Highlights of 2023 Revision to Company Law of China regarding liabilities of senior officers

On December 29, 1993, the Company Law of the People's Republic of China (the “Company Law”) was enacted and was formally implemented on July 1, 1994. The current effective Company Law was amended by the fourth amendment in 2018, the newly revised Company Law of the People’s Republic of China (2023 Revision) (the “Revision”) will have a substantial impact on the compliance obligations and risks associated with the performance of the duties of directors, supervisors, senior executives (manager, deputy manager, chief financial manager, secretary to the board of directors of a listed company, etc.) ( collectively the “senior officers”).

A major focus of the Revision is to expand the powers of directors and at the same time to strengthen the obligations of senior officers in terms of their obligations of loyalty and diligence, as well as their liabilities to the company and third parties.

Change 1: Obligations of preserving company's capital

In the Article 51 of the Revision, it stipulates that after the establishment of a limited liability company, the board of directors shall verify the shareholders' capital contributions. If it is found that a shareholder has not timely and fully paid the contribution as stipulated in the company's articles of association, the company shall issue a written payment demand to that shareholder for the outstanding amount. In the case of failure to fulfill the obligation stipulated above in a timely manner, resulting in losses to the company, any directors held responsible shall be liable for compensation.

The Article 53 of the Revision regulates that in the event of illegal withdrawal of contributed capital by the shareholder, the shareholder in violation shall return the withdrawn contribution amount; if such action causes losses to the company, any directors, supervisors and senior executives of the company held responsible shall bear joint and several liability for compensation along with that shareholder.

The changes as mentioned above will undoubtedly imposes greater obligations on senior officers to protect and preserve the company’s capital.

Change 2: Liability for losses suffered by third parties

The Article 191 of the Revision stipulates that for losses caused to others by a director or senior executives during the performance of their duties, the company shall be liable for compensation; if there is intent or gross negligence on the part of the director or senior executive, such director or senior executive shall also be liable for compensation.

In the current Company Law, the above liability for compensation does not extend to losses caused to a third party. While retaining the provisions of the current Company Law regarding the liability of senior fficers for losses suffered by a company as a result of their performance of duties in violation of the laws or administrative regulations or the articles of association, the Revision introduces new obligations for directors and senior executives to bear the compensation liability for losses caused to third parties in the performance of their duties due to willful misconduct or gross negligence.

Change 3: Obligations to exercise their duties independently and compliantly

In the Article 192 of the Revision, in cases where a controlling shareholder or actual controller of the company instructs any director or senior officer to engage in action harmful to the interests of the company or its shareholders, that person shall bear joint and several liability along with the director or senior officer.

The Revision strengthens the obligations of directors and senior executives to carry out their duties independently and compliantly, and refrain from being influenced by controlling shareholder or the actual controller that may lead to actions harmful to the interests of the company or its shareholders. Failure to meet these obligations may result in the risk of joint and several liability along with the controlling shareholder or actual controller.

Change 4: Liability for restricted financial assistance for share acquisition

The Article 163 of the Revision: “A company shall not provide gifts, loans, guarantees, or other financial assistance for others to acquire shares of the company or its parent company, except for the implementation of an employee stock ownership plan.

For the benefit of the company, a company may, upon a resolution of the shareholders' meeting, or a resolution of the board of directors made in accordance with the company's articles of association or authorization of the shareholders' meeting, provide financial assistance for others to acquire shares of the company or its parent company, provided the cumulative total amount of financial assistance provided shall not exceed 10% of its total issued share capital. Such a resolution of the board of directors shall be adopted by two-thirds or more of all the directors.

In cases of a violation of the preceding two paragraphs that results in losses to the company, any directors, supervisors, and senior executives held responsible for the violation shall be liable for compensation.”

This newly added provision introduces that in the event that a company provides financial assistance for a third party to acquire its share in violation of the law and thereby suffers losses, the senior officers who are responsible for such financial assistance shall bear the liability for compensation.

Change 5: Liabilities for unlawful profit distribution and unlawful capital reduction

The Article 211 of the Revision stipulates that in cases where profits are distributed to any shareholder in violation of this Law, the shareholder shall return the distributed profits involved in the violation to the company; if losses are caused thereby to the company, the shareholders, as well as any directors, supervisors, and senior executives responsible for violation, shall be liable for compensation.

The Article 226 of the Revisions regulates that in cases where a reduction in a company’s registered capital violates the provision of this Law, shareholders shall return the funds received, and any reduction in shareholders’ contributions shall be reinstated; if any losses are caused thereby to the company, shareholders, as well as any directors, supervisors, and senior executives responsible for the violation, shall be liable for compensation.

The Revision introduces two new provisions that the senior officers who are responsible for such unlawful distribution or capital reduction shall bear the liability for compensation in the event that a company makes profit distribution to its shareholders in violation of this law and thereby suffers losses, and in the event that the registered capital of a company is reduced in violation of this law and thereby suffers losses.

Change 6: Obligations of liquidation

The Article 232 of the Revision states that if a company is dissolved it shall undergo liquidation. Directors shall act as the liquidators and form a liquidation group within 15 days from the date when the cause for dissolution arises. The liquidation group shall be composed of directors, unless it is otherwise stipulated by the company's articles of association or appointed by resolution of the shareholders' meeting. If the liquidators fail to fulfill their liquidation obligations in a timely manner, resulting in losses to the company or its creditors, they shall be liable for compensation.

The Revision expressly provides that directors are the obligors in the liquidation of a company and imposes greater responsibility on the liquidation obligors. This amendment aligns with the Civil Code and further specifies that directors shall compensate for losses caused by their failure to fulfill the obligations of liquidation in a timely manner.

In summary, the Revision specifies the duties of senior officers in many clauses and various aspects, emphasizing their obligations and compensation liabilities in case of non-fulfillment, and it is advisable to pay full attention to these changes, whether for existing companies or newly established ones.