In China, the legal representative of a company is the main principal of the company who holds a special position therein and is the officer with the legal power to represent and enter into binding obligations on behalf of the entity he represents in accordance with the law or the articles of association of the company. Under the PRC Company Law, the Chairman of the board of directors, executive director (in case where there is no board of directors) or manager of a company can be the legal representative as provided by its articles of association. The liabilities of a legal representative can be divided into civil, administrative and criminal liabilities, each of which carries out different legal consequences.
Civil Liability
Since the legal representative represents the company in many material aspects, normally, his duty-related behaviors shall be deemed as the activities of the company. The respective civil liabilities arising therefrom shall be born by the company, while the legal representative is not directly liable to any third parties. For instance, if a legal representative acts beyond the authorization, and the third party has no knowledge of that, the company shall first be bound by the act of the legal representative, however, the company, after having undertaken liabilities to the third party, may claim damages from the legal representative for its losses caused by the legal representative. Therefore, civil liability for legal representative in this context means compensation. If the legal representative violates his/her obligations on diligence, loyalty and confidentiality to the company and causing losses to the company, the company may also claim compensation from the legal representative. Where the legal representative colludes with a third party to damage the interests of the company, he or she shall be jointly liable, together with the third party, to compensate the company.
Administrative Liability
Under a certain specific circumstances, if a company violates laws and regulations, its legal representative may be subject to fines and administrative punishment in accordance with the procedures of the relevant PRC government authorities, in addition to the punishment against the company. The circumstances where a legal representative may have to be subject to administrative liability include the following situations where the company
(1) conducts illegal operations beyond its business scope approved by and registered with the registry authority;
(2) conceals facts from the registry and tax authorities and practices fraud;
(3) secretly withdraws funds or hides property to evade repayment of debts;
(4) disposes of property without authorization after being dissolved or declared bankrupt;
(5) fails in applying for registration and making a public announcement promptly when it undergoes a change or terminates, thus causing interested persons to suffer heavy losses; or
(6) engages in other activities prohibited by law, damaging the interests of the State or the public interest.
Though the fine imposed thereon in the above circumstances is only up to RMB 2,000 which is relatively low, however, where a company undergoes liquidation and if it conceals any asset, makes any false record in its balance sheet or property checklist or fails to pay off its debts before distribution of its assets, and the legal representative is liable for such activities, and may be subject to a fine between RMB 10,000 and RMB 100, 000.
Criminal Liability
The PRC Criminal Law imposes criminal liability on both an entity and the persons who are directly in charge of or responsible for the crime of the entity which commits crime. In this sense, the legal representative as the main principal of the entity will not be pursued with any criminal liability unless he or she participates in the crime and is directly in charge of or responsible for the crime of the entity. In other words, though an entity commits crimes, however, its legal representative does not directly participates or plays an important role in the crime of the entity, he or she will not be pursued with any criminal liability just because he or she acts as the legal representative of such entity which commits crime.
The PRC Criminal Law provides for around 80 types of crimes which an entity may commit. The criminal liability for legal representative of an entity, if he or she shall be responsible for the crime of the entity, includes fines, public surveillance, criminal detention, imprisonment and even life imprisonment or death, as the case may be.