On Director’s Liability To The Company In Companies Limited By Shares-Chinese Problems And German Experience

This paper intends to figure out, under what conditions a director of a company limited by shares will be held liable for the losses the company suffered according to the Company Law of the People’s Republic of China(hereinafter referred to as the “Company Law”). The discussion will focus on the three bases of claim in the Company Law, namely Article 149, Paragraph 2 of Article 21 and Sentence 2 of Paragraph 3 of Article 112.To solve this problem, the legal relationship between a director and the company he works in must be clarified beforehand. The first chapter of this paper investigates in the first place the theories existing in China in respect of the company-director relationship, i.e. the trust theory, the agency theory, the trust and agency theory, the entrustment theory, the special relationship theory, the new relationship theory and the nihility theory. After such investigation, the paper finds out that none of the above theories has gained its dominance in China and such theories shall not be adopted to explain the company-director relationship in light of the law provisions in China. Then this paper illustrates the German “separation theory”, which was designed to explain the company-director relationship. And this paper is of the opinion that such separation theory reveals the nature of the company-director relationship and corresponds with the law provisions in China; therefore, China shall adopt the separation theory.The second chapter discusses the legal nature of director’s liability. First this paper introduces the different opinions among Chinese scholars. Some of them deem director’s liability as liability for breach of contract, while others consider it as tort liability. Then this paper explained the opinions of German scholars in relation to this problem. Based on the separation theory, this paper argues that the director’s liability in China is neither liability for breach of contract nor tort liability; rather, it is a liability for breach of statutory duties.The third chapter discusses the legal elements of director’s liability. Chinese scholars have not made comprehensive and adequate arguments regarding this problem, especially not from the perspective of legal interpretation. In comparison, the explanations from German scholars are more insightful. This paper opines that China shall establish its own director’s liability institution based on the applicable law provisions and that the German experience on relevant issues can be very useful where the applicable laws do not provide specific provisions.Lastly, this paper concludes that the director’s liability is a liability for the breach of statutory duties and that its legal elements shall consist of a breach of director’s statutory duty, company’s loss, causal link between the breach of duty and company’s loss as well as director’s fault. In respect of the director’s duties, this paper opines that China shall establish its own system of director’s duties; the duty to comply with laws, regulations, company byelaw and resolutions of shareholders meeting shall be the general duty of directors, while the duty of care and the duty of loyalty shall be the concrete forms of such general duty. Loss and causal connection are not defined in Chinese laws, this paper argues China shall employ the German theories to fill in this legal blank. And according to Paragraph 1 of Article 106 of the General Principles of Civil Law of the People’s Republic of China, the fault element of director’s liability is presumed by law..