China June car sales up 48.5% on year
July 9, 2009
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Understanding the Risks and Responsibilities of Legal Representatives
July 9, 2009
A legal representative is, put simply, a natural person appointed to act on the company’s behalf. Article 38 of the General Principles of Civil Law of the People’s Republic of China defines the role as the “responsible person who performs the duties and powers on behalf of a legal person in accordance with the law or the constituent documents of the legal person”. Under the Company Law of the People’s Republic of China (the ‘Company Law’), all businesses established in China must have a legal representative. The legal representative of a company may be the chairman of its board of directors, an executive director or its general manager, as provided by the company’s articles of association. The legal representative must also be registered with company authorities. Companies need to select their legal representative carefully, and legal representatives should be made aware of the responsibilities and liabilities that come with the position. In addition recent amendments to the Company Law now require all companies to appoint a
supervisor, whose role is to monitor the activities of the legal representative.
The Company Law does not precisely define the metes and bounds of a legal representative’s power. However, it is clear that a legal representative is authorized to perform all acts regarding general administration of the company and in accordance with the corporate purpose. For example, the legal representative can: take whatever actions are legal and necessary for the conservation or exploitation of the company’s assets; execute powers of attorney on the company’s behalf and authorise legal representation of and litigation by the company; and execute any legal transactions that are within the nature and scope of that company’s business. It is important to be aware that a company will generally be held liable for the unauthorized actions of a rogue legal representative. The Contract Law of the People’s Republic of China specifically provides that “if the Legal Representative … of a [company] creates a contract in excess of authority limits, such representative action is valid except where the counterparty knows or should know that it exceeded authority limits.” Generally speaking a company’s articles of association and related corporate documents, filed with the local Administration of Industry and Commerce, set forth the limits of the authority of its legal representative. In practice, counterparties may justifiably argue that they have limited capacity to view these documents to determine the legal representative’s authority. However from a legal
perspective it is nevertheless important to specifically limit a legal representative’s authority in the articles of association. For further protection companies may wish to publish the limits of their legal representative’s authority on their corporate website, in order to provide further public disclosure and thereby help to overcome the presumption of validity.
Different foreign investors have different preferences for their legal representative: some prefer an existing employee, even if no-one with Chinese management experience is available; whereas others will recruit directly from mainland China. We generally advise against the latter however, preferring someone highly familiar with the parent company’s culture and – more importantly – who is trusted completely. A director of the parent company is often a prudent choice for legal representative, since they also hold separate duties to the parent company under the laws of its place of establishment. The investor may then select a different with person greater local market experience as general manager. The Company Law provides that the company’s chairman, executive director or general manager can be its legal representative; however this may be further constrained by the articles of association.
To be a legal representative does not only mean power and glory; that person will also undertake substantial risk to themselves. The law holds legal representatives to a higher standard of care and competence than other personnel, and they will bear civil, administrative and even criminal liability
for wrongful acts – both the company’s and their own. Accordingly the legal representative may be subject to fines and penalties accrued by the company. Importantly, the liabilities of a legal representative extend to bankruptcy.
Under the Company Law, the role of the supervisor or board of supervisors is as follows:
1. to inspect the company’s finances and related information;
2. to exercise supervision over the acts of the directors and managers carried out in performance of their corporate duties to ensure that they do not violate any laws, regulations or the company’s articles of association;
3. to demand remedies from a director or manager when the acts of such director or manager are harmful to the company’s interests;
4. to propose the convening of an interim shareholders’ meeting; and
5. other powers as specified in the company’s articles of association.
Furthermore, supervisors may attend board meetings and present inquiries or proposals regarding issues to be determined by the board of directors.
The supervisor is also entitled to supervise and constrain the legal representative, and it is arguable that a supervisor reduces the risk borne by the legal representative as a consequence of their individual actions taken on behalf of the company.
Recommendations:
1. Take extreme care in selecting the person who will be your legal representative.
2. Ensure that the articles of association sufficiently limit the legal representative’s powers.
3. Prepare resignation documents for the legal representative to sign upon appointment.
4. Ensure that the company seals are kept in a secure location and establish a transparent procedure for their use, including the use of logbooks to record all transactions.
5. Take every effort to understand your China business, rather than simply relying upon your senior people based in China.
By DaisyXu,Attorney&MatthewMcKee,Foreign Legal Counsel
Tags: responsible person, legal person, liabilitiesRelated Posts:
Settlement of Employment Termination
July 8, 2009
It is common practice for an employee and employer to attempt to negotiate the monetary amount that the employer is required to pay the employee upon termination of employment. Any agreement in such circumstances will generally involve an employer paying an amount equivalent to its potential legal liability or lower. However, a question arises as to whether, under China’s Labour Contract Law, such an agreement is enforceable if an employee ultimately reneges on its agreement and takes the dispute to labour arbitration. The notion of free will and fair bargaining underpin Chinese contract law and the Chinese legal system in general. Accordingly, there may be such occasions where such an agreement could be struck down by the P. R. of China court.
It is advised that employers that it is in their interest to avoid labour arbitration as, in most cases, it favors the interests of employees. Further, in labour arbitration and litigation in China there is little possibility of recovering your legal costs and, accordingly, even if you are ultimately successful, there is a strong likelihood that you will incur legal expenses greater than the potential liability. For these reasons, many employers make every effort to settle matters with employees. The assumption is that in coming to an agreement with an employee, arbitration will be avoided.
Article 5 of the Law of the People’s Republic of China on Labor Dispute Mediation and Arbitration states that labour arbitration is available “where a labor dispute arises, if a party does not desire a consultation, the parties fail to settle the dispute through consultation, or a party does not execute a reached settlement agreement”. It seems, on the face of the matter, that where there is an agreement between the parties, there is no jurisdiction for the dispute to go to labour arbitration.
If an employee reaches an agreement with an employer regarding the termination of the labor contract and the economic compensation is far from the statutory standards, generally the agreement shall be deemed as invalid because it exempts the employer from statutory liability
and extinguishes the rights of the employee. The concepts of free-will and fair bargaining are critical principles underpinning Chinese Contract Law, particularly in the employment context. Article 4 of the Contract Law provides that ‘[t]he parties have the right to lawfully enter into a contract of their own free will in accordance with the law, and no unit or individual may illegally interfere therewith.’ Further, Article 3 of the Labour Contract Law provides that ‘[t]he principle of lawfulness, fairness, equality, free will, negotiation for agreement and good faith shall be observed in the formation of a labor contract.’ Whilst a settlement agreement in relation to economic compensation payable to an employee is not technically a “labour contract”, the matters outlined in Article 3 reflect common principles. Accordingly, where the agreed amount is well below the legal entitlement it will be difficult for the employer to show that the principles of fair-bargaining existed. In such circumstances, after an employee obtains economic compensation according to the agreement, if the employee applies for arbitration or files a suit to ask the employer pay the balance of the legal entitlement, the application shall be supported.
It is clear that the critical issue is whether there is fair-bargaining between the parties. As such, if the agreement stipulates the calculation methods and standards of economic compensation and the employee acknowledges that the agreed economic compensation is far from statutory standards, it shall be deemed that the employee has disposed of his or her rights, and any application to alter the terms of the agreement would be rejected. Further, if after an employee obtains economic compensation in accordance with an agreement with an employer, he or she applies for arbitration or files a suit beyond the statutory limitation period (it should be noted that the statutory limitation period is 1 year from the date of termination) for the balance of the employer’s legal liability, the employees rights shall be extinguished.
NancySun, Attorney & MatthewMcKee, Foreign Legal Counsel
Tags: dispute mediation, termination of employment, jurisdictionRelated Posts:
China Shipping Container Lines Raises Rates
July 7, 2009
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Employee Insurance Entitlements in China
July 6, 2009
What insurance payments and employer contributions are required by law?
The following insurance coverage and contributions are required by law:
1. Basic Pension
2. Basic Medical Insurance Premium
3. Unemployment Insurance Premium
4. Work Injury Insurance Premium
5. Maternity Insurance Premium
6. Housing Accumulation Fund
How much is an employer required to contribute in Beijing?
Employers are required to contribute the following amounts on behalf of employees:
1. Pension: 20% of the employee’s basic salary.
2. Medical Insurance Premium: 10% of the employee’s basic salary.
3. Unemployment Insurance Premium: 1.5% of the employee’s basic salary.
4. Work Injury Insurance Premium: 0.5% of the employee’s basic salary.
5. Maternity Insurance: 0.8% of the employee’s basic salary.
6. Housing Accumulation Fund: In Beijing, prescribed amount is 12% of the employee’s basic salary.
How much is an employee required to contribute in Beijing? Employees are required to contribute the following amounts:
1. Pension: 8% of the employee’s basic salary.
2. Medical Insurance Premium: the employee’s basic salary multiplied by 2% +3 RMB.
3. Unemployment Insurance Premium: 0.5% of the employee’s basic salary.
4. Work Injury Insurance Premium: 0.5% of the employee’s basic salary.
5. Maternity Insurance: 0.8% of the employee’s basic salary.
6. Housing Accumulation Fund: In Beijing, prescribed amount is 12% of the employee’s basic salary.
It should be noted that in respect of the payment of Work Injury Insurance Premium and Maternity insurance, only the employer must pay for these two types of insurance.
How do you determine the employee’s basic salary?
The benchmark for all social insurance including pension, unemployment, work – injury, maternity and basic medical insurance shall be decided by the employee’s average salary of the previous calendar year (monthly average salary of actual income between January and December of the previous year). Once the benchmark is confirmed, any further changes shall not be possible within the year of payment.
On March 25, 2009, the Beijing Municipal Social Insurance Fund Management Center issued a Notice of Benchmark and Amount of Payment for Social Insurance for Employees in Beijing. For the year of 2009, the monthly average salary of Employees in Beijing is RMB 3, 726 . For the employee’s monthly salary which exceeds three times of the monthly average salary of employees in Beijing (means RMB 11,178), the maximum amount for benchmark for payment of social insurance shall be RMB 11, 178 .
What are penalties for failing to make the prescribed payments?
According to “Chapter IV Penalty Provisions” of “Interim Regulation on the collection and payment of social insurance premiums” and other regulations, if the entity fails to pay its proportion for employee’s insurance and housing accumulation fund or failed to withheld the employee’s proportion of social insurance and housing accumulation fund, the entity will be punished depending upon severity of the breach; this could be a fine, a warning and or the notation of a fault record.
By Kelly Zong , Attorney & Matthew McKee, Foreign Legal Counsel
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