Obligations and Liabilities of DSMs under Company Law 2024

On December 29, 2023, the Standing Committee of the 14th National People’s Congress, China’s top legislature, approved a comprehensive revision to the Company Law (the “Company Law 2024”). The Company Law 2024 will come into force on July 1, 2024. It notably expands the director, the supervisor and the senior management’ obligations and imposes them more responsibilities and liabilities.

This article is a summary of obligations, responsibilities and liabilities of director, supervisor and senior management (collectively “DSMs”) of the company under the Company Law 2024.

1、Statutory Obligations of DSMs

1.1 Duties of Loyalty and Care

The Company Law 2024 provides that DSMs shall owe duties of loyalty and care, specifically:

(1) Duty of loyalty: to take measures to avoid any conflict of interest, and not to seek improper interests by taking advantage of their powers;

(2) Duty of care: to exercise reasonable care to ensure the best interests of companies when performing their work duties.

In particular, DSMs shall not:

(1) convert any property of the company or misappropriate any funds of the company;

(2) deposit funds of the company in bank accounts opened in his/her own name or in the name of others;

(3) take advantage of his/her functions and powers to accept bribes or other illicit incomes;

(4) pocket the commission for transactions between others and the company;

(5) disclose any secret of the company without authorization; or

(6) commit any other act that is in violation of his/her duty of loyalty towards the company.

Furthermore:

(1) DSMs shall not directly or indirectly enter into any contract or transaction with the company unless and until they report the contract or transaction to board of directors or shareholders’ meeting and board of directors or shareholders’ meeting approves the contract or the transaction in accordance with the articles of association.

Generally, DSMs shall not take advantage of their positions to seize business opportunities that belong to the company for their own benefit or the benefit of others.

(2) DSMs shall not engage in the same type of business as the company on their own or with others without approval of board of directors or shareholders’ meeting.

1.2 Affiliated Relationship

DSMs shall not take advantage of their Affiliated Relationship to damage the interests of the company. “Affiliated Relationship” here means the relationship between a DSM and the enterprise that he/she directly or indirectly controls as well as other relationships that could result in transfer of the company’s interests.

1.3 Shareholders’ or Supervisors’ Right to Know

If the shareholders’ meeting requests that DSM attends a meeting as a non-voting attendee, he or she shall attend such meeting and respond to the inquiries addressed to him or her.

The board of supervisors may request director or senior management to submit reports for his/her/their performance of duties. The director and senior management shall provide true information and data to the board of supervisors, and may not interfere with the board of supervisors or supervisor(s) in the performance of his/her/their functions and powers.

1.4 Continuing Performance of Duties of Director/Supervisor

If the number of members of the board of directors/supervisors falls below the quorum due to a failure to timely elect/reelect a director/supervisor upon the expiration of a director/supervisor’s term of service or due to the resignation by a director/supervisor during his/her term of service, the incumbent director/supervisor shall continue to perform his/her duties as director/supervisor in accordance with the laws, the administrative regulations and the articles of association of the company until a replacement is elected/reelected and takes up his/ her position.

1.5 Director’s Obligations to Preserve the Company’s Capital

Upon the establishment of the company, the board of directors shall verify the capital contributions made by shareholders and pursue the payment of any outstanding contributions by procuring the company to send a written notice to the defaulting shareholder which fails to pay the full amount of contributions on time as set forth in the articles of association of the company.

1.6 Director’s Liquidation Obligations

Directors shall be the obligors in the company’s liquidation and shall set up a liquidation committee within 15 days after a liquidation event occurs. The liquidation committee shall be composed of directors, unless otherwise provided in the articles of association of the company or otherwise appointed by the resolution of shareholders’ meeting.

2、Statutory Liabilities of DSMs

2.1 Civil Liability

2.1.1 DSMs shall undertake the legal consequence of his/her act under the following circumstances:

(1) If DSM violates any provisions of the laws, the administrative regulations or the articles of association of the company in the performance of his/her duties, thus causing any losses to the company, he/she shall be liable for compensation for such loss;

(2) If director or senior management violates any provisions of the laws, the administrative regulations or the articles of association of the company, thus causing any interest to the shareholder, the shareholder is entitled to bring a lawsuit against such director or senior management;

(3) Director or senior management shall be liable to compensate a third party for its losses if such losses arise due to his/her intentional misfeasance or gross negligence when performing work duty;

(4) DSM shall be liable for any losses that the company may suffer due to DSM taking advantage of his/her Affiliated Relationship to damage the interests of the company;

(5) If director fails to fulfil his/her obligations to preserve the company’s registered capital in time, he/she shall be liable to compensate the company for its losses;

(6) In case of shareholder’s illegal withdrawal of his/her capital contribution causing any losses of the company, DSMs, who are accountable for shareholder’s illegal withdrawal, shall be jointly and severally liable for such losses of the company;

(7) If the company distributes profits to shareholders in violation of the Company Law 2024, DSMs, who are accountable for such profit distributions, shall be liable to compensate the company for its losses;

(8) In case of a decrease of the registered capital of the company in violation the Company Law 2024, DSMs, who are accountable for such registered capital decrease, shall be liable to compensate the company for its losses; or

(9) DSM shall be liable if he/she violates duties of loyalty or care and such violation results in a bankruptcy of the company; he/she shall not act as a director, supervisor or senior management of any enterprise within three years from the completion of the bankruptcy procedures.

2.2 Administrative Liability

Generally speaking, administrative penalties in the form of warning, fine and detainment may be imposed on so called “the individuals who are directly in charge of the entity and others who are directly accountable” (there is no definition in the Company Law 2024). If DSMs are deemed by a competent authority as so called “the individuals who are directly in charge of the entity and others who are directly accountable” under any of the following circumstances, administrative liabilities may be imposed on them:

(1) Obtaining the company registration by misrepresenting the registered capital, submitting false materials or adopting other fraudulent means: a fine of RMB 30,000 to RMB 300,000;

(2) Failure of disclosing the company information of the company in accordance with the Company Law 2024: a fine of RMB 10,000 to RMB 100,000;

(3) Shareholders’ failure of delivering, or failure of delivering when due, monetary or non-monetary property as a capital contribution: a fine of RMB 10,000 to RMB 100,000;

(4) Shareholder’s illegal withdrawal of its contributed capital: a fine of RMB 30,000 to RMB 300,000; and

(5) Concealment of assets, false financial statements, or asset distribution prior to full repayment of debts in the course of liquidation: a fine of RMB 10,000 to RMB 100,000.

The above is a summary of general obligations, responsibilities and liabilities of DSMs in general. As the detailed provisions are widely scattered through different laws and regulations in certain narrow areas, the above summary does not exhaust all of their respective obligations or liabilities.