Piercing The Corporate Veil: Historical, Theoretical and Comparative Perspectives

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Piercing the Corporate Veil: Historical, Theoretical and Comparative

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Berkeley Business Law Journal
Volume 16 | Issue 1 Article 4
2019
Piercing the Corporate Veil: Historical, Theoretical

& Comparative Perspectives
Cheng-Han Tan
Jiangyu Wang
Christian Hofmann
Follow this and additional works at: https://scholarship.law.berkeley.edu/bblj

Part of the Law Commons
Recommended Citation
Cheng-Han Tan, Jiangyu Wang, and Christian Hofmann, Piercing the Corporate Veil: Historical, heoretical & Comparative Perspectives,
16 Berkeley Bus. L.J. 140 (2019).
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4. TAN WANG HOFMANN- FINAL CHECK (005) (1) (DO NOT DELETE) 2/20/2019 2:51 PM
PIERCING THE CORPORATE VEIL:

HISTORICAL, THEORETICAL AND
COMPARATIVE PERSPECTIVES
Tan Cheng-Han, Jiangyu Wang, Christian Hofmann, E W Barker Centre for
Law and Business, National University of Singapore
Introduction............................................................................................. 140
Historical Context ................................................................................... 141
Veil Piercing – A Theoretical Analysis .................................................. 150
Veil Piercing – A Comparative Analysis ................................................ 157
England and Singapore ................................................................ 158
United States................................................................................ 160
Germany ...................................................................................... 170
Veil-piercing in the context of the smaller German company
type, the GmbH .............................................................. 171
Cases of undercapitalization and liability for “annihilating
interference” .................................................................. 172
Principles of German law of capital maintenance................ 173
The Trihotel judgment of the Federal High Court (BGH) ... 175
The GAMMA judgment of the BGH ................................... 178
Veil-piercing for commingling of corporate and private assets
....................................................................................... 180
Further scenarios that may be regarded as veil-piercing in
other jurisdictions .......................................................... 183
People’s Republic of China ......................................................... 186
The evolution of the veil piercing doctrine in China ........... 188
Grounds for veil piercing in judicial practice ...................... 191
Some Concluding Observations.............................................................. 203
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,
this is a fundamental aspect of corporate law and courts hesitate to depart from
it. Nevertheless, the principle of separate personality is not absolute. In both,
common law and civil law countries, the courts have the power to depart from it.
Where the courts do not give effect to separate personality, it is often said that
the courts “pierce” or “lift” the corporate veil. This will usually, but not
140
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. Both
common law jurisdictions, including England, Singapore, and the United States,
and civil law countries, including China and Germany, are discussed in this
paper. The main purpose of this comparison is to offer a reasonably
comprehensive and thorough examination of how courts in these jurisdictions
apply the principle of veil piercing, which has been formally adopted either
through case law or legislation. This paper employs the functional method in
comparative law, but we also consider other aspects, including the law in context
method and the historical method. The countries being compared, whether they
use common law or civil law systems, share many parallels in part because the
historical circumstances leading to the rise of corporate personality were very
similar, and also because the corporate 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 such decisions give 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 a paucity of academic
commentary in this area. 2
This paper proceeds as follows. In the next part, we will outline the historical
context that led to the rise of the modern corporation. After this, the paper sets
out the conceptual 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.
HISTORICAL CONTEXT
Certain business arrangements, including forms approximating to the modern
partnership, can be traced back to ancient Rome and perhaps even before. Today,
we are familiar with the limited partnership as well as the general partnership,
both of which have roots in Roman times. The Roman societas (partnership)
allowed the socius (partner) to contribute capital or labor towards any enterprise,
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.
141
Berkeley Business Law Journal Vol. 16:1, 2019
commercial or otherwise, unless the enterprise was illegal. 3 The relationship

between the partners was contractual. Typically, the partners were responsible
for the societas’ debts and had rights to the societas’ claims. However, it was
possible to also structure the societas in a manner where a partner could be
exempt from all losses. 4 Therefore, the agreement between the partners
resembles a current general or limited partnership. 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. Any contract entered into by a
particular socius on behalf of the societas was the responsibility of that socius
only vis-à-vis the other contracting party. 5 The contract between the socii
determined the extent to which a socius could ask other socii 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, although over time some of its more individualistic characteristics were
abandoned to facilitate management. For example, 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 socii if he acted for the societas and not in his own name. 6 This
made the other socii directly liable to creditors. Over time, this development 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 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
of the modern company. The societas publicanorum was a variation of the
societas used by private entrepreneurs who entered into public contracts with the
state. The societas publicanorum resembled the modern shareholder company
with its ability to issue traded, limited liability shares, and the departure of socii
did not affect its existence. A single person could contractually bind the firm and
3. Henry Hansmann et al., Law and the Rise of the Firm, 119 Harv. L. Rev. 1335, 1356–57 (2006).
4. ULRIKE MALMENDIER, SOCIETAS, THE ENCYCLOPEDIA OF ANCIENT HISTORY 6304, 6304–06
(2013).
5. REINHARD ZIMMERMANN, THE LAW OF OBLIGATIONS: ROMAN FOUNDATIONS OF THE CIVILIAN
TRADITION 455 (1996).
6. Id. at 469.
7. Id. at 455–56; Ulrike Malmendier, Law and Finance “at the Origin” 47 J. ECON. LITERATURE
1076, 1088 (2009).
142
assume rights in the name of the firm. Some sources even describe it as
equivalent to a legal person. 8 The private entrepreneurs constituting the societas
publicanorum were known as “government leaseholders” or publicans. 9
Therefore, unsurprisingly, from the 16th century in England there were
attempts to create business organizations that had the same characteristics as the
societas publicanorum. In England, the early forms of corporateness were the
ecclesiastical and the lay. Of the latter, there were municipal corporations during
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. Boroughs, whether they had or did not have a royal charter, also
apparently held these privileges. 10 However, the rights that were not held through
a charter were not safe until the Crown recognized them. The authority of the
Crown supplemented natural prescriptive right. 11
The gilda mercatoria, which was an incorporated society of merchants
having exclusive rights of trading within a borough, was another early form of
corporateness. As they were associated with boroughs there is some controversy
about whether the grant of gilda mercatoria to the merchants of a borough was
a grant of corporateness to the borough as well. The intimate connection between
them makes it difficult to separate the two as distinct organizations. 12
Nevertheless, the fact that, occasionally the status of liber burgus (free borough)
and gilda mercatoria were granted separately suggests they were distinct. 13
Subsequently, the grant of royal charters extended to commercial enterprises
beyond those linked to a borough. 14 A few of the most famous commercial
enterprises included the East India Company, Standard Chartered Bank and
Royal Bank of Scotland. Aside from royal charters, the corporate form could also
be attained through an Act of Parliament. These were not frequently granted and
likely required either political connections, wealth or a combination of both.
Accordingly, a substitute developed. 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
8. Malmendier, supra note 7, at 1084–89.

9. Id. at 1085.
10. See Cecil Thomas Carr, Early Forms of Corporateness, in 3 SELECT ESSAYS IN ANGLO-
AMERICAN LEGAL HISTORY 129 (1909).
11. Id. at 138.
12. COLIN ARTHUR COOKE, CORPORATION, TRUST AND COMPANY: AN ESSAY IN LEGAL HISTORY
21 (1950).
13. Id. at 177–78.
14. The grant of royal charters also extended to other bodies, such as universities and professional
organizations. Further, see STEPHEN BAINBRIDGE & TODD HENDERSON, LIMITED LIABILITY: A LEGAL
AND ECONOMIC ANALYSIS 27–31 (2016).
15. PAUL L. DAVIES, GOWER’S PRINCIPLES OF MODERN COMPANY LAW 23 (6th ed. 1997).
143
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. 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. They differed from a
typical partnership because they generally consisted of many members, and this
meant that the articles of agreement between the parties were usually very
different. 20 This structure was not without its problems as partnership law was
not well suited for a large association. For example: (1) each of the investors was
liable for the joint stock company’s debts; (2) each investor had power to bind
the others to a contract with outsiders; and (3) 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.
The British Parliament intervened to curb the gambling mania by enacting the
‘Bubble Act’ of 1720. 23 The purpose of the Act was to prevent persons from
acting as if they were corporate bodies, or to have transferable shares without
any authority from the British Parliament. 24 Throughout the eighteenth century
and beyond the shadow of 1720 retarded the development of incorporated
companies. 25
16. Re Agriculturist Cattle Ins. Co. (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 (17th ed. 2018).
18. DAVIES, supra note 15, at 21.
19. See 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, 101 (2d ed. 1807); see also
NATHANIEL LINDLEY, A TREATISE ON THE LAW OF COMPANIES, CONSIDERED AS A BRANCH OF THE LAW
OF PARTNERSHIP 608–09 (5th ed. 1889).
21. AUSTIN ET AL., supra note 17, 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, 888–89 (2000).
23. Royal Exchange and London Assurance Corporation Act, 1719, 6 Geo. 1, c. 18 (Eng.).
24. COOKE, supra note 12, at 85.
25. DAVIES, supra note 15, at 28; see also WILLIAM ROBERT SCOTT, THE CONSTITUTION AND
FINANCE OF ENGLISH, SCOTTISH AND IRISH JOINT-STOCK COMPANIES TO 1720, at 438 (1912).
144
Notwithstanding the Bubble Act, unincorporated joint stock companies

continued to exist. An important provision of the Act was 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 also be directors. 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 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
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 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. See COOKE,, supra note 12, at 87.
32. Hallett, 21–22; Re. Family Endowment Soc’y (1870) L.R. 5 Ch. App. 118, 136–37; Re European
Assurance Soc’y (Hort’s Case) (1875) 1 Ch. D. 307, 323–25.
33. See WILLIAM SEARLE HOLDSWORTH, A HISTORY OF ENGLISH LAW 205 (3rd ed. 1925).
145
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
and marked the beginning of modern company law in England. 38 The Act of
1844 came about because of the continued importance of joint stock companies.
In addition, concerns 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. It had not been included in the 1844 Act because there
continued to be strong reservations against any extension of limited liability. 40
For instance, according to the 1854 report of the Royal Commission on
Mercantile Laws appointed in 1853, a majority opposed extending limited
liability to joint stock companies. 41 The commercial community also expressed
dissenting views. For example, the Manchester Chamber of Commerce thought
that limited liability was subversive of the high moral responsibility that was the
hallmark of the law of partnership. 42 A Manchester manufacturer said 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 unscrupulous promoters using
corporate vehicles 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
34. See id. at 213.

35. An early observation of what is today known as the ‘agency’ problem.
36. 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.
146
of those who did not welcome the democratisation of a business vehicle that
could lead to more competition. 44
Evidently, these concerns did not prevail. 45 One reason 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.
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 political 51 as they are economic.
Ultimately, corporations, like other institutions, must continue to justify their
existence by demonstrating that whatever their faults, they bring utility to society
that is not easily substitutable. It follows (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, and 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 Revolution,
44. See MCQUEEN, supra note 27, at 81–86.

45. Mahoney, supra note 22.
46. MCQUEEN, supra note 27 at 99–100.
47. HUNT, supra note 39, at 120.
48. See 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).
147
a strong and growing prejudice in favour of equality opposed the English

tradition that corporate powers be granted only in rare instances. 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, the State of New York became the first to pass a general
incorporation statute for businesses, although it originally only applied to
companies seeking to manufacture particular items, such as anchors and linen
goods. 56 Soon, the types of businesses eligible to incorporate 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. It arose because
of the pressure 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. It was also a matter of protracted political struggle.” 59
Taking two examples in Continental Europe, in 1848, Sweden 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 a number of German states, the pressure to
53. 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. FRIEDMAN, supra note 52, at 172; BAINBRIDGE & HENDERSON, supra note 14 at 37–38.
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 (quotations omitted).
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)
(quotations omitted).
60. CHARLES P. KINDLEBERGER, A FINANCIAL HISTORY OF WESTERN EUROPE 204 (2006).
148
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 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 people often
entered transactions based on 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 informed 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 eventually led to the promulgation of the 1993 Company Law,
which took effect on July 1, 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.
61. Peter Muchlinski, The Development of German Corporate Law Until 1990: An Historical
Appraisal, 14 GERMAN L.J. 339, 345–46 (2013) (citations omitted).
62. William C. Kirby, China Unincorporated: Company Law and Business Enterprise in Twentieth-
Century China, 54 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).
149
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
of the country to foreign trade. In addition, the Meiji government felt that a
modern commercial and corporate law system was necessary for 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 were at one
time heavily modelled after German corporate law, although American law has
since become increasingly influential. In many other parts of Asia that were
colonized such as Singapore, colonial governments introduced Western
corporate law and naturally mirrored the law in the colonizing country. 68
VEIL PIERCING – A THEORETICAL ANALYSIS

The brief historical analysis outlined above reminds us that even though we
currently 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. Corporate legislation implicitly tolerates these risks for the greater
good.
Statements such as the following have been made in numerous US cases 69
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.
This is the norm today; however, corporate legislation will often contain
express exceptions to separate personality or limited liability, 70 and it is not
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).
150
unusual for other legislation to express exceptions as well in specific

circumstances. 71 Such exceptions arise because of a policy choice that the
benefits of incorporation ought not to be fully available in such instances.
Given the existence of specific legislative carve outs, and the apparently
unqualified nature of limited liability in most jurisdictions, 72 it is conceivable
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
extend liability to shareholders or directors of companies. When corporate
personality is ignored or liability is extended, it is often said that the courts are
piercing or lifting the corporate veil, thereby allowing the courts 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 attributed only to the company.
What justifies such judicial intervention? In common law countries, 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 be fairly implied
from the express terms of the legislation and its purpose. 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, Salomon v. A. Salomon & Co. Ltd., it was
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
71. See e.g., Residential Property Act (Cap. 249, Rev. Ed. 2009) (Sing.), § 2, defining a “Singapore
company” as generally one which is incorporated in Singapore, and additionally all its directors and
members must be 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 which is found in Article 20 of
the PRC Company Law promulgated by the National People’s Congress, is an outlier, as we discuss in
the part on the People’s Republic of China 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 at 784; TLIG Maintenance Services, 218 So. 3d at 1271.
151
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 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 concluded that there are implicit 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. 78
Using Germany as a civil law comparator, Germany shares similarities with
the English common law approach insofar as courts are showing growing
reluctance to pierce the corporate veil. In Germany, when limited liability is
disregarded, it 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.” 79 Under the modern approach, courts limit veil
piercing to the scenario of commingled assets and otherwise rely on the law of
torts to deal with instances in which shareholders intentionally lead companies
into insolvency.
Given the importance of legislative policy to determine when piercing 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 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 advantages have been discussed widely elsewhere and will not be repeated
here. 81 Also, courts tend to be sensitive to the need for certainty in matters of
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. See e.g., First National City Bank v. Banco Para El Commercio Exterior de Cuba, 462 U.S. 611
(1983).
79. Overall outdated because of recent judicial changes, but still correct in this respect. See 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) (citations omitted).
80. See e.g., Prest v. Petrodel Resources Ltd [2013] UKSC 34; [2013] 3 WLR 1 (Eng.) (hereinafter
“Prest”); Alting, supra note 79, at 191. Although US courts affirm the exceptional nature of veil piercing,
the courts there appear more willing to pierce the corporate veil, and courts in China appear even more
willing to do so. This is discussed in the part on the People’s Republic of China 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, 95, 99–107 (1991); BAINBRIDGE & HENDERSON, supra note 14, Chapter 3.
152
business. The importance attributed to certainty is part of the explanation as to

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 inconsistent 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
judgment in Prest v. Petrodel Resources Ltd., opined 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 Arguably, this approach by the UK Supreme Court
is to be welcomed as it: (1) moves the focus away from metaphors such as
“sham” and “façade” to justify veil piercing and which provide virtually no
guidance to future courts, and (2) provides 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 abuse as the underlying principle
justifying disregard of the corporate personality. Under Glazer v. Commission on
Ethics for Public Employees, a court may, “pierce the corporate veil when the
established norm of corporateness has been so abused in conducting a business
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”); Faiza Ben Hashem v. Abdulhadi Ali Shayif [2008] EWHC 2380 (Fam), [2009] 1 F.L.R.
115 [163] (“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, at 20–21. See also Tan Cheng-Han, Piercing the Separate Personality of the
Company: A Matter of Policy?, 1999 SING. J. LEG. STUD. 531, 537–43 (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].
153
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 under the Federal system in the US courts are not
bound by a uniform position on veil piercing, generally there must be an element
of wrongdoing to justify disregarding corporate personality. 88
The importance of wrongdoing towards establishing abuse of the corporate
form is another reason piercing is an exceptional remedy. Controllers of
companies who in such capacity engage in wrongdoing will often find
themselves incurring liability to their companies. While such liability may be
academic where 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, in a superior position. The
more liberal the approach to veil piercing, the greater the risk of undermining the
insolvency process.
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
86. Glazer, 431 So.2d at 757 (citations omitted).

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).
154
unnecessary to pierce the veil.” Where this was not necessary, it would not be
appropriate to 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. Thus,
where the situation overlaps with another area of law, the underlying policies and
principles of that area, rather than veil piercing, 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 reflects the inherent inappropriateness of the claim.
An example of potential overreach may be found in cases where directors (or
senior management) were 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, 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
extend to corporate officers lest it gives rise to disincentives to manage
companies. Yet, this view conflicts with the principle that a person should answer
for their own 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 authorization, 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:
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
90. Prest [2013] 3 WLR 1 [35].

91. Prest [2013] 3 WLR 1 [64].
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.).
155
manufacturing and selling activity 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.
95
This approach has been accepted in a number of other Canadian decisions. 96

In Halford v. Seed Hawk Inc., 97 Pelletier J said 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 behavior 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 dominated and controlled, and being used as a shield
for fraudulent or improper conduct. Thus, the conduct in question must be akin
to fraud to warrant veil piercing. 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 Court of Appeal, held that where a statement of claim
alleged that the defendant had authorized, directed and/or procured acts that
amounted to corporate negligence, this was essentially a submission to lift the
95. Mentmore Manufacturing, (1978) 89 DLR (3d) 195 para. 28.

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
(“TV Media”) [118].
156
corporate veil. The court also agreed with the trial judge that the veil should be
pierced as the defendant director had authorized, directed or procured acts of
negligence. 102 In particular, the court said:
After all, a court can only find a director personally liable for authorizing, 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. 103
While such an approach seems to provide a basis to impose personal liability,
the issue may be better 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 “authorizes, procures or instigates the commission of a tort” by
another, the former becomes a joint tortfeasor who is equally liable with the
primary tortfeasor. 104 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 tort law, which constantly must
balance and assess the appropriate measures to regulate civil wrongdoings, 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,
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,
while corporate law lacks the analytical tools to address them. Engaging in veil
piercing creates a messy and uncertain shortcut.
VEIL PIERCING – A COMPARATIVE ANALYSIS

Having outlined the conceptual framework behind veil piercing, we now
analyze from a comparative perspective the judicial reasoning in veil piercing
cases and the specific factors that courts take into consideration when such issue
arises. The jurisdictions considered are England, Singapore, the United States,
Germany and China.
102. TV Media 3 Sing. L. Rep. at [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. TV Media 3 Sing. L. Rep. at [119].
104. DAVID HOWARTH ET AL., HEPPLE AND MATTHEWS’ TORT LAW 1121 (7th ed. 2015).
157
England and Singapore

Both England and Singapore have broadly similar approaches. Their courts
have increasingly recognized that the main issue in dispute in these corporate
liability cases revolves around whether corporate officers have abused or
misused the corporate form. Accordingly, England and Singapore have begun to
move away from the use of metaphors such as sham and façade as the basis to
disregard corporate personality.
One significant uncertainty in England relates to the scope of the veil piercing
doctrine. While it is an exceptional doctrine, Lord Sumption would limit it only
to a category of “evasion” cases, 105 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. 106 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 107 Human ingenuity suggests 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. 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
identification is relevant. Here, there is no lifting of the corporate veil, as the
court is merely looking behind the corporate structure to see what it is
concealing. 108 This is a well-known principle that goes beyond veil piercing.
According to Diplock LJ in Snook v. London and West Riding Investments Ltd,
parties carry out sham transactions when they execute documents or perform
other acts that are intended to give the appearance of legal rights and obligations
being created that are different from what they intend. 109 A company may be
used to create the appearance that it is a party to a transaction so as to mask who
the real parties are. 110 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. Traditionally, it has been considered an aspect of veil piercing and
105. Prest [2013] 3 WLR 1 [28], [33].

106. An example of which can be found in Gilford Motor Co Ltd v. Horne, [1933] Ch 935 (Eng.
C.A.) (hereinafter “Gilford Motor) (see Prest [2013] 3 WLR 1 [29]). 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].
107. Tan, supra note 77, at 31–32.
108. Prest [2013] 3 WLR 1 [28].
109. Snook v. London and West Riding Investments Ltd [1967] 2 QB 786, 802 (Eng. C.A.).
110. 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.
158
there are jurisdictions that treat it as such. 111 Concealment cases will therefore
be discussed in this paper.
Although the Singapore courts have generally endorsed the approach in Prest
v. Petrodel, that abuse of corporate personality is what underlies veil piercing, 112
the Singapore Court of Appeal had previously also 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. 113 This may arise because
the company was the agent or nominee of the controller. 114 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 Sumito, 115 the Court of Appeal accepted that the
appellant, Alwie, was the alter ego of a company known as OAFL. Accordingly,
the court reasoned that OAFL’s corporate veil should be pierced. Alwie
beneficially received payments from OAFL’s bank account and Alwie admitted
that he used the account as his personal bank account, which is an example of
commingling. In Alwie’s view, he was authorized and entitled to receive money
paid to this bank account. 116 In addition, Alwie also actively procured a payment
due to OAFL into his personal bank account. 117
Given the facts, Lord Sumption would have regarded this as a concealment
case. 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 cases
provide additional examples. In Re FG Films Ltd, 118 the court found that the film
in question, which was the subject of an application to receive a British film
classification, could not be classified as such 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
the making of the film in any real sense, which had cost at least £80,000. On this
basis, the court 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
111. For example, see the discussion below of cases involving commingling.
112. 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]; Goh Chan Peng v. Beyonics Technology Ltd [2017] 2
Sing. L. Rep. 592 [75]. See also Tjong [2012] SGHC 125 [67], which was decided before Prest v Petrodel.
113. 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].
114. NEC Asia Pte Ltd [2011] 2 Sing L. Rep. 565 [31].
115. Alwie [2013] 4 Sing. L. Rep. 308 [96] – [100].
116. Tjong [2012] SGHC 125 [70]; Alwie [2013] 4 Sing. L. Rep. 308 [98].
117. Alwie [2013] 4 Sing. L. Rep. 308 [99].
118. Re FG Films Ltd [1953] 1 WLR 483 (Eng. Ch. Div.).
159
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.” 119 Another example is Gencor
ACP v. Dalby, 120 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 court found that the controller of the
company was the alter ego of that company.
United States
Generally, in the United States, 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.” 121 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. A more uncertain basis involves companies that were
undercapitalized at the outset so that it could not pay its foreseeable debts.122
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. 123
The instrumentality doctrine was outlined in Lowendahl v. Baltimore & O.
R. Co. 124 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.” 125 Second, the defendant must have used such control “to commit fraud or
wrong, to perpetrate the violation of a statutory or other positive legal duty, or a
dishonest and unjust act in contravention of the plaintiff’s legal rights.” Finally,
119. Id. at 486.

120. Gencor ACP v. Dalby [2000] EWHC 1560 (Ch), [2000] All Eng. Rep. (D) 1067.
121. KLEIN ET AL., supra note 55, at 148.
122. Id. (quotation omitted).
123. Blumberg, supra note 59, at 304, n. 17; see also BAINBRIDGE & HENDERSON, supra note
14, at 86–102.
124. 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).
125. Id.
160
the control and breach of duty must have caused the injury or loss complained
of.
In RRX Indus, Inc. v. Lab-Con, Inc, 126 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 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. 127
Indeed, in Wm. Passalacqua Builders, Inc v. Resnick Developers South,
Inc, 128 the court was of the view that the instrumentality and alter ego doctrines
are “indistinguishable, do not lead to different results, and should be treated as
interchangeable.”
As mentioned earlier, 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 than 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.” 129 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, 130 but has relatively little weight
126. RRX Indus, Inc. v. Lab-Con, Inc, 772 F.2d 543, 545 (9th Cir. 1985).
127. Sabine Towing & Transportation Co, Inc v. Merit Ventures, Inc, 575 F.Supp. 1442, 1446 (E.D.
Tex. 1983).
128. Wm. Passalacqua Builders, Inc v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir.
1991) (“Wm. Passalacqua Builders Case”).
129. Id. at 139.
130. 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
161
in the other common law jurisdictions mentioned previously. Considering the

two elements of wrongdoing and control/dominance, 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 liable party. The American approach, on the other hand, places
significant weight on formalistic requirements as indicators of control and
dominance.
In accordance with control and dominance occupying a central place in the
United States to determine whether it is appropriate to ignore corporate
personality, the courts have set out a list of factors that would tend to show that
the defendant was a dominated corporation, such as:
(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. 131
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. 132 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
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. See also BAINBRIDGE &
HENDERSON, supra note 14, at 91–93.
131. 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).
132. See also KAREN VANDEKERCKHOVE, PIERCING THE CORPORATE VEIL: A TRANSNATIONAL
APPROACH 81 (2007) (finding that some courts “have been quite liberal in defining the ‘wrong’ required”
for the instrumentality doctrine).
162
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 risk of veil piercing. 133 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,” 134 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” 135 or “shell.” 136 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. 137 It is perhaps best described
as the “identity” doctrine which has been criticized as being “such a diffuse and
relatively useless approach that it does not deserve extended discussion.” 138
Certainly agency, properly speaking, ought to be distinct from veil piercing. 139
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. 140 Aside from agency, where a corporation is merely a “dummy” or
“shell,” this could include situations similar to the concealment principle that has
been recognized in England where the real party to a transaction is not the
corporation but some other person. 141 The understanding in the United States
133. 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.
134. Walkovszky v. Carlton, 223 N.E.2d 6, 7–8 (N.Y. 1966).
135. 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).
136. Wm. Passalacqua Builders Case, 933 F.2d at 138.
137. See e.g., Wm. Passalacqua Builders Case, 933 F.2d 131, 138; Fletcher v. Atex, Inc, 68 F.3d
1451, 1458 (2d Cir. 1995).
138. BLUMBERG, supra note 131, at 122.
139. See e.g., Lowendahl, 287 N.Y.S. at 74–75, which also noted that “agency” in this context was
not being used in its technical legal sense.
140. RESTATEMENT OF THE LAW (THIRD) OF AGENCY §1.01 (AM. LAW INST. 2006).
141. 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, 138 (the corporate
veil may be pierced “either when there is fraud or when the corporation has been used as an alter ego”);
Fletcher, 68 F.3d 1451 (finding 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; contra Walton
Construction Co, LLC v. Corus Bank, N.D.Fla., July 21, 2011, at *3 (stating that “fraud, or a similar
injustice or wrongdoing” must be demonstrated); Wausau Business Insurance Co. v. Turner Construction
Co., 141 F.Supp.2d 412 (S.D.N.Y. 2001) (adopting the approach from Wm. Passalacqua Builders Case,
163
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. 142
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, an appropriate officer of the parent
company has made representations assuring the plaintiff that the parent company
will be the responsible party, 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. In such cases, there is no need to resort to veil piercing. 143
As mentioned earlier in a different context, engaging in veil piercing risks
creating a messy and uncertain shortcut. Indeed, McFerren v. Universal
Coatings, Inc utilized an alternative approach. 144
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. The courts have pierced the corporate veil
because of the failure to sufficiently distinguish the company’s activities from its
parent/owner. Some examples will illustrate this. In Gorill v.
Icelandair/Flugleider, 145 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 addition, the subsidiary’s wrongful termination of employment was
a sufficient “wrong” for the doctrine to be made out. 146 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
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 131, 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 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.
142. Harris v. Wagshal, 343 A.2d 283, 287 (D.C. Ct. App. 1975); International Union 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, 817 (D.C. Ct. App. 1984).
143. See e.g., Morgan Bros, Inc. v. Haskell Corp., 604 P.2d. 1294 (Wash. Ct. App. 1979).
144. McFerren v. Universal Coatings, Inc., 430 So. 2d 350, 353 (La. 1983).
145. Gorill v. Icelandair/Flugleider, 761 F.2d 847, 853 (2d Cir. 1985).
146. Id. at 853.
164
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 when this element will not be satisfied. On such a
liberal view of “wrong,” any real limit on veil piercing will amount to little more
than the element of domination/control.
Carte Blanche (Singapore) Pte Ltd v. Diners Club International, Inc 147
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. The court 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. This depended on
whether its parent dominated or controlled its actions. 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) its 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.
147. Carte Blanche (Singapore) Pte Ltd. v. Diners Club International, Inc., 2 F.3d 24 (2d Cir. 1993)
(hereinafter “Carte Blanche Case”).
165
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. 148 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 the tort
of inducing a breach of contract, it might seem more appropriate for such wrongs
to be determined within this framework, which 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? 149 It is difficult to see how it was. The
subsidiary’s financial position did not appear to be 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. 150 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). This could
have led to its winding up and consequently brought the franchise agreement to
an end. 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
148. 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,
488 (2002)), the court in Carte Blanche may have arrived at its decision purely on the basis of control.
149. In Abraham v. Lake Forest, Inc, 377 So.2d 465, 469 (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.
150. It would have been possible to structure the relationship between the parent and subsidiary more
formally to minimize 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. A similar point is made by BAINBRIDGE & HENDERSON, supra note 14, at
108–09.
166
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. 151
Nevertheless, the outcome itself may have been correct as the subsidiary’s
operations and assets had been absorbed into the parent company. 152 This meant
that when the 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. Veil piercing would not be necessary in these
circumstances. The parent was liable to the plaintiff under the contract that the
parent and plaintiff became parties to.
Similarly, in Sabine Towing & Transp. Co., Inc. v. Merit Venture, Inc., 153 the
court apparently relied on a breach of contract as one aspect of wrongdoing.
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. 154 And in Vuitch v. Furr, the court opined that
insolvency or undercapitalization is often an important factor evidencing
injustice. 155 No elaboration was given and it is suggested that in and of
themselves such situations should not be equated with injustice.
Parker v. Bell Asbestos Mines, Ltd provides a further example illustrating a
broader understanding of wrongdoing in the United States. 156 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, where there was similar litigation,
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. 157 In Parker v Bell Asbestos Mines, Ltd, the court came to the opposite
conclusion from that in England by drawing a distinction between: 158
151. 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 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.
152. Carte Blanche Case, 2 F.3d at 28.
153. Sabine Towing & Transportation Co, 575 F.Supp. at 1448.
154. See Lowell Staats Mining Co, Inc v. Pioneer Uravan, Inc., 878 F.2d 1259 (10th Cir. 1989).
155. Vuitch v. Furr, 482 A.2d at 819 (D.C. 1984).
156. Parker v. Bell Asbestos Mines, Ltd, 607 F. Supp. 1397 (E.D. Pa. 1985).
157. Adams [1990] 2 WLR 657. Such an approach is also the position in Singapore, see Simgood
[2016] 1 Sing. L. Rep. 1129 [195].
158. Bell Asbestos Mines, Ltd., 607 F. Supp. at 1403.
167
(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 maximize 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 act. As a
general and unqualified statement of the law, however, Parker with respect
probably goes too far. 159
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.” 160
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. On the other hand, veil
piercing should not take place where creditors can protect themselves ex
ante. 161 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
159. See also Lake Asbestos of Quebec, Ltd., 843 F.2d at 145.
160. Chandler v. Cape plc [2012] EWCA (Civ) 525, [2012] 1 WLR 3111, 3131.
161. BAINBRIDGE AND HENDERSON, supra note 14, at 110.
168
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 invest recklessly. 162
As powerful as this view may be, veil piercing may not be the best solution.
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. 163 It may be that a more liberal approach to veil piercing
in the US is explicable on 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. 164 Such an approach reflects 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. 165 Part of the reason for this is because some innovation takes place
in start-up companies founded by former employees of large enterprises. 166 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. This will avoid disincentivizing enterprises
from growing without endangering the entire enterprise given the greater
162. Henry Hansmann and Reinier Kraakman, Toward Unlimited Shareholder Liability for
Corporate Torts, 100 Yale Law Journal 1879, 1882–83 (1991).
163. For example, see Walkovszky v. Carlton, supra note 134; and see also Mangan v. Terminal
Transportation System, Inc., 247 A.D. 853 (1936).
164. BLUMBERG, supra note 131, at 93–97; see also BAINBRIDGE & HENDERSON, supra note 14, at
293–301 which argues that veil piercing should be abolished with respect to individual shareholders.
165. 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), available at
http://www.nber.org/papers/w17793.pdf.
166. 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).
169
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 been met with much success. 167
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: 168
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. 169
Germany
Veil piercing by courts is rare in Germany. 170 The courts restrict direct claims
of harmed creditors against shareholders to situations in which assets have been
commingled. In all other instances, the principles established and applied by
German courts have recently changed. 171 Shareholders that strip a company of
its assets to the disadvantage of creditors may be liable, but for tort and not on
the basis of veil piercing. Courts avoid veil-piercing because the liability of the
shareholders is to the company, not to its creditors since the latter’s losses are 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
judgments that applied the principles relating to corporate groups172 to instances
where shareholders exercised a dominant influence over a company in the group
167. 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.
168. 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). see also BAINBRIDGE & HENDERSON, supra note
14, at 129–131.
169. 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.
170. For a similar conclusion, see COMPARATIVE COMPANY LAW – A CASE-BASED APPROACH 219
(Mathias Siems & David Cabrelli eds. 2nd ed. 2018).
171. 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.
172. 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.), available at https://www.gesetze-im-
internet.de/aktg/AktG.pdf, §§ 291-318.
170
to its financial detriment are obsolete. 173 They have been absorbed by newly
established principles that apply when 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.
Veil-piercing in the context of the smaller German company type, the

GmbH
Whereas English law, and the jurisdictions that have derived their corporate
laws from it, typically subject the private limited company to essentially the same
rules and requirements as the public limited company, 174 German law has created
two substantially different forms of corporations. One form is the Gesellschaft
mit beschränkter Haftung (“GmbH”), which is the company of choice of small-
and medium-sized businesses and therefore frequently closely held. 175 Its typical
structure explains why veil-piercing or a functional equivalent is a relevant issue
for the GmbH. 176 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, 177 the German GmbH requires directors to adhere to shareholder
resolutions decided in meetings. 178
173. GÜNTER H. ROTH & PETER KINDLER, THE SPIRIT OF CORPORATE LAW – CORE PRINCIPLES OF
CORPORATE LAW IN CONTINENTAL EUROPE 68 (2013).
174. 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. 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.
175. For these elementary principles of German company law, see generally Gregor Bachmann,
Introductory Editorial: Renovating the German Private Limited Company - Special Issue on the Reform
of the GmbH, 9 GERMAN L.J. 1064 (2008).
176. 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.
177. An example is in 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.
178. 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.
171
The GmbH is not simply 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 decision-making powers in its two-tier board and not in the
shareholders. 179 It is therefore generally considered a company form that is,
conceptually speaking, entirely different from the GmbH. 180
German legislation created the GmbH in 1892, 181 and the GmbH Act
(GmbHG) 182 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. In the late 19th and
early 20th centuries, German law had a significant influence over East Asian
jurisdictions. 183 Although German company law remains important in the region,
a wave of legal transplantation of US corporate law has dramatically reduced the
impact it once had. 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. 184
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
Federal High Court firmly decided against it in a 2007 ruling. 185 This discussion
about a potential liability for undercapitalized companies is best understood with
179. 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).
180. 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).
181. ROTH & KINDLER, supra note 173, at 16.
182. 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/.
183. 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 211–12 (2014); CARL
F. GOODMAN, THE RULE OF LAW IN JAPAN: A COMPARATIVE ANALYSIS 20 (4th ed. 2017).
184. See Beurskens & Noack, supra note 180, at 1071.
185. 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.
172
some insight in the basics of German principles of minimum capitalization and

capital maintenance. 186
Principles of German law of capital maintenance

The minimum initial legal capital of the stock corporation (AG) must amount
to EUR 50,000. 187 This is double the amount required by the EU second directive
that pursues a minimum harmonization approach and applies in all EU member
states. It permits the member states to implement higher, but excludes lower,
minimum capital requirements. 188 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. 189
The registration of the GmbH requires a minimum legal capital of EUR
25,000. 190 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,” 191 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. 192
In this respect, Germany contrasts with the UK. The minimum capital
requirements stemming from EU legislation 193 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
186. For more detail on the principles of capital maintenance in German company law, see ROTH &
KINDLER, supra note 173, at 54–66.
187. AktG, § 7.
188. Directive 2017/1132/EU of the European Parliament and of the Council of 14 June 2017
relating to certain aspects of company law (codification), 2017 O.J. EU (L 169) 46 [hereinafter
Codification Directive], art. 45.
189. Companies Act 2006 (c. 46) (UK), § 763(1). For further examples of EU countries going
beyond the required minimum, see ROTH & KINDLER, supra note 173, at 33.
190. Section 5(1) GmbHG. For a comparative look at different European jurisdictions, see ROTH &
KINDLER, supra note 173, at 33.
191. On the reform, see Bachmann, supra note 175, at 1063–68; Beurskens & Noack, supra note
180, at 1069–1073.
192. 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 180, at 1084.
193. Art 45(1) Codification Directive, supra note 188.
173
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. 194
In addition, principles of capital maintenance are strict in German company
law. The traditional German approach to capital and its maintenance for purposes
of creditor protection strongly influenced 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 companies. 195
Profits, and more generally assets necessary to maintain the legal capital are not
to be distributed to shareholders, 196 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 sum. 197 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. 198
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 High 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 less appealing.
As emphasized in the German legal literature, minimum capital requirements
bear no indication of the correct or appropriate amounts of capitalization for
companies. The minimal capital requirements aim to establish integrity of the
business that the founding members commit to, and they seek to prevent
insolvencies at an early stage of a company’s life. The underlying theory
194. 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 180, at 1071, and see also the discussion on the People’s Republic of
China at infra .
195. 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
Codification Directive, supra note 188, 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). On Germany’s influence on the directive Stefan Grundmann, European Company
Law (Intersentia 2012) 205.
196. GmbHG, §30(1). See CARSTEN JUNGMANN & DAVID SANTORO, German GmbH Law – Das
deutsche GmbH-Recht 39 (2011).
197. GmbHG, §§31(1) and (3). For exemptions from this rule, see JUNGMANN & SANTORO, supra
note 196, at 42.
198. GmbHG, § 64. See also JUNGMANN AND SANTORO, supra note 196, at 44.
174
provides that shareholders, and often 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. 199
The Trihotel judgment of the Federal High Court (BGH)

As early as the 1920s, German courts recognized that shareholders could be
held personally liable when companies became insolvent as a result of their
conduct. 200 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 insolvency and left creditors unpaid. 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, literally Federal Court of Justice, but more commonly
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. The majority of academic commentators has
welcomed this new series of judgments. 201
In its 2007 Trihotel judgment, 202 the BGH reaffirmed older judgments and
held that shareholders could be found personally liable for wrongful conduct in
cases where they improperly handled assets intended to be reserved
preferentially for creditors, and thereby triggered or aggravated the company’s
199. See also ROTH & KINDLER, supra note 173, at 36 (with references to literature in German);
JUNGMANN & SANTORO, supra note 196, 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.
200. 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.
201. See e.g., Altmeppen, supra note 200, at 2659. 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).
202. Bundesgerichtshof [BGH] [Federal Court of Justice] II ZR 3/04, Jul. 16, 2007 (Trihotel), 2007
NEUE JURISTISCHE WOCHENSCHRIFT [NJW] 2689.
175
insolvency. 203 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. 204 This had resulted in shareholders
being held directly liable vis-à-vis the company’s creditors 205 in situations where
recourse under the statutory provisions protecting the maintenance of the
GmbH’s capital 206 was insufficient to fully compensate them. 207 Liability was
imposed on shareholders where they openly or secretly depleted the company of
assets that were needed to satisfy creditors. 208
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
are therefore not bound by their previous rulings or those of other courts. 209
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. The BGH
explained that it considered its former rulings questionable from a doctrinal
perspective because they had resulted in shareholders being held directly liable
to creditors although no duties owed to creditors were breached. The duties that
were breached were owed to the company and only resulted in losses to the
company. The BGH considered it flawed to assume that any loss of corporate
assets immediately affected the creditors. 210 Instead, the losses were of a purely
reflective nature, and reflective losses generally did not give creditors any
remedies. 211 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
203. Id. ¶ 16.

204. 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.
205. BGH Trihotel, 2007 NJW 2689 ¶ 17.
206. GmbHG, §§ 30 & 31.
207. BGH Trihotel, 2007 NJW 2689 ¶ 18.
208. Id. ¶ 21.
209. 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, 426–27 (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.
210. BGH Trihotel, 2007 NJW 2689 ¶ 23.
211. Id. ¶ 26.
176
maintenance of capital (§§30 and 31 GmbHG) only led to shareholders’ internal

liability. 212
The Court emphasized 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 courts could use too lightly. 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. Thus, the court concluded that shareholders could not be liable for
“abuse of the corporate form” as set out in its previous decisions. 213
However, shareholders continued to be personally liable in cases of
“annihilating interference,” but no longer based on the considerations previously
applied. 214 The Court held that “annihilating interference” was henceforth to be
understood as tortious liability for improperly and self-servingly tampering with
corporate assets. These corporate assets are subject to strict rules of capital
maintenance in the interest of creditors. Tampering with these assets results in
tortious liability when it causes or aggravates corporate insolvencies. 215
Damages are owed to the company alone and not to its creditors because their
losses are of a purely reflective nature. 216 In practice, this means that
administrators in insolvency proceedings enforce these claims on behalf of the
company. 217 Outside of insolvency, creditors must obtain an enforceable title
against the company and then request to be assigned the company’s claims
against its shareholders. 218
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
212. 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.
213. Id. ¶ 27.
214. 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 173, at 68, but the wording chosen here reflects the
drastic language used by the courts in German.
215. BGH Trihotel, 2007 NJW 2689 ¶ 28.
216. 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 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 is
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 173, at 68.
217. BGH Trihotel, 2007 NJW 2689 ¶ 34.
218. Id. ¶ 34 and confirming BGH II ZR 129/04, Oct. 24, 2005, 2006 NZG 64.
177
to the other person to make compensation for the damage.” 219 This requires a
shareholder to harm the company intentionally and in bad faith. 220 The
provision’s premise is that the shareholder is aware that his 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 he understands
that the law holds his acts to be contrary to public policy, nor that he intends to
harm the creditors. It suffices to know and accept that the company’s ability to
pay its obligations is permanently impaired as a result of his actions, a state of
mind referred to as dolus eventualis. 221 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. 222 Importantly, not only the shareholders of the disadvantaged
company, but also the shareholders of a second company that itself holds shares
in the company can be liable. The BGH 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 he is not a shareholder himself is of no defense when effectively
the harm done is the same as if he were. 223
The GAMMA judgment of the BGH

The BGH confirmed these new principles shortly afterwards in its GAMMA
ruling. This ruling of the BGH was preceded by the judgment of a state court of
appeal that held the shareholders of a GmbH personally liable for using the
company as a so-called “Cinderella company”. The term is commonly used in
German cases and legal writing for companies in which shareholders exercise
their influence in ways that ultimately prove detrimental to creditors. 224 These
shareholders had burdened the company that subsequently became insolvent
with obligations originally owed by other companies in the same group although
219. BÜRGERLICHES GESETZBUCH [BGB] [CIVIL CODE], § 826, translation at https://www.gesetze-

im-internet.de/englisch_bgb/englisch_bgb.html#p3497 (Ger.).
220. ROTH & KINDLER, supra note 173, at 68.
221. BGH Trihotel, 2007 NJW 2689 ¶ 30; BGH II ZR 292/07, Feb. 9, 2009 (Sanitary), 2009 NZG
545 (547).
222. See Lutter & Bayer, supra note 201, at Rdn 40.
223. 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
in 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.
224. 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., 21st ed. 2017).
178
it had been clear, as the court put it, that the subsequently insolvent company was
inadequately capitalized in view 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 further 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. 225 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.” 226 The BGH emphasized that such undercapitalization alone could
not lead to shareholder liability and explicitly rejected academic writing to the
contrary. 227 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; such a duty would
be incompatible with the company’s nature as an entity of limited liability. 228
Shareholders are under no obligation to assess and provide adequate financing to
the company. They are only required to abstain from depriving the company of
its assets in any manner incompatible with the rules of capital maintenance. 229
Such acts can take place when they channel corporate assets to a sister company,
themselves or other shareholders or parties related to shareholders. 230
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. 231 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. As a result, the
employees had a direct claim against the shareholders because of a tortious act
committed against them, not against the company.
225. 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.
226. BGH GAMMA, 2008 NJW 2437 ¶ 13.
227. Id. ¶¶ 16–22.
228. Id. ¶ 23. The principle of limited liability follows from section 13(2) GmbHG.
229. BGH GAMMA, 2008 NJW 2437 ¶ 23.
230. Lutter & Bayer, supra note 201, at Rdn 35.
231. BGH GAMMA, 2008 NJW 2437 ¶ 12.
179
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 the holdings of Trihotel and
GAMMA. 232 In one of them, the BGH ruled that it could amount to “annihilating
interference” and hence shareholder liability (under section 826 of the BGB) to
the company when a shareholder prevented the company from pursuing its
legitimate claims against him. 233 Here again, the court confirmed that
shareholders might be personally liable for their actions, but generally not to
creditors of the company, but to the company itself.
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,
shareholders disregard 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. 234 It thereby confirmed
previous judgments that had arrived at the same conclusions. 235 Any personal
liability resulting from such conduct may only affect the shareholder(s)
responsible for the situation, and no other shareholders who simply happen to be
members of the company during the time when such commingling occurs. This
type of veil piercing therefore most commonly applies to sole or majority
shareholders. 236
As a result, German courts pierced the veil in cases in which shareholders
commingled corporate and private assets. Commingling presently represents the
232. BGH II ZR 252/10, Apr. 23, 2012 (Wirtschafts-Akademie), 2012 NZG 667.
233. Sanitary, 2009 NZG 545.
234. BGH II ZR 178/03, Nov. 14, 2005, 2006 NZG 350 ¶ 15. On these judgments, see also ROTH &
KINDLER, supra note 173, at 67.
235. BGH II ZR 16/93, Apr. 13, 1994, 1994 NJW 1801; BGH II ZR 275/84, Sep. 16, 1985
(Autokran), 1986 NJW 188.
236. BGH Nov. 14, 2005, 2006 NZG 350 ¶ 17.
180
only situation in which German courts still rely on the principles of veil-piercing
to hold shareholders directly liable to the creditors of a company.
Notwithstanding the principle that civil law judges do not make law, veil-
piercing in these commingling cases is a judge-made legal rule that fills a gap
left by statutory law. Its doctrinal basis is abuse of the corporate form 237 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. 238 It is
strictly separate from all other scenarios in which shareholders’ actions result in
losses for the company. These other cases are at present resolved by application
of general principles of law, be it the statutory provisions of liability for tortious
acts (as discussed above) or principles of contract law (as explained below). As
emphasized repeatedly, such application of general principles of the law may
result in shareholders’ internal liability, i.e., damages owed to the company, not
in any direct liability owed to the company’s creditors.
To distinguish these two scenarios, i.e., veil piercing with consequential
personal liability to the company’s creditors on the one hand and breaches of the
law resulting in shareholders’ liability vis-à-vis the company on the other, the
BGH emphasized that improper accounting is not a sufficient basis for veil-
piercing. While it certainly amounts 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. 239
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. 240 As explained above, shareholders are liable for
repayment to the company under sections 30 and 31 of the GmbHG when they
receive payments when 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
237. Called Objektiver Rechtsmissbrauch, see HUECK & WINDBICHLER, supra note 176, at §24 Rdn
30.
238. 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.
239. BGH Nov. 14, 2005, 2006 NZG 350 ¶ 15.
240. Fastrich, supra note 224, § 13 Rdn 45.
181
breach can result in claims by the company for restitution and damages. 241 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 the
company or creditors to experience any intentionally committed harm. 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.
Instead, commingling is an exceptional situation where the financial situation of
the company is so muddled that applying the principles of depletion of assets and
the consequential claims for their return to the company is of no use. The drastic
situation that corporate assets are indistinguishable from shareholders’ personal
assets justifies 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, 242 although 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.
Regardless of this immense swing in doctrinal analysis, the BGH clarified in
Trihotel that the principles applied in situations of commingling remain
applicable. 243
A different type of commingling must be distinguished from the one just
discussed. 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
241. CHRISTIAN HOFMANN, DER MINDERHEITSSCHUTZ IM GESELLSCHAFTSRECHT 315–17 (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.
242. BGH Nov. 14, 2005, 2006 NZG 350 ¶ 14.
243. BGH Trihotel, 2007 NJW 2689 ¶ 27.
182
held this shareholder personally liable and applied the principle of good faith in
section 242 of the BGB. The court reasoned 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 and an independent sole
proprietor, so as to hold him personally liable for all obligations under the legal
relationship with the third party. 244
The case has remained an outlier, and the BGH 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. 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. 245 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.
Further scenarios that may be regarded as veil-piercing in other

jurisdictions
The above discussion reflects the cases decided by German courts. As
demonstrated, veil-piercing in Germany only applies in one scenario, the
commingling of assets, while the courts analyzed a number of other situations on
the basis of tort law, the principles of good faith, or by relying on provisions in
the GmbHG. However, what about all other scenarios well-known from case law
in the common law jurisdictions? American, English and Singaporean case law
covers a wider range of situations, and the question arises of how German law
would deal with them.
The answer reads: all other instances in which third parties have rights
against shareholders are not considered exceptions to the principle of limited
liability. Instead, the principles of the law of obligations as well as teleological
interpretations of statutory provisions and widely-understood contractual terms
apply and protect third party interests. In all these instances, the shareholder is
held liable for what he did or promised to the third party, but not because of his
role in the company. The role of 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
244. BGH VII ZR 9/57, Jan. 8, 1958, 1958 WERTPAPIER-MITTEILUNGEN: ZEITSCHRIFT FÜR
WIRTSCHAFTS- UND BANKRECHT [WM] 463 ¶ 22.
245. Commentators that are generally supportive of veil-piercing categorize this case as one of
commingling of spheres, see Lutter & Bayer, supra note 201, 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
224, § 13 Rdn 46.
183
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 from any obligations they entered into. It may also grant them
damages against the shareholders, not because the corporate veil was pierced,
but because of a wrong they directly committed to such third parties.
The fact that the shareholders incorporated and used the company as part of
their fraudulent scheme represents the very wrong for which they are held liable.
Section 123 BGB 246 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 when the shareholder commits deceit, the company must accept that
the deceived party can avoid its declaration of consent to the contractual
agreement if the company knew or should have known of the deceit. Since in
such scenarios the fraudster shareholders are inevitably also the directors of the
company, their knowledge is attributed to the company based on section 166
BGB. The knowledge of the directors is the knowledge of the company, and their
mistakes are the mistakes of the company. 247 In addition, the shareholders are
liable to the deceived parties under tortious principles, particularly in the
application of sections 826 and 823(2) BGB read with section 263 StGB, the
provision of the Criminal Code that sanctions fraud. In addition, a shareholder
may be liable if he breaches duties of care and diligence in his role as the legal
representative of the company and as part of a fraudulent scheme. Such liability
requires that the shareholder enjoys a high degree of trust from the deceived party
and substantially influences the pre-contractual negotiations between that party
and the company. 248 Under these preconditions, a so-called “legal relationship
without primary obligations” exists between the shareholder and the third party
and may lead to the shareholder’s liability for breaches of the duties of care and
diligence under sections 311(2), 241(2), 280(1) BGB. 249
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
246. 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.
247. 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 176, § 9 Rdn 3.
248. These are requirements under the BGB: BGB, § 311 para. 3.
249. Such legal relationships are very common in German law and have no direct equivalent in
French or common law. In the context of this article, 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.
184
running a business in the same district 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. 250
German courts or scholars would never consider this a case of veil-piercing. If a
party to a contract is held to a valid non-competition clause, 251 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. 252
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 district, 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 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 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 tries to hide behind the
principle of limited liability and which are commonly discussed as veil-piercing
cases in other jurisdictions. It has been shown that the courts disregard the
principle of limited liability and allow creditors of the company to pursue claims
directly against shareholders in one narrow situation only: when shareholders
commingle the company’s assets with their own. The climate in Germany is
increasingly becoming hostile against any attempts to pierce the corporate veil.
250. As in Gilford [1933] Ch 935 where the corporate veil was pierced.
251. Such clauses are sometimes considered invalid 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.
252. 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).
185
Many commentators argue that the concept should be abandoned altogether, 253
and the BGH’s change of heart in the “annihilating interference” cases shows
that it might well be moving in that direction. 254
As explained, German company law relies heavily on principles of initial
capitalization and strict capital maintenance rules. It follows that the question
whether the principle of limited liability should be disregarded in instances where
shareholders adhere to capital maintenance rules but seek to take advantage of
the corporate veil in other ways should be answered in the negative. Not
corporate law, but general principles of the law as found in tort law and the law
of obligations stand ready to deal with these situations. Consequently, it is
submitted here 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. It is not evident 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
than another who systemically strips the company of its assets.
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, 255 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.” 256
Article 20 establishes a four-pronged legal test, or a standard comprising four
elements, for judicial application of the doctrine. 257 First, it must be proven that
253. See e.g., Fastrich, supra note 224, § 13 Rdn 44.

254. Lord Neuberger of the UK Supreme Court was sympathetic to such a view, see Prest [2013] 3
WLR 1 [79].
255. 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.
256. 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.”).
257. The standard has been articulated in different ways by judges of China’s Supreme People’s
Court in their scholarly writing. See Judges XI XIAOMING （奚晓明）and JIN JIANFENG（金剑
锋）, GONGSI SUSONG DE LILUN YU SHIWU WENTI YANJIU 公司诉讼的理论与实务问题研究
(CORPORATE LITIGATION: THEORIES AND PRACTICES) [Beijing: People’s Court Press, 2008],
pp. 562-564; Judge JIANG BIXIN (江必新) et al, ZUIGAO RENMIN FAYUAN ZHIDAOXING ANLI
CAIPAN GUIZE LIJIE YU SHIYONG (GONGSI JUAN) 最高人民法院指导性案例裁判规则理解与
适用（公司卷）[THE UNDERSTANDING AND APPLICATION OF JUDGING RULES IN
186
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 same coin. 258
Second, the purpose of the aforesaid abuse must be 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. 259 Another SPC judge, Yu Zhengping,
maintained that the wording of Article 20 “undoubtedly requires the existence of
a subjective intent” to evade debts. 260
Third, the interests of the creditors must be damaged “seriously” (yanzhong).
Needless to say, Company Law does not define “seriously,” and courts will
interpret its meaning 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. 261
Fourth, there must be a causal link between the shareholder’s abusive
behavior and the damage/losses suffered by the creditors. 262
Since 2006, when the new Company Law took effect, Chinese courts have
decided hundreds of veil piercing cases, and researchers within and outside
China are producing a growing body of academic literature. 263 Thus far, the
GUIDANCE CASES OF THE SUPREME PEOPLE’S COURT (VOLUME OF CORPORATION LAW),

Beijing: China Legal Publishing House (2012), p. 87.
258. Liu Junhai (刘俊海), Xiandai Gongsifa (现代公司法) [MODERN CORPORATIONS LAW] 665
(2015).
259. 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).
260. 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).
261. Zhou Yousu (周友苏), Xin Gongsi Fa Lun (新公司法论) [NEW SURVEY ON CORPORATIONS
LAW] 105 (2006).
262. See Xi and Jin, supra note 257, at 564; Jiang, supra note 257, at 87.
263. See e.g., 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 256; 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
187
literature, including both empirical studies and doctrinal analyses, seems to

overwhelmingly 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.” 264
The literature also suggests that Chinese courts practiced “judicial activism” in
veil piercing cases. 265
The evolution of the veil piercing doctrine in China

To fully understand veil piercing in Chinese law, it is necessary to appreciate
the position prior to the 2005 Company Law, as 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. 266 It has been stated: “[a]lthough
the 1993 Company Law did not include veil-piercing doctrine, the Chinese
judiciary cautiously applied it even without a clear statutory basis before its
codification in 2005.” 267
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].
Some people believe that the 1990 Circular is the first law to offer an exception
to the doctrine of limited liability, which was 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
适用) [Disregarding Corporate Personality in Cases of Undercapitalization], Faxue Pinglun (法学评论)

[LAW REVIEW] 163 (2015).
264. Yu & Krever, supra note 263, at 81.
265. Hawes et al, supra note 263, at 363–68.
266. 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).
267. WANG, supra note 66, at 80.
188
investors/incorporators benefited from the company’s operations or

misappropriated the company’s assets. 268
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
Enterprises Whose Subsidiaries were Revoked or Shut Down]). 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, and “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.” 269
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], mainly addressed legal
issues relating to business enterprises owned by the army, armed police force,
and judicial bodies, and 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 a confusion
caused by the 1994 Reply which had encouraged many lower courts to impose
unlimited liability improperly on shareholders. 270
268. See Jin Jianfeng (金剑锋), Gongsi Faren Fouren Lilun Jiqi zai Woguo de Shijian (公司法人否
认理论及其在我国的实践) [The Doctrine of Disregarding Corporate Personality and Its Adoption in
China], 2005 Zhongguo Faxue (中国法学) [CHINA LEGAL SCIENCE] 117–25 (2005).
269. 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.
270. See Jin, supra note 268, at 123 (noting that, after the 1994 Reply, some courts asked the
investing shareholders to repeated “making up for the differences” in their capital contribution because of
the lack of a definition about capital in the 1994 Reply).
189
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. 271
The veil piercing rule 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. In comparison, under Article 20 of the Company Law the court orders
veil piercing as an isolated case to ask the shareholder to bear joint and several
liability for the debts owned by the company to the creditor(s) who brought the
veil piercing lawsuit. It requests the responsible shareholders to pay for company
debts but will not terminate the company by any means.
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 or 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. 272 Such liability to make compensation
271. Wang, supra note 66, at 80.

272. Jin, supra note 268, at 124.
190
was fault-based. However, in the case of veil piercing under the Company Law,
fault is not necessarily an element for applying Article 20. 273
The broader historical background of the above-mentioned judicial
interpretations is also of notable importance. 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 or investors, especially state investors, in the subsidiaries
established by them. 274 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 or investors, but also government agencies which approved the
establishment of the enterprises. 275 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.
Grounds for veil piercing in judicial practice

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. 276
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
273. Fault or even negligence is especially not considered in veil piercing cases concerning
comingling of assets of corporate affairs. See Jiang Bixin et al, supra note 257. In a veil piercing case
adopted by the PRC Supreme Court as a Guiding Case with binding force on lower courts, it was ruled by
the Jiangsu High People’s Court veil piercing should be ordered simply because the three defendants had
commingled personalities in terms of “commingled personnel”, “commingled business” and “commingled
finances”. See Xugong Jituan Gongcheng Jixie Gufen Youxian Gongsi Su Chengdu Chanjiao Gongmao
Youxian Zeren Gongsi Deng Maimai Hetong Jiufen An (徐工集团工程机械股份有限公司诉成都川交
工贸有限责任公司等买卖合同纠纷案) [XCMG Construction Machinery Co, Ltd. v. Chengdu
Chuanjiao Industry and Trade Co., Ltd. et al., A Sale and Purchase Contract Dispute], (2011), adopted as
the Supreme People’s Court Guiding Case No. 15 on 31 January 2013, available at
http://www.court.gov.cn/fabu-xiangqing-13321.html. English information about this case is available at
Stanford Law School’s China Guiding Case Project at https://cgc.law.stanford.edu/guiding-cases/guiding-
case-15/.
274. See generally Wen, supra note 263.
275. Jin, supra note 268, at 124.
276. Wang, supra note 66, at 81–82; See also Liu, supra note 258, at 668–71; Xi and Jin, supra note
257, at 560–62.
191
confidentiality agreement, incorporates a company to evade his obligations. 277

Another example is when a shareholder uses the company to defraud creditors.
A third situation arises in circumstances where the company is a device to evade
statutory restrictions and involves 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
have 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: 278
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.
This cautionary statement should be contrasted with the sometimes made
assumption that undercapitalization is the most important ground for piercing in
China. 279 Xi and Jin, on the other hand, express 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.” 280 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%. 281
It was further found, of the 118 requested grounds for veil piercing, seventy-four
277. This seems similar to the cases in England on evasion, see Gilford [1933] Ch 935.
278. See Xi & Jin, supra note 257, at 559. Again there are parallels with judicial statements
elsewhere.
279. For example, see Liu, supra note 258, at 667–670.
280. Xi & Jin, supra note 257, at 560.
281. Huang, supra note 256, at 748–49.
192
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. 282
The case of China Orient Asset Management Co Ltd v. The Xi’an High-Tech
Area Branch of China Construction Bank 283 may illuminate 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: 284
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 false capital contributions should
be upheld.
However, the appellate court – in this case the Shan’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: 285
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,
282. Id. at 760–61.

283. 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.
284. Id.
285. Id.
193
namely that the shareholders were held to have the liability of buchong peichang,
or complementary liability. 286
The difference between the Chinese and German positions is notable. At one
time, both countries adopted a similar approach. 287 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 to third party creditors. The BGH considers such an
approach to be inconsistent with limited liability. Interestingly, both the
aforementioned first instance and appellate courts in China 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 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 Shan’xi High People’s Court, veil piercing based
on undercapitalization in China need not be limited to the statutory minimum
required by law. 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 be 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 some
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
286. Wen, supra note 263, 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.
287. Alting, supra note 79, at 210.
194
higher than that found in major common law jurisdictions. 288 Another survey of
published cases from 2006 to the end of 2012 found that the court lifted the veil
in 75.27% of cases. 289 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. 290 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. Abuse of the corporate form is possibly more
prevalent in economically less developed regions due to lesser knowledge of
corporate law and thus a higher level of corporate irregularities. 291 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. 292
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. 293
Commingling has certain aspects and is distinguished from misappropriation.
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 the apparent corporate transactions were the shareholders and
not the corporation itself. Using the language of Lord Sumption in Prest v.
Petrodel, 294 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, no part of the commingled assets should be regarded as
288. Huang, supra note 256, 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.
289. Hawes et al, supra note 263, at 350.
290. Huang, supra note 256, at 748.
291. Id. at 751.
292. Contra Hawes et al, supra note 263, at 351–52 which found no significant distinction between
economically developed and less-developed regions, or between lower-level and higher-level courts.
294. Prest [2013] 3 WLR 1 [28].
195
having ever properly been owned by the company, given that the company’s
involvement is merely illusory, 295 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. 296
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. 297
In Wuhan Vegetables Co. v. Wuan Jiutian Trade Development Co., 298 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 occurred. 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 she had negatively
affected the realization of the debt claims of the plaintiff as a creditor of Tianjiu.
Accordingly, Mrs Wang 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. 299 If this is the correct explanation of the case, in addition to the point
295. See also Tan, supra note 77, at 23–26.

296. See e.g., 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.
297. See e.g., section 403 of the Singapore Penal Code (Cap. 224) and section 1 of the UK Theft Act
1968.
298. Wuhan Shi Shucai Jituan Youxian Gongsi Su Wuhan Tianjiu Gongmao Fazhan Youxian Gongsi
deng Guquan Zhuanrang Hetong Jiufen An (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.
196
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. Commingling usually requires 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, 300 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 Mr. Xu as the CEO and 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, although 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 that the plaintiff
ordered 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 placing the monies in the finance manager’s bank account
was 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
300. 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.
197
assets against the finance manager and possibly other persons engaged in the
scheme as co-conspirators or joint tortfeasors. 301 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. 302 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. 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: 303
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. 304 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 cases is allied to the absence in Chinese veil piercing cases of the
responsibility of creditors to protect themselves. 305
However, this argument lacks support from cases. The cited support for this
broad proposition is not compelling. The case of Shanghai Zhongbo Company
(Appellant) v. Anhui Water Conservancy Construction Engineering Corporation
301. 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.
302. Hawes et al, supra note 263, 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.
303. Translation from http://www.npc.gov.cn/englishnpc/Law/2007-12/13/content_1384124.htm
(accessed on September 6, 2017).
304. Huang, supra note 256, 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 263, at 76, 80–81.
305. Yu & Krever, supra note 263, at 82–84.
198
and Others (Respondents) 306 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 appellate 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. 307
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 have concluded 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 static 308
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 only attribute the fault for delay 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. The trial preferred the
first possibility, while the appellate court preferred the second one. Relying on
Article 20 of the Company Law, the court ruled that, based 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
306. Shanghai Zhongbo Jingguan Luhua Yuanyi Youxian Gongsi yu Anhuisheng Shuili Jianzhu
Gongcheng Zonggongsi deng yu Gongsi Youguan de Jiufen Shangsu An (上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”）
307. Yu & Krever, supra note 263, at 83.
308. See also Wen, supra note 263, at 352 on the dynamic nature of the burden of proof.
199
consequence that the company’s veil should be lifted. 309 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 reasonably. 310
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 180 of the 2013 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) a corporate merger or division compels
liquidation; (4) the company’s license has been revoked or the company is
ordered to close in accordance with the law; (5) shareholders who own at least
10% of the ownership of the company request it 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, the company shall, within 15 days from the date when 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 the court to designate relevant
people to form a liquidation team. 311 Creditors may also petition the court to
develop a liquidation team in other circumstances such as when a liquidation
team has been developed but has deliberately delayed the liquidation, or when a
wrongful liquidation may seriously damage the interests of the creditors or
shareholders. 312
309. See Shanghai Zhongbo case, supra note 306.

310. Wen, supra note 263, at 354–55.
311. PRC Company Law, art. 183.
312. SPC Company Law Interpretation (II), Article 7.
200
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. 313 Second, if the failure in performing the aforesaid obligations has
caused the loss of essential 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. 314 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. 315 Also, 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. 316
Members of the liquidation team, which may include shareholders, can also
be liable to creditors when they do not discharge their obligations properly, such
as when 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. 317
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, 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
313. Company Law Interpretation (II), Article 18(2).

314. Company Law Interpretation (II), Article 18(3).
315. Company Law Interpretation (II), Articles 19 and 20.
316. Company Law Interpretation (II), Article 22.
317. Company Law Interpretation (II), Articles 11, 15 and 23.
201
debts, 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. The PRC Enterprise Bankruptcy Law 2006
governs bankruptcy issues of all legal business persons including companies
established under the Company Law. Under the 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. 318
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, for instance, 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. Therefore, creditors should
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. 319 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
318. PRC Enterprise Bankruptcy Law 2006, art. 2.

319. 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.
202
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 May 30, 2005 because it failed the
government’s annual inspection of business enterprises. According to Article
184 of the Company Law, the shareholders of Hengsheng, Mr. Zheng, Mr. Li
and Mr. Zhang, should have initiated liquidation of the company within 15 days.
Hengsheng failed to make payment as had been agreed, and Xianglan
brought legal action in 2011. An order was made in favour of Xianglan, and it
applied to enforce the order. On June 30, 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 against them, as their failure to liquidate the
company constituted an 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.
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. 320 Undoubtedly, the doctrine of veil piercing has been adopted in all
the jurisdictions under comparison in this paper, and there is also a striking
similarity in the notion of abuse that is said to underlie the disregard of the
corporate form to hold shareholders personally liable for corporate debts. In
addition, the history of how corporate law came into existence is a factor that has
influenced the shape of the doctrine. The law in Singapore for example
demonstrates the effect of transplantation with strong similarities with the legal
approach in England. China, on the other hand, appears to resemble the United
States more closely. This is not surprising given the more recent influence of US
corporate law in China and that it has a specific statutory provision that
recognizes veil piercing, thereby implying a broader role for the doctrine.
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
the 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
320. ZWEIGERT & KÖTZ, supra note 183, at 34.
203
other areas of the law. We find, for example, that the doctrine has become largely
unnecessary in 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), veil piercing may follow the same route,
given that before Prest v. Petrodel the approach towards veil piercing in both
jurisdictions was in any event conservative. Lord Sumption’s approach leaves
very little room for the veil piercing doctrine to operate. 321 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 inclined
towards giving businesses certainty.
On the other hand, the United States, also a common law country, is
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 misunderstood 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 in China and elsewhere. Where China is concerned, divergence in
practice is partly caused by the uniqueness of the business context which,
because of its stage of economic development, is less attuned to developed
notions of governance. 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.”
321. 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”.
204
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Piercing the Corporate Veil: Historical, Theoretical and Comparative

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Cheng Han Tan Jiangyu Wang

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PIERCING THE CORPORATE VEIL:

inevitably, lead to liability being imposed on another person, perhaps in addition

Berkeley Business Law Journal Vol. 16:1, 2019

commercial or otherwise, unless the enterprise was illegal. 3 The relationship

8. Malmendier, supra note 7, at 1084–89.

Berkeley Business Law Journal Vol. 16:1, 2019

was effected through the formation of large quasi-partnerships known as joint

Notwithstanding the Bubble Act, unincorporated joint stock companies

26. COOKE, supra note 12, at 85.

Berkeley Business Law Journal Vol. 16:1, 2019

otherwise have been employed in trade. 34 Nevertheless, there was ambivalence

34. See id. at 213.

44. See MCQUEEN, supra note 27, at 81–86.

Berkeley Business Law Journal Vol. 16:1, 2019

a strong and growing prejudice in favour of equality opposed the English

move towards a system of free incorporation became progressively irresistible in

Berkeley Business Law Journal Vol. 16:1, 2019

In fact, the process in Asia of creating a commercial law comparable to that

VEIL PIERCING – A THEORETICAL ANALYSIS

unusual for other legislation to express exceptions as well in specific

Berkeley Business Law Journal Vol. 16:1, 2019

business. The importance attributed to certainty is part of the explanation as to

82. Prest [2013] 3 WLR 1 [27].

Berkeley Business Law Journal Vol. 16:1, 2019

86. Glazer, 431 So.2d at 757 (citations omitted).

90. Prest [2013] 3 WLR 1 [35].

Berkeley Business Law Journal Vol. 16:1, 2019

This approach has been accepted in a number of other Canadian decisions. 96

95. Mentmore Manufacturing, (1978) 89 DLR (3d) 195 para. 28.

VEIL PIERCING – A COMPARATIVE ANALYSIS

Berkeley Business Law Journal Vol. 16:1, 2019

England and Singapore

105. Prest [2013] 3 WLR 1 [28], [33].

Berkeley Business Law Journal Vol. 16:1, 2019

119. Id. at 486.

Berkeley Business Law Journal Vol. 16:1, 2019

in the other common law jurisdictions mentioned previously. Considering the

Berkeley Business Law Journal Vol. 16:1, 2019

Berkeley Business Law Journal Vol. 16:1, 2019

While the preceding facts indicate a failure to properly segregate the

Berkeley Business Law Journal Vol. 16:1, 2019

Berkeley Business Law Journal Vol. 16:1, 2019

complexity and therefore risk inherent in larger enterprises. Such a viewpoint

Veil-piercing in the context of the smaller German company type, the

Berkeley Business Law Journal Vol. 16:1, 2019

The GmbH is not simply a smaller version of the stock corporation

Cases of undercapitalization and liability for “annihilating interference”