Risk Control for Legal Representative in the Company
Legal Representative is a basic company system under current China Corporate Law. That is, any new established company should appoint a natural person as the company’s legal representative, who may act on behalf of the company. The legal representative can be either Chinese or foreigner.
With regards the conditions for acting as a legal representative, under current law, the following persons cannot be appointed as legal representative:
1. has no civil disposing capacity or his/her civil disposing capacity is limited;
2. criminal penalty or mandatory criminal measure is being enforced on him/her;
3. is being wanted by the police or state security departments;
4. is sentenced due to taking graft or committing bribery, offences against property, disrupting socialism market economic order and has completed a term of imprisonment for less than 5 years; is sentenced due to other offences and has completed a term of imprisonment for less than 3 years; or is sentenced to depriving of political rights due to offence and has completed a term of imprisonment for less than 5 years;
5. ever was the legal representative or director or manager of any enterprise which was bankrupted due to bad operation and was responsible for the bankruptcy of such enterprise, and it is less than three years since the completion of liquidation for the bankruptcy of the enterprise;
6. ever was the legal representative of any enterprise which was revoked Business License due to illegal activities and was responsible for such illegal activities, and it is less than three years since the revocation of Business License;
7. has large outstanding personal debts.
In consideration of the special position of legal representative in a company, as well as the power he is granted and the legal responsibility he shall take, on the issue of selection and appointment of legal representative, the company shall have to strike a balance between power distribution and risk control.
Under current corporate law, the legal representative of a company appointed under its articles of association shall be its chairman of the board of directors, its acting director or its manager. Therefore, generally speaking, legal representative, in most cases, is core people in a company. However, in some cases, to prevent potential risk, the investor of the company may also appoint nominal legal representative, whose name is lent and who has nothing with company’s business.
From the perspective of legal representative, although he is granted with company power and can act on behalf of the company, he shall probably take civil, administrative or criminal liability due to company behavior, or even is subject to emigration restrictions. From this point, potential risk is there for a legal representative.
I. Potential legal risk for a legal representative
Generally speaking, when a legal representative acts in accordance with the laws, administrative regulations and articles of association of a company, such acts shall be deemed acts of the company and the liability arising out of such activities are assumed by the company. Therefore, generally a legal representative shall not take any personal responsibility for such acts.
However, in special circumstances, due to violation of the law, regulation and articles of association by legal representative, or in special cases, a legal representative shall take personal liability as follows:
Potential Civil Liability of a Legal Representative
A legal representative shall take civil liability in the following two situations:
1. A legal representative may be liable to compensate for loss suffered by the company if such loss is caused due to misconduct or negligence of the legal representative.
The act of a legal representative represents the company and all consequence relating to the act shall be assumed by the company itself. However, if the act of a legal representative is against the law, regulation or articles of association, which damages company’s interest, the company is entitled to request the legal representative to compensate any loss from the misconduct.
2. A legal representative may take responsibility due to his violation of fiduciary duty and duty of care to the company.
The violation of fiduciary duty and duty of care to the company herein refers to the situation where a legal representative takes advantage of his position by obtaining bribes or any other illegal gains, or misappropriating company assets for personal interest. The legal representative shall compensate to the company for any loss due to the illegal act.
Potential Administrative Liability of a Legal Representative
Under any of the following circumstances, except company liability assumed by the company itself, its legal representative may be subject to administrative sanctions, fines and if the offences constitutes a crime, criminal liability shall be investigated:
a. conducting illegal operations beyond the range approved and registered by the registration authority;
b. concealing facts from the registration and tax authorities and practicing fraud;
c. secretly withdrawing funds or hiding property to evade repayment of debts;
d. disposing of assets without authorization after the company is dissolved;
e. failing to apply for registration and make a public announcement promptly when the company undergoes a change or termination, thus causing interested persons to suffer significant losses;
f. engaging in other activities prohibited by law, damaging the interests of the state or the public interest.
Unless the legal representative can prove he was not aware of such acts and was not subjectively, at fault or delinquent in fulfilling his duty, he may bear administrative liability for the acts of the company that is in violation of the law and regulation.
Potential Criminal Liability of a Legal Representative
The criminal liability of a legal representative, in case of company crime, is a special liability associated with company crime, where the legal representative belongs to a person who is directly in charge or person is directly responsible for the crime. For example, according to article 153 of criminal law, in case of company smuggling, besides the fine which is imposed on the company, the persons who are directly in charge and the persons who are directly responsible for the crime shall be sentenced to fixed term imprisonment of not more than three years or criminal detention; if the circumstances are serious, they shall be sentenced to fixed term imprisonment of not less than three years but not more than 10 years; if the circumstances are especially serious, they shall be sentenced to fixed term imprisonment of not less than 10 years.
Although the laws do not provide the scope of the term "persons who are directly in charge and person who is directly responsible", in legal practice, a legal representative is commonly deemed to be within such scope and will be found liable for the criminal acts committed by the company.
There are other company crimes where a legal representative may be subject to criminal liability, including but not limited to, crimes of manufacturing and selling toxic or harmful foodstuff, crime of falsely declaring registered capital, crime of false capital contribution, or withdrawing capital contribution upon registration, crime of issuing stock or bonds by fraudulent means, crime of presenting false financial statement, crime of impairing liquidation, etc.
Compulsory Measures that may apply to a Legal Representative
In one of the following circumstances, a legal representative may be subject to compulsory measures:
1. if a company has unsettled civil cases or fails to perform its duties imposed by legal documents, judicial authorities may impose compulsory measures on its legal representative, including restrictions on him leaving the country;
2. If a company has entered bankruptcy proceedings, its legal representative shall not leave his place of domicile without court’s permission;
3. If a company defaults on its tax payment, the tax authorities may restrict its legal representative from leaving the country.
II. How to prevent legal risk to a maximum extent
For the legal risk a legal representative may face, the following measure shall be adopted to reduce the occurrence of such risk:
1. The legal representative shall carry out its fiduciary duty and duty of care to the company and act as allowed by the law, regulation and articles of association. When dealing with company matters, the legal representative shall avoid making any decision just based on his own experience blindly and shall try to find legal base for any decision. A formal legal advise shall be sought from a legal consultant to prevent potential risk;
2. The legal representative shall be careful in signing on various legal documents. As a legal representative, it is common he shall need to sign on a lot of legal documents, which may relates to the company finance, business and legal aspects. The legal representative shall not be in a casual manner in signing any document which is submitted by his staff without proper examination, which may cause serious problem afterwards and cannot be remedied;
3. Authorization Limit. In some cases, the legal representative has business trip or has to stay oversea for a long-term basis. For the sake of convenience, some of them like to authorize other person in the company to carry out his power as a legal representative. The problem is such authorization is without any written form and limit to the scope and term of authorization. More seriously, the legal representative does not care about the exercise of the power by the authorized person. In extreme cases, the authorized person abuses the power and even conducts illegal activities with such authorization. After occurrence of the problems, the legal representative cannot easily exclude himself from liability. Therefore, proper authorization and supervision is necessary;
4. The company shall keep a well-organized company regulation. The best is each person in the company attends his own duties and the responsibility arrives a person. In case of company crime, if the company does keep a well regulation which can prove the legal representative is not the person who is directly in charge for the criminal activity and knows nothing about the illegal decision made by other person within their duty in the company, the legal representative may be probably exempted from liability. On the contrary, without any company regulation, the legal representative is undoubtedly the prime suspect as a person who is directly in charge.