The legal representative occupies a powerful and important position in Chinese companies, but it is a position not always fully understood by foreign investors. Maarten Roos, Managing Director, R&P China Lawyers, looks at the risks for companies where these powers are abused, and at the personal risks and liabilities faced by legal representatives in cases of misconduct either by himself or by the company and its employees.

The legal representative is the person with the broadest individual authority in a company in China. Unlike in other countries, PRC law requires that only one person – either the chairman of the board of directors, the executive director or the general manager – is appointed by the investor(s) to represent the company on its behalf. In other words, this one person has access to and control over the company’s assets and capital, and in most cases the company’s stamps.

For foreign companies it is therefore important to understand not only the powers that are transferred to this one position, but also the liabilities that come with it. On the one hand, the legal representative executes great authority in the company’s daily operations, as he is considered to act on behalf of the company and has the right to make decisions regarding the company’s assets, to confirm transfers, and authorise legal representation of the company. The legal representative’s authorities are only limited by law and – internally – corporate governance rules such as the Articles of Association (AoA). On the other hand, the legal representative faces certain responsibilities that may lead to personal risks for wrongdoings either by himself or by the company and its employees, subject to civil, administrative or even criminal liability.

Risks for the company

In general, actions of the legal representative that fall within his professional assignment are considered actions of the company itself, and therefore the company will be held responsible. Even in cases where the legal representative exceeds his authority while concluding contracts and his actions do not comply with the actual intent of the company, the contract will be binding and the company will be held liable if the business partner reasonably believes that the legal representative acted on the company’s behalf. Therefore, a legal representative that has not been carefully chosen can seriously damage the business.

If the company can prove to the court that it has clearly defined and recorded the limits of the legal representative’s authority, it may ask a court to release it from the liability for the action. However, civil liabilities to the company may arise when the legal representative clearly violates the laws or AoA, or if his actions constitute malpractice, gross negligence or intentional harm to the company’s interests. If the company suffers any losses from the legal representative’s actions, it can claim compensation.

Access to company chops and termination of employment

In China, business contracts are usually ‘signed’ with the company stamp that is registered with the Public Security Bureau. In practice, the company stamp is much more powerful than a written signature. In fact contracts are legally binding even without the signature of the company’s authorised representative, as long as they are properly stamped. This can be convenient as the person in charge does not have to be physically present to conclude a binding contract. Moreover, rules on stamp use, and procedures to restrict access and monitor use – with or without the assistance of a law firm – are key parts to managing and supervising the activities of senior managers.

Firing an uncooperative legal representative can be painful if the proper precautionary measures have not been taken in advance. For a valid termination of employment, the legal representative must sign and approve his own termination documents, and a person who is confronted with accusations of exceeding his competences and harming the business may have anything in mind but cooperating with the employer who tries to get rid of him. It is not uncommon that the company finds itself in the unfavourable situation where a legal representative keeps the company stamps ‘hostage’ and demands a financial settlement. A good strategy to facilitate termination is to ask the person to be appointed as legal representative, to sign and stamp an undated termination agreement.

Risks for the legal representative

A potential risk for the legal representative is posed by activities of other executive directors or senior managers that harm the interest of the company. Since the legal representative’s actions are considered as those of the company, he can only avoid joint liability for the misconduct of others if he can show credibly that he was not aware of the harmful acts, did not participate in them, or explicitly disagreed at the board meetings.

Criminal activities of the company generally result in liability of the company itself. However, if the legal entity is charged with a crime, the persons directly in charge or the persons responsible for the crime may also bear criminal liability. Illegal business operations that could lead to risks of criminal liability for the legal representative include, most notoriously, tax evasion, customs duties evasion, bribery, environmental crimes and manufacturing of counterfeit or substandard quality goods. As the legal representative is in charge for the company’s business activities, the illegal activities may be considered within the scope of his duties and therefore he could be held directly responsible. When the melamine milk scandal was exposed in 2008, the legal representatives of various dairy companies were held responsible for manufacturing and selling substandard goods and had to face criminal prosecution.

Bankruptcy proceedings

Should the company file for bankruptcy, the legal representative will have to take on a heavy burden that even influences his private life. To make sure that the bankruptcy procedure runs smoothly, PRC law determines that the legal representative is responsible for preserving the company’s assets, stamps, accounting books and any documents under his control, and he is obligated to cooperate with courts and the bankruptcy administrator. Unless a replacement is found to take over the responsibility for unpaid taxes and liabilities, the legal representative may be prevented from leaving his domicile without permission of the court, and may not take up senior posts in another company. While the appointed legal representative is not required to reside in China, for those who are located in China this may result in a lengthy restriction on exiting the country. A way to mitigate this restriction is to seek permission of the courts to appoint an agent (usually a law firm) to represent the (foreign) legal representative in the process.

Some companies consider illegally withdrawing their investments from China, even though this means that it will be extremely difficult to conclude any future business in the country. In this scenario, the legal representative may be jointly held responsible for the failure to complete liquidation procedures, which can even lead to criminal charges.

Conclusion

The legal representative occupies a powerful and important position in the company. Due to the broad scope of authority and access to the company’s most valuable properties, it is important to carefully choose the right person for the position, and even more, to make use of best practices to prevent abuse of power. This includes clear limitations of the legal representative’s powers in the AoA and other internal rules, as well as stipulations on stamp use, and termination strategies.

Minimising personal risk is much more difficult. Liability insurance is generally available only for directors of listed companies and in any case does not protect against criminal liability. Best practice is for the legal representative to know what is going on, be able to show that he has done all he could to prevent unlawful practices, and if the threat of (criminal) liability does present itself, respond quickly to minimise further risks to his person.

Maarten Roos, Managing Director

R&P China Lawyers

This article was first published by R&P China Lawyers, reprinted with kind permission.The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

 

 

在中國公司裏,法人代表的權力很大,地 位重要,而外國投資者往往不能全面理解 這個職位的意義。R&P China Lawyers董事 總經理Maarten Roos探討這些權力遭濫用時 為公司帶來的風險,並討論在法人代表、 公司或僱員有失當行為時,法人代表所承 受的個人風險和法律責任。

法人代表是中國公司裏個人權力最 大的人物。跟其他國家不同,中 國內地法律規定投資者只可指定一人代 表公司,該人往往是董事會主席、執行 董事或總經理。換句話說,這一個人可 取得和控制公司的資產和資本,許多時 候也能取得和控制公司的印章。

因此外國公司不僅必須瞭解這個職位的 權力,還須認識相應的法律責任。一方 面,法人代表在公司的日常運作中行使 重大的權力,代表公司行事,有權就公 司的資產作出決定、確認資產轉移,並 授權他人作為公司的法律代表。法人 代表的權力只受法律限制,並由內部的 公司治理規則(例如公司章程)管限。 另一方面,法人代表的一些職責,會導 致他因個人、公司或僱員的不當行為而 面臨個人風險,須承擔民事、行政甚至 刑事責任。

公司的風險

一般而言,法人代表在個人專業範疇 內的一切行為,均視為公司的行為, 公司須負上責任。即使法人代表越權 訂立合同,而其行為亦與公司的真正 意圖不符,但假如商業夥伴有合理理 由相信法人代表是代表公司行事,該 合同便依然具有約束力,公司須負上 責 任 。 因 此 , 若 不 小 心 物 色 法 人 代 表,可嚴重損害公司業務。假如公司 能向法院證明自己曾清楚界定和記錄 法人代表的權限,便可請求法院解除 公司對該行為的法律責任。

然而,假如法人代表明顯違反法律或公 司章程,又或其行為屬不良行為、嚴重 疏忽或蓄意損害公司利益,則公司可能 須負上民事責任。假如公司因法人代表 的行為而蒙受損失,則可申索賠償。

取得公司印章及終止僱用

中國公司「簽訂」合同時,用的是在公 安局登記的公司印章。實際上,公司印 章比簽名更有效;即使合同上沒有公司 法人代表的簽名,只要妥善蓋上公司印 章,便具有法律約束力。這其實相當方 便,負責人不必親身在場,也可訂立具 有約束力的合同;況且,有關使用印章 的規則,以及限制取得印章和監察其使 用的程序(不論是否邀請律師事務所協 助制定相關規則和程序),是管理高層 管理人員和監察其活動的重要一環。

假如事先沒有做好妥善的預防措施,解 僱不合作的法人代表可能是相當困難的 事。法人代表必須簽署和批核他自己的 解僱文件,解僱才能生效;而在被指越 權和損害公司業務的情況下,法人代表 當然萬分不願意與欲除之而後快的僱主 合作。法人代表「扣押」公司印章,要 求達成財務和解協議,並非罕見,這會 令公司處於不利地位。在指定法人代表 前,先請有關人選簽訂沒有寫上日期的 終止僱用協議,並在上面蓋章,這不失 為方便日後終止僱用的良策。

法人代表的風險

其他執行董事或高層管理人員如有損 害公司利益的行為,法人代表便有可 能承擔風險。由於法人代表的行為視 為公司行為,法人代表若要避免就他 人的失當行為承擔共同責任,便要使 人相信他並不知悉那些有害的行為、 沒有參與其中,又或在董事會會議中 明確表示不同意。

公司的刑事行為,法律責任一般由公 司 本 身 承 擔 ; 但 若 法 律 實 體 被 控 有 罪,直接負責的人或負責犯罪行為的 人也有可能須承擔刑事責任。有可能 導致法人代表負上刑事責任的非法經 營行為包括逃稅、規避關稅、賄賂、 環境罪行、製造假冒偽劣產品等。由 於法人代表負責公司的商業活動,有 關非法行為便可視為他的職責範圍以 內,他可能須直接負上責任。 2 0 0 8年 三聚氰胺毒奶粉事件中,多家乳品公 司的法人代表均須為生產和出售劣質 產品負責,面對刑事起訴。

破產法律程序

公司申請破產時,法人代表須負起重大 責任,甚至影響私人生活。為確保破產 程序順利,中國法律訂明法人代表負責 保存公司的資產、印章、會計簿冊和他 所控制的文件,並須與法院和破產管理 人合作。除非找到他人承擔欠稅及欠債 的責任,否則法人代表便可能不得在未 經法院批准前離開居住地,也可能不得 擔任其他公司的高層職務。法人代表不 必一定在中國居住,但在中國居住的法 人代表,便可能因公司破產而長期不得 離開中國。為減輕這項限制所帶來的影 響,可向法院申請許可,指定代理人 (通常是律師事務所)在破產過程中代 表(海外)法人代表。

有些公司會考慮把投資非法撤離中國, 儘管這意味著投資者日後再難以在中國 營商。在這情況下,法人代表有可能須 為未能完成清盤程序承擔共同責任,甚 至有可能被刑事起訴。

結語

法人代表在公司裏的權力很大,地位 重要。由於法人代表權力範圍廣闊, 而且可取得公司最有價值的財產,公 司必須小心物色適當人選出任此職; 更重要的是採取最佳措施,防止濫用 權力。這些措施包括在公司章程和其 他內部規則中明確限制法人代表的權 力,以及訂明使用印章的程序,並訂 定終止僱用的策略。

在減低個人風險方面,則較難做到。法律 責任保險通常只供上市公司董事投保,而 且不會提供刑事責任方面的保障。法人 代表宜清楚瞭解公司事務,能顯示自己已 竭盡所能防止不法行為;假如有可能面臨 (刑事)法律責任,則須迅速回應,以盡 量減低個人承受的風險。

Maarten Roos

R&P China Lawyers董事總經理

本文原由 R&P China Lawyers發表,現 獲許在此重刊。

本文旨在就法人代表的相關事項提供 一般指引;讀者個別情況如何處理, 宜另尋求專門意見。

 

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