The Shanghai Hongkou District People's Court recently rejected an employment reinstatement claim from a company executive who was delinquent on a large personal debt and had been declared by the PRC Supreme People's Court as a person with an unreliable credit rating.

The executive was delinquent on a CNY 10 million personal debt. Due to this large delinquent amount, the PRC Supreme People's Court added the executive's name to the blacklist of persons with an unreliable credit rating. Once the executive's name was added to the blacklist, the company could no longer register the executive as the director of the company. Therefore, the company terminated the executive.

The Shanghai court upheld the termination and denied reinstatement because anyone delinquent on a significant personal debt is restricted by law from working as a director, supervisor or other senior manager. Although the court did not cite the specific law that provides this restriction, the Company Law applies in these exact circumstances to restrict a person from senior executive positions. Also, the news report did not state what termination ground under the Employment Contract Law ("ECL") was used to justify the termination.

Key take-away points:

This court ruling indicates the possibility for companies to terminate an employee who fails to meet the qualification requirements for senior executive positions under the Company Law. However, the Company Law's personal credit requirement is not listed as a statutory ground for termination under the ECL itself. Therefore, companies should still be cautious and not solely rely on the Company Law to terminate a senior executive for an unreliable credit rating. To strengthen the termination position, the company may try to connect the requirements under the Company Law to the statutory termination grounds under the ECL, such as by stipulating that a fulfilment of Company Law requirements for senior executives is a condition of employment and that failure to abide by Company Law requirements may be considered a serious breach of company rules.