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Legal representative: who are you?

The article titled: “Legal representative: who are you? ” from Lawyer Pham Thi Minh Trang, is published on Sai Gon economic times,  October 2011.

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Is it possible that the current Enterprise Law should allow a company to have more than one legal representative, as long as the appointment of such representatives is approved by the company’s board members and shareholders and registered with the registry authorities?

Working with foreign companies, we lawyers have seen a lot of documents signed by the company’s lawyer instead of by a legal representative. It is simply explained that a lawyer represents the company in legal matters, and there is no such title of legal representative in their companies. This brings about reconsideration of the legality of a legal representative in companies that are governed by Vietnamese laws.

What do Vietnamese laws say?

According to the Civil Code, the legal representative is the principal person of a legal entity (i.e. any enterprises except private companies) as stated in the articles of association of the company (Article 141, Civil Code). As a legal representative, s/he represents the company to participate in all kinds of civil activities for the benefits of that company (Article 140, Civil Code). The Enterprise Law does not provide a specific definition of a legal representative other than stating who can be a legal representative, which varies, depending on what type the company is. It can be the chairman of members’ council and director for limited liability companies, or chairman of the board of directors and director for joint-stock companies. Therefore, the current Enterprise Law owes a clear definition of the legal representative. In fact, it is assumed that a legal representative represents the company for external and internal affairs. S/ he can enter into contracts and agreements without any authorization or approval. In other words, the right of representation of a legal representative is unlimited. S/he can exert a decisive influence on internal affairs such as company structuring, daily operations, personnel, administration, authority on bank accounts, and company’s seal. What are the underlined issues of granting a legal representative with great power and authority?

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External risks

The assumption of unlimited representation of a legal representative results in a common practice among Vietnamese companies — they do not pay attention to the authority of the person who signs contracts on behalf of their business partners. This is a mistake, triggering risks for both parties. However, it is important to specifically set forth a legal representative’s powers and liabilities in the company’s articles of association or in the appointment documents. In many cases, a legal representative is just a contractual employee whose rights and obligations are defined within the labor contract with the company. Hence, it is unlikely that a legal representative’s powers are unlimited. In the event the legal representative signs a contract beyond his/ her authority, the contract can still be declared invalid by a court. It is then deemed as void, and both parties have to reimburse to each other what they have received. In other words, the object of the contract becomes impossible to achieve. From another perspective, the centralization of power in the hands of a legal representative enables him/ her to shirk responsibilities with partners from the signed contracts when s/he sees something unfavorable in a contract signed by his/her staff, claiming that it is signed without his/ her knowledge. The contract may be declared null and void; therefore, the company that s/he represents can refuse its binding liabilities within the contract, or at least the legal representative can get rid easily of his/her own liabilities, and possible damages are placed on the other party.

Overwhelmed with internal duties

Internally, a legal representative will be responsible for running the company, dealing with all kinds of matters, including trading, finance, accounting, or even technical problems. Other managers, legally, are the ones that carry out a duty under the authorization of the legal representative, and they are not directly responsible for their action because the legal representative is the one. For this reason, they do not have an active role in the company operations. Meanwhile, the legal representative is most likely to be in a dilemma – s/ he cannot either “let go” his/her duties to his/her staff or afford to assume these duties by him/herself. And if the legal representative is absent, the business will immediately come to a standstill because nobody runs the company.

A possible alternative

From the above analysis, it does not work to have only one legal representative while organizational structures of enterprises vary. Besides, there is no such equivalent title in many countries. The powers and liabilities of such a legal representative should be given to a board of directors or board of management, in which each director can represent the company for matters under his/her authorization. With this allocation of authority, each director will be responsible for his/her decision based on the company’s articles of association, except for decisions that need the board’s approval. From this approach, Vietnam’s laws should extend the denotation of legal representatives to a board of directors or board of management, and allow at least two members of the board to be selected as legal representatives to run the company. The allocation of authority helps prevent the burden of liabilities on an individual, especially when s/he is not the person who carries out an activity directly and/or is unable to be present whenever s/he is needed. This mechanism enhances the sense of responsibility of each director, and at the same time makes best use of the wisdom of the board. In the absence of one director, it will not affect the operations of the company, which is a quite common situation in Vietnamese enterprises.

From: ENTREPRENEURSHIP BUSINESS