1、 Problem posing

New Company Law[[1]]Article 11[[2]]Article 191 stipulates the civil liability that the legal representative shall bear for damages caused to others based on their official duties[[3]]The civil liability of directors and senior management personnel (hereinafter referred to as "executives") for damages caused to others based on their official behavior has also been stipulated. According to the provisions of Article 10 (1) and Article 265 (1) of the new Company Law, the legal representative of a company shall be determined from among the directors and senior executives of the company, and there is a situation of identity competition between the subjects of Article 11 and Article 191. So, in the case of identity competition, whether there is a competition in the application of Article 11 and Article 191 when the performance of duties causes harm to others, that is, whether the provisions of Article 191 can also be applied to the legal representative of the company, requiring them to jointly assume external compensation liability, has become a question that can be explored. Some opinions suggest that different situations should be distinguished for application. If the duties performed by the legal representative are only those of ordinary directors or senior management personnel, and not those of the legal representative, then only Article 191 shall apply instead of Article 11. If the director or

If the senior management personnel also serve as the legal representative and perform the duties of the legal representative, then special provisions shall prevail over general provisions and the provisions of Article 11 shall prevail. However,When the legal representative performs their duties, it is necessary to distinguish whether the content of their duties is the duties of directors or senior management personnel or the duties of the legal person. This boundary cannot be defined at least in practice, as the two belong to an inclusive relationship. The performance of duties by a legal entity necessarily includes the duties of directors or senior management personnel. Therefore, how to clarify the relationship between the two and correctly apply legal provisions undoubtedly has positive significance in judicial practice.This article will discuss this issue for everyone to explore.

2、 Theoretical sources of two articles

China is a country with a unified system of civil and commercial law. Given that there is no unified commercial law in China, the Company Law, as one of the basic norms of commercial law, is based on civil law theory.

The provisions of Article 11 of the new Company Law are derived from Article 61 of the Civil Code[[4]]And Article 62[[5]]The legal representative, as the representative of a legal entity, shall bear the responsibility for any damages caused to others during the performance of their duties, in accordance with the basic legal principles of agency relationships; At the same time, the company is granted the right to seek compensation from the legal representative who is at fault, in order to constrain the actions of the legal representative and protect the interests of the legal person from harm.

The provisions of Article 191 of the new Company Law are not derived from the currently effective provisions in China's legal system.Therefore, after the promulgation of the new Company Law, there has been a unanimous call from academia. This is a major highlight of the revision of the Company Law, which not only enhances the responsibilities of directors and senior management personnel, but also further safeguards the interests of creditors. According to Article 191, if a director or senior management personnel of a company causes harm to others due to their performance of duties, they shall jointly bear the liability for compensation with the company. This is a major breakthrough in the existing company law theory in the current revision of the company law. In the existing legal provisions, the provision on the legal liability of non legal representatives of a company for their official acts can be traced back to Article 170 of the General Principles of the Civil Law on the provision of job agency. However, this provision only emphasizes that the legal person needs to recognize the effectiveness of the official acts of its staff, and does not mention the issue of the legal person's recovery from the staff, nor does it stipulate that the staff should jointly assume external responsibility with the legal person. The provision in Article 34 (1) of the Tort Liability Law explicitly states that a legal person shall bear legal responsibility for the damage caused to others by the official behavior of its staff. However, this provision does not mention the issue of the employer's recovery from its staff, nor does it mention the issue of the staff's external liability. Currently, only Article 16 of the Provisional Regulations on Wage Payment is included in the existing legal normative documents[[6]]If the employee causes economic losses to the employer due to their own reasons, the employer may demand compensation in accordance with the contract. Employers can conduct internal recovery. From the above provisions, it can be seen that any harm caused to others due to official behavior shall be attributed to the company's external responsibility, and it is not mentioned that the staff performing their duties shall jointly bear external responsibility with the company.

The academic community in our country generally believes that the source of Article 191 is the fiduciary duty (also known as fiduciary duty) of directors under US corporate law, and most scholars focus on the Delaware General Corporation Law.Fiduciary duty of directors（Fiduciary duty is one of the most important aspects of corporate law, originating from the trust and agency systems of the Anglo American legal system. However, modern American corporate law theory no longer deliberately pursues the source of trust law or agency law for fiduciary obligations, but instead focuses on the characteristics of the company itself and develops a fiduciary duty system that meets the needs of corporate governance. The US law, represented by Delaware corporate law, divides fiduciary duties into two categories - duty of loyalty and duty of care. [[] Refer to Zhang Wei: "Directors' Prudential Obligations and Business Judgment Rules under US Law", Securities Court (2023) Volume 37, Pages 98-122. ]]The academic community in the United States distinguishes the fiduciary duty system of Delaware directors into the standard of conduct and the standard of review. The former mainly includes duty of care and duty of loyalty, aiming to establish a code of conduct for the actor; The latter mainly includes business judgment rules, overall fairness standards, and enhanced scrutiny standards, aiming to provide courts with post review judgment standards. [[7]]The fiduciary duty of directors under US corporate law initially referred to the fiduciary duty of directors towards the company and shareholders, but has gradually shifted towards creditors of the company. That is, when a company falls into some degree of financial distress (usually referring to the company losing its ability to pay), but has not yet applied for bankruptcy to the court, the beneficiaries of the fiduciary duty of the directors shift from shareholders in a healthy state of the company's operations to creditors.[[8]]

From the relevant provisions of foreign laws, it can be seen that the fiduciary duty of company directors corresponds to the company or shareholders, that is, directors who are appointed by company shareholders should be responsible to the company and shareholders. Only when the company encounters financial difficulties, do the company's directors face the same responsibility towards the company's creditors, that is, the external responsibility of the directors.The provisions in China's bankruptcy law are in line with this. Article 125 of China's Bankruptcy Law stipulates:If a director, supervisor, or senior management personnel of an enterprise violates their duty of loyalty or diligence, resulting in the bankruptcy of the enterprise, they shall bear civil liability in accordance with the law

This leads us to ponder a question: since the fiduciary duty of a company's directors or senior management comes from the company and shareholders, if this fiduciary duty is transferred to creditors, is it universally applicable or conditionally applicable? This question becomes the key to explaining the application of Article 191. If this provision can be universally applied, it will undermine the existing corporate organizational governance mechanism, be inconsistent with the legal principles of the Company Law, and be inconsistent with the source of directors' fiduciary obligations. This also renders the provisions on the responsibility of the legal representative in Article 11 meaningless. Therefore,The situations stipulated in Article 191 should not be universally applicable, but should have specific conditions before there is room for application, which should be in line with the true purpose of legislation.

3、 The constituent elements and legislative purposes of two articles

（1） The constituent elements and legislative purpose of Article 11

From the perspective of the four constituent elements, the subject element of Article 11 is the legal representative, the subjective element is fault, the objective element is that the company has already borne the consequences of the damage caused to others by the legal representative's performance of duties, and the object is the legitimate interests of the company. In terms of subjective elements, its use of fault includes both intention and negligence, and negligence includes both gross negligence and general negligence. From this point of view, the responsibility towards the legal representative is quite strict, and it is not allowed for them to make any mistakes while performing their duties.

Based on the severity of the responsibility borne by the legal representative, the law grants the company the right of recourse, and the legal representative assumes full fault liability. From the perspective of legislative purpose, it requires the legal representative to independently assume full responsibility.

（2） The constituent elements and legislative purpose of Article 191

From the perspective of the four constituent elements, the subject element of Article 191 is directors and executives, the subjective element is intent or gross negligence, the objective element is causing harm to others while performing duties, and the object is the legitimate interests of others. From its subjective elements, excluding the general negligence of directors and executives may be based on considerations of giving them commercial judgment space. After all, not all losses can be borne by the decisions of decision-makers. Therefore, all business decisions must be absolutely correct. In fact, there is no such thing as absolute correctness. Therefore, it cannot be too strict to reduce the work enthusiasm of directors and executives.

It can be seen that the reason why some people believe that there is a competitive relationship between Article 11 and Article 191 is because there is a competition between their subject elements and objective elements. Article 10 of the Company Law stipulates that the legal representative shall be a director or manager of the company. Article 265, Paragraph 1 stipulates that senior management personnel refer to the manager, deputy manager, financial officer, secretary of the board of directors of a listed company, and other personnel specified in the company's articles of association. Therefore, the legal representative must be a director or manager, which raises the issue of subject competition between Article 11 and Article 191. Due to the competition of subjects, from a formal perspective, the damage caused to others by the performance of their duties also constitutes competition.

The author believes that there is a competition in the subject identity between the two regulations, but they are not completely equivalent in objective requirements, because the responsibilities of the legal representative and the responsibilities of directors and executives have completely different consequences.

From the perspective of legislative purpose, the Standing Committee of the National People's CongressOn December 20, 2021, the "Explanation on the Revised Draft of the Company Law of the People's Republic of China (2021)" pointed out: "Thirdly, regarding the main content of the revised draft: (VI) strengthening the responsibility of controlling shareholders and management personnel... Thirdly, adding provisions: if directors and senior management personnel perform their duties and cause harm to others due to intentional or gross negligence, they shall bear joint and several liability with the company." However, the revised draft of the new Company Law did not explicitly state joint and several liability in the provisions of the Company Law when it was finally promulgated. There is reason to believe that legislation on the issue of external liability of company directors or senior management personnel is quite cautious, and it is not ruled out that attempts may be made through judicial interpretation first. If it is not in line with practice, adjustments may be made to increase the flexibility of legislation.

4、 Analysis of Subject Liability Issues in the New Company Law

Although this article discusses the issue of competition between Article 11 and Article 191, it is necessary to first clarify the issue of subject liability in the new Company Law before answering whether there is a competition application.

In the new Company Law, the entities responsible for compensation include shareholders (including shareholders at the time of establishment, controlling shareholders, and actual controllers), legal representatives, directors, supervisors, and senior management personnel. The legal responsibility of the aforementioned entities can be divided into internal responsibility and external responsibility based on their object attributes (see the table below for details).

From the above table, it can be seen that the legal responsibility for official actions not only exists in Articles 11 and 191, but also in Articles 188, 232, and 238. Article 188 stipulates the compensation liability of directors, supervisors, and executives to the company for their official actions, but this liability is not external responsibility, but internal responsibility of the company. Article 232 stipulates the compensation liability of the liquidation obligor (usually the director) to the company or creditors due to their official behavior, and Article 238 stipulates the compensation liability of the liquidation team members (usually the director) to the company or creditors due to their official behavior. Both articles stipulate the external responsibilities of directors and senior management personnel.It should be noted that the distinction between internal responsibility and external responsibility lies in the different basis of their claims. The basis for requesting internal responsibility is the contractual relationshipThe contractual relationship established between shareholders through the establishment of an agreement, the contractual relationship established between shareholders and the company through the company's articles of association, the contractual relationship established between directors, supervisors, executives and the company through appointment, and the legal representative and the company are entrusted contractual relationships.The basis of the right to request external liability is the infringement relationshipAccording to the principle of statutory liability for infringement, the liability of shareholders, directors, and senior management for infringement against others is statutory. And precisely because it is a tort liability, the allocation of responsibility needs to be based on the degree of fault, some of which need to be intentional or gross negligence, while others are completely at fault. These external responsibilities infringe upon the property rights of creditors, provided that shareholders, directors, and executives fail to fulfill their corresponding duties, resulting in the loss of the benefits that creditors can obtain. Therefore, the law grants them the right to claim compensation.

Based on domestic and international practices, for limited companies, the external liability of directors mainly arises during the bankruptcy or liquidation of the company.Since Articles 232 and 238 of the new Company Law have already clarified the compensation liability of directors, the significance of Article 191 is only to include executives in it to a certain extent. However, in reality, the Bankruptcy Law has already stipulated this.For joint-stock companies, the main disclosure issues are based on false records, inaccurate statements, or significant omissions, which have also been regulated by the Securities Law that regulates listed companies.Therefore, the positive significance of Article 191 lies in enhancing the due diligence obligations of directors and senior management personnel. However, how to coordinate its application with other provisions is a problem we face. If it is simply applied in a competitive manner, it is obviously not the original intention of legislation and will also cause confusion in judicial practice. If they are applied separately, it is necessary to clarify the conditions for the application of Article 191. The author's viewpoint is that,Before further interpretation of the Company Law is made, the responsibility of the legal representative cannot be naturally confused with that of general directors or senior management personnel of the company simply because the legal representative is derived from directors or managers. The different identities reflect the different basis of the right to request and determine the different applicable legal provisions. When a company falls into bankruptcy, its directors or senior management personnel are only responsible for compensating and holding the company's creditors accountable.