The Supreme People’s Court of China adopted the controversial rule of “debts-follow-assets” (the DFA rule) in 2003, which allows courts to deny the legal personality of subsidiary corporations and hold them jointly and severally liable for the debts of their shareholders under certain circumstances. This rule essentially establishes a legal basis for “affirmative asset de-partitioning”, which is similar to “outside reverse piercing of the corporate veil” and successor liability, two controversial and complex doctrines in the United States. I will present an empirical study of how Chinese courts enforce this rule in practice and evaluates its social costs and benefits. The basic finding is that courts often consider non-legal factors such as the identity of creditors and the number of investors in the subsidiary corporations. The current evidence is consistent with the prediction of the theory of asset partitioning. It also casts doubts on the widespread belief that legal personality is important and that the DFA rule should be abandoned.

About the speaker: Prof. James Zeng