This is a question we get quite a bit, all kinds of stories are out there, most not true. So I thought it was time to go through the rules again with folks. A simple post but just to reiterate the point that the principles of Director and Officer personal liability (with some exceptions for the Legal Representative) are generally the same in China as elsewhere.
Although Chinese laws vary according to the company structure, companies' board members, legal representatives, and auditors can potentially be held responsible for legal consequences that may occur as a result of actions by the company. A company manager may (although rarely) bear criminal responsibility for actions he/she does or does not do as part of his/her duty.
There have been some changes under the new Company Law, but traditionally companies have a two-tier supervisory structure. On the one hand, a Board of Directors or an executive director responsible for the management of the company. On the other hand, a supervisory board and an auditor. The supervisory board, at least in theory, has traditionally been responsible for a certain degree of oversight of the management by the board of directors or executive director - although there have been some recent changes in the new Company Law which I'll get into in a later post. In an nutshell, if they are asleep on the job then both board members and supervisors do have some risk of personal liability.
The Legal Representative, Supervisor, and the Board of Directors must abide by Chinese legal requirements as well as the country's administrative rules and bylaws. They have fiduciary duties of loyalty and care to diligently and faithfully act in the best interests of the corporation.
China Company Law and Board Decisions
While there is some risk, the baseline starting point is that the company's legal representatives, directors, and shareholders are immune from personal liability resulting from actions taken while carrying out their official duties or as a result of their ownership stake in the business. This is similar to laws elsewhere and mirrors the principles of the "business judgement rule" in the US - so long as the Board acts in good faith after due inspection and being well-informed, they are protected from decisions which turn out to cause harm to the Company.
However, since senior managers and board members are involved in the management and operation of the company, they may be held liable to the company for their actions that will cause the loss of the company in certain circumstances, such as fraud and gross negligence.
Directors and board members must act in accordance with the law, administrative regulations, and company charter. Company articles of association may contain rules to be followed by company directors and company employees during their employment – with sanctions to be applied when these rules are not followed.
Under Chinese law, those who act as directors or directors in limited liability companies can only be held liable for their personal actions (not company actions). For example, a manager may be accused of negligence or misconduct, but cannot be held responsible for actions such as breaching the company's contract with another company.
In such a case, no civil action can be brought directly against a director. In short, even if a director is considered internally responsible for the breach of contract by the company, he will not assume external legal liability to a third party.
Civil Obligations of Company Legal Representatives, Directors, and Officers
I've written about liability and other risks for being a Legal Representative in an earlier post.
1. Intentional Wrongdoing
Chinese law can also hypothetically criminalize certain actions of a company representative or director, that violates the company articles of association. For example, if the company general manager violates a covenant not to compete against the company, this action may be considered intentional wrongdoing.
2. Negligence
A legal representative or manager of a company is held legally liable if, by negligence of his duties, he has caused the company to incur losses. As a result of such negligence, the company may request compensation from the manager for the damage it has suffered.
3. Bankruptcy Proceedings
According to Chinese law, transactions such as the transfer of goods and debt payments of companies in the bankruptcy process must be carried out in accordance with the rules specified in the law. The idea is protection of creditors. If a director of a company has caused the wrongful or fraudulent transfer of company property, he will be held liable for any damage suffered by the company, even in the process of bankruptcy.
Administrative Obligations of Legal Representatives, Directors and Officers
1. Unpaid Registered Capital
According to Chinese corporate law, all shareholders are obliged to pay the committed capital amount. Shareholders who fail to fulfill this obligation may be fined a % of the overdue capital amount. The timeline has just been squeezed under the new Company Law rules which I wrote about here.
2. Misconduct and Negligence
Damage caused by misconduct or negligence by a legal representative or manager of a company can be claimed from their legal representatives. Depending on the consequences of the act, these persons may also be sentenced to fines and administrative penalties.
3. False or Inaccurate Disclosure
If the records required to be kept in the accounting, finance, HR units of a company are inaccurate or incomplete, managers can in theory be fined, although again, the mistakes would typically have to be intentional or grossly negligent.
4. Actions During Liquidation
Managers of companies that are in the process of liquidation can be fined if their legal representatives hide company assets, intentionally or negligently provide incorrect information on the company's balance sheet or listings of company assets.
Okay, that's it for a short refresher on the basics of personal liability for Company executives. Thank you everyone for reading and subscribing.
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