Signed and Paid a Supplier's Hong Kong Company? Is Its Mainland Affiliate Liable?

The contract names your supplier's Hong Kong company, and its header gives that company an "office" at a Guangzhou address. You pay the Hong Kong company. When the goods turn out to be fake, it stops answering your questions. So you sue the company registered at the Guangzhou address.

A Korean buyer was in that position in 2020. It sued the Guangzhou company first, in 2021, and added the Hong Kong company later. In April 2022 a court in Guangzhou's Nansha district decided which of them had to pay.

What happened in the mask case?

On 3 July 2020 the Korean company signed a supply agreement with a Hong Kong company. It covered 310,080 branded N95 masks at USD 3.10 each, FOB Guangzhou, for USD 961,248 in all. The agreement chose Chinese law. The seller promised that none of the goods would be counterfeit.

The agreement's header gave the Hong Kong company a head office in Hong Kong and an "office" in Panyu, Guangzhou. That address was the registered address of a Guangzhou clothing company.

The buyer paid in two transfers, on 6 and 13 July. The masks left Guangzhou for the United States on 13 July, addressed to a hospital. The end buyer reported that US customs had seized them. The brand owner confirmed that they were counterfeit and asked for them to be destroyed.

On 21 July, eight days after it had been paid in full, the Hong Kong company sent a purchase contract to show where the masks came from. It named the Guangzhou company as the buyer, an "authorised agent" as the seller and the factory licensed to make the brand's masks as the maker. The factory told the court it had never signed it, and that its seal on the document was forged. The agent's controller was later convicted in Shanghai of selling goods under a counterfeit trademark.

When the buyer asked for proof of the source, the Hong Kong company refused. It said it had done everything the agreement required.

The buyer pointed to four links between the two companies:

• Until March 2013 the Hong Kong company had carried the same name as the Guangzhou company.
• Its sole shareholder and director had the same name as the Guangzhou company's legal representative, who held that post until November 2020.
• The Hong Kong company's "office" in the agreement was the Guangzhou company's registered address.
• The Guangzhou company's seal was on the purchase contract sent to show the source.

In June 2021 the court let the buyer add the Hong Kong company to the case. The Hong Kong company never appeared, and the court decided the case without it.

Why wasn't the Guangzhou company liable?

The court began with the basic rule. A company's separate legal status, and its shareholders' limited liability, are the cornerstone of company law. So the court would treat related companies as one only with great caution.

Chinese courts call it "mixing of legal personality" when two companies are run as one. The court said three things must all be present:

• Signs. The companies mix their staff, their business and their finances.
• Substance. They mix their property.
• Result. The mixing has seriously harmed creditors.

If any one is missing, there is no mixing.

The buyer could not show any of them:

• Every step went through the Hong Kong company. The buyer signed with it, paid it, received the goods and invoices from it and wrote to it afterwards. Nothing showed that the Guangzhou company took part.
• The sealed purchase contract proved little. It was a photocopy, and the factory said it was false.
• The address was the Hong Kong company's own statement. The Guangzhou company had not agreed to it, and no other evidence showed that both companies worked there.
• A former name and a shared name were not enough. They did not prove that the companies mixed staff, business or property, or that the buyer's claim had been seriously harmed.

The buyer had to prove the mixing, so the claim against the Guangzhou company failed. The judgment mentions no bank records, staff lists or other documents showing money or people moving between the two companies.

What did the Hong Kong company have to pay?

The court held the Hong Kong company in breach. It had promised no counterfeit goods. It could not show where the masks came from, and it never answered the buyer's questions about the source.

The court decided the case under the old Contract Law, because the deal was made in 2020. The current rules on the same points are in the Civil Code (arts. 563, 565, 566 and 584).

• The contract ended on 30 September 2021. That was the day the Hong Kong company was served with the claim. The buyer had told it in August 2020 that it was in breach, but had never said the contract was over.
• Refund of USD 961,248. Interest ran from 30 September 2021 at the one-year loan prime rate, China's benchmark lending rate. The buyer had asked for interest from its payments in July 2020.
• USD 275,000 of losses. The buyer had paid USD 1.7 million to settle with its own customer. The court refused to use that figure, because the settlement also covered gowns and another end customer. It looked instead at what the customer further down the chain lost on this order of masks. It allowed USD 250,000 of extra freight and USD 25,000 of profit on the existing order. It refused USD 540,000 of profit on future orders, which the Hong Kong company could not have foreseen when it signed.
• Nothing for three other items. The cost of buying and shipping replacements (USD 192,933.51) was already covered by the freight award. Storage was refused for three reasons. It wasn't a necessary cost, the buyer had not destroyed the masks when the brand owner asked, and its payments did not match the storage invoice. Lawyer's fees of RMB 1,165,695 were refused because the agreement said nothing about them.

Why did the appeal court correct the trial court on jurisdiction?

Both companies objected to the Nansha court hearing the case. The Hong Kong company objected in writing within its time to defend, but not because of arbitration. The Guangzhou company only said at the first hearing, on 21 July 2021, that the buyer's agreement with the Hong Kong company had an arbitration clause.

In January 2022 the Guangzhou Intermediate People's Court held that this came too late. A party that wants a court case sent to arbitration must raise the arbitration agreement before the first hearing. The Hong Kong company, which had signed the agreement, never relied on arbitration. The Guangzhou company said it was not a party to the agreement, and it raised the clause only at the first hearing. So the court would not examine the point, and the case stayed in court. The same rule is now in article 37 of the revised Arbitration Law (in Chinese), in force since 1 March 2026.

The appeal court also found two mistakes in how the trial court handled the objection. It should have decided jurisdiction before hearing the merits. And it should not have ruled on whether the companies had mixed their personality in a jurisdiction ruling, because that question belongs to the full trial. The appeal court still upheld the result.

The judgment's summary of the agreement mentions Chinese law but no arbitration clause. The published documents don't say whether there was one.

Does the 2024 Company Law change the answer?

The mask case was decided under the old law. Since 1 July 2024 the revised Company Law (in Chinese) has a written rule for groups:

• A shareholder that abuses a company's separate status and its own limited liability to evade debts, seriously harming creditors, is jointly and severally liable for the company's debts (art. 23(1)).
• Where a shareholder uses two or more companies it controls to do this, each of those companies is jointly and severally liable for the debts of any of them (art. 23(2)).

The new rule still needs control, abuse to evade debts and serious harm to creditors, and the buyer has to prove them. A buyer in the same position today would still need evidence of how the two companies actually ran, which is what this buyer lacked. This case doesn't tell you how a mainland court would apply article 23 to a Hong Kong company.

What doesn't this case decide?

• It is one first-instance judgment. No appeal on the merits appears in the published records. Chinese courts are not bound by earlier decisions.
• The Hong Kong company did not defend. The court heard only the buyer and the Guangzhou company.
• Collection is unknown. The published records don't show whether the buyer collected anything from the Hong Kong company.

What should you do when the contract names a Hong Kong company?

1. Find out which company has the assets. Before you sign, ask which company makes the goods, which signs, which is paid and which owns anything in mainland China. Check each one in the public records. How to find a Chinese supplier's registered company name shows how.
2. Put the mainland company in the contract. Have it sign as a co-seller, or give a guarantee that says "joint and several". If a guarantee doesn't say which kind it is, Chinese law treats it as an ordinary guarantee, and you generally have to pursue the seller first (Civil Code art. 686).
3. Don't rely on an address or a letterhead. An "office" line in the contract is the other side's own statement. In this case it proved nothing about the Guangzhou company.
4. Get the source documents before you pay. For branded goods, ask for the brand owner's authorisation or the purchase chain before the balance goes out. Here the source contract arrived eight days after the last payment, and the factory said its seal on it was forged.
5. End the contract in writing. Under the Civil Code, a contract ends when your notice reaches the other side. If you skip the notice and go straight to court, it ends only when the court serves your claim (art. 565). Here that was more than a year after the buyer first complained, and interest ran only from then.
6. Put lawyer's fees and downstream losses in the contract. The court refused the fees because the agreement didn't mention them. A clause saying what the goods are for, and who they are going to, may help you argue later that the losses were foreseeable.
7. If there is an arbitration clause, raise it before the first hearing. This applies whichever side you are on.

Seller. [Mainland company], unified social credit code [ ], signs this contract as a seller together with [Hong Kong company]. They are jointly and severally liable for every obligation of the seller under this contract, including refunds, damages, interest and lawyer's fees. A notice to either of them is a notice to both.

I work out which company in a supplier's group signed, was paid and holds assets, and what you can claim from each →