Liability risks for legal representatives of enterprises

By Wei Jie and Zhang Yubo, Tiantai Law Firm
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The legal representative of an enterprise is the person in charge who exercises civil rights and performs civil obligations on behalf of a legal person, in accordance with the law or its articles of association. Usually any liability incurred to the legal representative acting in his or her official capacity is taken by the company he or she represents.

In specific circumstances, however, the legal representative must also assume relevant legal liabilities. The “person in charge” or the “person directly responsible” in the Criminal Law or other regulations mostly refers to the legal representative.

Daily duty performance

In accordance with the Company Law and other relevant regulations, only a person with full capacity for civil conduct, who has no large-value outstanding personal debts, and is not under investigation for liability over specific economic crimes, or has finished a specified period after serving his or her full sentence, is eligible to be a legal representative.

legal representative
Wei Jie
Associate
Tiantai Law Firm

The legal representative of a company shall conduct civil activities on behalf of the company in accordance with the law or its articles of association, and shall assume the duty of loyalty and duty of care to the company. In the course of his or her day-to-day duty performance, the legal representative is mainly at risk of incurring civil compensation liability and possible criminal liability for breach of authority and operational faults.

In terms of civil liability, if the legal representative of a company enters into a contract beyond his authority, but the other party does not know or cannot know his or her breach of authority, the contract is still valid. However, the company may claim civil compensation from its legal representative for any loss so incurred. Under an operation and management contract signed between the legal representative and the company, if the legal representative fails to fulfil the contractual obligations, he or she shall bear the liability for breach of contract.

legal representative
Zhang Yubo
Associate
Tiantai Law Firm

In terms of criminal liability, the legal representative, as the directly responsible person, shall be criminally liable for “unit crimes” in relation to: the production and sale of fake or inferior commodities; smuggling; commercial bribery; illegal operation; refusal to pay wages to workers, etc.

If the legal representative misuses his or her authority to accept bribes, embezzle corporate property, misappropriate corporate funds, provide guarantees for others in violation of regulations or without going through the decision making procedures, or uses his or her official capacity to facilitate business activities similar to those of the company for his or her own account, or on behalf of others, the proceeds or income generated shall be confiscated by the company.

Workplace safety protection

China implements a workplace safety permit regime for mining companies, construction companies, and producers of dangerous chemicals, fireworks and civil explosives. In accordance with relevant provisions of the Work Safety Law, the Environmental Protection Law, the Water Pollution Prevention Law and the Criminal Law, the legal representative shall be fully responsible for workplace safety, hazardous chemical safety management, fire safety, and environmental resource protection during operation of a company. Therefore, the legal representative of a company shall be fully responsible for the workplace safety and hazardous chemical safety management of the company, and shall be the person in charge of fire safety and environmental resource protection of the company.

According to relevant Chinese laws, the legal representative who fails to perform his or her duty of workplace safety management, and causes heavy casualties or other serious consequences, will be held criminally liable in accordance with relevant provisions of the Criminal Law.

Even after an incident takes place, the legal representative will face a fine of up to 100% of his or her annual income if he or she fails to immediately organize rescue efforts, delays in reporting or conceals the incident, is absent without leave during the incident investigation and treatment, or destroys evidence and documentation, or refuses to accept the investigation.

In the case of violating fire safety regulations and refusing to take corrective actions upon notification by the fire safety supervisory agency, which causes serious consequences, the directly responsible person will be sentenced to a fixed-term imprisonment of not more than seven years, depending on circumstances.

Also, relevant projects that fail to go through environmental impact assessments in accordance with the law, discharge pollutants without a pollutant discharge permit, or illegally discharge pollutants by evading supervision, will all trigger relevant liability. Where a water contamination incident is constituted, the person directly responsible will be subject to a fine of up to 50% of his or her annual income.

Chinese law also provides that where the legal representative of a company to which an incident occurs is subject to criminal punishment or removal from office, he or she will be disqualified from the person principally in charge of any business entity within five years from when he or she finishes serving the sentence or is removed from office.

Judicial restrictions

In accordance with relevant provisions of the Civil Procedure Law, if an enterprise fails to perform the effective court judgment in a timely manner, the right holder may apply for restricting its legal representative from leaving the country and engaging in conspicuous consumption. The court will issue a departure restriction order or a consumption restriction order after examination, and will notify the relevant organizations to co-operate in its enforcement.

The applicant has the right to request the legal representative of the indebted company to be restricted from leaving the country and engaging in conspicuous consumption until the company has discharged its debt obligations specified in the effective legal document. In addition, if the legal representative of a wholly foreign-owned enterprise within the territory of China fails to pay taxes, he or she must pay off the taxes payable and any late fees, or provide guarantees before leaving China. Otherwise, the tax authority may notify the exit administration authority to stop his or her departure.

To sum up, the legal representative acts in the interests, and at the will of, the enterprise as a legal person. The legal representative is directly responsible for the company’s operation and management, and thus is exposed to civil, administrative and criminal risks under specific circumstances. The legal representative can ensure his or her own safety only if he or she performs his or her duties in accordance with relevant regulations to the greatest extent possible, and maintains the company’s compliance in operation and management.

Wei Jie and Zhang Yubo are associates at Tiantai Law Firm

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E-mail:
weijie@tiantailaw.com
zhangyubo@tiantailaw.com
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