Directors’ Liability in China

(By Yu ZhiyuanDirectors’ liability in China is an attractive matter to foreigners who act or intend to act as directors in China. Today, we would like to introduce directors’ liability in China to the below questions.

 

1. What are the key areas of liability that directors in China need to be aware of?

Directors shall abide by laws, administrative regulations and articles of association of the company and shall have the fiduciary and diligent duties to the company.

Directors may not abuse their authorities by accepting bribes or generating other illegal income, and may not convert company property.

The directors:

(1) may not misappropriate company funds;

(2) may not deposit company assets into an account in his own name or in any other individual’s name;

(3) may not loan company funds to other people or give company assets as security for the debt of any other individual without the approval of the shareholders meeting, general meeting of shareholders or the board of directors in violation of the articles of association;

(4) may not execute any contract or engage in any transaction with the company in violation of the articles of association or without the approval of the shareholders meeting or the general meeting of shareholders;

(5) may not use the favorable conditions and conveniences to seek the business opportunities that shall belong to the company to engage in the same business as the company in which he serves as a director or the senior officer either for his own account or for any other person’s account without the approval of the shareholders meeting or the general meeting of shareholders;

(6) may not accept and possess the commissions paid by others for transactions conducted with the company;

(7) may not disclose company confidential information without authorization;

(8) may not engage in other activities in violation of his fiduciary duties.

 

  1. How has this changed in recent years?

According to the Provisions of the Supreme People’s Court on Certain Issues Concerning the Application of the “Company Law of the People’s Republic of China”(III), In the event that a shareholder fails to fulfill or fully fulfill his capital contribution obligation when the company increases its capital,the creditor can request the people’s court to hold a director liable on the ground that the failure of the director to fully perform his loyalty and diligence obligations under the Company Law.

 

  1. What are the implications of a liability claim being made against a director in China?

If a director causes detriment to the company while performing his duties in violation of laws, administrative regulations or the articles of association, he shall be liable for the loss so caused. If his behavior constitutes a crime, he shall bear criminal responsibility. Behinds, if a director is personally responsible for a company to undergo bankruptcy liquidation or a director serves as the legal representative of a company whose business license was revoked due to its violation of law, and being personally responsible for such revocation is, he may not serve as a director within three years.

 

Notes: the legal provisions in English hereof are quotes from internets for reference.

 

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