Liabilities for China Legal Representative

Liabilities for China Legal Representative

Every company with a China subsidiary has encountered the question of who will serve as Legal Representative for the new China company. Often the responsibilities and liabilities of this role are not clear. The Legal Representative is required to be the Board Chairman, Executive Director, or General Manager of the company, and each of those positions have prescribed duties and liabilities.

The law indicates the positions of Chairman of the Board, Executive Director, and General Manager each carry a “Duty of Due Diligence” to the company. There is no detail or explanation in the law regarding what such duty entails, any standard of care relevant to the duty, or what liabilities may be incurred if an individual is found to have violated such duty, however, one may make reasonable assumptions as to the practical meaning of the Duty of Due Diligence.

A Legal Representative, in holding such position for a distant company, for which the Legal Representative is not involved in the company’s daily operations, and for which the Legal Representative makes no effort to stay informed of the company’s operations and status, would appear to be in violation of the duty of Due Diligence, which would likely result in civil liability in connection with such duty.

Therefore any irregularity in company operations or management which results in harm to the company or to those doing business with the company, poses a risk of personal liability to the Legal Representative on the principle that had the Legal Representative fulfilled the Duty of Due Diligence, the conditions would not exist to carry out such harmful action.

Each time the Legal Representative’s seal is used the Legal Representative bears additional risk. As the Legal Representative bears a Duty of Due Diligence, this duty must apply to all documentation affixed with the Legal Representative’s seal. The Legal Representative thus has a duty of due diligence to understand the implications of each document that receives the Legal Representative’s seal. If a document stamped with the Legal Representative seal results in harm to the company.

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