorize this case as one of commingling of
spheres, see Lutter & Bayer, supra note 199, at ¶ 24, while others who are less supportive of this doctrine do
not include it in the list of decisions dealing with veil-piercing, see Fastrich, supra note 222, § 13 Rdn 46.

41
 (vii) Further scenarios that may be regarded as veil-piercing in other jurisdictions

As demonstrated, veil-piercing only applies in one scenario in Germany, the

commingling of assets. A number of other acts discussed above are analysed on the basis of
tort law, the principles of good faith, or by relying on provisions in the GmbHG. The list does
not stop there. There are other instances where third parties have rights against shareholders
which are not considered exceptions to the principle of limited liability because principles of
the law of obligations, and teleological interpretation of statutory provisions or widely-
understood contractual terms protect third party interests. In all these instances, the shareholder
is held liable for what he did or promised to the third party, not because of his role in the
company. The company in such scenarios is that of a silent bystander.
The following provides a few illustrative examples. If a company is used as a scheme
to trick third parties into contracting because they would never contract with the shareholders
of the company, e.g. because they are convicted bankrupts or fraudsters, German law applies
general principles of private law to free the third parties of any obligations entered into, and
may grant them damages against the shareholders, not because the corporate veil was pierced,
but because of a wrong committed directly by them to such third parties. The fact that they
incorporated and used the company as part of their fraudulent scheme represents the very
wrong for which they are held liable. Section 123 BGB242 entitles third parties to avoid the
contract, rendering it void ab initio. The other party to the contract is the company and not the
shareholder, but in cases of deceit committed by the shareholder the company must accept that
the deceived party can avoid its declaration of consent to the contractual agreement if the
company knew of the deceit or should have known. Since in such scenarios the fraudster
shareholders are inevitably also the directors of the company, their knowledge is attributed to
the company on the basis of section 166 BGB. The knowledge of the directors is the knowledge
of the company, and their mistakes are the mistakes of the company. 243 In addition, the
shareholders are liable to the deceived parties under tortious principles, in particular in the
application of sections 826 and 823(2) BGB read with section 266 StGB, the provision of the
Criminal Code that sanctions fraud. In addition, sections 311(2), 241(2), 280(1) BGB for

242
BGB, § 123 reads:
(1) A person who has been induced to make a declaration of intent by deceit or unlawfully by duress may
avoid his declaration.
(2) If a third party committed this deceit, a declaration that had to be made to another may be avoided only
if the latter knew of the deceit or ought to have known it. If a person other than the person to whom the
declaration was to be made acquired a right as a direct result of the declaration, the declaration made
to him may be avoided if he knew or ought to have known of the deceit.
243
On these generally accepted principles of attribution see Wolfgang Zöllner & Ulrich Noack, GMBHG § 35
Rdn 146 (Adolf Baumbach & Alfred Hueck eds. 20th ed. 2013); HUECK & WINDBICHLER, supra note 174, §
9 Rdn 3.

42
breach of duties of care and diligence stemming from a legal relationship without primary
obligations244 may be applicable if the shareholder, in his role as the legal representative of the
company and as part of his fraudulent scheme, enjoyed a high degree of trust from the deceived
party and substantially influenced the pre-contractual negotiations between that party and the
company.245

A second example involves a shareholder who is bound by a non-competition clause

with his former employer that states that the employee is prevented from running a business in
the same municipality where the employer is based. In order to avoid liability under the clause,
he incorporates a company which becomes the owner of a business that competes with the
shareholder’s former employer. 246 It would never occur to German courts or scholars to
consider this a case of veil-piercing. If a party to a contract is held to a valid non-competition
clause,247 this party is prevented from engaging in any activity that falls under the respective
clause. Sections 133 and 157 BGB require contracts to be interpreted as required by good faith,
taking customary practice into consideration, and to ascertain the true intention rather than
adhering to the literal meaning of the declaration. The courts have always applied an objective
test that interprets declarations of parties to a contract in the way that a prudent third person
would have understood it.248
These principles of interpretation would lead to the understanding of the non-
competition clause in a broad way. The prudent third party would have understood that the
former employer can operate free from any disadvantage that might result from the former
employee using his professional knowledge and experience in the employer’s municipality, be
it by running his own business, i.e. as a sole proprietor, or by forming any type of business
entity that engages in such a business and which the former employee supports with his
expertise. The scenario of a company whose director-shareholder the former employee
becomes would clearly be covered by the non-competition clause and since the employee
himself is found in breach of his contractual agreement with the former employer, the employer
could successfully seek a prohibitory injunction under sections 823(1) and 1004(1) BGB. The
same would apply if the former employee only had a contract of employment with another

244
Such legal relationships are very common in German law and have no direct equivalent in French or common
law. In the context of this paper, they result from the situation where a third party involved in contractual
negotiations dominates the negotiations or enjoys a high level of trust by the parties, a situation typical of
agents and organs of a company.
245
These are requirements under the BGB: BGB, § 311 para. 3.
246
As in Gilford [1933] Ch 935 where the corporate veil was pierced.
247
Such clauses are sometimes considered invalid as in breach of the BGB as contrary to public policy when
they disproportionately limit a person’s occupational freedom as guaranteed by the constitution: BGB, § 138
paras. 1–2; GRUNDGESETZ [GG] [BASIC LAW], art. 12 para. 1, translation at https://www.gesetze-im-
internet.de/englisch_gg/englisch_gg.html#p0071.
248
Sections 133 and 157 BGB as generally interpreted by the courts, see e.g. BGH X ZR 37/12, Oct. 16, 2012,
2013 NJW 598 (599 at ¶ 17).

43
company that placed him in a position of some materiality, such as being a director or having
some other management position. On the other hand, there would clearly be no breach if the
shareholder was merely a passive investor in a business even if that business was in competition
with his former employer.
These two examples show that the principles of veil-piercing are not needed in
Germany to deal with scenarios in which a shareholder tried to hide behind the principle of
limited liability. In fact, many commentators argue that veil-piercing should be abolished
altogether,249 and the BGH’s change of heart in the “annihilating interference” cases shows
that it might well be moving in that direction.250 It is submitted that even in the situation
involving commingled assets the Court could apply principles of tort law and hold the
shareholders liable when they overstep the line drawn by section 826 BGB because it is far
from obvious why the law should look less favorably at a shareholder who may be disorganized
or unsophisticated and has therefore indistinguishably commingled his and the company’s
assets compared to another who systemically stripped the company of its assets.

D. People’s Republic of China

As mentioned earlier, China (unusually) has a specific legislative provision that

provides an exception to separate personality and limited liability. Article 20 of the 2005
Company Law, 251 after restating the general principle that the shareholders of a company
should not abuse shareholders’ rights, the company’s legal person status or shareholders’
limited liability, provides in the third paragraph:

“Any of the shareholders of a company who abuses the independent legal person status
of the company and the limited liability of the shareholders to evade the payment of the
company’s debts, thus seriously damaging the interests of the company’s creditors,
shall bear joint liabilities for the debts of the company.”252

Article 20 establishes a four-pronged legal test for judicial application of the doctrine. First, it
has to be proven that the shareholder concerned has abused the company’s legal person status
and the shareholder’s limited liability. The abuse of the company’s legal personality and that
of shareholder limited liability are not separate acts, but rather understood as two sides of the

249
For example, see Fastrich, supra note 222, § 13 Rdn 44.
250
Lord Neuberger of the UK Supreme Court was sympathetic to such a view, see Prest [2013] 3 WLR 1 [79].
251
There was a revision to the legislation in 2013. All references to China’s Company Law are to the 2013
revised legislation unless otherwise stated.
252
Hui Huang, Piercing the Corporate Veil in China: Where Is It Now and Where Is It Heading?, 60 AM. J.
COMP. L. 743, 744 (2012) (describing this as “a bold move” to codify “a common law doctrine renowned for
its complexity and amorphousness.”).

44
same coin.253
Second, the purpose of the aforesaid abuse is to “evade” the payment of debts to the
company’s creditors. This has been interpreted by some judges of China’s Supreme People’s
Court (“SPC”) as the use of corporate personality to “avoid” contractual or legal obligations.254
Another SPC judge, Yu Zhengping, maintained that the wording of Article 20 “undoubtedly
requires the existence of a subjective intent” to evade debts.255
Third, the interests of the creditors must be damaged “seriously” (yanzhong). Needless
to say, “seriously” is not defined in the Company Law, and will have to be interpreted by the
courts on a case by case basis. Zhou suggests that the court should consider three factors when
determining whether the damage is serious enough to activate veil piercing: (1) the actual
damage to the creditors; (2) the debt-paying ability of the company; and (3) the subjective
intent of the shareholder concerned. 256 Fourth, there must be a causal link between the
shareholder’s abusive behavior and the damage/losses suffered by the creditors.
Since 2006 when the new Company Law took effect, hundreds of veil piercing cases
have been decided by Chinese courts, and a growing body of academic literature is being
produced by researchers within and outside China.257 Thus far, the literature, including both
empirical studies and doctrinal analyses, seems overwhelmingly to suggest that Chinese courts
have been enthusiastic in piercing the corporate veil, or, at least, “Chinese judges are clearly
much more willing to pierce a company veil and shift liability to its owners on the basis of
statutory authority than their common law counterparts relying on judicial doctrines”.258 It has
also been suggested that Chinese courts practiced “judicial activism” in veil piercing cases.259

253
Liu Junhai (刘俊海), Xiandai Gongsifa (现代公司法) [MODERN CORPORATIONS LAW] 665 (2015).
254
See Li Guoguang (李国光) & Wang Chuang (王闯), Shenli Gongsi Susong Anjian de Ruogan Wenti –
Guanche Shishi Xiudinghou Gongsifa de Sifa Sikao (审理公司诉讼案件的若干问题 – 贯彻实施修订后
公司法的司法思考) [Several Questions on Corporate Litigation: Judicial Thoughts on Implementing the
Revised Company Law] reprinted in Zuigao Renmin Fayuan Sifa Guandian Jicheng (最高人民法院司法观
点集成) [THE COLLECTION OF THE SUPREME PEOPLE’S COURTS’ JUDICIAL VIEWS] 286 (2005).
255
Yu Zhengping ( 虞 政 平 ), Zhongguo Gongsifa Anli Jingdu ( 中 国 公 司 法 案 例 精 读 ) [RESEARCH
INTERPRETATIONS ON SELECTED CHINESE CORPORATE LAW CASES] 146 (2016).
256
Zhou Yousu (周友苏), Xin Gongsi Fa Lun (新公司法论) [NEW SURVEY ON CORPORATIONS LAW] 105 (2006).
257
For example, see Mark Wu, Piercing China’s Corporate Veil: Open Questions from the New Company Law,
117 YALE L.J. 329 (2007); Ge Weijun (葛伟军), Lun Zuidi Ziben yu Jiekai Gongsi Miansha (论最低资本与
揭开公司面纱) [On Minimum Registered Capital and Piercing Corporate Veil], 13 上海财经大学学报（哲
学社会科学版）[JOURNAL OF SHANGHAI UNIVERSITY OF FINANCE AND ECONOMICS] 34 (2011); Huang, supra
note 252; Shuangge Wen, The Ideals and Reality of a Legal Transplant – The Veil Piercing Doctrine in China,
50 STAN. J. INT’L L. 319 (2014); Kimberly Bin Yu & Richard Krever, The High Frequency of Veil Piercing
in China, 23 ASIA-PAC. L. REV. 63 (2015); Colin Hawes et al, Lifting the Corporate Veil in China: Statutory
Vagueness, Shareholder Ignorance and Case Precedents in a Civil Law System, 15 J. CORP. L. STUD. 341
(2015); and Hu Gairong (胡改蓉), Ziben Xianzhu Buzu Qingxingxia Gongsifa Renge Fouren Zhidu de
Shiyong (资本显著不足情形下公司法人格否认制度的适用) [Disregarding Corporate Personality in
Cases of Undercapitalization], Faxue Pinglun(法学评论) [LAW REVIEW] 163 (2015).
258
Yu & Krever, supra note 257, at 81.
259
Hawes et al, supra note 257, at 363–68.

45
 (i) The evolution of the veil piercing doctrine in China

To more fully understand veil piercing in Chinese law today, it is necessary to

appreciate the position prior to the 2005 Company Law. Veil piercing was not officially
recognized in Chinese law prior to this. There was, however, a loosely crafted legal framework
to allow veil piercing under limited circumstances. This ambiguous and confusing framework
was established through “judicial practice”, or sifa shijian, which refers to the practice of the
judiciary to develop jurisprudence and legal doctrines, mainly through the SPC’s issuance of
judicial interpretations and selected case reports, as well as the legal enactments of the State
Council, China’s Central Government.260 It has been stated: “Although the 1993 Company
Law contained no mention of the veil-piercing doctrine, the Chinese judiciary cautiously
applied it even without a clear statutory basis before its codification in 2005.”261
The introduction of the veil piercing doctrine started with a regulation issued by the
State Council on 12 December 1990, titled Guanyu Qingli Zhengdun Gongsi zhong Bei
Chebing Gongsi Zhaiquan Zhaiwu Qingli Wenti de Tongzhi (Circular on Questions relating to
the Claims and Debts of Companies Dissolved or Merged with Others in the Campaign for

Sorting Out and Consolidating Companies) [关于清理整顿公司中被撤并公司债权债务清

理问题的通知]. The 1990 Circular is believed to be the first law to offer an exception to the
doctrine of limited liability, which doctrine was already well established in China through
various regulations but not codified yet into a national company law. It provided that investors
or incorporators of the company should directly assume the debts of the company but that such
liability was limited to the extent that the investors/incorporators benefited from the company’s
operations or misappropriated the company’s assets.262
The first judicial interpretation on veil piercing by the SPC is believed to have taken
place in 1994 in a Reply to a question submitted by the Higher People’s Court of Guangdong
Province (Zuigao Renmin Fayuan Guanyu Qiye Kaiban de Qiye bei Chexiao huo Xieye hou

Minshi Zeren Chengdan Wenti de Pifu (最高人民法院关于企业开办的企业被撤销或歇业

后民事责任承担问题的批复) [Reply of the Supreme People’s Court on the Civil Liability of

260
On the roles and functions of the various legal institutions in China (including their legislative functions), see
generally Jiangyu Wang, Legal Reform in an Emerging Socialist Market Economy, in LAW AND LEGAL
INSTITUTIONS OF ASIA: TRADITIONS, ADAPTATIONS, AND INNOVATIONS 24–61 (E. Ann Black & Gary F. Bell
eds. 2011).
261
WANG, supra note 66, at 80.
262
See Jin Jianfeng (金剑锋), Gongsi Faren Fouren Lilun Jiqi zai Woguo de Shijian (公司法人否认理论在我
国的实践) [The Doctrine of Disregarding Corporate Personality and Its Adoption in China], 2005 Zhongguo
Faxue (中国法学) [CHINA LEGAL SCIENCE] 117–25 (2005).

46
Enterprises Whose Subsidiaries were Revoked or Shut Down]). While this judicial
interpretation made an effort to strengthen the traditional mandate of limited liability, as it first
required the investing enterprise to undertake civil liability to the extent of the unpaid capital
contributions in the subsidiary’s registered capital, “if no capital was actually contributed to
the terminated company, or the amount was not sufficient according to the law, then the
company will be determined not to be a legal person and its full civil liability will be assumed
by the enterprise that established the company”.263
The SPC issued two judicial interpretations in 2001 and 2003 to further develop the
piercing doctrine. The 2001 judicial interpretation captioned Guanyu Shenli Jundui, Wujing
Budui, Zhengfa Jiguan Yijiao, Chexiao Qiye he yu Dangzheng Jiguan Tuogou Qiye Xiangguan

Jiufen Anjian Ruogan Wenti de Guiding (关于审理军队、武警部队、政法机关移交、撤销

企业和与党政机关脱钩企业相关纠纷案件若干问题的规定) [Provisions of the Supreme

People’s Court on Several Issues on the Trial of Cases concerning Enterprises transferred by
the Army, Armed Police Force and Judicial Bodies, Enterprises Whose Licenses have been
Revoked, and Enterprises Which Have been Disconnected from Party and Government
Agencies], which mainly addressed legal issues relating to business enterprises owned by the
army, armed police, and judicial bodies, provided that a shareholder/investor was no longer
liable if it made its legal or contractual obligations with respect to capital contributions. It is
important to note that this interpretation was aimed to clarify the confusion caused by the 1994
Reply which had encouraged many lower courts to impose unlimited liability improperly on
shareholders.264
The 2003 judicial interpretation, titled Guanyu Shenli yu Qiye Gaizhi Xiangguan de

Minshi Jiufen Anjian Ruogan Wenti de Guiding (关于审理与企业改制相关的民事纠纷案件

若干问题的规定) [Provisions of the Supreme People's Court on Several Issues concerning the
Trial of Cases of Civil Disputes Related to Enterprise Restructuring ], offered a relatively more
precise legal test for veil piercing in the context of a merger and acquisition transaction. Article
35 provided that the holding or parent enterprise shall be responsible for the debts of the
subsidiary where the subsidiary’s inability to pay off its debts was caused by the holding
enterprise’s own acts to withdraw capital from the subsidiary to evade its debts, if the holding
enterprise achieved its controlling stake through a merger and acquisition.265

263
David M. Albert, Addressing Abuse of the Corporate Entity in the People’s Republic of China: New Thoughts
on China’s Need for a Defined Veil Piercing Doctrine, 23 U. PA. J. INT’L ECON. L. 873, 883 (2002). A
historical analogy may be drawn with the pre-incorporation joint stock companies that were not legal entities
but partnerships and therefore the “shareholders” were ultimately liable for any shortfall in the assets of the
joint stock company. Given that Chinese law did recognize the doctrine of limited liability, this is a somewhat
strange judicial interpretation.
264
Jin, supra note 262, at 123.
265
Wang, supra note 66, at 80.

47
 The veil piercing rule that was eventually codified into the 2005 Company Law was
certainly built upon the aforesaid judicial interpretations, but it differs from the SPC’s
interpretations in at least two ways. First, the consequence for the court’s application of the
veil piercing rule merely means that the effects of corporate personality are not applicable to
the extent determined judicially. The shareholders concerned will be held liable for the debts
in the case in question, but the company will still be a going concern and keep its legal
personality with limited liability. In contrast, the judicial interpretations issued before 2005
aimed to hold the shareholders and investors liable in the course of a company’s liquidation,
which would lead to the company’s termination. The rationale was that the business license
was issued by the national or local Administration for Industry and Commerce and hence an
administrative act. While the court would normally respect such acts, the court is not bound by
it if it discovers that the conditions provided for in the national laws or administrative
regulations were not met.
Second, prior to the Company Law the extent of the liability of the shareholders or
investors was confined to their unpaid capital contributions to, or undeserved benefits received
from, the company; in other words liability was confined to what was due to the company or
benefits improperly obtained from the company. For example, an investor/shareholder would
be responsible for the debts of the company to the extent it received money or other assets,
without proper consideration, from the company. Likewise, it was responsible to the extent of
the money and assets it had illegally withdrawn from or transferred out of the company or
hidden from outsiders.266 Such liability to make compensation was fault-based.
It is also important to note the broader historical background of the above-mentioned
judicial interpretations. As clearly suggested by the stated purpose and explicit language in
those judicial rules, the rudimentary veil piercing framework then was largely developed to
address the abuse of power by shareholders/investors, especially state investors, in the
subsidiaries established by them.267 The intention of the SPC was to strike a balance between
the rights of shareholders and creditors. As noted, the application of the judicial interpretations
would lead to the termination of the subsidiary enterprises concerned. In this process, they
would hold accountable not only the shareholders/investors, but also government agencies
which approved the establishment of the enterprises.268 This is further indication that the main
targets of the judicial interpretations were abusive state owned enterprises. On the other hand,
the veil piercing doctrine seems thus far to have been rarely invoked against state owned
enterprises since it was adopted in the 2005 Company Law.

(ii) Grounds for veil piercing in judicial practice

266
Jin, supra note 262, at 124.
267
See generally Wen, supra note 257.
268
Jin, supra note 262, at 124.

48
 While Article 20 of the Company Law sets out a general principle, scholarly writing
has suggested the following circumstances that are capable of giving rise to sufficient abuse to
warrant veil piercing.269
The first is undercapitalization where either the shareholder did not make adequate
contributions to the company’s registered capital or that such capital, including corporate cash
and assets, was improperly withdrawn from the company by the shareholder. The second is
where the company has been used as a device to evade contractual obligations. This occurs
when the shareholder, who has to refrain from doing something under a non-competition
agreement or confidentiality agreement, incorporates a company to evade his obligations.270
Another example is when a shareholder uses the company to defraud creditors. A third situation
arises in circumstances where the company was a device to evade statutory restrictions and
involve illegal activities such as tax evasion or money laundering. Finally, it has been suggested
that veil piercing can take place where there has been a lack of formality or confusion of affairs.
In such cases, the shareholder himself disregards the separate legal personality of the company
and makes the company an alter ego of the shareholder. This could include the control of the
company so that the decision-making of the company is entirely dominated by the shareholder,
or there is confusion or intermingling of the assets, business, affairs, and even management
personnel of the company and the shareholder. It is clear that these instances where veil piercing
may take place has parallels in other jurisdictions discussed previously.
Although it would appear that there are many instances of veil piercing in China, the
exceptional nature of the doctrine has also been articulated. For example, two former prominent
judges of the SPC have noted:271

The fact that the doctrine of piercing corporate veil only serves to complement [the principle of
separate legal personality of the company law] determines that the application of the doctrine
must be exceptional….Our country’s Company Law has to establish the system of corporate
veil piercing because of practical needs. However, it must be emphasized that the courts must
be firmly cautious when applying this system and always be mindful of any abuse of it. Cautious
application of the doctrine means, whenever a problem can be solved by the normal rules in the
civil law, the piercing corporate veil rule must be avoided so as to protect the principles of
independent legal personality and limited liability of modern corporate law. The application of
the veil piercing doctrine must be the last resort, not a regular tool for the court.

269
Wang, supra note 66, at 81–2.
270
This seems similar to the cases in England on evasion, see Gilford [1933] Ch 935.
271
See XI XIAOMING and JIN JIANFENG, GONGSI SUSONG: LILUN YU SHIWU WENTI YANJIU
(CORPORATE LITIGATION: THEORIES AND PRACTICES) [Beijing: People’s Court Press, 2008], at 559.
Again there are parallels with judicial statements elsewhere.

49
 This cautionary statement should be contrasted with the sometimes made assumption
that undercapitalization is the most important ground for piercing in China.272 Xi and Jin on
the other hand express the view that undercapitalization should not be the only reason to pierce
the corporate veil stating that “only in the case where the company’s capital was extremely
inadequate should the court disregard corporate personality on the ground of
undercapitalization”.273 One empirical study has found that undercapitalization was the least
important reason for veil piercing. Huang examined court decisions in a five-year period from
2006 to 2010 and found ninety-nine cases on veil piercing. Chinese courts ordered piercing in
sixty-three cases, leading to a high frequency of 63.64%.274 It was further found, of the 118
requested grounds for veil piercing, seventy-four involved commingling or confusion of assets,
business or personnel; thirty-two concerned fraud or other improper conduct; eleven were
about undue control; while only one case was based on undercapitalization. Even in that single
case, the court rejected the request and refused to lift the veil on the ground of
undercapitalization.275
The case of China Orient Asset Management Co Ltd v The Xi’an High-Tech Area
Branch of China Construction Bank276 may be illuminative of the approach towards the ground
of undercapitalization. In this case China Construction Bank made a loan to a company named
Jinling Co. Jinling, however, failed to repay the China Construction Bank. The debt was
eventually transferred by the bank to the plaintiff, China Orient Asset Management Co Ltd.
(COAMC). COAMC brought a lawsuit against several shareholders of Jinling, asking them to
be jointly liable for the debt, because four of the shareholders made false capital contributions
and one shareholder withdrew RMB2 million from Jinling. At first instance, the Xi’an
Intermediate People’s Court upheld the plaintiff’s allegation. It said:277

According to paragraph 3 of Article 20 of the Company Law of the People’s Republic of China,
shareholders of a company who have abused the company’s independent legal person status
and shareholders’ limited liability, evade the payment of the company’s debt so as to harm the
interests of the company’s creditors, should be jointly liable for the company’s debt. On this
basis, the request of COAMC to ask the shareholders to be jointly liable to the extent of their

272
For example, see Liu, supra note 253, at 667–670.
273
Xi & Jin, supra note 271, at 560.
274
Huang, supra note 252, at 748–49.
275
Id. at 760–61.
276
Zhongguo Dongfang Zichan Guanli Gongsi Xi’an Banshichu Deng yu Zhongguo Jianshe Yinhang Gufen
Youxian Gongsi Xi’an Gaoxin Jishu Chanye Kaifaqu Zhihang Jiekuan Jiufen Zaishen’an (中国东方资产管
理公司西安办事处等与中国建设银行股份有限公司西安高新技术产业开发区支行借款纠纷再审案)
[Retrial of Loan Dispute between China Orient Asset Management Co Ltd et al and the Xi’an High-Tech Area
Branch of China Construction Bank], （2010）Shan Min Zai Zi Di 00013 Hao,Shaan’xi Higher People’s Ct.
Apr. 7, 2011, available at www.pkulaw.cn.
277
Id.

50
 false capital contributions should be upheld.

However, the appellate court – in this case the Shaan’xi Higher People’s Court, disagreed with
such legal reasoning. The appellate court ruled that the application of the veil piercing doctrine
was wrong. On this point, the Higher Court opined:278

Undercapitalization as a ground for piercing the corporate veil does not mean that a court can
simply make such determination by comparing the company’s existing capital to the minimum
registered legal capital prescribed in the Company Law. Instead, it means the company’s actual
capital is excessively lower than the risks that are generated by the business nature of the
company. Thus, in this case, the court cannot apply the piercing corporate veil rule simply on
the grounds that the shareholders had made false capital contribution or withdrawn capital from
the company.

In the end, the appellate court still ordered the shareholders to compensate the plaintiff for the
same amounts, but it was fashioned on a different legal basis, namely that the shareholders
were held to have the liability of buchong peichang, or complementary liability.279
The difference between the Chinese and German positions should be noted. At one
time, both countries adopted a similar approach.280 However, as discussed above, Germany
now no longer considers undercapitalization that does not involve a breach of the capital
maintenance requirements as capable of leading to shareholder liability as the Supreme Court
considers such an approach to be inconsistent with limited liability. What is interesting though
is that both the first instance and appellate courts ordered the shareholders to compensate
COAMC to the extent of the false capital contributions and wrongful withdrawal of capital. It
is suggested respectfully that care should be exercised in fashioning such a remedy as the court
must be reasonably satisfied that there are no other creditors of the company which appeared
to be effectively insolvent. Payment by the shareholders of the capital they should have injected
or not withdrawn ought to be a complete discharge of their obligations which would leave other
creditors of the company without a remedy. This seems particularly unfair if the capital should
have belonged to the company in the first place and therefore be distributed to creditors on a
pari passu basis. The application of a ‘proper plaintiff’ rule in this context seems apposite.
Based on the opinion of the Higher People’s Court, veil piercing based on
undercapitalization in China need not be limited to the statutory minimum required by law.

278
Id.
279
Wen, supra note 257, at 344 states that under Article 23(2) of the Company Law, a required precondition of
incorporation is having capital contributions of shareholders reach the statutory minimum amount of capital.
If shareholder’s capital contributions fail to meet the minimum legal threshold, the company will never be
duly incorporated and thus will not have separate personality in the first place. Such cases should not be
regarded as veil piercing cases but some courts have mistakenly relied on Article 20.
280
Alting, supra note 78, at 210.

51
Where payment is ordered to be made directly to some creditors where there are other possible
creditors, the risk is that from a practical standpoint the latter may not being able to recover
meaningfully if the shareholders’ assets are depleted from earlier judgments. It places well-
resourced and better informed creditors in a superior position. This note of caution applies not
only to China. Where undercapitalization gives rise to a remedy and has also led to insolvency,
it may be more optimal to explore means to facilitate a corporate claim the success of which
will benefit the creditors collectively rather than to allow veil piercing actions by individual
creditors.
Leaving aside undercapitalization, the other three grounds of commingling, undue
control, and fraud or other improper conduct mentioned by Huang as grounds for veil piercing
are matters that would support veil piercing in other jurisdictions as well. It would appear
nevertheless that a success rate of 63.64% of veil piercing cases over a five-year study period
seems significantly higher than that found in major common law jurisdictions. 281 Another
survey of published cases from 2006 to the end of 2012 found that the court lifted the veil in
75.27% of cases. 282 Yet Huang rightly states that caution should be exercised in drawing
conclusions as the numbers may be affected by several contextual factors such as the stage of
economic development and the number of firms in each jurisdiction.283 Some indication of the
former may be seen by the fact that a substantial percentage of piercing cases were brought in
economically less developed regions of China and cases from such regions were more likely
to have high rates of veil piercing. It is possible that abuse of the corporate form is more
prevalent in economically less developed regions due to lesser knowledge of corporate law and
thus a higher level of corporate irregularities.284 If Huang’s finding is true, it also raises the
question of whether judges in such regions have the same appreciation of corporate law as their
brethren in more economically sophisticated regions do.285
One reason for the higher rate of piercing in China may be that judges in some cases
have been overly enthusiastic in their approach towards veil piercing. This can be seen by
analyzing some of the commingling cases which constitute the largest number of cases brought
and where veil piercing occurred. 286 Where shareholders (or the corporate parent) do not
properly distinguish between corporate assets and their assets, it raises the issue of whether the
shareholders treated the corporation as a mere extension of themselves. By not recognizing the
integrity of the corporate entity as a matter of fact, the court may infer that the real parties to

281
Huang, supra note 252, at 748. However, the system of law reporting in China is by no means as
comprehensive as that found in major common law jurisdictions and therefore there is a danger of reading
too much into this statistic.
282
Hawes et al, supra note 257, at 350.
283
Huang, supra note 252, at 748.
284
Id. at 751.
285
Contrast Hawes et al, supra note 257, at 351–52 which found no significant distinction between economically
developed and less-developed regions, or between lower-level and higher-level courts.
286
Huang, supra note 252, at 760.

52
the apparent corporate transactions were the shareholders and not the corporation itself. Using
the language of Lord Sumption in Prest v. Petrodel287 the shareholders were merely concealing
their true involvement. Another aspect of commingling is that the financial affairs of the
company and that of another person, usually a shareholder, are such a “mess” that it is
impossible to distinguish which person is the owner of the assets in question. Whatever the
approach, the essence of commingling is that no distinction is made or can be made between
the assets of the company and that of its shareholders. They are therefore to be treated as one
and the same for this purpose. If this is the correct conclusion to be drawn, no part of the
commingled assets should be regarded as having ever properly been owned by the company
given that the company’s involvement is merely illusory,288 or it is impossible to make any
distinction between corporate and personal assets. In some instances, the court may even
conclude that the company simply held the assets on trust for the shareholders.289 There is a
subtle but real difference between commingling and the misappropriation of corporate assets
by the company’s shareholders. In the latter, the shareholders recognize that the assets belong
to a separate entity but improperly/dishonestly withdraw such assets. The corporation may
therefore maintain a claim for the recovery of its assets. Misappropriation is a form of theft that
can also give rise to criminal prosecution and in this context requires a particular mental state
involving some element of dishonesty.290
In Wuhan Vegetables Co v Wuan Jiutian Trade Development Co 291 the plaintiff
transferred its equity interest in Baishazhou LLC to Tianjiu Co. Tianjiu never fully paid the
plaintiff for this transfer. Tianjiu later transferred part of this equity interest to Mrs Wang
Xiuqun, making her a shareholder with a 70% interest in Baishazhou. Two subsequent transfers
then happened. First, Mrs Wang transferred her equity interest in Baishazhou to China Velocity
Group Limited, and subsequently she transferred her equity interest of 96% in Tianjiu to two
individuals, Huang Yi and Tao Xin. The court allowed the corporate veil to be pierced against
Mrs Wang. In the court’s view, the aforementioned acts of Mrs Wang, the majority shareholder
who had absolute control of Tianjiu, coupled with the fact that she did not have evidence to
prove that consideration was duly paid to the plaintiff for the transfer of its equity interest,
indicated that Mrs Wang had successfully “escaped” from Tianjiu by transferring her equity
ownership in Tianjiu to others. The court concluded that what she did had negatively affected
the realization of the debt claims of the plaintiff as a creditor of Tianjiu. Accordingly, Mrs Wang

287
Prest [2013] 3 WLR 1 [28].
288
See also Tan, supra note 77, at 23–26.
289
For example, see Asteroid Maritime Co Ltd v The owners of the ship or vessel “Saudi al Jubail” [1987]
SGHC 71; Gencor ACP v Dalby [2000] All ER (D) 1067.
290
For example, see section 403 of the Singapore Penal Code (Cap. 224) and section 1 of the UK Theft Act 1968.
291
(武汉市蔬菜集团有限公司诉武汉天九工贸发展有限公司等股权转让合同纠纷案) [Wuhan Vegetables
Co v Wuan Jiutian Trade Development Co), (2009) Wu Min Shang Chu Zi No. 66, Wuhan Interm. People’s
Ct., December 25, 2009, original judgment available at www.pkulaw.cn.

53
was jointly liable for Tianjiu’s debts under Article 20(3) of the Company Law. One way of
analyzing this case is that it is an example of a shareholder abusing the corporate form to
defraud creditors. Another explanation is that the defendant, Mrs Wang, had misappropriated
the assets the company had purchased from the plaintiff. This single act of misappropriation
was held to constitute evidence of commingling of assets thus justifying veil piercing.292 If this
is the correct explanation of the case, in addition to the point made earlier regarding the
distinction between commingling and misappropriation, it is difficult to see how a single act
such as this could have amounted to commingling which should usually require a pattern of
activity that demonstrates unequivocally that the separate personality of the corporation was
not respected.
Another decision where the same criticism can be made is Yueyang Shenyu Grease
Trading Ltd. v Lin and Others,293 a decision of the Yueyang Municipality Intermediate Court.
In this case, the defendant company had two shareholders, Mr Liu and Mr Hu. The company
hired one Mr Xu as the CEO and a Mr Peng as the finance manager. It was orally agreed that
Messrs Liu, Xu and Peng would be the shareholders of the company holding 40%, 40% and
20% respectively. Notwithstanding this agreement, Mr Liu and Mr Hu remained the only
shareholders on record though Messrs Liu, Xu and Peng were regarded within the company as
the actual shareholders and controllers. The plaintiff made a number of payments to the
company for purchases of cotton. The finance manager deposited these payments into his
personal bank account to minimize the company’s income for tax purposes. When the cotton
ordered by the plaintiff was not delivered, the plaintiff brought a claim against the company
and joined its shareholders as defendants as the company did not have sufficient assets.
At first instance, the court ruled that the three shareholders who were regarded as
actual shareholders, namely Messrs Liu, Xu and Peng, had abused the company’s independent
legal personality by commingling personal assets with corporate property. They were therefore
held jointly liable for the company’s debts. Mr Hu on the other hand was not liable. The
appellate court revised the first instance decision. It ruled that Mr Liu, as the company’s legal
representative and a registered shareholder had indeed abused the company’s separate
personality and harmed the interests of creditors. The corporate veil was therefore correctly
lifted in relation to him. As Mr Hu was also a shareholder he too was liable for the company’s
debts. The finance manager, on the other hand, was not a shareholder and therefore veil piercing
was inapplicable. The court did not consider Mr Xu’s case as he had accepted the first instance
decision.
If the purpose for the monies being placed in the finance manager’s bank account was

292
Huang, supra note 252, at 765.
293
Yueyang Shenyu Youzhi Maoyi Youxian Gongsi deng yu Lin XX deng Zhaiquanren Liyi Zeren Jiufen
Shangsu An (岳阳神禹油脂贸易有限公司等与林 XX 等债权人利益责任纠纷上诉案), [(2010) Yue Zhong
Min San Zhong Zi Di 276 Hao, Yueyang Interme. Peple’s Court, September 30, 2011, available at
www.pkulaw.cn.

54
tax evasion, the characterization of the case as one involving commingling may not be correct.
Rather it is a case of shareholders recognizing that they were removing corporate assets with a
view to under-declaring the company’s income. The proper remedy would appear to lie with
the company for the recovery of its assets against the finance manager and possibly other
persons engaged in the scheme as co-conspirators or joint tortfeasors.294 The finding of liability
against Mr Hu seems particularly harsh given that he was not an active shareholder, presumably
because it was intended that at some point there would be a transfer of his shares. It is difficult
to see how in this context he could be regarded as a shareholder who had abused the
independent legal status of the company.295 It would seem over-inclusive and contrary to the
public policy underlying incorporation to impose liability on shareholders who are merely
passive investors and therefore not involved in any abusive conduct.
The position regarding commingling in the Chinese context is also unusual in the
context of one-person companies because the burden of proof in the case of such companies is
that the shareholder must establish that the property of the company is independent of his own.
If he cannot do so, he becomes personally liable for the debts of the company. This is set out
in Article 64 of the Company Law:296

Where the shareholder of a one-person company with limited liability cannot prove that the
property of the company is independent of his own property, he shall assume the joint and
several liability for the debts of the company.

It has been argued that it is extremely difficult for a defendant shareholder to discharge the
burden.297 If this is correct, it provides another explanation of why veil piercing takes place
more frequently in China. Yu and Kraver go further and suggest that beyond single-shareholder
companies the courts have appeared to shift the burden of proof from creditors to companies
and their shareholders more than the legislative language implies and this is the most plausible
explanation for the higher frequency of veil piercing in China. This shift of onus in veil piercing

294
For example, at common law joint tortfeasance may be established by showing that Messrs Liu and Xu
procured or authorized the finance manager to commit the wrongful act, see e.g. Mentmore Manufacturing
Co v National Merchandise Manufacturing Co (1978) 89 DLR (3d) 195; C Evans & Son Ltd v Spritebrand
Ltd [1985] 1 WLR 317; Gabriel Peter & Partners v Wee Chong Jin [1997] 3 SLR(R) 649.
295
Hawes et al, supra note 257, at 364 state that the finance manager had purchased the shares from the seller,
presumably Mr Hu, but the share transfer had not been registered. This may not be entirely accurate. While
the oral agreement contemplated that the finance manager would be made a shareholder, there was no sale of
Mr Hu’s shares to the finance manager.
296
Translation from http://www.npc.gov.cn/englishnpc/Law/2007-12/13/content_1384124.htm (accessed on
September 6, 2017).
297
Huang, supra note 252, at 765–66, citing as an example the case of Zhao Yongying Su Quzhou Weini
Huagong Shiye Youxian Gongsi deng Maimai Hetong JIufen An (赵庸英诉衢州威尼化工实业有限公司等
买卖合同纠纷案) [Zhao Yongying v Quzhou Weini Chemical Industrial Ltd Co], (2010) Qu Shang Chu Zi
No. 1130, People’s Court of Qujiang District of Quzhou City of Zhejiang Province, 2010. See also Yu &
Krever, supra note 257, at 76 & 80–81.

55
cases is allied to the absence in Chinese veil piercing cases of the responsibility of creditors to
protect themselves.298
The cited support for this broad proposition is not compelling. The case of Shanghai
Zhongbo Company (Appellant) v Anhui Water Conservancy Construction Engineering
Corporation and Others (Respondents)299 is cited as a typical example of the tendency to shift
the burden of proof away from creditors. The shareholders’ argument was that debts could not
be paid in the course of liquidation and the liquidation process was taking a lengthy period of
time because of inter alia complications from partial ownership of assets and difficulties
dealing with competing claims from other creditors. The appeal court did not require the
plaintiffs to show abuse; rather, the court indicated that the defendants had failed to provide
proof of the reasons offered for the delay and treated the non-payment for an extended period
as abuse. It is said that in the same fact situation, a common law court might very well have
come to a similar conclusion but first such a court would have required the creditor plaintiffs
to prove abuse by showing there were no legitimate reasons for extending the liquidation period
for such a long time.300
However, it is difficult to expect creditors in all instances to prove that there were no
legitimate reasons for the length of the liquidation period. These may not be matters particularly
within the knowledge of creditors. Given that the liquidation process had already been going
on for five years, together with the defendant company’s lack of cooperation during the process,
a common law court might well have taken the view that there was some prima facie evidence
of unreasonable delay such that the burden of proving that the delay was justifiable had shifted
to the defendant. Issues relating to the burden of proof are not static301 and can shift where, as
in this case, the objective facts call for an explanation that only the defendant can reasonably
provide. If the defendant cannot do so, it is not unreasonable for a court to find that the fault
for the delay can only be attributed to the defendant. Whether this should amount to abuse is a
separate issue. There are at least two possibilities. First, it may be arguable that if a defendant
company and its shareholders were intransigent in the liquidation process, the court could infer
from the circumstances as a whole that the corporate structure had been used in an abusive
manner. The decision, however, proceeded on the second possible mode of analysis, namely
that responsibility for the failure to complete the liquidation process ought to be placed on the
shareholders. On appeal, it was the former reasoning that was preferred. Relying on Article 20

298
Yu & Krever, supra note 257, at 82-84.
299
Shanghai Zhongbo Jingguan Luhua Yuanyi Youxian Gongsi yu Anhuisheng Shuili Jianzhu Gongcheng
Zonggongsi deng yu Gongsi Youguan de Jiufen Shangsu An (海仲伯景观绿化园艺有限公司与安徽省水
利建筑工程总公司等与公司有关的纠纷上诉案), (2011) Wan Min Er Zhong Zi Di 00007 Hao, Higer
People’s Court of Anhui Province, March 28, 2011, available at www.pkulaw.cn （hereinafter the Shanghai
Zhongbo case）
300
Yu & Krever, supra note 257, at 83.
301
See also Wen, supra note 257, at 352 on the dynamic nature of the burden of proof.

56
of the Company Law, the court ruled that on the evidence available (including evidence
provided by the parties which also comprised the repeated applications from the company to
delay the first-instance trial), it was clear that the shareholders intended to abuse the
independent corporate personality of the company and the shareholders’ limited liability, with
the consequence that the company’s veil should be lifted.302 On either analysis, there is no
basis to state that the courts have illegitimately shifted the onus of proof from creditors to
shareholders.
Beyond whether Chinese judges have adopted an overly broad view of commingling,
and if the burden of proof has been unfairly shifted from creditors to shareholders, it has also
been suggested that loopholes regarding shareholder performance in corporate liquidation may
have led judges to use veil piercing to play a gap filling role. It is argued that unlike many other
jurisdictions that have rules to prevent the liquidation process from being unduly influenced by
shareholders, many of these rules are scarce in China’s company law context. Rather than
independent liquidators who are insolvency professionals, Chinese company law allows
shareholders of a limited liability company to form a liquidation group, the composition of
which must be determined by the shareholders’ meeting. This has led to courts using veil
piercing to impose liability on shareholders where the liquidation process is not completed or
does not proceed in a reasonable manner.303

If this is one of the reasons that have led to a more liberal approach towards veil
piercing in China, it appears unjustified. Two points can be made. First, it is undoubtedly true
that under the Company Law creditors do not have a general right to initiate a corporate
winding up through the appointment of a liquidator or equivalent institution. Pursuant to Article
181 of the Company Law, a company is to be liquated if: (1) the circumstances for liquidation
provided for in the articles of association of the company occur; (2) the shareholders’ meeting
passes a resolution to liquidate; (3) liquidation is compelled by a corporate merger or division;
(4) the company’s license has been revoked or the company is ordered to close in accordance
with the law; (5) it is requested by shareholders who own at least 10% of the ownership of the
company in cases involving a corporate deadlock.
Corporate creditors are relegated to a secondary role. For example, where a company
is dissolved as a result of factors (1), (2), (4) and (5) in the preceding paragraph, it shall within
15 days from the date the reasons for dissolution prevail, set up a liquidation team to begin the
process. Where a company fails to do so, its creditors may apply to court to designate relevant
people to form a liquidation team.304 Creditors may also petition the court to form a liquidation
team in other circumstances such as when a liquidation team has been formed but has

302
See Shanghai Zhongbo case, supra note 299.
303
Wen, supra note 257, at 354-55.
304
PRC Company Law, art. 184.

57
deliberately delayed the liquidation, or a wrongful liquidation may seriously damage the
interests of the creditors or shareholders.305
It is understandable that where shareholders are in control of the liquidation process,
such control ought not to be unqualified as it can lead to prejudice to other stakeholders, in
particular creditors. Accordingly, in addition to creditors being allowed to file a petition to the
court in certain circumstances, there are also instances where shareholders can be held directly
liable to creditors. First, if a company does not form a liquidation team within the statutorily
prescribed period of 15 days and this has caused the depreciation, loss, damage or
disappearance of corporate assets, the creditors can ask the court to hold the responsible
shareholders liable for compensation to the extent of the value of the said assets.306 Second, if
the failure in performing the aforesaid obligations has caused the loss of important documents
and accordingly made it impossible for the liquidation to proceed, the court, at the request of
the creditors, can additionally hold the responsible shareholders jointly liable for the company’s
debts. 307 Third, creditors can ask the court to make the shareholders liable to provide
compensation if the shareholders (and directors in joint stock limited companies) maliciously
disposed of corporate assets and caused losses to the creditors after the company’s dissolution,
or if the shareholders wrongly caused the companies registration authority to deregister the
company without it being lawfully liquidated.308 In addition, if the company does not have
sufficient assets to satisfy the claims of the creditors at the time of its dissolution, the creditors
can ask the court to hold the shareholders liable to the extent of their unpaid capital
contributions.309
Members of the liquidation team, which may include shareholders, can also be liable
to creditors where they do not discharge their obligations properly, such as where they fail to
give notice to all known creditors of the company’s liquidation; the liquidation team
implements a liquidation scheme that is not confirmed by shareholders or the court as the case
may be; or there has been violation of laws, administrative regulations, or the company’s
articles of association, thereby causing loss to creditors or the company.310
While the application of these rules may lead to shareholder liability, it is incorrect to
regard them as veil piercing cases. Insofar as the shareholders are liable to creditors, the liability
arises when the company is liquidated for dissolution and deregistration. The legal test of
Article 20 of the Company Law does not apply in these circumstances. The shareholders will
be held liable to provide compensation to creditors jointly and severally for the debts of the
company if it can be established that in the course of and related to the liquidation process they
were directly or indirectly involved in acts that made the company unable to repay its debts,

305
SPC Company Law Interpretation (II), Article 7.
306
Company Law Interpretation (II), Article 18(2).
307
Company Law Interpretation (II), Article 18(3).
308
Company Law Interpretation (II), Articles 19 and 20.
309
Company Law Interpretation (II), Article 22.
310
Company Law Interpretation (II), Articles 11, 15 and 23.

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including non-payment of outstanding capital contributions. Liability is premised on the
liquidation having been conducted improperly and is different from shareholders’ abuse of the
independent legal status of corporate personality and shareholders’ limited liability as required
by Article 20 of the Company Law. The relevant rules in the aforesaid judicial interpretations
are not aimed at clarifying Article 20, and hence are not interpretations about the doctrine of
veil piercing.
The second point is that there is another legislation that allows creditors to initiate the
liquidation of a company. Under the PRC Enterprise Bankruptcy Law 2006, which governs
bankruptcy issues of all legal business persons including companies established under the
Company Law, where a company fails to repay its debts and its assets are not sufficient to pay
all debts that are due, or the company is obviously incapable of paying its debts, its creditors
can petition the court for revival (re-organization), compromise, or bankruptcy liquidation.311
Even if the liquidation process under the Company Law has commenced, creditors are free to
petition the court to initiate the bankruptcy procedure under the Enterprise Bankruptcy Law as
long as it can be established that the conditions of Article 2 are met. These two forms of
liquidation found in different Chinese legislation are not unusual and can be broadly equated
with voluntary and creditor windings-up in Commonwealth jurisdictions such as the UK and
Singapore. It is sensible for a liquidation regime to allow shareholders to liquidate a company
in certain circumstances such as where the objectives set out in the constitution have been
fulfilled or the requisite majority of shareholders pass such a resolution, while allowing
creditors to do so if the corporation becomes insolvent. This is because where a company is
insolvent, its remaining assets effectively belong to creditors since they are the ones who are
entitled to the residue in priority to shareholders. Creditors should therefore have the right to
commence liquidation to ensure an orderly distribution of corporate assets.
Given the above, if cases in the insolvency setting have contributed to the greater than
average percentage of successful veil piercing cases, the number of such cases has been
overstated by the inclusion of cases that ought not to involve piercing at all. In addition, if veil
piercing has taken place because of a perceived gap in the insolvency framework, this is also
not justified. One example of the former is Hengsheng Co. Ltd v Xianglan Co. Ltd. 312
Hengsheng had purchased RMB 2.2 million worth of electric cables from Xianglan from 2000
to 2003. Hengsheng failed to repay Xianglan. In March 2003 the parties reached a repayment
agreement under which Hengsheng was obliged to make payment in full before 2007.
Hengsheng’s business license was revoked by the local Administration of Industry and
Commerce on 30 May 2005 because it failed the government’s annual inspection of business

311
PRC Enterprise Bankruptcy Law 2006, art. 2.
312
Hengsheng Gongsi yu Xianglan Gongsi Jiekuan Hetong Jiufen Zhixing An (恒生公司与橡缆公司借款合同
纠纷执行案) [Hengsheng Co. Ltd v Xianglan Co. Ltd on Enforcing a Lending Contract], (2015) Yang Hui
Zhi Zi Di 393 Hao (2015), Yanggu Basic People’s Court, June 30, 2015, available at www.pkulaw.cn.

59
enterprises. According to Article 184 of the Company Law, the shareholders of Hengsheng, Mr
Zheng, Mr Li and Mr Zhang, should initiate liquidation of the company within 15 days.
Hengsheng failed to make payment as had been agreed, and Xianglan brought a legal
action in 2011. An order was made in favour of Xianglan and it applied to enforce the order.
On 30 June 2015, the Court issued its enforcement decision, in which Article 20(3) of the
Company Law and Article 18 of Company Law Interpretation (II), among others, were relied
upon as the legal basis on which the court ordered that the aforementioned Messrs Zheng, Li
and Zhang were persons against whom the agreement could be enforced. The court held that
the corporate veil should be pierced as against them as their failure to liquidate the company
constituted abuse of corporate personality and limited liability. Although Article 18(2) of
Company Law Interpretation (II) was also properly invoked it is questionable if veil piercing
should have been relied upon.

V. SOME CONCLUDING OBSERVATIONS

This paper goes beyond the traditional functional method in comparative law which
mainly looks at how different legal systems offer solutions to the same problems. 313
Undoubtedly, the doctrine of veil piercing has been adopted in all the jurisdictions under
comparison in this paper, and there is also striking similarity in the notion of abuse that is said
to underlie the disregard of the corporate form so as to hold shareholders personally liable for
corporate debts. However, in addition to this, the history of how corporate law came into
existence is a factor that has influenced the shape of the doctrine. Furthermore, the law in
Singapore and Japan demonstrate the effect of transplantation with strong similarities with the
legal approaches in England and Germany respectively. China on the other hand appears to
more closely resemble the United States which is perhaps not surprising given that it has a
specific statutory provision that recognizes veil piercing, thereby implying a broader role for
the doctrine relatively speaking.
By critically examining the relevant statutory provisions as well as judicial reasoning
in veil piercing cases against the doctrine’s underlying conceptual framework, we can see how
the doctrine is used, arguably misused, or even sidelined in the jurisdictions under comparison.
In particular, we caution against indiscriminate use of veil piercing where more appropriate
legal tools are available. Veil piercing can be a blunt and simplistic instrument to achieve
perceived justice without addressing the real policy issues that are at the heart of other areas of
the law. We find for example that the doctrine has become largely unnecessary in Japan and
Germany because of other remedies that provide more direct and effective solutions. In
England (and perhaps Singapore if the courts adopt the approach advocated by Lord Sumption)

313
ZWEIGERT & KÖTZ, supra note 179, at 34.

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veil piercing may follow the same route given that even prior to Prest v. Petrodel the approach
towards veil piercing in both jurisdictions was already conservative. Lord Sumption’s approach
certainly leaves very little room for the veil piercing doctrine to operate.314 It is interesting to
observe that both countries are highly mercantilist in outlook which may (at least partially)
explain the strong tendency not to disregard corporate personality as evidenced by the paucity
of veil piercing cases. Judicial policy is obviously inclined towards giving businesses certainty.
On the other hand, the United States, also a common law country, is, relatively speaking,
significantly more liberal in piercing the veil even though its courts articulate that this should
be done exceptionally.
Similarly, the Chinese courts also adopt a more liberal approach towards veil piercing
and we believe that our analysis of the veil piercing doctrine in Chinese company law offers
an original perspective of how this doctrine is (mis)understood and applied by Chinese courts
through judicial interpretations and judgments. The evolution of the doctrine in China to its
final codification into the Company Law (and the approach taken by the other jurisdictions
discussed) is one indication of the strong trend of convergence of corporate law across the
world. Yet the doctrine’s application by Chinese courts is also a demonstration of a material
degree of divergence. Formal law which has converged in this area, and the law in practice,
can be very different and this is true not only in the case of China. Where China is concerned,
divergence in practice is caused partly by the uniqueness of the business context which, because
of its stage of economic development, is less attuned to developed notions of governance. At
the same time, we also argue that some of the interpretations by Chinese courts are doctrinally
questionable, which partly explains the significantly higher number of successful veil piercing
cases, though we disagree with some of the reasons advanced by others for this. As the doctrine
is a relatively new transplant to China, it is understandable that it will take some time before
the law “settles”.

314
Indeed, Lord Neuberger in Prest [2013] 3 WLR 1 [79] was initially strongly attracted by the argument that
the veil piercing doctrine “should be given its quietus”.

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