China - Duties & Liabilities of Directors & Officers
* A Primer for the smart Business Executive who should take great heed from his / her duly appointed advisors.
Ancient Chinese Proverb:
Better return and make a net,
than to go down to the stream and merely wish for fish.
How does one avoid “business hurdles” and potential civil / criminal liabilities in China’s fluid business environment……….?
Quite simply: Learn the rules, take sound advice and don’t do something you clearly wouldn’t do anywhere else.
In the light of recent scandals and widespread investigations in China, it is critically important for foreign business executives to understand the roles, responsibilities and criminal liabilities of key personnel running fully operational companies in China. It goes without saying that foreign executives taking up key roles in the PRC should be acutely aware of their responsibilities and the potential for civil or criminal prosecution if they, or their company, break the law. Importantly, a foreign-invested company or legal entity established in China is a subsidiary of a foreign company and therefore falls under both China’s laws and the laws of the country in which its parent company is registered.
As such, the ”buck” for any malfeasance in China stops with those in command and control regardless of the number of legal, compliance and audit personnel you might have in situ or where the masterminds actually reside.
The Legal Representative
Beyond the established requirement a having Legal Representative (or Chief Representative for a Rep Office) in place, the key positions in a foreign-invested enterprise (FIE) in China vary by virtue of enterprise structure and size. In a wholly Foreign-owned Enterprise (WFOE) or Joint Venture (JV), the Legal Rep position is held concurrently with another key position. Moreover, the responsibilities of officers in other key positions are not limited to those defined under Chinese law.
For this reason, foreign businesses and individuals operating in China should familiarize themselves with expanding local laws and regulations, as well as increasing extra-territorial legislation (i.e. the U.S. Foreign Corrupt Practices Act and UK Bribery Act). Indeed, it is quite a challenge to keep up with such (focused) legislative evolution. This is why smart companies invest in good audit, legal and compliance personnel at the local and supervisory level. It avoids a whole lot of headaches in the guise of potential fines, business set backs, loss in employee morale, corporate investigations and prosecutions, as well as an intangible "loss of face" (trust).
Qualifications of Key Office Bearers
Pursuant to PRC Company Law, a person cannot be appointed as a Supervisor, Director, General Manager or other Senior Manager of a company if the following is evident:
- He / she does not have civil capacity or has only limited civil capacity;
- He / she has been convicted of any criminal offense in the nature of corruption, bribery, conversion, misappropriation or disrupting the economic order of the market;
- Is a former director or manager of a company or enterprise which has been declared bankrupt and liquidated in circumstances where he was personally responsible for the bankruptcy;
- Is a former legal representative of a company or enterprise which has had its business license revoked and has been ordered to close its business operations due to any violation of law in circumstances where the former legal representative was personally liable for the revocation of the business license; or
- He / she has significant unpaid debts.
Any purported appointment of a person to such an aforementioned position made in violation of Article 147 shall be legally invalid. Any existing Supervisor, Director, General Manager or other Senior Manager who falls foul of the qualifying criteria of PRC Company Law (or who violates the law) shall be removed from his / her post. [If the company has knowledge of such matters, it is far better if this is done promptly by the company itself.]
Liabilities (In Summary):
- Personal Liability:
The majority of liabilities for the company fall upon the “individual shoulders” of the Legal Rep. However, those in other key positions also have liabilities for (and, of course, liabilities to) the company. Briefly, these include:
- Liability for criminal offenses
- Liability for liquidation
- Liability to the company
Under PRC Company Law, the officer directly in charge (who may be the Legal Rep) is also liable where:
- The company issues false or deceptive financial and accounting reports to the public
- A company in liquidation conceals property, records false information or distributes property prior to payment of debts
………in which case the officer directly in charge, along with other directly responsible personnel, may be personally subject to serious fines / scrutiny.
When a case is serious enough to involve criminal liability, the Legal Rep and/or the person directly responsible will generally be investigated by the Public Security Bureau (amongst other law enforcers).
- Liability to the Company
PRC Company Law provides that Directors and Officers should assume the duties of loyalty and diligence to the company. They cannot take advantage of their position or powers to accept bribes or collect illicit earnings, and should not take illegal possession of the company's property.
Where those in key positions may violate laws, administrative regulations or the Company’s Articles of Association in performance of their duties for the company, and thus cause losses to the legal entity itself, then they will be personally liable for compensation to the company.
PRC Company Law also prohibits a Director or Senior Manager from engaging in the following conduct, for which he/she will be personally liable to compensate the company for any resulting damage to its interests / name:
- Lending the company’s funds or property without the approval of the Shareholder(s) or the Board;
- Concluding contracts or conducting business with the company without the approval of the Shareholder(s) or the Board;
- Usurping the company’s business opportunities or engaging in illegal conduct;
- Accepting commissions from third parties for transactions with the company; or
- Breaching fiduciary duties to the company.
In addition, any Shareholder of the company is entitled to initiate, or request the company’s Supervisor or Board (as the case may be) to initiate legal proceedings against individuals for certain transgressions:
In summary, it is highly advisable for executives who may wish to take up key positions in China to suitably “arm themselves” with the facts about China’s legal requirements in order to avoid any potential civil or criminal liability. It is certainly good to take note of the wise words of one ancient orator:
Listen to your advice - better than reading books for ten (or more) years.
