Foreigners considering starting a company in China may come across unfamiliar concepts that require clarification. Terms like registered capital, legal representative, and business scope can be perplexing.
In the following weeks, we will delve into these concepts one by one. Today, let’s focus on the concept of the Legal Representative, which lacks a direct equivalent in common law countries.
According to the Civil Law of the People’s Republic of China, every company incorporated in China must appoint a legal representative. This individual acts on behalf of the company, exercising its functions and powers in accordance with the law and the company’s articles of association.
In simple terms, the legal representative is a natural person designated to represent the company’s interests. Depending on the company’s structure, the legal representative can be the Chairman, Executive Director (if there is no Board of Directors), or General Manager.
Being a legal representative carries authority and responsibility. The legal representative has the power to execute contracts and handle transactions on behalf of the company, and the company assumes the associated consequences.
However, the position of legal representative is not solely about power and prestige; it also entails assuming substantial risks. Legal representatives are liable for the consequences of the company’s activities and may face civil, administrative, and even criminal liabilities for both their own wrongful acts and those of the company.
According to the Civil Law of the People’s Republic of China, a legal representative may face administrative sanctions, fines, and criminal responsibility if the company is found to be engaged in activities such as:
1. illegal operations;
2. concealing information from registration and tax authorities, fraudulent practices;
3. unauthorized disposal of assets after dissolution or bankruptcy;
4. failure to promptly report changes or termination of the company, causing significant losses to interested parties, or:
5. engaging in other activities prohibited by law that harm the interests of the state or the public.
Moreover, the company can seek compensation if it suffers losses due to the legal representative’s wrongful acts. The Criminal Law of the People’s Republic of China provides detailed provisions, specifying that legal representatives may be subject to imprisonment ranging from 3 to 7 years, as well as other penalties, for the company’s criminal offenses. These offenses may include false capital contribution, surreptitious withdrawal of contributed capital, major labor security breaches, and bribery, among others.
Additionally, as per the Company Law of the People’s Republic of China, if a company has its business license revoked and is ordered to cease operations due to legal violations, the legal representative will be blacklisted. This blacklist prohibits them from holding positions such as director, supervisor, or senior manager in any company for a period of three years.
Understanding the role of a legal representative is crucial for foreign companies operating in China. It is important to navigate the legal landscape carefully, ensuring compliance with regulations and minimizing risks associated with this position.
Regulated provisions in Company Law of the PRC
Article 146 Whoever is under any of the following circumstances is not allowed to assume the post of a director, supervisor, or senior management person of a company:
…
(4) He/she has served as the legal representative of a company or enterprise that has its business license revoked and is ordered to close down due to violations of the law, and is personally liable for such punishment, and less than three years have elapsed since the date of revocation of the business license of the company or enterprise;
