Chinas new company law 2024 and liabilites – why the Supervisor can still be useful

Even though underestimated many times, the Supervisor could play a crucial role in the performance of a Chinese business. Being on an equal level of communication with the management comes with many plus points. The new company law brings profound changes for company representatives, shareholders, capital distributions and the Supervisor. Where after the old law a Supervisor was mandatory, this won’t be the case from 1 July on.This change could make the Supervisor even more important than ever. Why?

Under the current law

Companies must have a supervisor or a board of supervisors. They control finances, monitor the company’s performance, and keep an eye on the compliance and liability side. Basically, he ensures, that the management is carrying out their duty accordingly to laws and regulations in China. Finding the right supervisor is therefore essential for the performance of the whole company.

Under the new law

Now, limited liability companies have these 3 options:

1. Have a Supervisory Board (at least 2 Supervisors with at least 1/3 of Supervisors elected by the employees)
2. Have 1 Supervisor
3. Have 1 Audit Committee (formed by directors and with the power of the Supervisory Board, even though there is no Supervisor nor a Supervisory Board)

Firms characterized by a small number of shareholders have the option to designate a sole supervisor without forming a supervisory board or audit committee. Alternatively, with unanimous consent from all shareholders, they may opt to not appoint any supervisor at all (Article 83).But, as the criteria for clearly determining a “small-scale company” are not further clarified. Hence, even smaller companies should be very careful here, it is not sure how small a company can be.

Establishing an audit committee comprised solely of directors, effectively assuming the responsibilities of the Supervisory Board, raises significant concerns. Essentially, this implies that there may no longer be a requirement for a supervisor or a Supervisory Board. However, the primary role was not only to supervise the General Manager but also to oversee the directors. Consequently, if they are eliminated, who will assume this responsibility ? In addition, it creates problems with conflicts of interest if directors have to monitor themselves. The significance of the Supervisor cannot be overstated, especially considering China’s new company law. Despite often being overlooked, the Supervisor plays a vital role in the functioning of Chinese businesses, provided that they actively contribute to the company’s compliance and daily business and do not merely exist as a symbolic position on paper. Their direct line of communication with management and multifaceted responsibilities make them indispensable assets. Also deserving attention is the issue of liability. Should any issues arise, the Supervisor might be held accountable prior to the director being held responsible for any matters. It is a safety wall.

The amendments to the law, effective from July 1st, may seem to offer more flexibility in governance structures, but they also underscore the heightened importance of the Supervisor and not having one will increase the liabilities and risks of all directors.