Chinese corporate law  Liability and indemnification obligation in China

I. Liability of the shareholders of the German parent company

According to Article 3 of China's "Company Law", the limited liability partners are liable to the company to the extent of their capital contribution. In other words: the liability of the German shareholders is limited to the amount of their capital contribution. This principle has led most German shareholders to believe that once they have paid up their entire share capital in the event of a loss, whatever the circumstances, they are completely shielded from shareholder risk. In practice, however, it can happen that German shareholders exceed their capital contributions for various reasons and are subject to additional legal liability in China. For example, if the German shareholder intentionally harms the interests of the Chinese subsidiary's creditors or fails to respect the integrity and independence of the Chinese subsidiary, the Chinese courts will hold the German shareholder liable and order the German shareholder to be directly liable to the Chinese subsidiary's creditors. In particular, it should be noted that a German shareholder loses the protection of limited liability if he intentionally abuses his controlling position to the detriment of the Chinese subsidiary or its creditors.

II. Personal liability of the German executives of German parent companies to their Chinese subsidiaries

According to Chinese "company law", a limited liability company is independently liable for the company's assets, and the members of a limited liability company are only liable for the company's debts to the extent of their capital contribution unless there is a confusion between the company's assets and the assets of the shareholders. The management of the German parent company is not a shareholder of the Chinese subsidiary and is not liable for the debts of the Chinese subsidiary with its own assets in Germany. However, if an executive of the German parent company acts as a member of the board of directors, supervisory board, or executive of the Chinese subsidiary, he is liable for the damage he causes to the subsidiary if he violates the provisions of the law, administrative regulations or the articles of association in the performance of his activity of the subsidiary violates.

III. Criminal Liability of Chinese Subsidiaries

The Chinese "criminal law" uses the concept of "unit crime," meaning that a company or enterprise is criminally liable if it commits a crime against the company as defined by law. Generally, a company is held criminally responsible for crimes committed against itself, and a fine is imposed on the relevant corporate unit/entity.

Typical crimes include tax evasion, embezzlement, and bribery, major engineering safety accidents, manufacturing and sales of counterfeit and substandard products, financial fraud, illegal business practices, etc.

IV. Personal Liability of Chinese Executives to their Chinese Subsidiary

For certain crimes under China's "criminal law," in addition to the company, "directly responsible persons and other directly responsible persons" can also be held criminally responsible.

The person directly responsible for the crime is the person who decides, approves, authorizes, condones, or directs the commission of the crime by the company and is generally the person in charge of the company, including the legal representative.

The "other persons directly responsible" are those who specifically commit the crime and play a significant role in the commission of the crime, either the management or the company's employees, including those who are employed or hired.

Typical executive crimes include corruption, embezzlement, misappropriation of public funds, misappropriation of funds, etc.

In general, the acts of the legal representative are the acts of the company, so the civil liability resulting from there is borne by the company. The legal representative is generally not directly liable to third parties but only to the company.

If the legal representative breaches his duties negligently or intentionally, he is liable to the company for damages, and the other parties involved can be jointly and severally liable. However, if the action of the legal representative is based on a resolution of the shareholders' meeting, the legal representative is not liable for damages in this respect unless the content of the resolution of the shareholders' meeting is unlawful. If a senior executive of the company, in the ordinary course of his work for the company, acts to carry out his duties for the benefit of the company, the company is liable.

It is important to note that the person liable in a limited liability company is never just the legal representative. Executives such as directors, board members, supervisory board members, and department heads are also personally liable if they neglect their duties in the course of their work and cause financial losses to the company.

If a senior executive commits an illegal or tortious act detrimental to the company, the legal representative of the company who participated in the resolution of the relevant transaction or who signed the relevant document shall be liable in addition to the person who committed the act, as an accomplice and is also liable to the company, unless the legal representative has expressly objected to the corresponding resolution of the Board of Management and recorded this in the meeting minutes, or the legal representative has no knowledge of the infringement and is not acting negligently.

V. Liability in connection with liquidation

If the company is dissolved without liquidation, or if the partners undertake to be liable for the company's debts at the time of dissolution, the company's shareholders can be directly involved as executors in the case and are liable to the creditors for the company's debts.

If the company is not liquidated in good time after the dissolution, and this results in a devaluation of the company's assets or damage to the company, the shareholders are liable to the creditors for the amount of the damage. Even if a liquidation team is formed to liquidate the company, the shareholders will be jointly and severally liable for the company's debts if the company's assets, books, and important documents are lost and the company cannot be liquidated or if the company goes into liquidation for the same reason cannot be liquidated as part of bankruptcy proceedings.

In addition, shareholders, typically as members of the liquidation team, may also be liable for deficiencies in the liquidation process (e.g., failure to issue a public notice or notify known creditors in accordance with the law), with a corresponding liability of the liquidation team.

VI. Liability in connection with bankruptcy

A member of the Board of Directors, a member of the Supervisory Board, or an executive officer who breaches his or her duty of loyalty or care and causes the company's insolvency will be held civilly liable and barred from serving as a member of the Board of Directors, a member of the Supervisory Board, or an executive officer for three years.

Legal representatives and other persons directly responsible for the company are liable if the company takes any of the following actions to the detriment of creditors.

1. Concealment or transfer of assets to avoid debt; fictitious debts or acknowledgment of false debts.

2. Within six months prior to the court's acceptance of the bankruptcy petition, is unable to pay its debts when due and does not have sufficient assets to pay all of the debts, or is manifestly unable to do so do, but still satisfies individual creditors (unless the individual satisfaction benefits the company's assets).

3. Within one year prior to the acceptance of the bankruptcy petition by the court: the transfer of property without compensation; the deal at a manifestly unreasonable price; the provision of real security for debts that are not secured by assets; the early payment of unpaid debts; the waiver of claims.

By: Fang Fang (Partner bdp China), Frank Yang (Lawyer), Sara Zimmermann (Senior Consultant)