Index > Authors> ChinaLaw> Supervisor Banned from Checking Accounts

Supervisor Banned from Checking Accounts

Mr. Hu, the shareholder and supervisor of acertain technical company brought the company to court because he had beenbarred from checking the accounts. Recently, the Beijing Secondary People’sCourt dismissed the appeals of Mr. Hu and supported the judgement made by thecourt of first instance.

Case in brief:

Mr. Hu is the shareholder and supervisor ofa technical company, Mr. Liu is the executive director and legal representativeof the company, and Mr. Ding is the manager of the company.

Mr. Hu claimed that Mr. Liu and Mr. Dingcontrolled the financial information of the company and had never provided therelevant financial and operating documents to him through using their status asmajor shareholder and executive management, which made him unable to fulfil hisduty of examination and supervision. Moreover he found out that Liu and Dinghad damaged the interests of the company, its shareholders, and the Statethrough illegal activities such as secretly setting up accounts, transferring companycapital, and falsifying accounts for tax evasion. In view of the abnormalfinancial and operational circumstances, he wrote to the company on 24 December2008 and asked to examine its financial and operating status, and alsorequested the company to provide the relevant documents, however his requestwas rejected by the company. For this reason he sued the company to providefinancial and operating documents, including financial statements, reports,account books as well as the original certificates, bank account information,business contracts and other financial and operating information since theestablishment of the company, so that he could employ an accounting firm tocheck the company’s financial and operating status.

The technical company argued that there wasno factual basis for Mr Hu to claim that Liu and Ding had committed suchserious illegal acts. The articles of association stipulates that a supervisorshall not engage in any competitive business or any business that may competewith the company’s business, however, Mr. Hu had established another companyengaging in exactly the same business, thus his request to check the financialand operating status of the company might damage the company’s interests.Therefore the company did not agree with the claims of Mr. Hu.

Mr. Hu was not satisfied with the judgementmade by the court of first instance, and appealed to the Secondary People’sCourt.

Judgement:

The court held that the technical companywas a limited liability company established in accordance with the law, therights and obligations of its shareholders, executive director, supervisor, andexecutive management should be adjusted based on Company Law and provisions inthe company’s articles of association. Both the Company Law and articles ofassociation stipulated that the supervisor’s powers included financialinspection, however the articles of association also stipulated thatshareholders, directors, supervisors and executive management are banned fromengaging in business that is in competition with the company unless they havereceived approval from the board of shareholders. This regulation should beeffective as it does not violate laws, administrative regulations andcompulsory provisions. Mr. Hu was a supervisor and shareholder of the technicalcompany, however he established another company with a similar scope ofbusiness as the technical company, which had reasonable reasons to believe thatMr. Hu’s request to check the financial and operating status were improper andmight damage the lawful interests of the company. Furthermore, according to thelaw, if the company has reasonable grounds to believe that the shareholder whomakes the request has an ulterior motive and may cause damage to the legalinterests of the company, the company may reject the request. Therefore, thecourt did not support Mr. Hu’s claim to check the company’s financial andoperating status as it might damage the lawful interests of the company.Finally the Secondary Court made thejudgement.