Legal risk from the provision allowing enterprise to have more than one legal representative

Inadequacy from Law on Enterprises in 2005

As prescribed in Law on Enterprises 2005, the legal representative (Legal Rep) of an enterprise may possibly be Chairman of the Management Board of joint stock company, Chairman of the Members’ Council, or Chairman of company of limited liability company, or Director, General Director thereof. As such, Law on Enterprises in 2005 allowed an enterprise to have only one Legal Rep and this Legal Rep would authorize another person on behalf to take his/her rights and obligations of the Legal Rep of the company if his/her absence in Vietnam lasted more than thirty days in writing in line with the company’s charter in accordance with Articles 46, 49, 67 and 95. In this article, joint stock company and limited liability company are collectively referred to as enterprise/company for conciseness.

The practice of application showed that the said provision allowing an enterprise to have only one Legal Rep of Law on Enterprises in 2005 resulted in the delay of almost all transactions of the company when the legal rep was absent in Vietnam but did not legally authorize any others, or when the legal rep was in the detention center, etc.

New provision in Law on Enterprises in 2014

Based on the above-mentioned inadequency of Law on Enterprises in 2005, Article 13.2 of Law on Enterprises in 2014 has adjusted that: “A limited liability company or joint-stock company may have one or multiple legal representatives. The quantity, titles, rights and obligations of legal representative of the enterprise shall be specified in the company’s charter”. As such, a company may have more than one legal reps, which contributes to create the flexibility when one is absent in Vietnam or cannot perform his/her rights and obligations on behalf of the company as the case may be.

Legal risk from the provision allowing enterprise to have more than one legal reps

Despite of the fact that Law on Enterprises in 2014 has improved the said inadequacy of Law on Enterprises in 2005, its provision on allowing an enterprise to have more than one legal reps has created legal risk for either party itself participating in the transactions. In this article, to make clear the responsibilities of the subjects engaging in the transactions, the following terms have been used and interpreted: enterprise, and enterprise’s partner are considered to be each party of the transaction, legal rep of enterprise and legal rep of enterprise’s partner are legal rep of each party.

Article 13.2 of Law on Enterprises in 2014 states: “The quantity, titles, rights and obligations of legal representative of the enterprise shall be specified in the company’s charter.”, so when an enterprise has more than one legal reps, then each will be in charge of executing different transactions. This may appear to be difficult for one party to determine the power of the legal rep of the other party with whom it is dealing. Indeed, in case an enterprise has more than one legal reps, then the allocation on power for each is internal, which results in the fact that one party finds it hard to comprehend whether the legal rep of the other party has power to execute or not. This can also lead to certain damages to either party because one party shall not be bound to any rights, obligations arisen from the transactions executed by an unauthorized person, except for some cases specified in Articles 142 and 143 of Civil Code in 2015.

According to the foresaid provisions of Civil Code in 2014, one party shall take responsibility if it: (i) recognizes the transactions; or (ii) knows the transaction without any objection within an appropriate time limit; or (iii) has fault that the other party does not know or is not able to know that the person entering into and performing the transaction therewith is unauthorized. As such, besides creating legal risk for either party, this provision of Law on Enterprises in 2014 allowing an enterprise to have more than one legal reps can also bring risk for the enterprise itself in the way that the enterprise shall be required to take responsibility to the transaction established by its unauthorized person or by its legal rep beyond scope of representation..

The aforesaid issues have come to questions on the responsibility of the subjects engaging in the transactions, particularly, whether one party shall notify the other party the scope of representation of its legal reps or publish its charter, or one party shall actively enquire about the charter of the other party to clearly determine the power of the legal reps of the other party for avoiding risk.

Remedies to minimize legal risk for parties

Through our practical experience in consultancy and handling the clients’ cases, where more than one legal reps have been preferred, LuatViet always emphasizes on the importance of clearly defining rights, obligations and scope of representation of each legal rep in the charter in line with Law on Enterprises in 2014.

However, not every enterprise complies with such provision of Law on Enterprises in 2014. Thus, Luatviet recommends either party when engaging in the transactions, to take this matter into consideration, take a comprehensive review in relevant regulations on the scope of representation of the legal rep of the other party in the charter and business registration information on enterprise registration certificate or national business registration portal and tax payer’s information to update and reduce legal risks.

To be sure, there is another measure to which can be applied in practice. Accordingly, after fully entering into a contract, either party can immediately send a duly certified copy of the contract to the head office of the other party by courier. This is because, as prescribed in Article 143.1 (b), Civil Code in 2015, a civil transaction entered into and performed by a representative beyond his or her scope of representation shall give rise to rights and obligations of the principal if the principal knows it without any objection within an appropriate time limit. Therefore, the delivery of the fully executed contract to the head office of the other party ensures that the other party must acknowledge this transaction and may give appropriate response in case the legal rep who has signed the contract beyond his or her scope of representation power. As such, this can reduce the risk for the enterprise as well as the legal responsibility for the enterprise’s partner itself.

In practice however, due to various and unpredictable transactions, enterprises are advised to consult lawyers to receive suitable assistance for each in order to secure legal safety.