Vol 8 (2011) - Issue 5

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Directors’ Liability in the Chinese Bankruptcy Law: A Big Gap

Introduction

China’s new Bankruptcy Law was enacted in August 2006 after a long drafting process of twelve years and came into force since June 2007. It has a number of notable features such as the establishment of a bankruptcy administrator and cross-border insolvency, the introduction of a modified reorganisation procedure and formulation of transaction avoidance provisions. This paper fully examines another remarkable feature of this law: the establishment of a directors’ liability system, which includes civil, criminal, administrative liability and directors’ disqualification. In addition, it describes the relations between directors’ liability and the use of corporate rescue procedures from the perspective of a ‘carrot-and-stick’ approach, and in the meantime, discusses the potential problems within the new bankruptcy law.

1. Framework of the Chinese directors’ liability in insolvency

1.1. Civil liability

There is only one article specifying directors’ civil liability which might be incurred if directors violate the duties of loyalty and diligence, and such breach of duties result in insolvency of the company. In other words, the civil liability will be imposed upon the directors when two above-mentioned conditions are satisfied at the same time. There are some potential issues within this provision which might cause difficulty in judicial practice. First, interpretation of the duties of loyalty and diligence cannot be found in the new bankruptcy law. The Chinese Company Law enumerates a series of behaviours which are not allowed to be conducted by directors, including that a director (1) may not misappropriate company funds; (2) may not deposit company assets into an account in his own name or in any other individual’s name; (3) may not loan company funds to other people or give company assets as security for the debt of any other individual without the approval of the shareholders meeting, general meeting of shareholders or the board of directors in violation of the articles of association; (4) may not execute any contract or engage in any transaction with the company in violation of the articles of association or without the approval of the shareholders meeting or the general meeting of shareholders; (5) may not use favourable conditions and conveniences to seek business opportunities that should belong to the company to engage in the same business as the company in which he serves as a director or the senior officer either for his own account or for any other person’s account without the approval of the shareholders meeting or the general meeting of shareholders; (6) may not accept commissions paid by others for transactions conducted with the company; (7) may not disclose company confidential information without authorisation; (8) may not engage in other activities in violation of his fiduciary duties. However, the Company Law does not establish a proper explanation for the understanding of duties of loyalty and diligence.