Chinese laws and regulations are very strict regarding the responsibilities and obligations of companies and their legal representatives. Both must be aware of the considerable amount of liabilities and risks, as well as the legal consequences when violating the law.
In China, according to the Civil Code and the Company Law, the legal representative is the person who represents the company in civil activities. The legal representative is required to fulfill obligations and bear the corresponding legal liabilities, while managing the company’s operations.
The Chinese law states that there are 13 legal liabilities of the legal representative across four different areas: civil liability, restrictions or disciplinary measures, administrative liability, and criminal liability.
Civil liability
When a legal representative causes harm to others while performing their duties, it constitutes tortious conduct. In this case the legal representative must have acted against a third party, infringing on its personal or property rights, and such conduct must be related to the execution of their duties. If it is unrelated to their duties, it does not constitute tortious conduct.
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.
After the company has assumed civil liabilities externally, it may seek compensation from the legal representative at fault in accordance with the law or the company’s Articles of Association.
The Company Law establishes that the 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 a senior executive position, the same limits imposed on senior executives apply to the legal representative.
According to the Company Law, directors and senior executives have a “fiduciary obligation” to the company and if they 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.
A few of the behaviors directors and senior executives must not engage in are using their relationships to harm company interests; accepting bribes or other illegal income, embezzling the company’s property; misappropriating company funds; depositing company funds in their own name, lending the company’s funds to others and disclosing company secrets without authorization, among others.
If legal representatives help shareholders to withdraw capital, they shall bear joint and several liabilities. To determine whether an act constitutes assisting with the withdrawal of capital, it must be proved that the assistance has been objectively carried out, such as helping in the transfer of funds, and signing relevant documents.
When a bankrupt company violates the law doing acts 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 bears the compensation liability.
In the event of a company’s refusal to fulfill payment obligations, a disciplinary measure that can be imposed against the legal representative in judicial enforcement cases, is the restriction of consumption and travel.
This measure may include travel by plane, high-consumption activities at places such as hotels, nightclubs, or golf courses, purchasing real estate or buildings, renting high-end office buildings or apartments; purchasing non-essential vehicles; going on vacations; sending children to private schools; and paying high premiums to buy insurance and financial products.
The Court may also restrict the company’s legal representative from exiting China.
If a company 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 the company refuses to report its property status, makes a false report, or fails to report within a reasonable time without a legitimate reason, the Court may impose fines or order the detention of the directly responsible personnel.
When a company refuses to cooperate, it will be included in the “List of Dishonest Persons Subject to Enforcement”. The information of its legal representative will also be added to a public database.
The Chinese law states that companies must pay taxes and operate their business with integrity. If an entity has unpaid taxes and overdue fines and does not provide guarantees that it will pay, then the authorities may prevent the legal representative from leaving the country until the taxes are paid.
A similar situation can happen if a company has unresolved foreign-related commercial disputes in China. The legal representative may be restricted from leaving the country to prevent the company from maliciously evading litigation or legal obligations.
Once a company enters bankruptcy proceedings, the transfer and verification of relevant materials, investigation, and management of property status, and recognition of creditor claims require a high level of cooperation from the company’s legal representative. To ensure the smooth progression of bankruptcy-related work, the law prohibits the legal representative from leaving their home without permission.
To maintain the safety of market transactions and prevent market operation entities from maliciously evading legal responsibilities, a legal representative responsible for the bankruptcy or legal violations of a company may be restricted from the same position with a different firm for a period of three years after the completion of bankruptcy liquidation or from the date of the revocation of the business license.
Administrative liability
In China, a company must obey all relevant laws and regulations during the process of establishment, operation, management, and liquidation. If a company fails to do so, its legal representative 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 behaviours of the company and relevant laws and regulations.
Criminal liability
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 behaviour.
In the event that the legal representative is only a nominal legal representative and is unaware of, or has not participated in, the company’s criminal behaviour, then they may not be held responsible. Holding the position of legal representative will not necessarily lead to the conclusion that they are directly involved.
Company crimes include fundraising fraud, insurance fraud, forced labor, false litigation, and others. The law states that the corporation shall be fined, and the directly responsible personnel are also liable for penalties.
A legal representative in China carries a high level of responsibility and faces many risks. For this reason, this person should always ensure that the company decisions they participate in are legal and compliant with the law.
At the same time, they should be familiar with and closely involved in the company’s business to better understand the compliance requirements and to assess compliance risks when deciding whether to sign documents.
Woodburn Accountants & Advisors is one of China’s most trusted business setup advisory firms.
Woodburn Accountants & Advisors is specialized in inbound investment to China and Hong Kong. We focus on eliminating the complexities of corporate services and compliance administration. We help clients with services ranging from trademark registration and company incorporation to the full outsourcing solution for accounting, tax, and human resource services. Our advisory services can be tailor-made based on the companies’ objectives, goals and needs which vary depending on the stage they are at on their journey.
Talk to an expert
Schedule a 30-mins complimentary, no-obligation call to see how Woodburn can help you. Book a call with our Head of Business Advisory - Kristina Koehler-Coluccia.
Topics we can advise on include:
Company Registration
Cloud Accounting & Financial Reporting
Cloud Payroll Services
Tax & Audit Services
Recruitment
Employer-of-Record
Visa Application
Trademark Registration
Switch to Woodburn
Partner with Woodburn (cross referral)
Our calls are automatically scheduled via Zoom - or via Teams, WeChat or WhatsApp upon direct request.
Our advisory calls are available from Monday-Friday from 8am to 5pm CEST and Wednesday until 9pm CEST.