Why Should Legal Representative be Liable for Company’s Offence?

Company A works on the manufacture and sale of electronic products, which are sold in the domestic market, or to the overseas market by processing on order. It arranges production according to orders, and the raw materials supply will be in short when the clients’ demand is urgent. Because the brand and standard of raw materials for domestic-sale and overseas-sale products are the same, in order to follow up with the due date, manager of production Dept. use non-bonded raw materials for domestic-sale products occasionally. Besides, the general manager who is also the legal representative has to examine and approve the raw material application every time. Eventually, Company A is investigated by the Customs, due to the serious result, A is considered to constitute the crime of smuggling, and its legal representative is also imposed of criminal punishment.

The company shall be liable for its offence, but why should the legal representative be liable as well?

According to the relevant articles in Criminal Law, when the crime of smuggling common cargo is committed by a unit, persons directly in charge or directly responsible for such actions are highly possible to be imposed of criminal punishment. As for “persons directly in charge”, according to Working Minutes of the PRC Supreme Court regarding the Trial of Finance-related Crimes by PRC Courts (Fa [2001] No. 8), refers to persons who decide, approve, instigate, connive or organize the unit crime. They are generally referring to the chief manager including the legal representative. In this case, the legal representative of A signed on the application to ratify usage of the raw material, so it’s reasonable for the court to affirm the legal representative as the persons directly in charge, and impose criminal punishment.

In judicial practice, principally, if there is no direct evidence to prove that the legal representative plays the above role in unit crime, the court would seldom impose criminal punishment to the legal representative.

Then, let’s assume that the legal representative in this case hasn’t yet signed the application, will he be safe from any risks? In other words, in order to avoid the risk of being liable for the company’s offence, whether the legal representative can act negatively?

The answer is no. According Company Law, Article 13, the legal representative of a company shall be assumed by the chairman of the board of directors, acting director or manager according to Articles of Association. Article 148 stipulates that the directors, supervisors and senior managers shall bear the obligations of fidelity and diligence to the company. Thus, if the legal representative acts negatively, namely defaulting on the management obligation, such action shall be deemed as the legal representative fails to perform duty of diligence under Company Law, and shall bear the liability of the losses incurred.

Therefore, the legal representative shall be responsible for the company’s operation. In fact, many senior managers may not intent to manage illegally, but due to a lack of stringent and efficient management system or examination and approval system, some illegal actions may arouse, which bring significant legal risks to those senior managers, especially the legal representative. In this case, the manager of production Dept. and the legal representative may not have subjective intent of smuggling, but the serious consequences just result from weak legal consciousness and dereliction of duty.

It is an important issue which shall be concerned by senior managers (including the legal representative), on running the company legitimately to avoid such risks. In principle, on the one hand, enterprises shall design comprehensive and normative rules and regulations; on the other hand, enterprises shall intensify the employees’ Legal awareness.