Dezan Shira & Associates on the Liabilities of the Legal Representative
By Eunice Ku and Shane McDonnell
SUZHOU, Apr. 12 – Fabian Knopf, business development associate at Dezan Shira & Associates’ Suzhou branch, headed a seminar at OfficeStar’s Suzhou New District office on Tuesday discussing the duties and liabilities of the legal representative and other key personnel of an FIE.
This seminar coincided with the April 2012 edition of China Briefing Magazine, titled “The China Manager’s Handbook,” which is temporarily available as a complimentary PDF download on the Asia Briefing Bookstore this month.
Firstly, every foreign enterprise is required to assign a legal representative. Because this position involves many heavy responsibilities, it is considered to be one of the top-ranking positions of a FIE. The reason for that is if a single individual in a foreign-invested enterprise is to be held accountable for company actions, that person is typically the legal representative.
In a wholly foreign-owned enterprise, the legal representative is usually the executive director, the chairman of the board of directors, or the general manager. In a joint venture, the chairman of the board of directors or, in some cases, the general manager acts as the legal representative.
Knopf then introduced the “blacklist” which acts as an enterprise “credibility supervision information system.” The “blacklist” categorizes companies into four categories (A, B, C, D) based on their creditability and is shared only between local Administration of Industry and Commerce bureaus and not made available to the public. We discussed this “blacklist” as well as the different categories and their criteria in our article last week titled, “When Expats Get Blacklisted in China.”
In addition, the remaining key positions of a FIE in China – namely shareholders, supervisors, directors, and senior management – were discussed and their duties and potential legal liabilities outlined as stipulated by China’s 2006 Company Law, as well as Criminal Law, Civil Code and Tax Law.
According to Company Law, the role of the shareholder entails:
- Deciding operational policy and investment plans
- Electing and/or replacing directors and supervisors
- Examining and approving reports from the boards of directors and supervisors, annual financial budget plans and final accounts plans of the company
- Adopting resolutions on changes in registered capital, issuance of corporate bonds and changes in corporate structure
- Amending the articles of association
The supervisor of a FIE is entitled to:
- Examine financial affairs
- Supervise acts of directors and senior management
- Demand rectifications on violation of company interest
- Put forth motions in the shareholders assembly
- Conduct legal proceedings against directors or senior management
- Exercise other functions as stipulated by articles of association
The functions and powers of the executive director should be stipulated in the company’s articles of association and include:
- Executing shareholders’ resolutions
- Deciding company’s operational plan and investment scheme
- Formulating annual plans such as financial budgets, profit distribution/loss recovery, changes in registered capital and in corporate structure
- Making decisions regarding senior management
The duties of the general manager include:
- The daily operating of the company
- Implementing board’s structures and plans
- Formulating specific rules of the company
- Recommending senior management positions
- Drawing up plans for internal administrative bodies and basic management of the company
Furthermore, Fabian Knopf outlined the liabilities associated with the key positions of the company.
For instance Civil Code offenses include illegal business activities beyond the business scope, engaging in fraud, or failing to apply and register a change or termination. Liabilities under Bankruptcy Law include trading at an obviously unreasonable price and concealing/transferring property to avoid payments of debt.
Concealing facts or committing fraud during business registration, commencing business without approval, and failing to cancel registration are all deemed to be liabilities to the Administration of Industry and Commerce. Bribery, unlawful seizure and misappropriation of funds fall under liabilities for criminal offense.
Liability for liquidation occurs when there is a delay in the performance of shareholder duties that results in the loss of significant properties, account books or material documents. Finally, liability to the company includes lending company funds to others, concluding contracts and conducting business without the proper approval.
The different actions taken by the respective authorities in the event of any of the above were then discussed. These can range from fines to the suspension of the business license and even detention in some cases.
Dezan Shira & Associates is a boutique professional services firm providing foreign direct investment business advisory, tax, accounting, payroll and due diligence services for multinational clients in China, Hong Kong, India, Singapore and Vietnam. For further information on the risks and responsibilities you have as a foreign manager in China, please email firstname.lastname@example.org, visit our web site at www.dezshira.com, or download our brochure here.
The China Manager’s Handbook
Stories of expats having their name added to the Administration of Industry and Commerce “blacklist,” or being “trapped in China” for company legal proceedings, encourage a careful consideration of key positions in an FIE. This issue of China Briefing Magazine aims to shed a little light on this topic.
Doing Business in China
Our 156-page definitive guide to the fastest growing economy in the world, providing a thorough and in-depth analysis of China, its history, key demographics and overviews of the major cities, provinces and autonomous regions highlighting business opportunities and infrastructure in place in each region. A comprehensive guide to investing in the country is also included with information on FDI trends, business establishment procedures, economic zone information, and labor and tax considerations.
Internal Control and Audit
This issue of China Briefing Magazine is devoted to understanding effective internal control systems in the Chinese context and the role of audits in detecting and preventing fraud.
Annual Compliance for FIEs
Prior to distributing and repatriating profits, foreign-invested enterprises must complete annual compliance, involving an audit, tax filing and inspection. These procedures are not only required by law, but are a good opportunity to conduct an internal financial health check. Also in this issue, we take a look at individual tax filing procedures for expatriates living and working in China.
The Foreign Corrupt Practices Act and its Impact on China Subsidiaries
This issue of China Briefing Magazine is dedicated to helping companies understand the Foreign Corrupt Practices Act and establish controls to prevent (and, if necessary) resolve FCPA noncompliance.