Legal Risk of the Legal Person

Legal Risk of the Legal Person

Article Abstract

The COVID-19 epidemic not only causes enterprises and companies to reduce orders, operating difficulties, but also may face the emergence of contract disputes. In order to avoid debts and their own risks, some companies try to change the registration of shareholders and legal persons, and some people are even "legal persons" without knowledge. This paper briefly analyzes the potential legal risks.

Keywords: Legal Representative | Nomination Risk | Infringement Revocation

Identity cards are borrowed by others to change the registration, become the company's nominal shareholder or legal representative, and some are even "legal persons" without knowledge. Recently, friends often ask about the legal risks of such problems. Some of them are out of the face of colleagues, relatives and friends, and some of them are for the benefit of a little profit. But they know only one of the purposes of lending identity cards, do not know the second, in fact, there is a great legal risk in this kind of nomination.

I. A brief description of the legal representative

1. Legal representative. Under the law of our country, a single legal representative is the person in charge who represents the legal person to exercise the functions and powers on behalf of the legal person in accordance with the law or the articles of association of the legal person, which is a legal concept. Article 61 of the General Rules of the Civil Law stipulates that, in accordance with the law or the articles of association of the legal person, the person in charge who represents the legal person in performing civil activities shall be the legal representative of the legal person. Article 81 of the General Rules of the Civil Law stipulates that if the executive body is the board of directors or executive director, the chairman of the board of directors, executive director or manager shall act as the legal representative in accordance with the articles of association of the legal person; if the legal person has not set up the board of directors or executive director, the main responsible person as stipulated in the articles of association of the legal person shall be the executive body and legal representative. Article 13 of the Company Law also stipulates that the legal representative of the company shall be the chairman of the board of directors, the executive director or the manager in accordance with the articles of association of the company and shall be registered in accordance with the law. If the legal representative of the company is changed, the company shall go through the formalities for change of registration.

The functions and powers of a legal representative are from the explicit authorization of the law. If a legal representative conducts civil activities in the name of the legal person, his or her official acts on behalf of the company shall be deemed as the legal person's acts. According to Article 61 of the General Rules of the Civil Law, if a legal representative conducts civil activities in the name of the legal person, the legal consequences thereof shall be borne by the legal person. The restriction on the legal representative's right of representation imposed by a legal person's articles of association or authoritative body shall not challenge any bona fide other party.

2. Nominal legal representative. In practice, another type of legal representative, i.e. legal representatives registered with the industrial and commercial authority, usually have no substantive relationship with the establishment and operation of the company. They do not hold any positions of chairman of the board of directors, executive director or manager. Out of illegal considerations such as hiding identity, operating business in different lines, evading taxes or even preparing for other illegal activities, the actual controller of a company usually uses his or her identity as an ordinary employee or relative of the company, or even pays to buy identity information for registration of his or her legal representative. During the epidemic, quite a few companies have changed their industrial and commercial registration one after another in order to avoid his or her own risks. These legal representatives are generally referred to as "nominal" legal representatives, based on the verbal promise of the actual controller of the company or without his or her knowledge of the situation.

Ⅱ.Legal Risk of Nomination

Even if he or she does not enjoy any rights and obligations of a company and is only nominal, if he or she cannot prove that he or she is a legal person and has no knowledge of the operation of the company, the legal person may still face corresponding legal risks and liabilities.

1. Civil liability is one of the most common legal risks of being a legal representative of a company. Article 62 of the General Rules of the Civil Law provides that a legal person shall bear civil liability for any damage caused by its legal representative while performing his or her duties. As a business model, a company will inevitably run into some civil disputes, especially when the company gets into trouble due to the impact of Novel Pneumonia. Article 49 of the Civil Procedure Law provides that a legal person shall be represented in the proceedings by its legal representative, while other organizations shall be represented in the proceedings by their principal responsible persons. The legal representative of a company shall have the right to directly represent the company in filing suit or responding suit with the people's court. The litigation he or she conducts is the litigation act of the legal person, and shall have legal effect on the legal person. Fortunately for the plaintiff, if the company refuses to comply with the effective civil award rendered by the court, the court may put its legal representative on the blacklist of dishonest persons, which will have great influence on the company's future loans, consumption, travel and children's education.

Generally, a company shall assume repayment liability to the extent of its own assets. However, if the company is a legal person and is unable to prove that it is a nominal legal representative without knowledge of the company's knowledge, the company may also be required to assume civil liability for the losses caused to the company due to the violation of the laws or regulations by himself or any of the company's directors, supervisors or senior managers, falsified capital contribution, withdrawal of capital contribution to the actual controller, transfer of assets in the course of the litigation or disposal of assets without liquidation, etc. However, if he or she signs and issues guarantee documents for the company's loans or other business activities, he or she shall still assume due legal liability whether he or she is aware of the violation.

2. Administrative liability. If the company violates relevant laws and regulations, the company's legal representative shall also bear administrative liability such as administrative penalty or fine, etc. For example, pursuant to Article 205 of the Company Law of the People's Republic of China ("PRC"), where a company is in liquidation, the company registration authority shall order the company to make corrections and impose a fine of not less than 5% but not more than 10% of the amount concealed or the amount of assets distributed prior to debt repayment on the company, and impose a fine of not less than RMB 10,000 but not more than RMB 100,000 on the directly responsible person (s) -in-charge or any other directly responsible person (s). As the directly responsible person, the legal representative may bear corresponding administrative liability for the above violations of the company, unless the legal representative can prove that he or she is not aware of the company's business activities and is not at fault or negligent in his or her duty.

3. Criminal liability. For criminal activities committed by a company, in addition to the punishment imposed on the entity, the "directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other directly responsible person (s) -in-charge or any other person (s) -in-charge, unless he or she can prove that he or she is/they are a" legal person "-in-charge or that he or she is/they are not at fault.

4. Other restrictive measures. In addition to the abovementioned legal risks, the nominal legal person may also be subject to other restrictive measures. For instance, when a company is applied for enforcement, fails to pay its tax, or enters into bankruptcy proceedings, the legal representative may also be subject to the following restrictions:

According to Article 231 of the Civil Procedure Law of the People's Republic of China, "where an enforcee fails to perform the obligation specified in the legal document, the people's court may take measures or notify the relevant entity to assist in taking measures such as restricting the enforcee from leaving the country, publicizing the enforcee's failure to perform his obligation through the credit system records or the media, or other measures provided by the law."And Article 37 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Enforcement Procedures in the Application of the Civil Procedure Law of the People's Republic of China, which provides that "where an enforcee is an entity, its legal representative, main responsible person or other person directly responsible for influencing the performance of the obligation may be restricted from leaving the country."According to the Interpretation of the Civil Procedure Law of the People's Republic of China, the people's court may take compulsory measures such as restricting the enforcee from leaving the country due to the company's failure to perform the obligation specified in the legal document.

According to Article 44 of the Law of the People's Republic of China on the Administration of Tax Levying, where a defaulting taxpayer or its legal representative needs to leave the country, it shall settle the amount of tax payable and late payment fines or provide a guaranty to the tax authorities before leaving the country. If the taxpayer neither settles the amount of tax payable and late payment fines nor provides a guaranty, the tax authority may notify the authority responsible for exit to prevent the taxpayer from leaving the country. "It is stipulated that if a company defaults on its tax payment, its legal representative may be restricted by the tax authority from leaving the country.

During the bankruptcy proceedings, the legal representative of a company shall not leave the place of domicile without the permission of the people's court. In addition, the legal representative shall also bear corresponding obligations, such as properly keeping the property, seals, account books, documents and other materials in his/her possession and management; performing his/her work as required by the people's court and the administrator and answering the inquiries truthfully; attending the creditors' meeting as a non-voting delegate and answering the creditors' inquiries truthfully, etc.

Ⅲ.Revocation of a "Legal Person"

In daily life, it is necessary to pay attention to preventing himself/herself from being a "legal person". At the same time, it is necessary to timely apply to the industrial and commercial registration authorities for revocation or other relevant litigation channels to protect his/her legitimate rights and interests.

1. Do not easily lend his/her identity information to others. To avoid any potential risk, it is necessary to pay attention to preventing his/her identity information from being illegally used. If he/she is not fully aware of the legal consequences or does not have strong financial and psychological endurance, he/she shall not hastily lend his/her identity information to others for registration or change of company. Where it is necessary to give the identity information to others, he/she shall write the copy only for "XX" purpose, with the contents detailed as possible, and shall not cover up his/her identity number and name.

2. Where his/her identity card is lost or stolen, he/she shall timely go through the formalities of registration and announcement. Where the original ID card is lost or stolen, he/she shall, in addition to obtaining a new certificate, timely go through the relevant formalities of registration of the lost property with the public security department, make public announcement if necessary, and keep evidence, so as to safeguard his/her rights and interests to the maximum extent in case of any dispute.

3. Once he/she knows that he/she is a "legal person", he/she shall timely apply to the industrial and commercial authorities for deregistration. According to the Guiding Opinion on Revoking Company Registration Obtained by Illegally Using Others' Identity Information (Guo Shi Jian Xin No.128) promulgated by the State Administration for Market Regulation on June 28, 2019, an illegally used person may provide documents and materials that help to determine the basic facts of the imitation registration, such as the alarm receipt for the loss of his/her identity card, public announcement of the loss of his/her identity card, bank record of the loss of his/her identity card, handwriting authentication report issued by a professional institution, etc. The industrial and commercial authorities may, after confirming the false facts of the registration documents based on the above evidence, directly make provisions on revoking the registration of a company:

The registration authorities shall, after verifying the application for deregistration signed by the illegally used person and the copy of his/her identity card, promptly make public the information on the suspected company's imitation registration (including the time of the imitation registration, specific registration items, contact information of the registration authorities, etc.) through the National Enterprise Credit Information Publicity System (hereinafter referred to as the "Publicity System"). The publicity period is 45 days. Where the investigation is completed and the investigation conclusion is made during the publicity period, the publicity shall be terminated. The investigation conclusion is made upon completion of the investigation or expiry of the publicity period, and a decision on revocation or non-revocation of registration shall be made accordingly. Where the business license of a company is revoked prior to the investigation, the decision made by the registration authorities on revocation of registration shall not be affected.

Where the registration authorities determine upon investigation that the basic facts of the imitation registration are clear, or the company and the relevant personnel cannot be contacted or do not cooperate in the investigation, and no interested party raises any objection during the publicity period, the registration authorities shall make a decision on revocation of registration pursuant to the law if they deem the imitation registration is valid.

Of course, a person who is assumed to be a legal person can also claim for protection of his/her rights through civil, administrative or criminal litigation. Document No. 128 of the State Council provides that the registration authorities shall make a decision on revocation of registration in the event that the effective judgment or ruling of a People's Court has ascertained the fact of imitation registration.

In short, there is a certain legal risk for a "legal person" to authorize or forge signed registration materials without prior consent. From the perspective of civil infringement, if a person is unknowingly "a legal person", his/her act constitutes an infringement of his/her right of name as stipulated in the Tort Law, and the person whose name is assumed can directly file an infringement lawsuit. From the perspective of the outcome of the administrative act, the person whose name is assumed can protect his/her legitimate rights and interests by filing a complaint or report to the administrative authorities for revocation of the relevant registration information.