Responsibilities and liabilities of the Supervisor in Foreign invested companies in China


By: Alex Wu, Donia Joevion Fuller-Barrett     On: 2016-07-01

Introduction

In part one of this five part article series, it would have become apparent to the reader that companies can face a real challenge on the matter of appointing a legal representative. A part of this challenge is not just the fact that the legal representative has tremendous power to bind a company to certain obligations whether or not the company wants to be so bound. Rather, it also includes the fact that any sensible individual who would be suitable for the role would more than likely be aware of the risks attendant to the role which could be a disincentive to an interested party. Recognizing these challenges, the Company Law was amended in 2006 so as to establish the role of the “supervisor”. Noteworthy is that Article 52 of the Company Law stipulates that a larger company must have a “board of supervisors” consisting of at least 3 persons, whereas a smaller company may have 1 or 2. However, what is common to either size company is that the supervisor cannot be currently serving director or senior manager. Thus references to “supervisor” throughout this article ought to be read to mean the “board of supervisors” where applicable.

The Role of the Supervisor

The supervisor’s role in a nutshell encompasses the safeguarding of the company’s interests through oversight of the legality and regularity of the company’s operations, as stipulated by Article 54 of the Company Law. Therefore, the supervisor has extensive powers, including but not limited to the ability to inspect the financial situation of the company, supervise the directors and managers, propose the removal of directors or managers who have violated the law or statutes and mandate that directors or managers to rectify their actions where possible. The supervisors may also attend the meetings of the board of directors as non-voting delegates, and may raise questions or suggestions on the matters to be decided by the board of directors. If the supervisor finds that the company is running abnormally, he/she may make investigations. Where necessary, he/she may hire an accounting firm to help with the relevant expenses being born by the company. Therefore, the supervisor is very relevant restraining the potential liabilities of the legal representatives.

Risks and Liabilities of the Supervisor

Even though the role of the supervisor seems to be a regulatory one, it does not mean that it is without any risk of liabilities. That this is so, is made evident by Article 11 of the Company Law which stipulates, among other things that, “A company's articles of association shall be binding upon the company, shareholders, directors, supervisors and senior officers.” Thus, even if there was an absence of any provision prohibiting the supervisor from using his role to harm the interests of the company, such actions could not have been permissible. In any event however, Article 21 of the Company Law states that, the supervisor[s] of a company may not use their affiliation to harm the interests of the company. The consequence of such actions being that if losses result to the company, such a person is “liable for compensation.”

Moreover, Article 147 establishes in no uncertain terms that the supervisor, like a director or any other senior office of a company is required to, “abide by laws, administrative regulations and the articles of association of the company, and have a fiduciary obligation and obligation of diligence to the company.” Additionally, a supervisor “may not take advantage of their positions and powers to collect or accept bribes or other illegal income, and may not encroach upon the property of the company.” A failure to adhere to these stipulations or any other “provisions of laws, administrative regulations or the articles of association of the company in the execution of company duties, thereby causing losses to the company” results in a supervisor being “liable for compensation” as stipulated by Article 149 of the Company Law.

Exercise Caution When Selecting a Supervisor

In view of the foregoing, it is evident that a similar standard of care must be employed by a company when the decision must be made to choose a supervisor or a board of supervisors. The following persons as enumerated in Article 146 of the Company Law may not serve as supervisors. 

  1. a person with no or limited capacity for civil acts;
  2. a person that was sentenced to criminal punishment for the crime of corruption, bribery, encroachment of property, misappropriation of property or disruption of the order of the socialist market economy, and not more than five years has elapsed since the expiration of the enforcement period; or a person that was deprived of his political rights for committing a crime, and not more than five years has elapsed since the expiration of the enforcement period;
  3. a director, factory director or manager of a company or enterprise liquidated upon bankruptcy that was personally responsible for the bankruptcy of the company or enterprise, and not more than three years has elapsed since the date of completion of the bankruptcy liquidation;
  4. the legal representative of a company or enterprise that had its business license revoked and had been closed down by order for violation of law, for which such representative bears individual liability, and not more than three years has elapsed since the date on which the business license of the company or enterprise was revoked; and
  5. a person with a comparatively large amount of personal debts due and unsettled, since the completion date of the execution of the penalty; or who has ever been deprived of his political rights due to any crime and 3 years have not elapsed since the completion date of the execution of the penalty;

It is not difficult to envisage why each of the scenarios outlined in the Company Law would disqualify a person from serving as a supervisor. For example how prudent can the financial management of a supervisor be if he/she was recently a senior official in a company that went bankrupt, or if he/she personally has large debts for which he is liable? Other precautions include ensuring that the Articles of Association are clear about the roles and powers of the supervisor, much in the same way that they should be clear in respect of the legal representative.

Conclusion

A critical aspect of corporate governance for foreign companies operating, or seeking to operate in China is the taking of all precautions possible to ensure compliance with relevant laws and regulations. In this regard, a supervisor is critical; therefore who this individual will be based on the factors which could disqualify a person from serving in this capacity is an important matter for consideration. Thus, it may even be prudent to enlist the assistance of consultants who specialize in issues of compliance particularly in the case of foreign companies. Noteworthy for these purposes, is that Asia Base Law & Projects – with their Corporate Compliance Guard equips a supervisor with what has become reputed as an indispensable tool to ensure at least the compliance with authorities. This “Audit” in combination with the annual audit by the appointed CPA Firm --- puts the supervisor in good stead to fulfill his role with only minor additional involvement.