Liabilities of the Legal Representative

Every business established in China, foreign or domestic, is required to designate a legal representative, i.e. the responsible person who performs the duties and power on behalf of a company.

The legal representative is, by definition of his or her role, one of the most powerful people in a foreign-invested enterprise. Yet this power comes with heavy responsibility and, if a single individual in a foreign-invested enterprise is to be held accountable for company actions, that person is more likely than not the legal representative.

The people eligible to fill the role of legal representative vary by FIE type. In a wholly foreign-owned enterprise (WFOE), the chairman of the board of directors (or executive director in lieu of a board) or the general manager  acts as the legal representative of the company. In a joint venture (JV), the legal representative can generally be either the chairman of the board of directors or the general manager. However, in practice, local authorities may not accept a general manager concurrently serving as a legal representative, due to a conflict between the China’s Company Law and the JV Regulations.

The name of the legal representative is stated in the business license and articles of association of a company. Since the legal representative is the authorized signatory of the company, the legal representative’s signature should be filed with Administration of Industry and Commerce (AIC). 

In light of the heavy responsibility given to an FIE’s legal representative, some will note that the legal representative is not required to reside in China or even place a toe on Chinese soil. Rather, the legal representative can (through written power of attorney) authorize someone in China to act in their place, including managing the legal representative’s chop.

A legal representative of one company cannot concurrently serve as the legal representative of another company under normal circumstances.

Where, under special circumstances, an individual needs to concurrently serve as the legal representatives of two companies, they can only do so where the two companies are affiliated, associated, or have an investment relationship, and approved by the government or registration department in charge.

Liabilities

The legal representative has dual liabilities, those that apply to all senior positions and those that apply specifically to the legal representative. The former are discussed in the second article and the latter are discussed here.

The liabilities specific to a legal representative are spread across a variety of laws and regulations. Three of the most important liabilities are those dictated under the Civil Code, those under Enterprise Bankruptcy Law and those outlining obligations to the AIC.

Civil Code

The legal representative represents a legal person in litigation. The legal representative may be subject to fines, detention,  administrative sanctions, or criminal liability pursued under the General Principles of the Civil Law of the People’s Republic of China 1986 (“the Civil Code”) if the enterprise:

1. Carries out illegal business activities beyond the scope of business approved and registered by the AIC or its local delegate;

2. Conceals facts from the AIC or its local delegate or from the tax authorities;

3. Engages in fraud;

4. Extracts funds or conceals assets for the purpose of evading debts;

5. Fails to apply immediately for the registration and public announcement of a change or of termination, causing an interested party to sustain substantial loss; or

6. Engages in other activities prohibited by law, causing damage to State interests or common public interests.

Under the Civil Code, the legal representative is not required to have personally engaged in, or have actual knowledge of, the above acts. Accordingly, it is possible that the legal representative may be sanctioned in the event the enterprise undertakes any of the above acts, notwithstanding that the legal representative is not personally at fault.

The People’s Court may also order the detention of the legal representative for a period of no more than 15 days. Under Chinese law, detention for this duration is considered to be a civil or administrative penalty rather than a criminal punishment.

Liabilities under Bankruptcy Law

According to the 2007 Enterprise Bankruptcy Law, the legal representative of the debtor and the person who is directly responsible will be liable for compensation where an enterprise debtor commits the following acts, thereby undermining the interests of its creditor:

1. Transfer property without consideration;

2. Trade at an obviously unreasonable price;

3. Provide property guaranty to unsecured debts;

4. Pay off debts that are not yet due;

5. Abandon claims;

6. Debtor does not have enough assets to pay off debts but still chooses to repay certain creditors;

7. Conceal or transfer property to avoid repayment of debts; or

8. Fabricate debts or acknowledge non-existent debts.

Liabilities to the AIC

The Regulations of the PRC Concerning the Administration of the Registration of Enterprises with the Status of Legal Persons 1988 (“Registration Regulations”) expand slightly on the liabilities listed above.

Namely, an enterprise may be punished by the AIC by issuing a warning, imposing a fine, confiscating illegal income, ordering the suspension of business for rectification and confiscating or revoking its business license when the enterprise:

1. Conceals facts or practices fraud during registration or commences business without approval and registration;

2. Amends any of the main items of registration without authorization or engages in business activities beyond its approved and registered scope of business;

3. Fails to cancel its registration in accordance with regulations or to submit the annual inspection report and carry out annual inspection procedures;

4. Forges, alters, rents out, lends, assigns, sells or duplicates without authorization its business license of an enterprise legal person or copy thereof;

5. Gives away, diverts or conceals its property in order to evade its liabilities;

6. Engages in illegal business activities.

Where failures in the above lead to the revocation of the enterprise’s business license, the legal representative will not be permitted to serve as a legal representative within three years of the revocation date of the business license (except where they were unable to normally carry out their functions and powers during the annual inspection period).

Qualification to be a Legal Representative

An individual cannot serve as a legal representative if he/she:

1. Lacks capacity for civil conduct or has limited capacity for civil conduct;

2. Is undergoing criminal punishment or a criminal coercive measure is being enforced against him/her;

3. Is being wanted by public security organs or state security authorities;

4. Has been:

a. Sentenced to criminal punishment for embezzlement, bribery or financial fraud or for disrupting the order of the socialist market economy, and not more than five years have elapsed since the expiration of the enforcement period; or

b. Has been sentenced to criminal punishment for another crime, and not more than three years have elapsed since the expiration of the enforcement period; or

c. Has been deprived of political rights for committing a crime, and not more than five years have elapsed since the expiration of the enforcement period;

5. Served as the legal representative, director or manager personally responsible for the bankruptcy liquidation of an enterprise due to mismanagement, where not more than three years have elapsed since the date of completion of the bankruptcy liquidation;

6. Served as the legal representative of an enterprise that had its business license revoked for violating the law, for which he/she bears personal liability and not more than three years have elapsed since the date of revocation of the business license;

7. Is burdened with relatively large amounts of personal debts past due but have not been settled; or

8. Under any other circumstances prescribed by law and the state council.

Dezan Shira & Associates is a specialist foreign direct investment practice, providing business advisory, tax, accounting, payroll and due diligence services to multinationals investing in China, Hong Kong, India, Singapore, and Vietnam. Established in 1992, the firm is a leading regional practice in Asia with twenty offices in five jurisdictions, employing over 180 business advisory and tax professionals. For professional advice on doing business in China, please contact Dezan Shira & Associates at info@dezshira.com or visit www.dezshira.com.