Legal representative fictitiously claims debt, transfers funds, and embezzles public money, resulting in liability

This article is reprinted from Changzhou Daily

□ Zhou Shuning

As the company’s legal representative, responsible for representing the company externally, they bear significant duties. Their performance not only affects the company’s own fate but is also closely linked to the interests of numerous creditors. However, in reality, there are cases where some legal representatives abuse their authority and breach legal boundaries, leading to a series of complex legal disputes. In a bankruptcy liquidation case involving Company A, there was an incident where the legal representative, Song, falsely transferred the company’s claims to his personal account, with Company B cooperating by providing a lending account, among other actions. After trial by the Liyang Court, the violating parties were all held responsible.

In August 2019, Company A participated in the bidding for a highway project contracted by a certain engineering company and successfully won the bid. After the project was completed and put into use, most of the project funds had been paid during construction, with about 100,000 yuan remaining unpaid. In July 2023, Song, the legal representative of Company A, signed a “Debt Transfer Agreement” with Company B in the name of Company A, transferring the above claim to Company B, and issued a “Debt Transfer Notice” to the engineering company. In August 2023, the engineering company transferred the 100,000 yuan to Company B’s account. Later, the funds were transferred from Company B to Song’s personal account on the grounds that there was a debt relationship between Song and Company B.

In April 2024, due to poor management, Company A entered bankruptcy proceedings. The court appointed a bankruptcy administrator. According to the investigation, there was no debt relationship between Company A and Company B. Song transferred the original claims belonging to Company A to Company B, then into his personal account. This behavior severely infringed on the interests of Company A and its creditors, and Song should return the funds. Company B actively cooperated with Song’s actions but failed to exercise due caution and should bear joint liability. Therefore, Company A sued Song, Company B, and the engineering company together.

The court held that in this case, Song, the legal representative and executive director of Company A, transferred company assets to his personal account by fabricating a claim transfer, damaging the company’s interests, violating the duties of loyalty and diligence, and should compensate for damages. The claim transfer between Song and Company B was invalid due to falsehood. Company B’s lending of bank accounts violated regulations and failed to exercise due caution, aiding Song’s infringement, and was at fault for the damage, thus bearing joint liability. The court ordered Song to return 100,000 yuan plus interest to Company A, with Company B bearing joint responsibility.

The judge stated that this case involves three core legal points: the boundaries of the legal representative’s duties, the validity of false civil acts, and the risks of lending bank accounts:

1. Legal representatives must strictly adhere to the duties of loyalty and diligence and must not abuse their authority. According to the Company Law, the legal representative, as the company’s representative body, owes loyalty and diligence obligations. The core requirement is not to use their position to embezzle or transfer company assets or harm the company’s and creditors’ interests.

2. False civil acts are invalid from the outset; do not rely on luck. According to the Civil Code, civil legal acts performed with false intentions are invalid. Song and Company B’s fabricated claim transfer relationship, even if funds were transferred, is legally ineffective. The company has the right to recover the transferred assets.

3. Bank accounts should not be lent arbitrarily; otherwise, joint liability may be incurred. Bank accounts are important financial documents. Lending bank accounts violates national financial management regulations. In practice, if the lender fails to exercise reasonable caution and assists others in illegal activities such as transferring assets or evading debts, and there is a causal relationship with the damage, they may be deemed joint tortfeasors and liable jointly.