Corporate law in China: Liability risks under the new law

As of 1 July 2024, China’s revised corporate law imposes stricter liability rules for directors and board members, significantly heightening personal accountability for violations of duties and laws. This change amplifies transparency and due diligence obligations while subjecting directors to stricter oversight.

Directors are now required to act in accordance with the law and the company’s articles of association (AoA), or risk being held personally liable for company losses resulting from their actions, say the Ecovis advisors. Expanded duties of loyalty and care are now codified (e.g., Articles 180, 188), with directors obligated to report personal transactions that could impact the company, subject to shareholder or board approval (Articles 182-184).

What changes under the new corporate law in China

Directors can face personal liability in cases such as:

1. Abuse of their position through embezzlement, bribery, or unlawful disclosure of sensitive information (Art. 181).
2. Failing to promptly identify and collect overdue or insufficient shareholder contributions, causing company losses.
3. Collective compensation responsibilities if shareholders unlawfully withdraw capital (Art. 53).
4. Facilitating a third-party’s share acquisition that results in company losses.
5. Premature profit distribution without offsetting prior losses or creating required reserves (Art. 211).
6. Illegally reducing registered capital, leading to company losses (Art. 226).
7. Failing to initiate timely liquidation, resulting in compensatory liabilities (Arts. 232, 234-238).

Liability can extend to internal and external claims:

• Internally, shareholders can sue directors for damages due to misconduct (Arts. 188, 189).
• Shareholders may file direct civil suits for personal losses caused by directors violating laws or AoA provisions (Art. 190).
• Externally, third parties can claim damages for grossly negligent or intentional breaches by directors (Art. 191).

Chinese sanctions partly also recognised in Germany

In severe cases, financial and criminal penalties may be imposed. Similar to German law, personal liability for directors exists in both jurisdictions. Breaching duty of care or loyalty can lead to “piercing the corporate veil,” allowing access to personal assets in cases of abuse, such as asset commingling.

While no treaty exists for mutual recognition of court judgments between China and Germany, certain judgments might still be acknowledged under the principle of reciprocity. Misconduct can result in additional repercussions, including travel restrictions, such as visa denials or entry bans. Directors already in China facing investigations might encounter exit bans.

Both Chinese and German corporate laws impose personal liability on directors. The latest changes in China create significant risks, emphasising the importance of adhering to duties and conducting thorough compliance reviews to mitigate potential liabilities.

Resource: https://www.ecovis.com/global/corporate-law-in-china-liability-risks-under-the-new-law/