China Special Situations Insight (Volume 1, Issue 8)
Can NPL Investors Approach the Debtor's Directors for Debt Repayment?
In order to increase the chance of NPL recovery, as well as seeking the possibility of pursuing against the debtor’s shareholders (see China Special Situations Insight Volume 1, Issue 5 ) , in certain circumstances NPL investors may turn to the debtor’s directors.
In general, a director of a company is only liable for his/her performance of duties towards the company and its shareholders and do not bear such liabilities to the company’s creditors. However, it is possible for creditors to directly claim for a director’s personal liability for a company’s debt when he/she fails to perform his/her fiduciary duties with respect to the shareholders’ capital contribution and statutory obligations during liquidation to the detriment of the interests of the creditors, which are outlined below:
(1) A shareholder defaults payment on their capital subscribed at the time of the company's increase of capital
As required by the fiduciary duties provided in PRC Company Law, directors are generally responsible for supervising and procuring shareholders to make full and timely payments for their subscribed capital. In accordance with the judicial interpretation promulgated by the Supreme People's Court of the PRC, in terms of the capital subscribed at the time of the capital increase of the company, if a creditor is able to prove to the court that (a) a shareholder defaults payment on their subscribed capital upon the expiration date set out in the articles of association, (b) the directors, who are aware of such default, have the ability but fail to make calls upon such shareholder in respect to their outstanding amount of subscribed capital in accordance with the articles of association of the company, and (c) such non-action by the director has jointly caused damages to the company’s creditors by allowing such damages to occur (the “Capital Increase Scenario”), the company’s creditors may thus seek to hold the directors jointly and severally liable for the debt the company owes them to the extent of the outstanding amount of subscribed capital.
(2) A shareholder defaults payment on their capital subscribed at the time of the establishment of the company
领英推荐
It is not explicitly provided in Chinese laws or regulations that a creditor is legally entitled to hold the directors personally liable for a company’s debt in the circumstance whereby the directors fail to fulfill their fiduciary duties to make calls upon shareholders in respect to their outstanding amount of capital subscribed at the time of establishment of the company (the “General Scenario”).
However, in judicial practice, some decided cases indicate that the courts have expanded the interpretation of the explicit rule regulating the Capital Increase Scenario above-mentioned to the effect that the directors may also be held jointly and severally liable to a creditor for the company’s debt in a General Scenario. According to a civil judgment issued by the Supreme People's Court of the PRC in 2019, the judges were of the view that the obligations of the shareholders to pay in their capital subscribed at the time of the establishment of the company are the same as those at the time of a capital increase of the company, thus the obligations of directors to supervise and procure shareholders to contribute their capital shall not be treated differently. However, it is worth noting that China is a nation that does not follow case law and a different court may hold a different opinion in a specific case.
Capital withdrawal is strictly prohibited under PRC Company Law, and it is deemed to impair the liquidity of the company thus damaging the interests of creditors. If a shareholder commits capital withdrawal with the assistance of a director, the director may be personally held jointly and severally liable with the shareholders for the company’s debts to the extent of the amount of withdrawn capital and interest accrued thereon.
When a company enters liquidation, a director acting as a member of the liquidation committee shall fulfill the statutory obligations in the interests of the company’s creditors. If a director damages the interests of the company’s creditors through any action or omission, they may be personally held liable for the debts that the company owes to the creditors. An example of this is maliciously disposing of a company’s property after a company’s dissolution or being negligent resulting in the loss of company records, making the company’s liquidation impossible.
For further information, please contact Catherine Miao, Head of Special Situations and Alternative Investment at JunHe LLP: [email protected] or +86-21-22086350.