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HOME > Publications > Professional Articles > Chinese Company’s Joint Liability With Its Offshore Affiliates

Chinese Company’s Joint Liability With Its Offshore Affiliates

Author: Wei Jiabei & Yuan Yiming 2022-08-13376

Chinese Company’s Joint Liability With Its Offshore Affiliates--Case Analysis And Legal Approach Under Chinese Law


To achieve trade convenience, expedited foreign exchange payment, risk isolation, etc., some Chinese companies would choose a suitable location to setup their offshore subsidiaries or affiliated companies, which are used as critical transit points for economic and trade activities worldwide. In comparison to those mainland parent companies/headquarters or operational entities holding core assets, offshore companies may lack independence in respect of staff, asset, decision-making and business operation.


In the meantime, many foreign enterprises chose to establish their regional headquarters in places such as Hong Kong S.A.R. or Singapore for further investment into mainland. In this case, companies established in mainland are usually subsidiaries of those regional headquarters.


During economic and trade activities, disputes may rise between an offshore company and its counterparty. In order to realize monetary compensation, the counterparty might pursue legal liability of the parent company/affiliated company Located in mainland. Upon this, can offshore companies achieve risk isolation as independent legal persons? How to make a company jointly liable with its offshore subsidiaries or affiliates? How to take preventive measures against possible risks such as personality confusion or co-seller responsibility? This article is going to provide some suggestions from the perspective of Chinese judicial practices.


Conflict of Law Rules


From practical view, there are mainly three approaches to hold a mainland shareholder/affiliate liable, which includes (1) piercing the corporate veil, (2) claiming joint tortfeasors, and (3) claiming co-seller. Relative cases will be discussed in detail below.


Conflict of law rules related to this issue mainly include:


1.The Rule Regarding Legal Personality


Article 14 of the Law of the Application of Law Concerning Foreign-related Civil Relations of People’s Republic of China (“the Foreign-related Law”) stipulates that, matters concerning the capacity for civil rights or civil conduct, institutional structure, or shareholders' rights and obligations of a legal person or its branches shall be governed by the law of the place of registration of such legal person. Where a legal person's principal place of business is not consistent with its place of registration, the law of the principal place of business may apply. A legal person's place of habitual residence shall be deemed the principal place of business of such legal person.


In practice, once a litigation or arbitration is initiated in mainland, in order to apply the substantive law of mainland (so to avoid procedural costs and uncertainty of searching extraterritorial law), the plaintiff would try to prove the defending offshore company’s principal place of business is in mainland.[1] Meanwhile, there are cases where the substantive law of mainland applied because defendant couldn’t prove that its principal place of business was located offshore.[2] There are also cases where the court directly adjudicate in accordance with the substantive law of mainland, skipping the applicable law issue.


2. The Rule Regarding Co-seller Contracts


Pursuant to Article 41 of the Foreign-related Law, the parties concerned may choose the laws applicable to contracts by agreement. If the parties did not choose one, the laws at the habitual residence of the party, which best reflects the characteristics of the contract in performing its obligations, or other laws most closely related to the contract shall apply.


3. The Rule Regarding Joint Tortfeasors


Pursuant to the Civil Code of People’s Republic of China (“Civil Code”), where two or more persons jointly commit a tortious act causing damage to another person, they shall bear joint and several liability.


Pursuant to Article 44 of the Foreign-related Law, tort liability shall be governed by the law of the place where the tort occurs. Where the parties share a common place of habitual residence, the law of their common place of habitual residence shall apply. Where the parties reach an agreement on the application of law for the settlement of the tort after it occurs, such agreement shall apply.


Corporate Personality Confusion

“Piercing the Corporate Veil”


Relevant substantive law mainly includes the following provisions.

  • Clause 2 of Article 3 of the Company Law of People’s Republic of China (“Company Law”) -- A shareholder of a limited liability company is liable to the company to the extent of its/his respective capital contribution. A shareholder of a joint stock limited company is liable to the company to the extent of the shares it/he has subscribed for.

  • Clause 3 of Article 20 of the Company Law -- Where any shareholders of a company abuse the independent status of the company as a legal person or the shareholder's limited liabilities to evade debts and seriously injure the interests of the company’s creditors, it shall bear joint and several liabilities for the debts of the company.

  • Article 63 of the Company Law -- If the shareholder of a single shareholder limited liability company is unable to prove that the company’s property is independent from the shareholder’s own property, the shareholder shall bear joint and several liabilities for the debts of the company.

  • In addition, Article 10 [confusion of personality], Article 11 [excessive dominance and control] and Article 12 [significant capital deficiency] of Minutes of the 9th National Court Work Conference for Civil and Commercial Trials ("Minutes") issued by the Supreme People's Court also provide more guidance and reference for the application of Clause 3 of Article 20 of Company Law.


In judicial practice, when it comes to whether one can “pierce the corporate veil” or successfully make a personality confusion claim, there is a huge amount of decisions supporting either way, based on the evidence and the application of law.


The following paragraphs will be analyzing two approaches to “pierce the corporate veil”, i.e., (1) personality denial of single shareholder limited liability company (“single shareholder LLC”) (Article 63 of Company Law), and (2) personality confusion resulted from shareholders’ abuse (Article 20 of the Company Law).


Ⅰ. Personality Denial of single shareholder LLC (Article 63 of Company Law)


1. Affirmative Cases


  • Case 1


Dongguan Haixinghe Industrial Co., Ltd. v Bifili (Shenzhen) Technology Co., Ltd. and Huijing (Hong Kong) Co., Ltd [(2020)粤0391民初1234号]

Judicial opinion--


Pursuant to Article 63 of the Company Law, Bifili Company, the defendant, is a single shareholder LLC invested and established by Huijing Company, the other defendant. No evidence has been provided from Huijing Company to prove that its property is independent from Bifili Company, for which Huijing Company shall bear legal responsibility of failing the burden of proof. The plaintiff requested that Huijing company to bear joint and several liability for the debts together with Bifili company, the court decides in favor of the plaintiff.


  • Case 2


Guangdong Ellington Electronics Technology Co.,Ltd. v Ramaxel Information Limited and Ramaxel Technology (Shenzhen) Co., Ltd [(2017)粤民申2404号]

Judicial opinion--


Ramaxel Shenzhen Company, as the sole shareholder of Ramaxel Information (a HK registered limited company), provided no evidence to prove that the property of Ramaxel Information is independent of its own property, it is therefore found by the court to have personality confusion with Ramaxel Information. It shall therefore bear joint and several liability for the debts involved in the case of Ramaxel Information. Decision of the court of second instance is found to be correct. Therefore, the cause of action for retrial submitted by Ramaxel Information and Ramaxel Shenzhen Company cannot be established.


  • Case 3


Liu Huajie v Face to Face Catering Chain Management Co., Ltd. and Xie Guangran, Sun Xianxian [(2020)豫知民终156号]


Judicial opinion--


Face to Face Catering is a single shareholder LLC, while Sun Xianxian is the sole shareholder. There is property confusion between the two. Therefore, for the deposit of 70,000 RMB with interest required by Liu Huajie to be returned by Face to Face, Sun Xianxian shall be jointly and severally liable with the latter.


2. Negative Case


  • Case 4


Hangzhou TC Information Technology Co., Ltd v Lifan Industrial Group Co., Ltd [(2020)最高法民申4272号]


Judicial opinion--


In this case, Lifan Group, the shareholder of Lifan Passenger Vehicle Company, has submitted the Audit Report of Lifan Passenger Vehicle Company (2019), the Audit Report of Lifan Group (2019), the Capital Contribution (Shareholders) of Lifan Passenger Vehicle Company, real estate certificate, real estate registration information and other evidences, which can prove that the financial accounts between Lifan Group and Lifan Passenger Vehicle Company are standardized and clear, and the properties are independent of each other. TC Information did not approve it, but did not provide evidence to refute it. Therefore, it is not inappropriate for the court of second instance to determine that Lifan Group should not be jointly and severally liable for the debts of Lifan Passenger Vehicle Company in this case.


  • Case 5


China Construction Seventh Engineering Division Corp Ltd v Hyundai (Handan) Logistics Port Development Co., Ltd, Hyundai (Handan) Real Estate Co., Ltd, Hyundai RNC Investment Group [(2017)最高法民终718号]


Judicial opinion--


Hyundai RNC Investment Group Limited claims that as a foreign legal person, its funds are subject to strict supervision according to the relevant provisions of China's foreign exchange policy. Its personnel, property and goods are independent from those of Hyundai (Handan) Logistics. Article 63 of the Company Law is a special provision which targets at single shareholder LLC, aiming to prevent confusion of property between the shareholder and the company, which may harm the interests of a third party. The uniqueness of this case lies in that although Hyundai (Handan) Logistics is a single shareholder LLC, its sole shareholder is a Hong Kong company. In view of the strict supervision of domestic and foreign funds under China's foreign exchange system, it is not possible to confuse properties. Therefore, the claim of China Construction Seventh Engineering Division requiring Hyundai RNC Investment Group Limited to bear joint and several liability in accordance with Article 63 cannot be supported and should therefore be rejected.


3. Summary


Article 63 of the Company Law implies a rebuttable presumption that a single shareholder LLC cannot be independent from its shareholder, while placing the evidentiary burden to rebut on its shareholder, which in practice, relatively favors the plaintiff. There is a large amount of such cases. In the two negative cases of the Supreme People's Court cited hereinabove, both of the mainland companies’ shareholders are located in Hong Kong S.A.R.. As per the judgment in Case 4, the defendant won by providing evidence, satisfying the burden of proof to rebut legal presumption. In Case 5, the Court took foreign exchange control as the starting point, which is worth learning from. However, in other cases, it remains to be discussed whether the assets of a subsidiary and its parent company can be determined to be independent of each other solely based on the existence of foreign exchange control.


Ⅱ. Corporate Personality Confusion (Clause 3 of Article 20 of the Company Law)


1. Affirmative Cases


  • Case 6


Cecil Import and Export Trading Co v Zhao Shuping [(2017)粤民终1019号]

Judicial opinion--


Pursuant to Article 108 of the Interpretation of the Supreme People's Court on the Application of the Civil Procedure Law of the People's Republic of China, where a People's Court finds that the existence of a fact to be proved is highly probable upon examination of the relevant facts, it shall affirm the existence of the said fact. Conversely, where a party provides evidence to refute the facts claimed by the party bearing the burden of proof, after examining and combining all the relevant facts, where a People's Court believes that a fact to be provided is unclear upon examination and in combination with the relevant facts, it shall affirm that the said fact does not exist.


In this case, Cecil company claims that Hong Kong Booslon and Shenzhen Booslon are affiliated companies that have mixed business operations, with evidence proving that the two companies “set two brands outwardly while sharing one set of personnel inwardly”. Hong Kong Booslon denied the claim without providing any evidence. Shenzhen Boshilong had neither made a written reply nor appeared in court to respond to the cause of action, which shall be deemed to have waived its right to defense. Based on the evidence materials of this case, the court of the first instance was correct to find that the two affiliated companies abused the independence of corporate personality during business operation, and there was a serious confusion in property, operation, personnel and office space, which constituted a confusion of corporate personality, so that the two companies should be jointly and severally liable.


  • Case 7


Lianyungang Branch of Jincheng International Logistics Service Co., Ltd v Lianyungang Dongfang Hongwei Shipping Co., Ltd [(2017)沪72民初640号]

Judicial opinion--


There is a personality confusion between Dongfang Hongwei Company and Dongfang Shipping Company. The reasons are as follows:


Firstly, according to the industrial and commercial registration information provided by Jincheng Logistics, Zhang A originally owned 100% shares of Dongfang Hongwei Company, later transferred the company's shares to Zhang B, while Zhang A still served as the general manager of Dongfang Hongwei Company when negotiating with Gan C, a staff member of Jincheng Logistics via QQ. According to the investigation by the court of the first instance, the ocean freight invoices under the bill of lading involved in the case were issued to the shipper in the name of Dongfang Hongwei. The drawer of all the invoices was issued by Zhao D. It can therefore be determined that Zhang A and Zhao D represented Dongfang Hongwei, and there exists personnel confusion;


Secondly, Page 52 of QQ chat record submitted by Jincheng Logistics, together with the email sent by Zhao D to Gan C on December 9, 2016 submitted by Dongfang Hongwei, in which the office address and telephone number of Dongfang Shipping were the same as the business registration information of Dongfang Hongwei, both proved that there is organization confusion between Dongfang Shipping and Dongfang Hongwei;


Thirdly, according to the charter party between Dongfang Shipping and the Shipper, the Shipper should pay the sea freight to Dongfang Shipping, but the existing evidence shows that the Shipper paid the sea freight involved to Dongfang Hongwei in line with the invoice issued by Dongfang Hongwei, and Dongfang Hongwei did not provide evidence showing that the freight involved had been paid to the Carrier Dongfang Shipping. On this ground, it can be determined that there is financial confusion between Dongfang Shipping and Dongfang Hongwei.


There is confusion between Dongfang Shipping and Dongfang Hongwei in office address, personnel and contact number, and the boundary between them is too blurred to be accurately identified by outsiders. To conclude, with the inability to distinguish their respective properties, the two companies have lost their independent personality, which therefore constitutes personality confusion.


2. Negative Cases


  • Case 8 (Appeal Judgment of Case 7)


Dongfang Hongwei Shipping Co., Ltd v Lianyungang Branch of Jincheng International Logistics Service Co., Ltd [(2018)沪民终472号]


Judicial opinion--


Although the evidence provided by Jincheng Logistics can prove that there is a high degree of connection between Dongfang Hongwei and Dongfang Shipping in terms of personnel, business operations and finance affairs, the said two companies are registered in Lianyungang, China, and the Republic of Marshall Islands respectively. As such, the documented evidence is not enough to prove that this high degree of connection between the two companies has led to the inability to distinguish their respective properties, the loss of independent personality, nor had it seriously damaged the interests of creditors. Therefore, the court will not accept the claim of Jincheng Logistics that Dongfang Hongwei and Dongfang Shipping constituted personality confusion.


  • Case 9


Globair Limited v Guangzhou DPI Logistics Limited [(2020)粤01民终4452号]

Judicial opinion--


The existing evidence indicates that Hong Kong DPI Company has not set up any branches in mainland. Although Guangzhou DPI Company and Shenzhen DPI Company are in line with the so-called Guangzhou Branch and Shenzhen Branch of Hong Kong DPI Company in place of business and mail suffix, it fails to lead to the conclusion that Guangzhou DPI Company is the Guangzhou Branch of Hong Kong DPI Company or participated in the contract transaction involved herein, as Guangzhou DPI Company and Shenzhen DPI Company act as independent civil subjects. As for the evidence provided by Globair Company during the second instance, it can only manifest the relevant enterprise information of Guangzhou DPI Company and Shenzhen DPI Company, yet to deny their independence from Hong Kong DPI Company, nor can it prove that Guangzhou DPI Company acted as the counterparty of the contract involved herein.


  • Case 10


Tyfashion International Company Limited v Ludun International (HK) Co.,Limited [(2019)浙04民终578号]


Judicial opinion--


Tyfashion also claimed that Ludun International, Shanghai Ludun and Jiashan Ludun Factory constitute personality confusion based on the evidence from the internet. However, the most fundamental criterion to decide whether there is personality confusion among these enterprises is whether the enterprises have independent intention and independent property, which cannot be judged merely by the advertising materials from the enterprise’s website…...Ludun International Company is a company established in Hong Kong S.A.R., while Shanghai Ludun Company and Jiashan Ludun Factory are enterprises established in mainland. There are many differences in the company management system and financial system between Hong Kong S.A.R. and mainland, therefore, Ludun International Company, Shanghai Ludun Company, and Jiashan Ludun Factory cannot achieve financial confusion objectively, it is then impossible to form personality confusion. Thus, Tyfashion Company fails to establish this claim.


3. Summary


In general, except the case of single shareholder LLC, the claim of personality confusion between vertically or horizontally affiliated enterprises is relatively difficult to establish. The main reasons may include the followings.


Firstly, the independence of corporate personality is an important basis of modern commercial system, so the judicial system remains cautious when applying Clause 3, Article 20 of the Company law;


Secondly, unless there is an inversion of burden of proof, the plaintiff should prove that there is confusion among the defendant companies, and the core of it is financial confusion. As it is difficult for outsiders to obtain the financial information of another company, it is very difficult to bear the of burden of proof;


Thirdly, for affiliated enterprises registered in different jurisdictions, there are many differences in the company management system and financial system, and the capital flows are subject to China's foreign exchange control. Therefore, to some extent, there are certain congenital conditions to avoid confusion;


Fourthly, in some cases, if the court fails to consider the application of law, or the plaintiff cannot prove that the principal business place of the offshore company is located in mainland, the substantive law of mainland may not apply. However, it is difficult for the court to make a substantive trial based on legal provisions of offshore jurisdiction. As such, the court tends to find that the differences between legal systems constitute a natural barrier of personality confusion.


The Co-seller Approach


Whether with a fraudulent intention or not, it is not rare to be seen in practices that some trade companies might contact its potential buyer in the name of company A, then signing and issuing invoices in the name of affiliated Company B, whilst the bank account receiving payment could be Company A’s or Company B’s or even Company C’s. Later, when performing the contract, personnel, equipment, and communication methods (business address, email address, and telephone number, etc.) of the affiliated companies might be found overlapped or mixed up with each another. Based on these circumstances, the court may find that all affiliated companies in the transaction are the actual parties of the contract, therefore requiring the affiliated companies to bear joint and several liability, which will be referred to as "Co-seller Approach” in this Article.


  1. Affirmative Cases


  • Case 8 (Judgment of Second Instance of Case 7)


Lianyungang Dongfang Hongwei Shipping Co., Ltd v Lianyungang Branch of Jincheng International Logistics Service Co., Ltd [(2018)沪民终472号]


Judicial opinion--


In the circumstance where Jincheng Logistics clearly see Dongfang Hongwei as the counterparty of its offer, Zhang A and Zhao D have the obligation to clarify Dongfang Hongwei’s role in the transaction. However, Zhang A and Zhao D neither denied their representation of Dongfang Hongwei, nor did they explicitly state that they only represented Dongfang Shipping. During the trial, Dongfang Hongwei stated that they signed an Agreement of Collection and Payment with Dongfang Shipping, the ocean freight invoices paid by Jincheng Logistics were actually issued by Dongfang Hongwei on behalf of Dongfang Shipping. Therefore, the Court held that in this case, Zhang A and Zhao D represented Dongfang Hongwei when contacting Jincheng Logistics. Therefore, according to the agreement signed by the three parties, Jincheng Logistics shall have the right to request Dongfang Hongwei to return the advancement against the ocean freight invoices.


  • Case 11


Ajaltouni SAL v Foshan Bailipu Garment Co Ltd., Anson Industrial (Hong Kong) Co Ltd., Foshan Xingyunxing Trading Co Ltd., and Li Lihua [(2020)粤06民终254号]


Judicial opinion--


The legal representative of Bailipu Company at that time was Li Lihua, whose relationship with Liang A, the representative of Anson Company, was husband and wife. In the documents it provided to the insurance company, Bailipu identified itself as related to Anson, and both companies were controlled by Li Lihua. There were two purchase contracts of Anson Company, whose text and related materials contains Bailipu Company’s contact number. The above facts are sufficient to show that Bailipu and Anson are Co-sellers during the performance of the two purchase contracts. In consideration of the private relationship of the legal representatives and the statement of association between the two companies to the insurance company, Bailipu Company’s evidence such as repayment agreement, contract, customs declaration form, etc. is not enough to prove that Bailipu Company and Anson Company can maintain mutual independence in the contractual relationship in this case. Based on the above analysis, the two purchase contracts were signed by Anson, but the actual executor could be identified as Bailipu. Bailipu shall therefore bear the corresponding contractual obligations.


2. Negative Cases


  • Case 11


Ajaltouni SAL v Foshan Bailipu Garment Co Ltd., Anson Industrial (Hong Kong) Co Ltd., Foshan Xingyunxing Trading Co Ltd., and Li Lihua [(2020)粤06民终254号]


Judicial opinion--


In terms of whether Xingyunxing Company and Li Lihua should be liable for the debts of this case, as mentioned above, there is no correlation between the two transactions involved and Xingyunxing Company, despite the fact that Moon is an employee of both Bailipu Company and Xingyunxing Company. Whilst Bailipu Company and Xingyunxing Company are correlated, the email correspondence provided by Ajaltouni also reflected that Ajaltouni knew that Bailipuy was the actual counterparty of the two contracts in question when it engaged in the transaction with Bailpu and Anson. Ajaltouni had no evidence that Xinyunxing Company was involved.


3. Summary


Case 8 is quite typical, as it involves both personality confusion and co-seller issues. The Court of the first instance determined that there was personality confusion between Dongfang Hongwei and Dongfang Shipping, and Dongfang Hongwei should therefore bear the legal liability. However, in the second instance, the Court did not support the view of personality confusion but held that Dongfang Hongwei and Dongfang Shipping constituted co-seller, then upheld the judgment of the first instance. In result, Dongfang Shipping (registered in the Republic of Marshall Islands) as an offshore company, failed the aim of risk isolation.


Case 11 is also worth noticing, as the plaintiff claimed personality confusion and co-seller issues against multiple defendants. The Court accepted Bailipu Company's co-seller status and its joint and several liability based on the evidence, but rejected the other company’s responsibility. In comparison, the plaintiff's intention about who is the counterparty in a contract is also a key element to the Court's judgment.


The Joint Tortfeasors Approach


Whilst joint tortfeasors between mainland companies and offshore companies might be based on a variety of facts and legal relations, it occurs more frequently in intellectual property infringement cases with foreign-related factors. A common phenomenon in such cases is that even if the evidence is not enough to identify the personality confusion between affiliated companies, the court may decide that each affiliated company shall bear joint and several liability based on the fact of collusion and cooperation in the tort.

Two typical cases are listed below:


  • Case 12


Mitsubishi v Shenzhen Geliang Photoelectric Co., Ltd and Intematix Corporation [(2019)最高法知民终649号]


Judicial opinion--


In this case, Mitsubishi Chemical Holdings claimed that Intematix Company, Suzhou Company, Geliang Company cooperated in the manufacturing, selling, offering for sale, and importing of the alleged infringement products etc.. Specifically, Intematix Company and Geliang Company, its authorized distributor in China, jointly conducted the acts of selling and offering for sale of the alleged infringement products.


Firstly, according to the facts identified, it can be confirmed that Geliang Company, as the authorized distributor of Intematix Company in mainland, conducted the act of selling the alleged infringement products. Though Geliang Company raised the legitimate source defense, the evidence submitted by it was not enough to prove a genuine transaction relationship with GoldenluxCo.,limited or Intematix Photoelectric Co., Ltd. In consideration of the fact that Geliang Company established and advertised itself as the authorized distributor and an important marketing channel of Intematix Company in the Chinese market, Geliang Company has a close and tight relationship with Intematix Company, therefore it lacks qualification to raise the legitimate source defense. In addition, Geliang Company’s claim that the source of alleged infringement products is irrelevant with Intematix Company is inconsistent with the facts. …


To sum, the Court of the first instance is correct to find that Intematix Company, Suzhou Company and Geliang Company cooperated in manufacturing, selling, offering for sale, and importing or the alleged infringement products etc., they shall jointly bear the tort liability of stopping the infringement and pay the compensation.


  • Case 13


Midea Group Co., Ltd v Huangyue, Hualing Refrigeration Technology (Zhongshan) Co., Ltd, Guoxin Hualing Group Co, Limited [(2020)粤20民终4030号]


Judicial opinion--


The alleged infringement products manufactured by Hualing (Zhongshan) Company were marked with the words "Honorary Product of Guoxin Hualing Group". Guoxin Hualing Company appears as producer, it is therefore regarded as the co-manufacturer of the alleged products. Guoxin Hualing claimed that it did not engage in the production or selling of the alleged infringement products. However, according to the affirmation of Hualing (Zhongshan) Company and Guoxin Hualing Company, Hualing (Zhongshan) Company is authorized to carry out business in mainland on behalf of Guoxin Hualing Company. Meanwhile, Huang Xu, the legal representative of Hualing (Zhongshan) Company, is the brother of Huang Yue, both the registrant and the director of Guoxin Hualing Company. In addition, Guoxin Hualing Company had applied and registered for a series of trademarks such as "Hualing", "HUALING", etc. for many times ever since its establishment. Therefore, the behavior of Guoxin Hualing Company is sufficient to prove that it was aware of and recognized its brand to be used on the infringement product. It is found that Guoxin Hualing Company and Hualing (Zhongshan) Company constitute joint infringement, and shall therefore jointly bear the civil legal liability for stopping infringement and compensating losses.


As for the liability of Huang Yue, pursuant to Article 8 of Tort Liability Law of People’s Republic of China, if two or more persons jointly commit a tortious act and cause damages to others, they shall bear joint and several liability. In this case, Huang Yue, a resident of mainland, registered Guoxin Hualing Company in Hong Kong with HK$10,000 in 2014 and held 100% of the shares of it. After that, Guoxin Hualing Company applied for trademarkes as the same or similar ones with Midea's "Hualing" trademarks in mainland, and intentionally authorized others to use such trademarks in mainland in order to charge licensing fees. Further, Guoxin Hualing Company admitted in Court that it has neither carried out business operations in Hong Kong nor abroad. Apparently, the fundamental purpose of Huang Yue's registration and establishment of Guoxin Hualing Company in Hong Kong was to use the similar trademarks in order to obtain benefits in mainland. Its subjective intention of "free-riding" is too obvious. Moreover, Huang Yue should have known that Guoxin Hualing Company authorized Hualing (Zhongshan) Company to use its brand on the infringement products. Therefore, Huang Yue and Guoxin Hualing Company constitute joint infringement.


Suggestions for Better Risk Prevention


1. For companies with offshore affiliates

  • Keep compliance with applicable law wherever you operate your business. The principle of good faith applies without borders, the judicial system will eventually try to achieve substantive justice. Meanwhile, with increasingly complicated extraterritorial jurisdiction rules of various countries, it is crucial to take into account of different judicial regions that the business activities may be involved in.

  • Optimize shareholding structure and take into consideration the company’s particular situation. Try to avoid the structure of single shareholder company.

  • Improve corporate governance mechanism of offshore companies and project companies as far as possible: (1) avoid overlapping of directors, managers and staffs, (2) keep separate record of properties and assets, (3) keep separate financial records and do auditing on a regular basis, (4) avoid double or multiple identity/occupation of one certain personnel, especially in the cases of directors, sales and marketing staff.

  • Follow the Arms-Length rule when doing transactions among affiliated companies. Avoid improper interest transmissions, transfer pricing, unreasonable consideration, and other similar situations.

  • Implement decision-making procedures according to the Articles of Association and governing rules of each company.


2. For companies doing business with off-shore companies,

  • Pay attention to the information of your counterparty; take notice of the website, email, phone number, business address and other details;

  • If the salesperson is contacting you by using their English name, before going any further into the discussion, please let them provide their official/real Chinese name first;

  • Be aware of whether the commercial invoice or bank account information is provided by a different company;

  • In case of co-seller, list each and every seller on the contract;

  • Liaise with a reliable local lawyer to carry out due diligence investigation if possible.


注释

[1] ZHEJIANG JINDUN PRESSURE VESSEL CO., LTD. v Lishen Zhao, (2018)浙民终1014号.

[2] Niimotohiroaki v Siqi (China) Electrical Equipment Co., Ltd, (2021)粤01民终17986号.