When dealing with international clients we often get questions about the term ‘legal representative’. In Chinese law, for every business whether domestic or foreign it is compulsory to appoint a legal representative. The scope of the legal representative with regards to for example power and liability often differs from other jurisdictions.
The legal representative is the person with the legal power to represent the company and enter into binding obligations on behalf of the company in accordance with the law and/or the company’s articles of association. It can be the chairman of the board of directors, the executive director (if there is no board of directors), or the general manager. There are no restrictions on nationality or residency. But for example, people being pursued for a crime, convicted for bribery or corruption within the last 5 years or former directors/managers of a less than 3 years ago liquidated or declared bankrupt company are excluded.
Although the Chinese law does not clearly define the powers of a legal representative, he/she is entitled to sign contracts or handle transactions on behalf of the company. The legal representative’s chop and/or signature are required on numerous company documents and administrative formalities such as business registration. When closing a contract a legal representative’s acts are binding to the company even if he/she is acting beyond the authorized scope.
However the legal representatives’ powers are not unlimited. He/she has to act within the Chinese law and the articles of association of the company. This means that he/she has to refrain from exercising forbidden activities. And, according to the Chinese Company Law, a company is required to appoint a supervisor or board of supervisors (depending on the size of the company) to oversee the activities of the legal representative and, when necessary, to constrain its powers.
Furthermore, the legal representative will bear civil, administrative and criminal liability for wrongful acts, both the company’s and his own.
As already mentioned, the legal representative’s activities are considered company activities, which means that civil liabilities arising from the legal representative’s actions are endured by the company. However, the company may claim damages for any losses caused by the legal representative.
Both the legal representative and the company can be subject to fines and punishment if the company violates any Chinese laws and regulations.
Both the legal representative and the company can be held criminal liable. To be pursued with criminal liability and be accountable for the company’s crimes, the legal representative has to personally participate, be “directly in charge of” or “directly responsible” for the crime committed.
The legal representative and the company are intertwined with each other. The company is bound by the legal representative’s actions and at the same time, the legal representative can be liable for the company’s wrongful acts. In effect this constitutes what is called a “piercing of the corporate veil”, meaning that individuals can be held personally accountable for acts undertaken by the corporate entity which they are legally representing.
Therefore, it is necessary for companies to properly understand the legal representatives’ powers and liabilities and think wisely about appointing the right legal representative.
In order to avoid any difficulties and minimize the risk a legal representative may expose to the company, it is important for companies to specifically define the role, responsibilities and power and limit a legal representative’s authority in the articles of association.
If you have any questions regarding this subject, please feel free to contact us.