Courts in Republic of China

Courts in Republic of China

When the courts in the People’s Republic of China hold a director personally liable for their actions

In its forthcoming newsletter, CONSULEGIS International Litigation & Arbitration Specialist Group presented an abbreviated overview of multiple jurisdictions’ legal views on when, based on company law, is a director is personally liable for their actions.

Among the contributors to writing on the topic are five legal advisors from Horizons addressing China, Korea (DPRK), Mongolia, Indonesia and. In this post, we offer the entry on China.

CHINA

Company Law of the People’s Republic of China (“Company Law”), adopted in 1993 and last revised in 2013, are the main legislations governing and applicable to all corporate entities. Under Company Law, directors are accountable to the Company and the Shareholders; all duties and responsibilities granted to directors shall be performed with loyalty and due diligence.

In Article 46, the board of director’s responsibilities, which in the end shall be burdened by all directors, are stipulated as the main governing body of the company. Therefore, any directors in breach of conduct may be subject to the legal liabilities provisioned in articles of the Company Law (Article 21 &148 & 149 & 152), corresponding articles in Provisions as well as the company’s articles of association. Dependent on the violation, the penalty may range from independent or joint civil compensation or criminal imprisonment.

Any director in violation of the law, administration regulation or the articles of association is liable to compensate the company for damages and losses (Article 149, Company Law). Where any director damages the shareholders’ interest by violation maybe sued by shareholders in the people’s court (Article 152, Company Law & Article 12, Provisions IV). Furthermore, any cause for the losses of creditors, the responsible director may be sued by creditors for compensation (Article 18 & 19 & 21, Provisions II & Article 13 & 14, Provisions III)

Specific violations are mainly defined in the Law and the Criminal Law of the People’s Republic of China (‘Criminal Law’). Primarily, as directors owe a fiduciary duty and due diligence to the company, any abuse of power and neglect of performance may be considered a violation, including:

  • Misappropriating company funds, commodities, services or other assets gratis
  • Unauthorised disclosure of company confidential information
  • Undisclosed acceptance of commission for transactions between the company and other parties
  • Without consent of the shareholders or the resolution of the board of directors
  • Abuse of authority
  • Business opportunities sought in one’s own self interest
  • Assist other companies in competition against the company
  • Provide guarantee to a unit or individual without justifiable reasons
  • Relinquish creditors’ rights or assume debts without justifiable reasons
  • Other related acts in breach of loyalty in the company’s articles of association and in Article 148, the Law

The abovementioned violations, among others, including manipulation of the company to commit unlawful acts, shall fall under the scope of sentences under Article 165 and Article 169a of the Criminal Law.

In the corporate governance structure (Company Law, Section 2), both the shareholders and supervisors may initiate legal proceedings against a director for company mismanagement.

In a criminal case, the director, as the criminal suspect, shall be strictly proceeded upon in accordance with procedures regulated under the Criminal Procedure Law of PRC (revised 2012). In the event of high frequency losses of property in cases where directors are involved, an incidental civil action may be bought when initiating public prosecution and the defendant's property maybe seized or frozen when necessary (Article 99 & 100, Criminal Procedure Law).

All directors are called upon to perform in the best interest of the company. Neglect of responsibilities, mismanagement and abuse of position may lead to severe repercussions for the individual, both in civil and criminal proceedings.

LI Hua Jing, LI Dan April
Horizons Corporate Advisory
www.horizons-advisory.com