Company Legal Representatives in China – Risks and Legal Liabilities
Company legal representatives in China must take on a considerable amount of liabilities and risk when assuming this important position. Both companies and their legal representatives must be aware of all of their respective responsibilities and obligations to ensure compliance with China’s laws and regulations. In this article, Fanny Zhang from Dezan Shira & Associates outlines all of the legal liabilities and risks of legal representatives and discuss how to mitigate them.
According to relevant provisions of the Civil Code of the People’s Republic of China (the “Civil Code”) and the Company Law of the People’s Republic of China (revised in 2018) (the “Company Law”), the legal representative is the person who represents a company in conducting civil activities.
The legal representative enjoys many rights in the management of the company’s operations. However, while enjoying these rights, the legal representative is also required to fulfill corresponding obligations and bear the corresponding legal liabilities.
This article summarizes the 13 legal liabilities of the legal representative across four different areas: civil liability, restrictions or disciplinary measures, administrative liability, and criminal liability.
Liabilities of the Legal Representatives of Companies in China
|Civil liability||Compensation liability of the legal representative due to their tortious conduct in the course of fulfilling their duties.|
|Civil liability for actions that harm the company’s interests of the legal representative as director or senior management personnel of the company.|
|Joint liability of the legal representatives for assisting shareholders in withdrawing capital in violation of the law.|
|Compensation liability of legal representatives in the event a bankrupt company unreasonably reduces the company’s assets and damages the interests of creditors during bankruptcy proceedings.|
|Restrictions or disciplinary measures||Consumption and/or travel restrictions placed on legal representatives in the event a company refuses to fulfill payment obligations as determined by a legally binding document.|
|Fines, detention, criminal responsibility, and other penalties placed on legal representatives in the event a company is subject to law enforcement and does not cooperate with the court’s investigation or law enforcement work.|
|Publication of legal representatives’ personal information in the event a company is listed as a dishonest entity due to its failure to perform a court’s execution order.|
|Prohibition of the legal representatives from leaving the country in the event of a company’s failure to pay taxes.|
|Prohibition of the legal representatives from leaving the country due to the existence of unresolved foreign-related commercial disputes of the company.|
|Prohibition of the legal representatives from leaving their domicile without permission after a company enters bankruptcy proceedings.|
|Prohibition on individuals from serving as legal representatives of companies or non-corporate enterprises within a certain period, if they have served as legal representatives of bankrupt companies, companies or non-corporate enterprises whose business licenses have been revoked or ordered to close, and who bear personal responsibilities.|
|Administrative liability||Administrative penalties, such as fines and detention given to legal representatives in the event the company violates relevant laws and regulations.|
|Criminal liability||The criminal responsibility of a legal representative as a directly responsible supervisor in the case of corporate crime.|
Compensation liability of the legal representative due to tortious conduct
When a legal representative causes harm to others while performing their duties, it constitutes tortious conduct caused because of their duties. To be considered as such, two conditions must be met:
- The legal representative’s conduct must constitute a tortious act against a third party, such as infringing on a third party’s personal or property rights.
- The legal representative’s tortious conduct must be related to the execution of their duties. If the legal representative’s tortious conduct is unrelated to the execution of their duties, it does not constitute tortious conduct because of their duties.
The legal representative is the person who represents the company in civil activities. The legal consequences of the legal representative’s civil activities on behalf of the company are borne by the company. Therefore, if a legal representative causes harm to others while performing their duties, the company should also bear civil liability.
To constrain and restrict the performance of duties by the legal representative, after the company has assumed civil liabilities externally, it is given the possibility of indemnification against the legal representative. That is, it may seek compensation from the legal representative at fault in accordance with the law or the company’s Articles of Association.
The legal basis for this definition is stipulated in Article 62 of the Civil Code, which states that “Where a legal representative of a legal person [a company] causes damage to others while performing their responsibilities, the civil liability thus incurred shall be assumed by the legal person [company]. After assuming the aforementioned civil liability, the legal person [company] has the right to indemnification, in accordance with law or its articles of association, against its legal representative who is at fault.”
Civil liability for actions that harm the company’s interests
According to Article 13 of the Company Law, the company’s legal representative must be the Chairman of the Board of Directors, the Executive Director, or the Manager of the company. Since the company’s legal representative is deemed to be in a senior executive position in the company, the constraints placed on senior executives under laws, regulations, or the company’s Articles of Association also apply to the legal representative.
According to Article 147 of the Company Law, directors and senior executives have a “fiduciary obligation and obligation of diligence” to the company and must not harm the interests of the company. Article 148 stipulates that if directors and senior executives violate these obligations and harm the interests of the company, the income that they derived from violating their obligations will be owned by the company, and the losses caused to the company must be compensated.
According to articles 21, 147, and 148 of the Company Law, the behaviors that directors and senior executives must not engage in that could harm the interests of the company mainly include:
- Using their relationships to harm company interests;
- Accepting bribes or other illegal income, embezzling the company’s property;
- Misappropriating company funds;
- Opening an account to deposit company funds in their own name or in the name of others;
- Lending the company’s funds to others or providing guarantees for others without the consent of the Shareholders’ Meeting, General Meeting of Shareholders, or Board of Directors, in violation of the company’s Articles of Association;
- Entering into contracts or transactions with the company in violation of the company’s Articles of Association or without the consent of the Shareholders’ Meeting or General Meetings of Shareholders;
- Using their position to seek commercial opportunities belonging to the company for themselves or others without the consent of the Shareholders’ Meeting or General Meetings of Shareholders, engaging in business activities that are the same as those of the company as self-employment or for others;
- Keeping the commission received from transactions between others and the company for themselves; and
- Disclosing company secrets without authorization.
Engaging in other behaviors that violate their fiduciary obligation and obligation of diligence to the company.
Joint liability for assisting shareholders in withdrawing capital
According to Article 12 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Company Law of the People’s Republic of China (III) (Revised in 2020) (“Interpretation (III)”), withdrawing capital refers to the behavior of shareholders who have fulfilled their capital contribution obligations to the company, but then produce false financial accounting reports to:
- Inflate profits for distribution;
- Transfer their capital contributions by fictitious debt relationships;
- Transfer their contributions through related party transactions; or
- Withdraw their capital contributions through other means not in accordance with legal procedures.
Therefore, assisting with the withdrawal of capital is seen as an active act rather than a passive one.
To determine whether an act constitutes assisting with the withdrawal of capital, it is necessary to consider whether there is subjective intent for the joint infringement and whether the assistance has been objectively carried out, such as the provision of personal account information for shareholders to withdraw capital, assisting in the transfer of funds, and the signing of relevant documents.
As mentioned earlier, legal representatives in China generally also hold positions as directors or senior executives, and in accordance with Article 14 of the Interpretation (III), if legal representatives provide convenience or assistance for shareholders to withdraw capital, they shall bear joint and several liabilities.
Liabilities of the legal representative in abnormal bankruptcy proceedings
According to the relevant provisions of the Enterprise Bankruptcy Law of the People’s Republic of China (the “Enterprise Bankruptcy Law”), if a bankrupt company engages in behavior such as unreasonably disposing of the company’s assets, individual repayment, concealing and transferring assets, and fabricating debts during a specific period that may lead to a reduction in the bankrupt company’s assets and damages the interests of creditors, the legal representative of the bankrupt company should bear the compensation liability. These behaviors are outlined in articles 31 to 33 of the Enterprise Bankruptcy Law.
Specifically, Article 128 of the Enterprise Bankruptcy Law states that if a company that is in debt engages in these types of behavior that damages the interest of creditors, then the company’s legal representative and other directly responsible personnel “shall bear the compensation liability according to law”.
Restrictions or disciplinary measures
Restrictions to legal representatives’ consumption and travel in the event of a company’s refusal to fulfill payment obligations
Article 3 of the Provisions of the Supreme People’s Court on Restricting High Consumption and Other Relevant Consumption of Persons Subjected to Law Enforcement (2015 Revision) (“Provisions on the Restriction of High Consumption”) states that, in judicial enforcement cases, the legal representative may be subject to restrictions on consumption by judicial authorities in the event of a company’s refusal to fulfill payment obligations, as well as the company itself.
Restricted types of consumption are:
- Choosing to travel by airplane, soft sleeper on trains, or cabins above second class on ships;
- Engaging in high-consumption activities at places such as hotels, nightclubs, golf courses, and other venues with a star rating;
- Purchasing real estate or buildings, expanding or extravagantly decorating a house;
- Renting high-end office buildings, hotels, or apartments;
- Purchasing non-business-essential vehicles;
- Traveling or going on vacations;
- Sending children to high-priced private schools;
- Paying high premiums to buy insurance and financial products; and
- Engaging in other non-essential consumer behaviors, such as taking all seats on G-series bullet trains and first class or higher on other bullet trains, that are not necessary for daily living or work.
In addition, Article 24 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of the Civil Procedure Law of the People’s Republic of China in Law Enforcement Procedures” (Revised in 2020) states that the People’s Court may take measures to restrict the company’s legal representative from exiting China.
Penalties when a company refuses to cooperate with an investigation or law enforcement work
According to Article 9 of the Provisions of the Supreme People’s Court on Several Issues Concerning Property Investigation in Civil Enforcement (Revised in 2020), if a company is subject to law enforcement and does not cooperate with the court’s investigation or law enforcement work, its legal representative may face penalties, such as fines, detention, or even criminal responsibility.
If a company is subject to a compulsory enforcement order by the People’s Court, it must actively cooperate with the relevant enforcement order and report its property status to the People’s Court.
If the company refuses to report, makes a false report, or fails to report within a reasonable time without a legitimate reason, the People’s Court may mete out fines to or place its main responsible person or directly responsible personnel under detention; if it constitutes a crime, it shall be pursued for criminal responsibility in accordance with the law.
Publication of personal information when companies are included in the Dishonest Persons List
If a company is included in the “List of Dishonest Persons Subject to Enforcement” due to its refusal to cooperate with the compulsory enforcement order by the People’s Court, the relevant information of its legal representative will also be published through a public database. This could in turn have a certain negative impact on the legal representative.
Article 6 of the Several Provisions of the Supreme People’s Court on Publishing Information on Dishonest Persons Subject to Execution (Revised in 2017), states that “The information recorded and published in the List of Dishonest Persons Subject to Enforcement shall include:
- The name, unified social credit code (or organization code), legal representative or person in charge of the legal person or other organization as the person subject to enforcement;
- The name, gender, age, and ID number of the natural person as the person subject to enforcement;
- The obligations determined by effective legal documents and the fulfillment of the person subject to enforcement;
- The specific circumstances of the dishonest conduct of the person subject to enforcement; and
- The unit and document number of the enforcement basis, enforcement case number, filing date, and enforcement court.
Other matters that the People’s Court considers should be recorded and made public that does not involve state secrets, commercial secrets, or personal privacy.
Restrictions on leaving the country in the event of tax debt
Companies in China have the obligation to pay taxes according to law and should actively fulfill their tax obligations and operate their business with integrity. According to Article 44 of the Tax Collection and Administration Law of the People’s Republic of China (Revised in 2015), if a company has unpaid taxes and overdue fines and does not provide guarantees that it will pay the due taxes, then its legal representative may be prevented from leaving the country by relevant authorities, as a means of compelling the enterprise to pay taxes as soon as possible.
Restrictions on leaving the country in the event of unresolved foreign-related commercial disputes
If a company has unresolved foreign-related commercial disputes in China, to prevent the company from maliciously evading litigation or legal obligations, the People’s Court can take measures to restrict the legal representative from leaving China.
This is according to Article 93 of the Notice of the Supreme People’s Court on Issuing the Summary of the Second National Conference on Foreign-related Commercial Maritime Trial Work, which states that “In the trial of foreign-related commercial disputes, the People’s Court may take measures to restrict the exit of relevant personnel in the following circumstances:
- There are unresolved foreign-related commercial disputes in China;
- The personnel restricted from exiting are the parties to the dispute or their legal representatives or persons in charge in the unresolved cases;
- There is a possibility of evading litigation or legal obligations; and
- Their exit may cause difficulties in the trial or compulsory enforcement process of the case.”
Restrictions on leaving domicile after a company enters bankruptcy proceedings
After a company enters bankruptcy proceedings, the transfer and verification of relevant materials, investigation, and management of property status, and recognition of creditor claims all require a high level of cooperation from the company’s legal representative. To ensure the smooth progression of bankruptcy-related work, Article 15 of the Enterprise Bankruptcy Law stipulates that, after a company enters bankruptcy proceedings, its legal representative shall not leave their domicile without permission.
In addition, Article 129 of the Enterprise Bankruptcy Law states that if the legal representative of the company leaves their domicile without permission, the People’s Court may give them a warning, place them under detention, or impose a fine according to law.
Temporary ban on serving as legal representative following bankruptcy or certain administrative penalties
To maintain the safety of market transactions and prevent market operation entities from maliciously evading legal responsibilities, if a person has served as the legal representative may be restricted from serving as a legal representative of another company for a period of time, if they have born responsibility for the bankruptcy or legal violations of the former company.
Specifically, Article 12 of the Regulations on the Administration of Market Entity Registration states that persons who meet any of the following conditions are not permitted to serve as legal representatives in China, for either a company or non-company enterprise:
- Those who have served as the legal representative, director, or factory director/manager of a company or non-company enterprise in bankruptcy liquidation, and who bear personal responsibility for the bankruptcy; and
- Those who have served as the legal representative of a company or non-company enterprise whose business license has been revoked or ordered to close due to illegal acts and who bear personal responsibility for these illegal acts.
In both of the above scenarios, the person is not permitted to serve as a legal representative for a period of three years after the completion of the bankruptcy liquidation or from the date of the revocation of the business license.
Administrative penalties due to a company’s violation of laws and regulations
During the process of establishment, operation, management, and liquidation, companies should abide by relevant laws and regulations. If a company fails to fulfill its obligations as required, its legal representative, as the person responsible for the company’s civil activities, may also be subjected to administrative penalties by relevant authorities. Whether the legal representative is held liable for administrative responsibility due to the company’s actions is determined based on the specific behaviors of the company and relevant laws and regulations.
The administrative penalties on legal representatives in China are written into a vast range of laws and regulations. Two such laws are the Anti-Monopoly Law of the People’s Republic of China (revised in 2022) (the “Anti-Monopoly Law”) and the Drug Administration Law of the People’s Republic of China (revised in 2019) (the “Drug Administration Law”).
Article 56 of the Anti-Monopoly Law stipulates that the legal representative can be held personally responsible for reaching a monopoly agreement – which is prohibited under the law – and fined up to RMB 1 million (approx. US$145,030).
Meanwhile, Article 118 of the Drug Administration Law stipulates that in the event that “a company produces or sells counterfeit drugs, or produces or sells substandard drugs with serious circumstances”, the legal representative will have their illegal gains confiscated and will be fined between 30 percent and three times the amount of the illegal gains obtained during the period when the illegal conduct took place. The legal representative will also be banned from engaging in drug production and business activities for life and may be detained for between five and 15 days by the Public Security Bureau.
Criminal responsibilities as a directly responsible supervisor in the case of corporate crime
Article 2 of the Circular of the Supreme People’s Court on Issuing the Summary of the National Symposium on the Trial of Financial Crime Cases states that if the legal representative plays a direct role in a crime committed by the company, such as by making decisions, giving approval, instructing, condoning, or commanding, then they will be identified as the “directly responsible person in charge” of the company’s criminal behavior and will bear corresponding criminal liability.
It should be noted that if the legal representative is only a nominal legal representative and is unaware of, or has not participated in, the company’s criminal behavior, then they may not necessarily be held criminally responsible. That means that merely holding the position of legal representative will not necessarily lead to the conclusion that they are the directly responsible person in charge.
Company crimes are distributed in various chapters of the Criminal Law of the People’s Republic of China (the “Criminal Law”), including in provisions on fundraising fraud, insurance fraud, forced labor, false litigation, and others. Whether the directly responsible person in charge bears criminal responsibility is determined in combination with specific cases and relevant provisions of the Criminal Law.
For example, Article 30 of the Criminal Law, which deals with corporate crimes, states that the corporation shall be fined, and the directly responsible personnel and other directly responsible personnel are also liable for penalties.
Considerations for companies and legal representatives in China
Company legal representatives in China bear a high level of responsibility for the conduct and activity of companies and therefore are exposed to a high degree of risk.
To mitigate risks, the legal representative should ensure that the company decisions they participate in are legal and compliant to avoid personal liability to the greatest extent.
Finally, as legal representatives are required to be signatories to certain company documents, such as company amendments or closing documents, regardless of whether they are involved in the business operation or not, we generally advise that the person who is appointed as legal representative is familiar with and closely involved in the company’s business. This is because a person who is familiar with the business will have a better understanding of compliance requirements and will be better able to assess compliance risks when deciding whether or not to sign documents, thereby providing an additional layer of protection for the company and the legal representative themself.
China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at firstname.lastname@example.org.
Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.
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