The Nature and Application of Directors’ Liability to Third Parties under a Regime of Limited Enhanced Director Liability

Abstract

Japan’s Commercial Code first introduced a provision on directors’ liability to third parties in 1899. In 1969, the Grand Bench of the Supreme Court of Japan adopted the statutory liability theory, encompassing both direct and indirect loss, and thereby established what later became the prevailing view. After more than a century of case-law development, the expansion of directors’ duties owed to the company has also expanded directors’ liability to third parties, producing uncertainty concerning the boundaries of liability and the legal basis for attribution. In recent years, Japanese scholars have re-examined the statutory liability theory and criticized its tendency to substitute appeals to social justice for a coherent theoretical foundation. By examining Japanese legislative history and recent case law, this article argues that the scope of liability under Article 191 of China’s Company Law should be clearly delimited. Article 191 is not a general rule governing every breach of directors’ duties owed to the company; rather, it is a special supplement to Article 1191 of the Civil Code, designed to strengthen remedies available to third parties. The liability contemplated by Article 191 should be confined to compensatory liability that can be characterized as tort liability. Liabilities serving special policy purposes, such as liability for securities misrepresentation, delayed bankruptcy filing, or breach of capital maintenance obligations, should be separately provided by the Company Law, the Enterprise Bankruptcy Law, the Securities Law, or other special statutes, and should not be generally expanded through Article 191.