China business: The all-important role of a company’s Legal Representative (法定代表人)

The importance of the legal representative of a China-based company is too often overlooked. At Horizons, we often encounter companies who underestimate the role and responsibilities of the legal representative, which may raise the risk potential for both the individual and company.

The General Principles of the Civil Law of the People’s Republic of China (effective 1987) stipulates that, in accordance with the law or the articles of association governing the legal person, the responsible person who acts on behalf of the legal person in executing a company’s functions and powers shall be its legal representative. In other words, the legal representative is responsible for representing the company in exercising its functions and power, as well as daily management.

The responsibilities of the legal representative include, but are not limited to, legally conserving the company’s assets, executing powers of attorney on the company’s behalf, authorising legal representation of and litigation by the company and entering into contracts and taking responsibility for legal obligations in the company’s name. Therefore, choosing a suitable, qualified legal representative to possess such broad powers and potentially be exposed to unlimited liability is extremely important in reducing potential risk.

The Company Law of the People’s Republic of China (revised 2014) requires all legal entities to establish a legal representative and stipulates the chairman of its board of directors, its executive director or its general manager, in accordance with the articles of association of the company, to serve as the legal representative.

The established legal representative is required to be registered in accordance with the law and in the event of a change of the legal representative, the company shall register the change. It is not advisable for a board member to be appointed as the legal representative, as the additional responsibility of daily management could bring higher exposure for the board member.

An option for foreign companies to consider is the utilization of a professional, such as a lawyer. Although a lawyer as the legal representative may lack the corporate knowledge of the company, the lawyer may be highly effective in utilising the powers of the legal representative to govern the company. For example, the lawyer could ensure that contracts entered into correspond with the resolutions of the board of directors or board of shareholders. The lawyer, as the legal representative, may also request the senior officer to report to the board of shareholders, should any contract fail to correspond with the resolutions of the board of directors.

However, we note, that the lawyer as legal representative should only govern the actions of the senior officer and not manage the senior officers. For example, the lawyer as legal representative audits contracts before their signing is governance, whilst a lawyer as legal representative requesting senior officers to audit contracts is management.
Since the legal responsibility calls for acting on behalf of the company, the law holds the legal representative to a higher standard of due diligence and care. A legal representative may face civil, administrative and criminal liabilities accrued by the company.

Let’s review some definitions of liability assigned the legal representative.

Civil Liability
The actions of the legal representative are deemed as activities of the company, with any civil liabilities arising from the legal representative’s actions being borne by the company. However, the company may claim damages from the legal representative for any losses caused by their improper actions.

Administrative Liability
If a company violates any PRC laws, the legal representative of such company may be subject to fines and punishment, in addition to any punishments passed to the company.  Where the violation is deemed serious, the legal representative may be subject to criminal liability.

Criminal Liability
The PRC Criminal Law imposes criminal liability on both the individual and the company of whom the individual is in charge of, or responsible for, that commits a crime. As the main principal of the company, the legal representative will not be pursued with any criminal liability unless they have participated in the crime and are directly in charge of or responsible for the crime committed by the company.

On the company side, a company may be held liable for any contracts entered into by the legal representative even though the legal representative may have exceeded his or her scope of authority. The contract can only be deemed as invalid where the counterparty knew or should have known the legal representative was acting beyond or outside the scope of their authority as stipulated in the Contract Law of the People’s Republic of China (effective 1999). In practice, the counterparty may only hold such knowledge of the authority scope via accessing the Articles of Association, which customarily defines the legal representative’s scope of authority.

Overall, the legal representative is an essential role in the management of a company and should not be underestimated. Selecting an appropriate, trustworthy person as legal representative is crucial to minimise risk. Although the scope of the authority may be defined in the Articles of Association to limit the powers of the legal representative, selecting the wrong legal person may still cause major damages to a company.  

If you would like more information about the role of the legal representative in a company in China or other related corporate matters, send us an email at talktous@horizons-advisory.com, and we’ll have a Horizons professional contact you.

Horizons Corporate Advisory helps clients solve complex problems, thrive and be inherently responsible in their business activities worldwide. The countries we operate in include Belarus, Belgium, China, Colombia, Costa Rica, Cyprus, Ecuador, France, Germany, Hong Kong, Indonesia, Italy, Lichtenstein, Luxemburg, Macau, Malta, Mexico, Mongolia, Netherlands, Nigeria, Portugal, Russia, Singapore, Spain, Switzerland (French and German-speaking cantons), Turkey, United Kingdom (England and Wales) and the United States of America.

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