In Chinese civil law, limited liability is the limitation on the responsibility of a debtor to pay a debt, and is divided between personal and in rem liability. Liability limited to personal liability means that the debtor is only liable up to a certain amount of property. In the case of a corporation, shareholder liability is limited to the value of their shares. Liability limited to in rem refers to the limitation of liability to a specific property, such as the common scenario where an heir’s liability for the debts of an estate is limited to the property inherited.

Exceptions

Significant limitations are placed on the applicability of liability limitations.

Under the veil-piercing limitation on liability, the legal personality of the shareholder must, in principle, be separate from the company. The first factor in making this determination is whether the company exists independently of its shareholders. To be deemed independent, the company must independently hold title to its property, have full civil law capacity, the capacity to act in its own name and be able to independently assume civil liability. Secondly, the company must operate separately from the shareholders, that is, commingling is not permitted.

Such a separation is seen in the separation of shareholder and company property. Additionally, the separation is evident in how shareholders are not making day-to-day decisions about how the company is managed. Chinese jurists consider the lack of shareholder involvement in day-to-day decisions as more fundamental under a veil-piercing theory.

Jurisprudence

A policy goal of these jurists is to provide security to creditors, who can ensure that their counterparty is an organizational actor and not an individual shareholder. Failing to enforce the principle of separation between corporations and shareholders could allow for abuse of limited liability for unjust enrichment. Chinese law would consider this unjust, and creditors would be unwilling to provide loans without the possibility of recourse against bad actors. Thus, Chinese company law will not allow limited liability for shareholders if there has been any commingling.

Further Reading

See our comprehensive resources on China’s Foreign Investment Law. and an overview of FDI regulation in our Foreign Investment Law FAQ.

Translation Guide

See: 有限责任