How Do We Know When an Enterprise Exists? Unanswerable Questions and Legal Polycentricity in China

33 Pages Posted: 3 Oct 2003

See all articles by Donald C. Clarke

Donald C. Clarke

George Washington University Law School

Date Written: August 20, 2003

Abstract

One of the most perplexing aspects of Chinese enterprise law concerns the conditions under which state institutions will acknowledge and give effect to the existence of a business organization distinct from the natural or legal persons that participate in its operations. The answer might appear to be simple - they will do so whenever legally stipulated conditions are met - but this answer would be wrong. State institutions often give real and meaningful effect to the existence of entities with no apparent statutory basis, or whose legal basis dictates consequences that seem at odds with the consequences called for by constitutionally superior law. On what basis does the court (or some other government agency) decide that a corporation does or does not exist?

This essay raises the question in the context of Chinese enterprise law. Chinese courts and government agencies do not consider a statute to be necessary for the recognition of an organization's existence. At the same time, however, a mere assertion by an interested party is not good enough, either. But if a legal basis is not required, what exactly is the basis of a governmental decision that an entity exists or not?

This essay postulates that the very attempt to find a consistent rule involves a misunderstanding of what the system is all about; that the system under examination is not designed to produce consistent rules, and that any rationalization of existing decisions is not the discovery of an inherent underlying principle, but rather nothing more than a formulation that happens to fit the materials today but may not fit them tomorrow. There simply does not exist any consistent rule of recognition guiding the decisions of various governmental agencies in China when they face the question of whether or not to acknowledge a claim that a particular business entity "exists" and that particular consequences should follow from the existence. While such a consistent rule might be a good idea, there is nothing in the Chinese legal system that will operate to produce one.

This claim follows from what I posit as a fundamental characteristic of China's current legal system: its radical polycentricity. There is no single Chinese legal "system"; that there are instead many Chinese legal systems, each with its own jurisdiction, hierarchy of authority, and way of operating. As a result, Chinese enterprise law is only a part of what there is to say about Chinese enterprise organization and the practical rights of various claimants to enterprise assets. Indeed, a legal sanction is not necessary for a Chinese enterprise to have an existence that is acknowledged as affecting legal rights of various parties. An enterprise can "exist" if a government agency says it exists and has the capacity to make its fiat respected in part or all of the system. There are no rules about which government agency has the power to create what kind of enterprise, and there is no settled way to resolve disputes about such power.

Keywords: China, Chinese law, corporate governance, entity law, organizational law, corporate law, company law, debtor-creditor law, polycentricity

JEL Classification: L20, P31, K22, K10, K40

Suggested Citation

Clarke, Donald C., How Do We Know When an Enterprise Exists? Unanswerable Questions and Legal Polycentricity in China (August 20, 2003). Available at SSRN: https://ssrn.com/abstract=437340 or http://dx.doi.org/10.2139/ssrn.437340

Donald C. Clarke (Contact Author)

George Washington University Law School ( email )

2000 H Street, N.W.
Washington, DC 20052
United States
202-994-2830 (Phone)
202-318-4479 (Fax)

HOME PAGE: http://docs.law.gwu.edu/facweb/dclarke/

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