China: Getting Real With Deadbeats: SAIC Bans Delinquent Judgment Debtors From Serving As An Officer Of Any Company

SAIC Launches a New Campaign under an Old Company Law Rule

In December 2015, the SAIC (State Administration of Industry and Commerce), China's central business registry, announced on its website that with effect from December 2015, individuals on the Supreme People's Court's list of delinquent judgment debtors (called "Dishonest Persons Subject to Enforcement") will be automatically barred from registration as a legal representative, director, supervisor or general manager of any company nationwide.

The PRC Company Law has a long existing rule that "individuals who do not discharge substantial personal debts when due shall not act as director, supervisor or general manager of a company".  However, in the past, the SAIC only requested the investor of a company to certify on application forms that the appointees for the legal representative, etc. meet the relevant legal requirements, but it had no effective means to check that statement.

Background of This SAIC New Campaign

In recent years, the Chinese government has been trying to establish a credit rating system. In October 2013, the Supreme People's Court published its "List of Dishonest Persons Subject to Enforcement" ("List") on its official website http://shixin.court.gov.cn/.

In March 2014, the Supreme People's Court signed an MOU with several other central governmental agencies, including the SAIC, to impose various sanctions/restrictions on persons on the List, including bans on air and high-speed rail travel within China and bank loans, and barring registration as legal representative, director, supervisor or general manager of any company nationwide. The Chinese rules of civil procedure also permit judgment creditors to apply to ban judgment debtors leaving China until their debts are repaid.

The Supreme People's Court shares the List with the other agencies for their real time monitoring.

How This SAIC Ban Will Work and Its Impact

The SAIC has connected its computer system to the List so that the SAIC computer system will automatically block the registration of any individuals as legal representative, director, supervisor or general manager if they are on the List, and the SAIC will notify the affected person to contact relevant court to discharge their judgment debts to be removed from the List.

This will affect any filings for the first appointment of a legal representative, director, supervisor or general manager with the SAIC, but it is not yet clear whether it will affect incumbent company officers.

According to the SAIC, there are currently 1.7 million persons on the List. If the SAIC were to remove all existing delinquent officers, there would be hundreds of thousands of companies (especially domestic companies) who may need to change their legal representatives or directors, which will be a huge burden not only on the companies but also on the SAIC. Therefore, it can be expected that the SAIC will take a gradual approach to this endemic problem in China.

Multinationals, which commonly appoint non-resident officers in China, should enhance their financial and management control of subsidiaries in China to ensure that even minor judgment debts are satisfied so that they are not disqualified from serving as a company officer in China, let alone banned from travel in China.

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