The Shanghai Hongkou Arbitration Committee recently ruled that a company had illegally terminated its general manager and ordered the company to reinstate him, even though the board of directors had removed him from his post in accordance with the Company Law.

Facts

The company's board of directors decided to remove the general manager on May 13 2014 and the proposal to remove him from the board of directors was passed at a shareholders' meeting on June 12 2014. As a result, his employment was deemed to have been terminated.

According to the company, the grounds for termination were dereliction of duty and serious violation of company rules. Specifically, the company introduced an audit report prepared by a professional accounting firm to justify the termination. The report cited material defects in the company's internal control system and gave an adverse opinion on it. The company claimed that, as general manager, the employee was solely responsible for establishing and implementing the internal control system and was therefore responsible for its defects.

Decision

The committee found that:

  • a general manager cannot be held solely responsible for a corporate internal control system or damages caused by its defects, because the board of directors, the chairman of the board and other senior managers are also responsible for internal control systems;
  • the company had not provided sufficient evidence to prove that the employee had acted negligently or improperly in performing his duties associated with the internal control system (in fact, the evidence supported the opposite conclusion, because the board of directors had evaluated the employee's performance and rated it as being "up to grade" as recently as January 2014); and
  • the company had not provided sufficient evidence to prove that the defects in the internal control system had caused significant damage to the company.

The committee therefore ruled that the termination was illegal and granted the employee reinstatement and payment of salary for the period from termination until reinstatement.

Finally, the committee emphasised that, while the removal of an employee from the position of general manager is completely discretionary and can be done in accordance with the Company Law and the company's articles of association, the removal cannot automatically result in termination of employment. Termination of employment is restricted by the Employment Contract Law and may occur only if its requirements are met. However, as this was an arbitration ruling, some courts may take the position that the removal of a general manager by a board of directors constitutes grounds for termination.

For further information on this topic please contact Andreas Lauffs or Jonathan Isaacs at Baker & McKenzie's Hong Kong office by telephone (+852 2846 1888), fax (+852 2845 0476) or email (andreas.lauffs@bakermckenzie.com or jonathan.isaacs@bakermckenzie.com). The Baker & McKenzie website can be accessed at www.bakermckenzie.com.

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